Coronavirus Archives - Urish Popeck

Financial Reporting And Accounting Impact on Insurers From Coronavirus Pandemic

Posted on April 2020 by info

There are many questions that cause anxiety for insurance leaders as they navigate the business implications of the COVID-19 pandemic, including: Will the effects of the pandemic last longer than expected, thereby causing a prolonged spike in life insurance claims? What reimbursement support or relief can the health insurers expect from the federal government for claims related to testing and treatment of the virus? And as people spend more time isolating at home, will a decrease in auto claims frequency be offset by an increase in bad debt expense on premium receivable?

In the face of further uncertainty ahead, there are steps that insurers can take now to mitigate the impacts of COVID-19 on their business. Insurance leaders can look to their CFO and senior financial executives for guidance on critical accounting, financial reporting and operational decisions that can help position the business to sustain through the crisis and thrive in its wake.

Insurers should examine these four key questions to provide some clarity during this uncertain time:

1. What impact can insurers expect on asset quality and impairment?

Fixed income securities and mortgage loans make up a majority of insurance company assets. Current market volatility and a decline in the federal funds rate has caused market value declines on many insurers’ investment portfolios. Here is an analysis on some of the underlying sectors supporting the fixed income asset class.

Commercial mortgage loans (CML) and commercial mortgage-backed securities (CMBS): This asset class, which was performing well until recently, has abruptly experienced a sharp decline in value. It could be under duress over the longer term as the economic slowdown caused by the novel coronavirus continues. Take the commercial office space sector, for example. Before the COVID-19 pandemic, occupiers were already experimenting with new workplace designs to foster productivity through shared spaces, which was reducing both their footprint and, in turn, their real estate costs. Now, social distancing requirements due to COVID-19 have changed the long-term market dynamics again as companies realize the benefits of remote working on productivity and costs. Compounding the risk to the real estate sector more broadly, the COVID-19 pandemic has accelerated online shopping purchases, putting additional pressure on many brick and mortar retailers to reduce their store footprint. These underlying trends will have a lasting impact on commercial mortgage loans and mortgage-backed securities held by many insurance companies.
Municipal bonds: March saw a significant decline in the S&P Municipal Bond Index, but this recovered quickly as buyers saw bargains in this asset class. According to BlackRock: “Municipals will experience some stress alongside the U.S. economy. Muni issuers must continue to operate despite revenue uncertainty. Some segments will face daunting financial challenges, and federal support may be insufficient. Issuers with solid balance sheets will need to draw down reserves to meet obligations. Safety net hospitals, senior living facilities, mass transit and airports with limited resources will require funding from the states and municipalities they serve. Non-rated stand-alone projects may experience significant credit deterioration.” Overall, this is considered a high-quality asset class which could have some potential downgrades and credit issues along the way if the COVID-19 crisis or the following recession lasts longer than expected. But the overall credit quality in this sector is expected to remain strong.
High-quality corporate bonds: These bonds have benefited greatly from recent interventions by the Federal Reserve, such as: cutting the federal funds rate close to zero, opening a lending facility to enhance liquidity in short-term commercial paper markets, and lending directly to corporations and buying investment-grade corporate bonds. In addition, the Treasury restarted its bonds buying program. The Fed is also trying to keep bond markets liquid and functioning smoothly, but the intent is not to rescue the entire corporate bond markets. Issuers with low ratings and certain industries, such as oil and gas, hospitality, entertainment and restaurants, will continue to face downward pressure and may have a difficult time rebounding. This will result in downgrades and credit deterioration over the next several quarters.

These factors will have a direct effect on insurance company investment portfolios, and individual positions with deteriorating asset quality will increase the probability of impairment.

