Norms for the Accounting and Valuation of Securities in the Investment Portfolio of Insurance Companies

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CDSSF-06/2001 NCS-018

NORMS FOR THE ACCOUNTING AND VALUATION OF SECURITIES IN THE INVESTMENT PORTFOLIO OF INSURANCE COMPANIES

Approval: 08/02/2001
Effective Date: 01/03/2001

The Board of Directors of the Financial System Superintendence, based on the authority contained in letter c) of Article 10 of the Organic Law of the Financial System Superintendence; in compliance with Articles 37 and 85 of the Insurance Companies Law and Articles 25 and 26 of the Regulation of the Insurance Companies Law, issues the:

NORMS FOR THE ACCOUNTING AND VALUATION OF SECURITIES IN THE INVESTMENT PORTFOLIO OF INSURANCE COMPANIES

CHAPTER I
OBJECT AND SUBJECTS

Art. 1.- The object of these Norms is to expand and determine the concepts regarding the form, methodology, and periodicity with which the valuation of investments in debt-representative securities of insurance companies mentioned in Article 37 of the Insurance Companies Law and Articles 25 and 26 of the Regulation of said Law will be carried out.

Art. 2.- The subjects obligated to comply with these Norms are the following:
a) Insurance companies incorporated in El Salvador; b) Branches of foreign insurers; and, c) Cooperative associations that provide insurance services.
When insurance companies are mentioned in these Norms, it shall be understood that they refer to the subjects mentioned in the letters of this article.

CHAPTER II
VALUATION AND ACCOUNTING

Frequency of Valuations

Art. 3.- The valuations of the financial instruments referred to in these Norms shall be made at the end of each month, and the methods described below shall be adopted in the order in which they are presented.

Acquisition Value

Art. 4.- Debt-representative instruments shall be accounted for at their acquisition value when they are short-term, understood as those that do not exceed twelve months.

Market Value

Art. 5.- Instruments shall be accounted for at their market value when they are documents issued for a term greater than twelve months and that are traded repeatedly in the secondary stock market. An instrument shall be understood to have been traded repeatedly when it has been negotiated at least once in each of the four weeks prior to the valuation reference date, for which the statistics of the Stock Exchange must be consulted.

This method consists of comparing the book value of the securities with the market value. Market value is understood as the weighted average of transactions occurring in the last four weeks. If the market value is lower than the book value, the latter shall be corrected by creating an estimate or provision in the corresponding supplementary asset account; when the opposite case arises, the book value shall be maintained.

For the purposes of this method, so-called repo operations must not be considered.

Present Value

Art. 6.- Instruments shall be accounted for at their present value when they are debt-representative documents issued for a term greater than one year and that are not traded in the secondary Stock Exchange market, either because they are non-negotiable or because they have no market.

This method consists of adjusting the book value of the securities by calculating their present value, using as the discount rate the simple average resulting from the highest average rate of the immediate previous month of securities issued by the Central Reserve Bank and negotiated in the secondary market of the Stock Exchange, according to the statistics of the Stock Exchange and the average rate of active operations published by the aforementioned bank. For the difference between the book value and the determined present value, the provision or estimate in the corresponding supplementary asset account must be established.

This method must also be applied when dealing with debt-representative instruments issued by entities located abroad, when they do not have a risk category.

Provision by Risk Category

Art. 7.- When there are debt-representative instruments to which none of the three methods described above can be applied and they are securities issued by entities located in the country, a provision must be established based on the risk category assigned by a risk rating agency registered with the Securities Superintendence, based on Annex No. 1.

The risk categories and ratings referred to above shall be those provided by the Securities Superintendence.

When dealing with debt-representative securities issued by entities located abroad, the insurance company must obtain the risk rating of the instrument and proceed according to the second paragraph of this article, assigning it the risk category that most closely approximates the table in the referenced Annex. The assimilation of the instrument's risk category with those issued by the Securities Superintendence must be documented and authorized by the appropriate person according to the policies of each insurance company.

Valuation of Stock Investments at Market Value

Art. 8.- The valuation of temporary stock investments shall be based on the market value of the share, and if there is no quotation in the market, the proportional book value or participation methods shall be applied.

For these purposes, market value is understood as the value at which shares are quoted on a specific date at the Stock Exchange. A share shall be understood to have been quoted when it has been negotiated at least once in each of the four weeks prior to the valuation reference date, for which the statistics of the Stock Exchange must be consulted.

If the market value is lower than the book value, the latter shall be corrected by creating an estimate or provision in the corresponding supplementary asset account; if the opposite case arises, the book value shall be maintained.

