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Reporting Standard LRS 120.0

Management Capital

Objective of this reporting standard

This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001. It requires all registered life insurance companies to report to APRA, in general, on a quarterly and an annual basis in relation to management capital.

This reporting standard outlines the overall requirements for the provision of relevant information to APRA. It should be read in conjunction with Form LRF 120.0 Management Capital, and the associated instructions (both of which are attached and form part of this reporting standard).

Purpose

1. Information collected in Form LRF 120.0 Management Capital (LRF 120.0) is used by APRA for the purpose of prudential supervision, including assessing compliance with prudential standards and actuarial standards where appropriate. It may also be used by the Reserve Bank of Australia, the Australian Bureau of Statistics and the Australian Securities and Investments Commission.

Application

2. This reporting standard applies to all life insurance companies including friendly societies (together referred to as life companies) registered under the Life Insurance Act 1995 (Life Insurance Act).

Information required

3. A life company must provide APRA with the information required by Form LRF 120.0 for each reporting period.

Note: the instructions for Form LRF 120.0 explain in more detail the information that is required.

4. The information required to be provided to APRA under this reporting standard is not intended to form part of the financial statements or the annual returns, within the meaning of section 124 of the Life Insurance Act, given by the life company to APRA.

Method of submission

5. The information required by this reporting standard must be given to APRA either:

(a) in electronic form using the ‘Direct to APRA’ application, applying one of the electronic submission mechanisms under that application; or

(b) by completing Form LRF 120.0 on paper and mailing the completed form to APRA

Note: the ‘Direct to APRA’ application software and paper forms may be obtained from APRA.

Reporting periods and due dates

6. Subject to paragraph 7, a life company must provide the information required by this reporting standard:

(a) in unaudited form - in respect of each quarter based on the financial year
of the life company; and

(b) in audited form - in respect of each financial year of the life company.

Note 1: this means that this form will be submitted five times for a full financial year.

Note 2: the annual audited form must be submitted in conjunction with the annual auditor’s report, as required under Prudential Standard LPS 310 Audit and Actuarial Requirements Paragraph 8.

7. APRA may, by notice in writing, change the reporting periods, or specified reporting periods, for a particular life company, to require it to provide the information required by this reporting standard more frequently, or less frequently, having regard to:

(a) the particular circumstances of the life company;

(b) the extent to which the information is required for the purposes of the prudential supervision of the life company; and

(c) the requirements of the Reserve Bank of Australia or the Australian Bureau of Statistics or the Australian Securities and Investments Commission.

8. The quarterly information required by this reporting standard in unaudited form must be provided to APRA within 20 business days after the end of the reporting period to which the information relates. The annual information required by this reporting standard in audited form must be provided to APRA within four months after the end of the reporting period to which the information relates.

9. APRA may grant a life company an extension of a due date in writing, in which case the new due date for the provision of the information will be the date on the notice of extension.

Quality control

10. The information provided by a life company under this reporting standard must be the product of processes and controls that have been reviewed and tested by the auditor of the life company.

11. All information provided by a life company under this reporting standard must be subject to processes and controls developed by the life company for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the life company to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.

12. Information provided to APRA in audited form must be audited by the auditor of the life company.

13. Actuarial valuations and calculations included in, or used in the preparation of, the information provided to APRA must be in accordance with the actuarial standards and prudential standards in force for the reporting period. However, life companies may use reasonable estimates when preparing information that will not be audited (i.e. for the first four submissions of information for a full financial year). The instructions to Form LRF 120.0 include general principles on the use of estimates.

Authorisation

14. If the officer of a life company provides the information required by this reporting standard:

(a) using Direct to APRA (D2A), the officer must digitally authorise, submit the data to APRA and receive a D2A receipt number for the information to be considered given to APRA. APRA will issue ‘digital certificates’ to officers of the life company who have authority to transmit the data to APRA; or

(b) on paper, the relevant completed form must be signed on the front page by the principal executive officer or chief financial officer of the life company.

Note: information in draft returns saved at APRA using D2A will not be considered to be provided to APRA for the purposes of the life company's obligations under this reporting standard.

