Bond sale at gain with previous OTTI

[EricS-AMIC]

Hello,

We wrote down a bond earlier this year and it has subsequently bounced back in value. We can sell and recognize as a gain, but I want to be sure we follow the pieces. Even thought this all occurred in the same year, I assume we would still show the OTTI realized loss, then the realized capital gain (since the new cost basis was the FV at the time of the OTTI measurement). I assume we can't reverse the OTTI we previously reported and recognized?

For our life company, we would need to determine which part of the gain is credit related and which is interest related (AVR/IMR). What do companies do for this bifurcation process? Is there a standard practice?

Thank you,
Eric

[Glenn]

Hello Eric,

Please see my responses below after each question.

My assumption is that you are addressing Stat guidance .
Eric question :
We wrote down a bond earlier this year and it has subsequently bounced back in value. We can sell and recognize as a gain, but I want to be sure we follow the pieces. Even thought this all occurred in the same year, I assume we would still show the OTTI realized loss, then the realized capital gain (since the new cost basis was the FV at the time of the OTTI measurement). I assume we can't reverse the OTTI we previously reported and recognized?

GS Response : You are correct . Don't reverse previous OTTI. Separately recognize gain at disposal.

Eric question:
For our life company, we would need to determine which part of the gain is credit related and which is interest related (AVR/IMR). What do companies do for this bifurcation process? Is there a standard practice?

GS response:
Yes you need to bifurcate interest related gains for IMR and Non Interest Related gains ( NIRD - Stat language). GAAP calls them credit related.
NIRD gains go to AVR.

The guidance is in SSAP 43R for Loan Backed and structured securities.

Also, for Non Loan backed securities you turn to SSAP 26R.

Regards,
Glenn Sackett

[EricS-AMIC]

To clarify, what would happen if we wrote the bond (SSAP 26R) down and recognized in AVR (credit related), but then subsequently there was a tender offer and we can recognize the gain. The NAIC instructions state that the IMR should include gains on "Called bonds, tendered bonds, and sinking fund payments."

If the value climbed from the date of the OTTI would the bond gain from the tender now have to be recognized in IMR?

Thank you.