Valuation of Stock Investments by the Participation Method

Art. 9.- This method consists of initially recording the stock investment at acquisition cost, which must be adjusted annually to recognize the proportional share of the issuing company's profits or losses after the acquisition date. If it is profit, it must be recorded in the respective sub-account of account 57 "FINANCIAL AND INVESTMENT INCOME"; if it is a loss, in the respective sub-account of account 47 "FINANCIAL AND INVESTMENT EXPENSES".

Permanent stock investments of insurance companies shall be subject to treatment in another Norm.

Risk-Free Documents

Art. 10.- Securities issued or guaranteed by the Central Reserve Bank and by other State entities, payable with funds from the National Budget, shall be considered risk-free for the purposes of these Norms; consequently, the book value must be equal to the acquisition value established in Article 4 of these Norms.

Initial Recording

Art. 11.- The securities acquired by the insurance company must be accounted for at the acquisition cost net of brokerage fees, commissions, and other expenditures related to the purchase.

When securities are purchased between interest payment dates, the accrued interest from the date of the last payment to the purchase date must not form part of their cost, so they shall be recorded as interest receivable.

Brokerage fees, commissions, and any expenditure identified with the purchase must be applied to the corresponding income statement account.

Establishment of Provisions

Art. 12.- The provisions or estimates referred to in the previous articles shall be made monthly, debiting operational expenses in account 4702 named "Provision for Investment Depreciation" and crediting the supplementary asset account 1299 named "Provision for Investment Depreciation".

Recognition of Losses

Art. 13.- The recognition of a loss in an investment will result in a credit to the asset account that records the investment and a debit to the supplementary asset account up to the value provisioned corresponding to the written-off instrument; the difference, if any, shall be debited to account 4901 of expenses named "Extraordinary Expenses" – "Write-off of Investment Returns in Securities".

Release of Provisions

Art. 14.- The release of provisions will result in a credit to account 5802 "Decrease in Provisions" – "Provisions for Investments" and a debit to the supplementary asset account.

The release of provisions may be caused by a decrease in the provision requirement, by the redemption of the instrument, or by its transfer.

CHAPTER III
OTHER PROVISIONS AND EFFECTIVE DATE

Art. 15.- Insurance companies that, when establishing the provisions required by these Norms, have a decrease in their minimum net equity below the legally required amount, may present a plan for the establishment of such provisions to the Superintendence.

Art. 16.- What is not provided for in these Norms shall be resolved by the Board of Directors of the Financial System Superintendence.

Art. 17.- These norms shall be effective as of March 1, 2001.

MODIFICATIONS:
(1) The Board of Directors of the Financial System Superintendence, in Session CD 24/01 of May 17, 2001, agreed to repeal the last paragraph of Article 7, a reform that will take effect after 48 hours from the communication of the reform.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CDSSF-06/2001 NCS-018

NORMS FOR THE ACCOUNTING AND VALUATION OF SECURITIES IN THE INVESTMENT PORTFOLIO OF INSURANCE COMPANIES

Approval: 08/02/2001
Effective Date: 01/03/2001

Annex No. 1
CLASSIFICATION CATEGORIES

CATEGORIES Provision LONG-TERM DEBT SECURITIES ISSUANCE

AAA
Corresponds to those instruments whose issuers have the highest capacity to pay principal and interest on the agreed terms and deadlines, which would not be affected by possible changes in the issuer, the industry to which it belongs, or the economy.

AA
Corresponds to those instruments whose issuers have a very high capacity to pay principal and interest on the agreed terms and deadlines, which would not be affected by possible changes in the issuer, the industry to which it belongs, or the economy.

A 2%
Corresponds to those instruments whose issuers have a good capacity to pay principal and interest on the agreed terms and deadlines, but this is susceptible to slight deterioration in case of possible changes in the issuer, the industry to which it belongs, or the economy.

BBB 5%
Corresponds to those instruments whose issuers have a sufficient capacity to pay principal and interest on the agreed terms and deadlines, but this is susceptible to weakening in case of possible changes in the issuer, the industry to which it belongs, or the economy.

BB 10%
Corresponds to those instruments whose issuers have capacity to pay principal and interest on the agreed terms and deadlines, but this is variable and susceptible to deterioration in case of possible changes in the issuer, the industry to which it belongs, or the economy, potentially incurring delays in interest payments.

B 25%
Corresponds to those instruments whose issuers have the minimum capacity to pay principal and interest on the agreed terms and deadlines, but this is very variable and susceptible to deterioration in case of possible changes in the issuer, the industry to which it belongs, or the economy, potentially incurring loss of interest and principal.