Minor alterations to forms and instructions

15. APRA may make minor variations to:

(a) a form that is part of this reporting standard, and the instructions to such a form, to correct technical, programming or logical errors, inconsistencies or anomalies; or

(b) the instructions to a form, to clarify their application to the form

without changing any substantive requirement in the form or instructions.

16. If APRA makes such a variation it must notify in writing each life company that is required to report under this reporting standard.

Transitional

17. A life company must report in accordance with this reporting standard for any reporting period ending on or after 1 January 2008. However, a life company must also report to APRA in accordance with the Prudential Rules which applied before the commencement of this reporting standard in respect of any reporting period ending before 1 January 2008.

Note: as an additional transitional measure, a life company must also report to APRA in accordance with Reporting Standard LRS 901 Transitional Arrangements 2008.

Interpretation

18. In this reporting standard:

business days means ordinary business days, exclusive of Saturdays, Sundays or public holidays;

principal executive officer means the principal executive officer of the life company for the time being, by whatever name called, and whether or not he or she is a member of the governing board of the entity;

reporting period means a reporting period under paragraph 6 or, if applicable, paragraph 7.

Management Capital

Objective of this reporting standard

This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001. It requires all registered life insurance companies to report to APRA, in general, on a quarterly and an annual basis in relation to management capital.

This reporting standard outlines the overall requirements for the provision of relevant information to APRA. It should be read in conjunction with Form LRF 120.0 Management Capital, and the associated instructions (both of which are attached and form part of this reporting standard).

Purpose

1. Information collected in Form LRF 120.0 Management Capital (LRF 120.0) is used by APRA for the purpose of prudential supervision, including assessing compliance with prudential standards and actuarial standards where appropriate. It may also be used by the Reserve Bank of Australia, the Australian Bureau of Statistics and the Australian Securities and Investments Commission.

Application

2. This reporting standard applies to all life insurance companies including friendly societies (together referred to as life companies) registered under the Life Insurance Act 1995 (Life Insurance Act).

Information required

3. A life company must provide APRA with the information required by Form LRF 120.0 for each reporting period.

Note: the instructions for Form LRF 120.0 explain in more detail the information that is required.

4. The information required to be provided to APRA under this reporting standard is not intended to form part of the financial statements or the annual returns, within the meaning of section 124 of the Life Insurance Act, given by the life company to APRA.

Method of submission

5. The information required by this reporting standard must be given to APRA either:

(a) in electronic form using the ‘Direct to APRA’ application, applying one of the electronic submission mechanisms under that application; or

(b) by completing Form LRF 120.0 on paper and mailing the completed form to APRA

Note: the ‘Direct to APRA’ application software and paper forms may be obtained from APRA.

Reporting periods and due dates

6. Subject to paragraph 7, a life company must provide the information required by this reporting standard:

(a) in unaudited form - in respect of each quarter based on the financial year
of the life company; and

(b) in audited form - in respect of each financial year of the life company.

Note 1: this means that this form will be submitted five times for a full financial year.

Note 2: the annual audited form must be submitted in conjunction with the annual auditor’s report, as required under Prudential Standard LPS 310 Audit and Actuarial Requirements Paragraph 8.

7. APRA may, by notice in writing, change the reporting periods, or specified reporting periods, for a particular life company, to require it to provide the information required by this reporting standard more frequently, or less frequently, having regard to:

(a) the particular circumstances of the life company;

(b) the extent to which the information is required for the purposes of the prudential supervision of the life company; and

(c) the requirements of the Reserve Bank of Australia or the Australian Bureau of Statistics or the Australian Securities and Investments Commission.

8. The quarterly information required by this reporting standard in unaudited form must be provided to APRA within 20 business days after the end of the reporting period to which the information relates. The annual information required by this reporting standard in audited form must be provided to APRA within four months after the end of the reporting period to which the information relates.

9. APRA may grant a life company an extension of a due date in writing, in which case the new due date for the provision of the information will be the date on the notice of extension.

Quality control

10. The information provided by a life company under this reporting standard must be the product of processes and controls that have been reviewed and tested by the auditor of the life company.

11. All information provided by a life company under this reporting standard must be subject to processes and controls developed by the life company for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the life company to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.