2. How is the NAIC providing relief to the insurance industry?

On April 16^th, 2020, the National Association of Insurance Commissioners (NAIC) adopted three interpretations in response to policies impacted the COVID-19 outbreak:

Interpretation 20-02 provides for a temporary, one-time optional extension of the 90-day rule for uncollected premium balances, bills receivable for premiums and amounts due from agents and policyholders, amounts due from policyholders for high deductible policies, and amounts due from non-government uninsured plans for uncollected uninsured plan receivables. INT 20-02 is available for policies in effect and current prior to the date as of the declaration of a state of emergency by the federal government on March 13, 2020, and policies written or renewed on or after that date.
Interpretation 20-03: Troubled Debt Restructuring Due to COVID-19, was also adopted.This interpretation clarifies that a modification of mortgage loan or bank loan terms in response to COVID-19 shall follow the provisions detailed in the April 7 “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” and the provisions of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act in determining whether the modification shall be reported as a troubled debt restructuring.
Interpretation 20-04 offers limited-time exceptions to defer assessments of impairment for bank loans, mortgage loans and investments, which predominantly hold underlying mortgage loans, that are affected by forbearance or modifications in response to the COVID-19 pandemic.

These short-term interpretations are designed to provide temporary exceptions for insurers’ March 31^st and June 30^th financial statements, but the working group will continue to review the situation and will consider whether extensions or additional interpretations are necessary.

3. How does the CARES Act benefit insurers?

The CARES Act provides significant tax relief for insurers and other mid- to large-sized companies, because it allows for net operating losses from 2018 through the end 2020 to be carried back for five years prior to the loss. This effectively reverses some provisions from the 2017 Tax Cuts and Jobs Act, which had eliminated carrybacks for net operating losses for certain companies, including life insurers.

The CARES Act now allows companies to carry net operating losses to before the effective date of the Tax Cuts and Jobs Act, in addition to being able to use the previously applicable tax rate. This has additional benefits for insurance companies that can take advantage of applicable tax credits as a result of the carrybacks. The CARES Act also allows companies to file for accelerated refunds of excess alternative minimum tax (AMT) credits by allowing them to claim the refund in full for 2018 or 2019.

These legislative changes combine to provide relief for insurers that could potentially be facing a surge in new claims because of the pandemic. Other tax savings opportunities for insurers include payroll tax credits and deferrals and tax-deductible charitable contributions. To determine eligibility for tax relief under the CARES Act, insurers should contact their tax professional for further guidance.

4. How can insurers re-establish internal control policies in a remote environment?

During the pandemic, remote working capabilities have been an important component of insurers’ business continuity plans, allowing them to continue operations while also maintaining the safety and productivity of employees. However, work-from-home arrangements may give rise to other risks, potentially compromising the integrity and security of an organization’s sensitive financial and accounting data.

For example, many employees working remotely may not have the same cybersecurity safeguards as a secure office space. Employees that use their personal devices for work can also expose an organization to increased cyber vulnerabilities. It’s critical that management work with the IT department to re-evaluate the internal control structure and make any necessary adjustments, including ensuring appropriate data retention and privacy practices, as well as confirming comprehensive cybersecurity practices for remote workers.

It remains unclear what impact the COVID-19 pandemic will have on the future earnings and growth prospects for insurers. That’s why it’s imperative for financial leaders at insurance companies to help guide their organization on the path to profitability. A key component of this is advising about all aspects of the applicable relief offered through government stimulus packages. It’s crucial to take steps now that prepare the organization for sound financial reporting and accounting strategies, which can help minimize potential risks to future operations.

What You Need To Know About Section 4001 Of The CARES Act

Posted on March 2020 by info

On March 27, Congress passed the $2 trillion “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) in order to provide “emergency assistance and health care response for individuals, families and businesses affected by the 2020 coronavirus pandemic.” The largest rescue package in American history, this historic piece of legislation includes a number of programs designed to offset the severe economic losses incurred from the COVID-19 global pandemic.

Section 4001 of the CARES Act authorizes the Secretary of the Treasury to make loans, loan guarantees, and other investments of up to $500 billion to eligible businesses operating in severely distressed sectors of the economy, states, and municipalities. The $500 billion will be allocated as follows:

$25 billion for passenger air carriers
$4 billion for cargo air carriers
$17 billion for businesses “critical to maintaining national security”
$454 billion for other eligible businesses, U.S. states, and municipalities

Unlike the CARES Act’s forgivable loan program for small businesses, these loans must be paid back and come with public disclosure requirements.

