2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

pwc Canadian Institute of Actuaries Appointed Actuary meeting Financial Instruments – Toronto, 2006

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné What are the new standards?  CICA 3855 Financial Instruments – Recognition and Measurement: generally requires most financial assets to be measured at fair value; policy liabilities are outside its scope  CICA 4211 Life Insurance Enterprises – Specific Items: eliminates the moving-to-market model for investments other than real estate.  CICA 3861 Financial Instruments – Disclosure and Presentation: requires some enhanced disclosures, mainly regarding fair values; P&C policy liabilities are in scope, L&H policy liabilities are outside scope  CICA 3865 Hedges: provides rules for the application of hedge accounting  CICA 1530 Comprehensive Income: establishes a new concept for income

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Definitions Financial instrument A contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial asset Cash, a contractual right to receive cash, a contractual right to exchange financial instruments with another party under potentially favourable conditions or an equity instrument of another entity. Financial liability Any liability that is a contractual obligation to deliver cash or another financial asset or to exchange financial instruments with another party under potentially unfavourable conditions

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné What is fair value?  FAIR VALUE is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act.  Quoted price in an active market- ” bid ” or “ ask ” price VS “ closing ” price  Valuation techniques- DCF, option pricing model  Cost – used when fair value is not reliably measurable- will be rare.

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Comprehensive income – a new financial statement Still the focal point of performance by InvestorsStill the focal point of performance by Investors Other Comprehensive Income Other Comprehensive Income = + All changes in net assets other than transactions with investors Net Income Net Income Comprehensive Income Comprehensive Income Includes unrealized gains and losses on some investmentsIncludes unrealized gains and losses on some investments

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Impact on insurance financial assets Policy loans, receivables from cedents, deposits with cedents, retrocession recoverables Bonds and stocks Generally will continue to be measured at cost or amortized cost unless the company elects that they should be measured at fair value Accounting treatment is dependent on how the company designates these assets on purchase or initial adoption of the new standards Loans and receivables Investments CATEGORYEXAMPLES ACCOUNTING TREATMENT

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Designation of investments Held to maturity Held for trading Available for sale Investments Amortized value Fair value Individual assets must be irrevocably designated on purchase or on initial adoption of the new accounting standards

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Impact on net income and other comprehensive income Held to maturity Held for trading Available for sale Investments Amortization (effective interest rate) nil Amortization (ie.interest/dividend Income) Change in fair value Net Income Other Comprehensive Income nil Change in fair value

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Held to maturity designation  Can only be used where there is a positive intention and ability to hold investments to maturity.  Fixed and determinable payments and maturity date  Sales of more than an insignificant portion of “ Held to maturity ” designated assets results in “ tainting ” of the entire portfolio and immediate reclassification as “ AFS ” or “ HFT ”.

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Balance sheet extract – Shareholders’ equity (new P&C-1)

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Statement of Comprehensive Income (P&C-1:20-42)

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Statements of Accumulated Other Comprehensive Income (P&C-1:20-42)

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Transition rules  New standards effective for fiscal years beginning on or after October 31, 2006  Prospective adoption with no restatement of comparatives  Must have designations in place on first day and must be documented  Re-measure financial statement values on day one  Adjustments to opening retained earnings and accumulated other comprehensive income

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Comparison to US GAAP and IFRS  Similar but not identical to US GAAP and IFRS

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Economic impact – interest rates and asset values Interest Rate Market Value of Investments

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Economic impact – P&C companies Interest Rate Market Value of Investments Actuarial Liabilities Increases in interest rates raise discount rates and reduce actuarial liabilities.

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Economic impact – the potential for mismatch Changes inChanges in investment valuesinvestment values Other Comprehensive Income Changes in actuarial liabilities Held to maturity Held for trading Available for sale Amortization nil Amortization Change in market value Net Income nil Change in market value Change due to market value change Change due to market value change M I S M A T C H Change due to amortization

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné OSFI Guideline D-10  OSFI is concerned with the reliability of fair values determined using valuation techniques (rarely an issue for insurers) and wants sound risk management.  D-10 limits the use of the Held for Trading designation unless: 1.it significantly reduces an accounting mismatch; or 2.the financial instruments are managed together and evaluated on a fair value basis  Must maintain a documented risk management strategy and the fair values must be reliable

2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Thank you. PwC © 2006 PricewaterhouseCoopers LLP, Canada. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, Canada, an Ontario limited liability partnership, or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.