12. Information provided to APRA in audited form must be audited by the auditor of the life company.

13. Actuarial valuations and calculations included in, or used in the preparation of, the information provided to APRA must be in accordance with the actuarial standards and prudential standards in force for the reporting period. However, life companies may use reasonable estimates when preparing information that will not be audited (i.e. for the first four submissions of information for a full financial year). The instructions to Form LRF 120.0 include general principles on the use of estimates.

Authorisation

14. If the officer of a life company provides the information required by this reporting standard:

(a) using Direct to APRA (D2A), the officer must digitally authorise, submit the data to APRA and receive a D2A receipt number for the information to be considered given to APRA. APRA will issue ‘digital certificates’ to officers of the life company who have authority to transmit the data to APRA; or

(b) on paper, the relevant completed form must be signed on the front page by the principal executive officer or chief financial officer of the life company.

Note: information in draft returns saved at APRA using D2A will not be considered to be provided to APRA for the purposes of the life company's obligations under this reporting standard.

Minor alterations to forms and instructions

15. APRA may make minor variations to:

(a) a form that is part of this reporting standard, and the instructions to such a form, to correct technical, programming or logical errors, inconsistencies or anomalies; or

(b) the instructions to a form, to clarify their application to the form

without changing any substantive requirement in the form or instructions.

16. If APRA makes such a variation it must notify in writing each life company that is required to report under this reporting standard.

Transitional

17. A life company must report in accordance with this reporting standard for any reporting period ending on or after 1 January 2008. However, a life company must also report to APRA in accordance with the Prudential Rules which applied before the commencement of this reporting standard in respect of any reporting period ending before 1 January 2008.

Note: as an additional transitional measure, a life company must also report to APRA in accordance with Reporting Standard LRS 901 Transitional Arrangements 2008.

Interpretation

18. In this reporting standard:

business days means ordinary business days, exclusive of Saturdays, Sundays or public holidays;

principal executive officer means the principal executive officer of the life company for the time being, by whatever name called, and whether or not he or she is a member of the governing board of the entity;

reporting period means a reporting period under paragraph 6 or, if applicable, paragraph 7.

Objective of this reporting standard

This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001. It requires all registered life insurance companies to report to APRA, in general, on a quarterly and an annual basis in relation to management capital.

This reporting standard outlines the overall requirements for the provision of relevant information to APRA. It should be read in conjunction with Form LRF 120.0 Management Capital, and the associated instructions (both of which are attached and form part of this reporting standard).

Transitional

17. A life company must report in accordance with this reporting standard for any reporting period ending on or after 1 January 2008. However, a life company must also report to APRA in accordance with the Prudential Rules which applied before the commencement of this reporting standard in respect of any reporting period ending before 1 January 2008.

Note: as an additional transitional measure, a life company must also report to APRA in accordance with Reporting Standard LRS 901 Transitional Arrangements 2008.

Interpretation

18. In this reporting standard:

business days means ordinary business days, exclusive of Saturdays, Sundays or public holidays;

principal executive officer means the principal executive officer of the life company for the time being, by whatever name called, and whether or not he or she is a member of the governing board of the entity;

reporting period means a reporting period under paragraph 6 or, if applicable, paragraph 7.

Reporting Form LRF 120.0

Management Capital

Instruction Guide

Introduction

Form LRF 120.0 Management Capital (LRF 120.0) provides APRA with the necessary information on the management capital requirement of the shareholders’ fund, as well as management capital reserve & ratio, component details, and the prudential capital requirement & coverage, to undertake an assessment of the adequacy of a life insurance company’s capital position outside of its statutory funds. It also assists APRA in the supervision of compliance with the requirements of the Life Insurance Act 1995.

This Instruction Guide is designed to assist reporting entities in the completion of LRF 120.0. The Instruction Guide provides:

• general directions and notes regarding preparation and lodgement; and
• instructions relating to specific items.

General directions and notes

Reporting levels

LRF 120.0 must be completed by all life insurance companies, including friendly societies.

The form is to be completed for the shareholders’ fund (management fund) only.

