Bond Tender Offer less than BACV

[EricS-AMIC]

Hello,

We received a bond tender offer that is less than BACV as well as Par (but price is greater than current market price). Looking at SSAP 26R and footnote 7, it seems to suggest in cases of accepting a tender where BACV is greater than consideration received, then the entire difference between consideration received and BACV is reported to invested income.

However, how does this impact life companies and IMR? Guidance seems silent on this. It was our understanding this tender at a loss is still an interest related loss, and therefore should flow through the IMR as any other sale would, but the footnote is leaving us confused.

Would appreciate any feedback. Thank you!

[Lisa]

Hello Eric,

As you mentioned, Footnote 7 of SSAP 26R is focused on situations where the consideration received is less than par but greater than the book adjusted carrying value. In your description, the tender off you describe is less than both PAR and the BACV. So, it doesn?t appear this footnote would be applicable.

Paragraph 17 of SSAP 26R describes the situations when an amount of prepayment penalty or acceleration fees should be reported as investment income. Based on my limited understanding of your situation, it doesn?t appear your situation fits either situation described in 17a or 17b.

The IMR instructions indicate interest related realized gains and losses on tendered bonds should be included in IMR.

Depending on the materiality of the transaction, you may want to confirm the treatment with your outside auditor.

Regards,
Lisa Mullen

[EricS-AMIC]

Hi Lisa,

I read the beginning of footnote 7 as simply stating the guidance that is explicit above in paragraph 17B, which talks about gains when consideration is less than par but more than BACV. Footnote 7 towards the end then clarifies what to do if if it is less than both (since 17B is already less than par guidance), this is simply saying it is also less than BACV.

However, i do agree that IMR guidance should trump this, and I would think the entire difference should be an interest related loss in the IMR, otherwise it defeats the purpose of it. One could event interpret it as still going through investment income, because that is where amortization of IMR flows through.