Key Terms and Conditions of the Loans

This legislation does provide specific terms and conditions related to any loan, loan guarantee, or other investment(s) provided to entities. Economic aid may be provided under this section of the CARES Act if the Secretary of the Treasury determines (at its discretion) that each of the following have been met:

The eligible business is created or organized in the U.S. with a majority of its employees based in the U.S.
The eligible business has, or is expected to, incur covered losses such that its continued operations are jeopardized.
The applicant is an eligible business for which credit is not reasonably available at the time of the transaction.
The intended obligation by the applicant is prudently incurred.
The loan or loan guarantee is sufficiently secured or is made at a rate that reflects the risk of the loan or loan guarantee.
The duration of the loan or loan guarantee is no longer than 5 years.
The eligible business cannot do the following with loan proceeds for a period of 12 months after the date of the loan or loan guarantee:
- Buy back its own stock.
- Pay dividends or make other capital distributions.
The eligible business must maintain its employment levels that existed as of March 24, 2020 through September 30, 2020 (to the extent practicable) and not reduce levels by more than 10% during this period.

Procedures for Applying

The specific procedures to apply for these loans have not yet been disclosed, but, according to the legislative text, will be published within 10 days after it is enacted. The Secretary of the Treasury will also release more detailed requirements for eligibility.

Oversight

The President will appoint a Special Inspector General for Pandemic Recovery who will be responsible for conducting, supervising, and coordinating audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Secretary under this legislation. The Special Inspector General may also obtain services from experts and consultants in connection with carrying out its administrative duties.

Insights

We can anticipate that the loan application process will require companies to provide the loan administrator with a number of documents, schedules, and analyses. This may include an analysis to demonstrate the economic losses sustained from the COVID-19 disruption and continuing operations are at risk. Other documents may include, among others, financial statements, employee headcount details and payroll records. The application may also call for companies to show that the requested loan is sufficiently secured through company assets or other collateral as well as company financial projections demonstrating the ability to repay the loan within 5 years.
How the Treasury deems what businesses are “critical to managing national security” is likely to align with the 16 critical infrastructure sectors as outlined in the Cybersecurity and Infrastructure Security Agency Act (CISA) of 2018. The Act defines critical infrastructure as any business “vital to the United States that their incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety.”
While many of the requirements for eligibility are currently unknown, we expect this will be a very far reaching loan program with a significant percentage of the market being able to apply for and secure loans.

Coronavirus Strikes Nonprofits in More Ways than One

Posted on March 2020 by info

Now present on every continent except Antarctica, COVID-19 has infected more than 125,000 people, and is responsible for more than 4,600 deaths. With the number of cases in the U.S. continuing to climb, individuals and companies alike are taking steps to prepare for a pandemic. From a shortage of masks and hand sanitizer, to CDC-imposed travel restrictions and the cancellation of conferences and other large events across the globe, this public health emergency is rapidly evolving and all sectors are having to navigate its impact and uncertainty around what the future holds.

The nonprofit industry is no exception—in fact, they face more challenges than most.

The raison d’tre of nonprofit organizations is to help make the world a better place by helping the most vulnerable sectors of the population. These constituencies are also likely to be the hardest hit by the virus. This situation indicates the importance of a healthy nonprofit sector. Many current nonprofit beneficiaries may need greater services and the number of individuals needing services will likely increase. The sector has always risen to the challenge and we don’t predict that changing.

As with previous crises, the nonprofit sector is poised to help pull the country through this latest challenge. Congress just allocated $8.6B in funding designated for coronavirus prevention, preparation and response efforts, and many nonprofits could stand to receive a portion of those funds.

At the same time, nonprofits also need to mitigate risk for their organization at large, whether that’s protecting employees or preparing for the potential financial fallout from the virus. This situation exposes the importance of resiliency in the nonprofit sector, and some organizations will be better positioned than others to manage this crisis.

While this situation is evolving daily, here are some of the key goals nonprofits should prioritize when considering their response to COVID-19.

Maintaining the Mission
Even during times of significant uncertainty, nonprofit organizations should be sure to keep their mission as the North Star guiding their response. The novel coronavirus is no exception. Many organizations may face interruptions to programming as a result of reduced travel and social distancing.