LRF 120.0 contains four sections:

1. Management Capital Requirement;
2. Management Capital Reserve/Ratio/Coverage;
3. Management Capital Inadmissible Assets; and
4. Management Capital Resilience Requirement.

Within each section, reporting items are to be completed at total fund level.

Unit of measurement

LRF 120.0 is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.

Definitions

Definitions for data reporting items required by this form have been provided where appropriate in the instructions under the section headed ‘Instructions for specific items’.

Definitions, unless specified, apply to all life insurance companies, including friendly societies as if each reference to a statutory fund, or shareholders’ fund, were a reference to an approved benefit fund, or management fund, respectively. Likewise, reference to shareholders should be taken to embrace ‘members’ of a mutual association and/or a society. The term ‘life companies’ or ‘life insurance companies’ includes friendly societies unless stated otherwise. This is in line with the usage of terms in the Life Insurance Act 1995.

Reporting period

Life companies are required to report the information in the reporting form on a quarterly and annual basis.

• The quarterly information is to be completed as at the end of each quarter based on the financial year of the life company, not the calendar year.
• The annual information is to be completed as at the end of the financial year of the life company.
• The financial information requested in this form is to be reported as at the close of business for the last day of the reporting period.

Basis of preparation

In completing this form, unless specifically stated otherwise, institutions are to follow the basis that is used for the preparation of the annual financial statements in accordance with the Australian accounting standards.

Asset values are to include interest or dividend income accrued but not received. All assets of a statutory fund are to be reported in this form at Fair Value, with movements in Fair Values recognised in Profit or Loss. NB this treatment differs from Australian accounting standards, which do not allow assets to be valued at Fair Value in all circumstances eg owner occupied property.

Actuarial valuations and calculations included in, or used in the preparation of, the form must be in accordance with prudential standards.

Whilst maintaining that the requirements of Prudential Standard LPS 6.03 Management Capital Standard (LPS 6.03) apply on a continuous basis, APRA recognises that for some periods life insurance companies (including friendly societies) may not carry out full accounting, actuarial valuation, and audit procedures or do so in sufficient time to report on the return (for quarterly returns). Where this applies, some estimation could be applied reasonably at the current quarter to determine an approximation to the results that would be obtained if full detailed valuations had been carried out.

APRA expects that all life insurance companies (including friendly societies) will utilise their best endeavours to ensure that any estimations adopted are a good and reasonable basis of approximation. The estimation process needs to be sufficiently rigorous in order to be acceptable and at a minimum should be of a standard that would be considered appropriate for use in reporting to management and the Board of directors. APRA generally expects that the approximation methodology used will be approved by the Appointed Actuary; this provides an assurance that he or she is satisfied that the methods should be reasonably acceptable and consistent with the requirements in LPS 6.03.

If additional clarification is required for specific items in this form, reference should be made to the section ‘Instructions for specific items’, which is provided as a guide.

Instructions for specific items

This form is designed to report items defined by the relevant LPS 6.03, as referred to above. Therefore the following instructions are largely intended to deal with matters not already defined or discussed in the Actuarial Standard or to highlight particular aspects of the reporting requirements.

While these instructions apply to all life insurance companies, including friendly societies, not all items may be applicable to both: some items may not be applicable to friendly societies while others may not be applicable to life insurers.

1. Management Capital Requirement

This part of the form consists of Items 1.1 to 1.9 inclusive. This section of the form aligns directly with the methodology of LPS 6.03 as set out in Section 6 of that standard. Note that some elements in this part of the form are applicable only in the case of friendly societies.

1.3. Total Amount of Liabilities for Management Capital purposes ( = L ) [derived item]

This is calculated automatically by derivations contained within the form and represents the sum of item 1.1.4 and item 1.2.3.

1.4. Management Capital Inadmissible Assets Reserve (see Section 3) [derived item]

This equals to the total inadmissible amount calculated under section 3. This item will be derived automatically by the form, i.e. no separate entry is required.

1.6. Solvency Requirement of the Shareholders’ Fund [derived item]

This is calculated automatically by derivations contained within the form, as the sum of total amount of liabilities (item 1.3), inadmissible assets reserve (item 1.4) and resilience reserve (item 1.5.3).