C 50%
Corresponds to those instruments whose issuers do not have sufficient capacity to pay principal and interest on the agreed terms and deadlines, with a high risk of loss of capital and interest.

D 75%
Corresponds to those instruments whose issuers do not have the capacity to pay principal and interest on the agreed terms and deadlines, and which present effective default on interest or principal payments, or a bankruptcy proceeding in progress.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CDSSF-06/2001 NCS-018

NORMS FOR THE ACCOUNTING AND VALUATION OF SECURITIES IN THE INVESTMENT PORTFOLIO OF INSURANCE COMPANIES

Approval: 08/02/2001
Effective Date: 01/03/2001

Annex No. 1
CLASSIFICATION CATEGORIES

CATEGORIES Provision LONG-TERM DEBT SECURITIES ISSUANCE

E 100%
Corresponds to those instruments whose issuer has not presented sufficient information, or does not have representative information for the minimum period required for classification, in addition to the lack of sufficient guarantees.

CATEGORIES Provision SHORT-TERM DEBT SECURITIES ISSUANCE

N-1
Corresponds to those instruments whose issuers have the highest capacity to pay principal and interest on the agreed terms and deadlines, which would not be affected by possible changes in the issuer, the industry to which it belongs, or the economy.

N-2 5%
Corresponds to those instruments whose issuers have a good capacity to pay principal and interest on the agreed terms and deadlines, but this is susceptible to slight deterioration in case of possible changes in the issuer, the industry to which it belongs, or the economy.

N-3 10%
Corresponds to those instruments whose issuers have sufficient capacity to pay principal and interest on the agreed terms and deadlines, but this is susceptible to weakening in case of possible changes in the issuer, the industry to which it belongs, or the economy.

N-4 25%
Corresponds to those instruments whose issuers have capacity to pay principal and interest on the agreed terms and deadlines, which does not meet the requirements to be classified in levels N-1, N-2, N-3.

N-5 100%
Corresponds to those instruments whose issuer has not provided representative information for the minimum period required for classification, in addition to the lack of sufficient guarantees.

Source: Securities Superintendence (Except for provision percentages)

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CDSSF-06/2001 NCS-018

NORMS FOR THE ACCOUNTING AND VALUATION OF SECURITIES IN THE INVESTMENT PORTFOLIO OF INSURANCE COMPANIES

Approval: 08/02/2001
Effective Date: 01/03/2001

Annex No. 2
RISK CATEGORIES BY ISSUER

Category Provision INDICATOR

EAAA
Corresponds to those entities that have the highest capacity to pay their obligations on the agreed terms and deadlines, which would not be affected by possible changes in the entity, the industry to which it belongs, or the economy. The risk factors are insignificant.

EAA
Corresponds to those entities that have a very high capacity to pay their obligations on the agreed terms and deadlines, which would not be affected by possible changes in the entity, the industry to which it belongs, and the economy. The protection factors are strong, the risk is modest.

EA 2%
Corresponds to those entities that have a good capacity to pay their obligations on the agreed terms and deadlines, but this is susceptible to slight deterioration in case of possible changes in the entity, the industry to which it belongs, or the economy. The protection factors are satisfactory.

EBBB 5%
Corresponds to those entities that have a sufficient capacity to pay their obligations on the agreed terms and deadlines, but this is susceptible to weakening in case of possible changes in the entity, the industry to which it belongs, or the economy. The protection factors are sufficient.

EBB 10%
Corresponds to those entities that have capacity to pay their obligations on the agreed terms and deadlines, but this is variable and susceptible to deterioration in case of possible changes in the entity, the industry to which it belongs, or the economy, potentially incurring delays in the payment of their obligations. The protection factors vary widely with economic conditions and/or the acquisition of new obligations.

EB 25%
Corresponds to those entities that have the minimum capacity to pay their obligations on the agreed terms and deadlines, but this is very variable and susceptible to deterioration in case of possible changes in the entity, the industry to which it belongs, or the economy, potentially incurring loss of their obligations. The protection factors vary very widely with economic conditions.

EC 50%
Corresponds to those entities that do not have sufficient capacity to pay their obligations on the agreed terms and deadlines, with a high risk of loss of these. There is a substantial risk that contractual obligations will not be paid on time.

ED 75%
Corresponds to those entities that do not have the capacity to pay their obligations on the agreed terms and deadlines, and which present effective default on these, or a request for dissolution, liquidation, or bankruptcy in progress.

EE 100% Corresponds to those entities that do not possess sufficient information or this is not representative, which does not allow issuing an opinion on their risk.

Source: Securities Superintendence (Except for provision percentages)