But that doesn’t mean that furthering your mission should take a backseat. Organizations should take a step back and put together a crisis management team, including executive leaders, investment advisors, communications and program staff to assess how to maintain as much normalcy as possible while limiting exposure risks to both their own employees and the constituencies they serve.

Technology can be a powerful tool to help organizations continue to deliver on their mission while limiting in-person gatherings and travel. We’ve already seen this, for example, with higher education institutions that are moving classes online. Organizations should consider bringing planned meetings and events online, or even postponing or cancelling them completely, along with office closures.

Remote work arrangements can also help organizations continue to operate as normally as possible. There is good reason to think that many nonprofits are leveraging the types of cloud-based platforms that support remote work. According to last year’s Nonprofit Standards Benchmarking Survey, 47% of organizations surveyed offer telecommuting options, and an additional 9% said they plan to in the next 1-2 years. However, the 44% of organizations that had no plans to offer telecommuting may want to consider updating their approach in light of the current situation. The reality is that some organizations may be hindered by their access to technology, or may have processes or functions that must be done in person. Those organizations should consider limiting on-site staff to only those that absolutely must be in the office.

Ultimately, regardless of the tactics a nonprofit employs, the goal should be to continue to deliver on your mission as much as possible under the current circumstances. Some nonprofits that serve vulnerable populations, for example the homeless or the elderly, may not have many options. Those that can, however, should leverage whatever tools they have available.

Safeguarding Finances
While disruption to programming and mission is important, nonprofits should also consider the potential financial fallout of the coronavirus. Many organizations in the social services space rely on physical attendance to continue to receive funding. Museums and zoos may be facing decreased ticket sales. Organizations with planned fundraising events or conferences could need to eat some of those costs if the events are not rescheduled, and “high touch” fundraising efforts may decline. Donations could also be impacted if the financial markets don’t rebound quickly. All of these forces could put nonprofits’ finances at risk.

If an organization faces financial threats that put its very existence in jeopardy, those who benefit from its mission and programming are in jeopardy as well. It’s important that organizations do whatever they can to ensure they stay financially healthy during this time of uncertainty. How organizations optimize and leverage existing revenue and reserves will be important measures of sustainability.

A key element of this is to maintain adequate liquidity, which has long been a challenge for organizations. Our benchmarking survey found that 63% of organizations have 6 months or less of operating reserves, meaning they could be at risk if this situation continues in the near term. Nonprofits should consider shoring up their reserves as much as possible in order to weather any funding delays that could be on the horizon. To do so, they should consider drawing on available lines of credit, and get in contact with lenders to ensure their credit lines are open should liquidity become an issue. Organizations should also reach out to investment advisors to discuss the liquidity available in their portfolios and how to adjust both long and short-term investment strategies if needed.

It’s also important that nonprofits communicate openly and honestly with funders, whether donors or grantmakers, about the financial challenges they may face in light of the COVID-19. Some news coverage has mentioned grant officers considering helping to cover the costs of cancelled nonprofit events. Having open conversations about your financial health can help ensure organizations are protected as much as possible.

Evolving the Approach
The spread of COVID-19 and the resulting ripple effects around the globe are happening at a rapid pace. What looks like an overreaction one day may be an appropriate response merely days later. Employees and volunteers are likely to continue to have questions about how an organization is minimizing their risk while seeking to maintain business as usual. This means that while nonprofits should look to established contingency plans, they may not be relevant for long.

Organizations should seek to evolve their response appropriately as this situation shifts over time. Pay close attention to what governments and health agencies recommend and try to follow their recommendations as much as possible. For organizations with international boots on the ground, seek to follow the measures being implemented in each of those countries.

Your organization’s leadership team should also be having regular, transparent conversations on what policies and procedures you’re putting in place. Consult with peer organizations collectively to discuss your plans to managing risk. Don’t be afraid to change your approach if the situation warrants it. It’s also important to maintain open lines of communication with employees to ensure you are hearing their concerns and factoring them into major decisions.

One of the major challenges of this situation is that no one knows for sure when concerns will abate. Regardless of what is to come, it’s critical that nonprofit organizations seek to balance furthering their mission with protecting their organizations.