2.2. Management Capital Reserve [derived item]

This is calculated automatically by derivations contained within the form, as:

Total Management Capital Requirement (Item 1.9)

less

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve calculated in this manner relates only to the requirements of LPS 6.03, and is before consideration of the Prudential Capital Requirement established in accordance with Prudential Standards No. 3 (PS3). As such, it agrees with the description of ‘Management Capital Reserve’ included in Attachment E to APRA’s letter of 15 March 2006 to CEO’s of all registered life insurance companies other than friendly societies, titled ‘Updated Version of APRA Life Insurance Diskette (version 6) for IFRS’.

2.3. Management Capital Reserve Ratio (%) [derived item]

This is calculated automatically by derivations contained within the form, as:

Management Capital Reserve (Item 2.2)

divided by

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve Ratio (%) calculated in this manner again relates only to the requirements of LPS 6.03, and is before consideration of the Minimum Capital Amount established in accordance with PS3. While it is consistent with the corresponding reserve ratio calculated in LRF 100.0 Solvency and also with the reserve ratio calculated in LRF 110.0 Capital Adequacy in that it only reflects the capital requirement of the relevant actuarial standard, it differs from the description of ‘Management Capital Reserve %’ included in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Item 2.2). The latter included the Minimum Capital Amount before deriving the Reserve Ratio even though the description ‘Management Capital’ was still included.

2.4. Prudential Capital Requirement – Prescribed Minimum Capital Amount

This is the requirement established in accordance with PS3.

2.5. Prudential Capital Requirement [derived item]

This is calculated automatically by derivations contained within the form, as the greater of the Management Capital Reserve (Item 2.2) and the Minimum Capital Amount (Item 2.4).

2.6. Amounts Available for Prudential Capital Requirement

This is the amount that will be compared with the Management Capital Reserve to establish ‘coverage’. It should reconcile with the Shareholder Fund net assets in LRF 300.2 Statement of Financial Position (SF Total, SHF, SH Elim, Entity) (LRF 300.2).

2.7. Prudential Capital Coverage [derived item]

This is calculated automatically by derivations contained within the form, as:

Amounts Available for Prudential Capital Requirement (Item 2.6)

divided by

Prudential Capital Requirement (Item 2.5)

The Prudential Capital Coverage calculated in this manner is consistent with the corresponding calculation described as ‘Coverage of Capital Requirement’ in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Items 2.2 and 2.3).

3. Inadmissible Assets

In completing this section, life companies should refer to LPS 6.03 Section 9.

Amounts entered in the Value column are the full value of any asset which is wholly or partly inadmissible, and should be consistent with what is reported in LRF 300.2. A Value entry is not required for Item 3.4.

Amounts entered in the Inadmissible Amounts column represent the inadmissible portion of the assets reported in the Value column. These amounts add up to the Inadmissible Assets Reserve.

4. Resilience requirements

While the first ‘Adjustment’ column relates solely to the Yield change element of Credit Risk, the second ‘Adjustment’ column reflects not only the yield change, but also the application of Diversification benefit. The insertion of this further column assists in making the logical flow of this part of the form align more closely with the methodology in LPS 6.03.

Please refer to the instruction guide for LRF 300.1 and LRF 300.2 for definition of items under asset and liability category.

4.1.12. Assets with non-standard resilience factors

This asset class should only be used in rare cases. It is intended to cover situations where assets are disaggregated into (1) an identifiable sub-asset and (2) a residual that does not fit into any of the asset sectors specified by LPS 6.03 for resilience purposes, or where a non-standard resilience risk has been modelled in accordance with paragraph 10.9 of LPS 6.03.

4.2. Assets with no resilience requirement

This is for assets that are admissible but do not have resilience requirements.

4.3. Total Admissible Assets

The sum of Item 4.3 and the Inadmissible Amounts items 3.1, 3.2, 3.3 and 3.5 should be equal to the total assets in LRF 300.2.

4.4.2. Effective borrowings

These are to be calculated on a look through basis.

Reporting Form LRF 120.0

Management Capital

Instruction Guide

Introduction

Form LRF 120.0 Management Capital (LRF 120.0) provides APRA with the necessary information on the management capital requirement of the shareholders’ fund, as well as management capital reserve & ratio, component details, and the prudential capital requirement & coverage, to undertake an assessment of the adequacy of a life insurance company’s capital position outside of its statutory funds. It also assists APRA in the supervision of compliance with the requirements of the Life Insurance Act 1995.

This Instruction Guide is designed to assist reporting entities in the completion of LRF 120.0. The Instruction Guide provides:

• general directions and notes regarding preparation and lodgement; and
• instructions relating to specific items.

General directions and notes

Reporting levels

LRF 120.0 must be completed by all life insurance companies, including friendly societies.

The form is to be completed for the shareholders’ fund (management fund) only.

LRF 120.0 contains four sections:

1. Management Capital Requirement;
2. Management Capital Reserve/Ratio/Coverage;
3. Management Capital Inadmissible Assets; and
4. Management Capital Resilience Requirement.

Within each section, reporting items are to be completed at total fund level.

Unit of measurement

LRF 120.0 is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.

Definitions

Definitions for data reporting items required by this form have been provided where appropriate in the instructions under the section headed ‘Instructions for specific items’.

Definitions, unless specified, apply to all life insurance companies, including friendly societies as if each reference to a statutory fund, or shareholders’ fund, were a reference to an approved benefit fund, or management fund, respectively. Likewise, reference to shareholders should be taken to embrace ‘members’ of a mutual association and/or a society. The term ‘life companies’ or ‘life insurance companies’ includes friendly societies unless stated otherwise. This is in line with the usage of terms in the Life Insurance Act 1995.

Reporting period

Life companies are required to report the information in the reporting form on a quarterly and annual basis.

• The quarterly information is to be completed as at the end of each quarter based on the financial year of the life company, not the calendar year.
• The annual information is to be completed as at the end of the financial year of the life company.
• The financial information requested in this form is to be reported as at the close of business for the last day of the reporting period.

Basis of preparation

In completing this form, unless specifically stated otherwise, institutions are to follow the basis that is used for the preparation of the annual financial statements in accordance with the Australian accounting standards.

Asset values are to include interest or dividend income accrued but not received. All assets of a statutory fund are to be reported in this form at Fair Value, with movements in Fair Values recognised in Profit or Loss. NB this treatment differs from Australian accounting standards, which do not allow assets to be valued at Fair Value in all circumstances eg owner occupied property.

Actuarial valuations and calculations included in, or used in the preparation of, the form must be in accordance with prudential standards.

Whilst maintaining that the requirements of Prudential Standard LPS 6.03 Management Capital Standard (LPS 6.03) apply on a continuous basis, APRA recognises that for some periods life insurance companies (including friendly societies) may not carry out full accounting, actuarial valuation, and audit procedures or do so in sufficient time to report on the return (for quarterly returns). Where this applies, some estimation could be applied reasonably at the current quarter to determine an approximation to the results that would be obtained if full detailed valuations had been carried out.

APRA expects that all life insurance companies (including friendly societies) will utilise their best endeavours to ensure that any estimations adopted are a good and reasonable basis of approximation. The estimation process needs to be sufficiently rigorous in order to be acceptable and at a minimum should be of a standard that would be considered appropriate for use in reporting to management and the Board of directors. APRA generally expects that the approximation methodology used will be approved by the Appointed Actuary; this provides an assurance that he or she is satisfied that the methods should be reasonably acceptable and consistent with the requirements in LPS 6.03.

If additional clarification is required for specific items in this form, reference should be made to the section ‘Instructions for specific items’, which is provided as a guide.

Instructions for specific items

This form is designed to report items defined by the relevant LPS 6.03, as referred to above. Therefore the following instructions are largely intended to deal with matters not already defined or discussed in the Actuarial Standard or to highlight particular aspects of the reporting requirements.

While these instructions apply to all life insurance companies, including friendly societies, not all items may be applicable to both: some items may not be applicable to friendly societies while others may not be applicable to life insurers.

1. Management Capital Requirement

This part of the form consists of Items 1.1 to 1.9 inclusive. This section of the form aligns directly with the methodology of LPS 6.03 as set out in Section 6 of that standard. Note that some elements in this part of the form are applicable only in the case of friendly societies.

1.3. Total Amount of Liabilities for Management Capital purposes ( = L ) [derived item]

This is calculated automatically by derivations contained within the form and represents the sum of item 1.1.4 and item 1.2.3.

1.4. Management Capital Inadmissible Assets Reserve (see Section 3) [derived item]

This equals to the total inadmissible amount calculated under section 3. This item will be derived automatically by the form, i.e. no separate entry is required.

1.6. Solvency Requirement of the Shareholders’ Fund [derived item]

This is calculated automatically by derivations contained within the form, as the sum of total amount of liabilities (item 1.3), inadmissible assets reserve (item 1.4) and resilience reserve (item 1.5.3).

2.2. Management Capital Reserve [derived item]

This is calculated automatically by derivations contained within the form, as:

Total Management Capital Requirement (Item 1.9)

less

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve calculated in this manner relates only to the requirements of LPS 6.03, and is before consideration of the Prudential Capital Requirement established in accordance with Prudential Standards No. 3 (PS3). As such, it agrees with the description of ‘Management Capital Reserve’ included in Attachment E to APRA’s letter of 15 March 2006 to CEO’s of all registered life insurance companies other than friendly societies, titled ‘Updated Version of APRA Life Insurance Diskette (version 6) for IFRS’.

2.3. Management Capital Reserve Ratio (%) [derived item]

This is calculated automatically by derivations contained within the form, as:

Management Capital Reserve (Item 2.2)

divided by

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve Ratio (%) calculated in this manner again relates only to the requirements of LPS 6.03, and is before consideration of the Minimum Capital Amount established in accordance with PS3. While it is consistent with the corresponding reserve ratio calculated in LRF 100.0 Solvency and also with the reserve ratio calculated in LRF 110.0 Capital Adequacy in that it only reflects the capital requirement of the relevant actuarial standard, it differs from the description of ‘Management Capital Reserve %’ included in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Item 2.2). The latter included the Minimum Capital Amount before deriving the Reserve Ratio even though the description ‘Management Capital’ was still included.

2.4. Prudential Capital Requirement – Prescribed Minimum Capital Amount

This is the requirement established in accordance with PS3.

2.5. Prudential Capital Requirement [derived item]

This is calculated automatically by derivations contained within the form, as the greater of the Management Capital Reserve (Item 2.2) and the Minimum Capital Amount (Item 2.4).

2.6. Amounts Available for Prudential Capital Requirement

This is the amount that will be compared with the Management Capital Reserve to establish ‘coverage’. It should reconcile with the Shareholder Fund net assets in LRF 300.2 Statement of Financial Position (SF Total, SHF, SH Elim, Entity) (LRF 300.2).

2.7. Prudential Capital Coverage [derived item]

This is calculated automatically by derivations contained within the form, as:

Amounts Available for Prudential Capital Requirement (Item 2.6)

divided by

Prudential Capital Requirement (Item 2.5)

The Prudential Capital Coverage calculated in this manner is consistent with the corresponding calculation described as ‘Coverage of Capital Requirement’ in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Items 2.2 and 2.3).

3. Inadmissible Assets

In completing this section, life companies should refer to LPS 6.03 Section 9.

Amounts entered in the Value column are the full value of any asset which is wholly or partly inadmissible, and should be consistent with what is reported in LRF 300.2. A Value entry is not required for Item 3.4.

Amounts entered in the Inadmissible Amounts column represent the inadmissible portion of the assets reported in the Value column. These amounts add up to the Inadmissible Assets Reserve.

4. Resilience requirements

While the first ‘Adjustment’ column relates solely to the Yield change element of Credit Risk, the second ‘Adjustment’ column reflects not only the yield change, but also the application of Diversification benefit. The insertion of this further column assists in making the logical flow of this part of the form align more closely with the methodology in LPS 6.03.

Please refer to the instruction guide for LRF 300.1 and LRF 300.2 for definition of items under asset and liability category.

4.1.12. Assets with non-standard resilience factors

This asset class should only be used in rare cases. It is intended to cover situations where assets are disaggregated into (1) an identifiable sub-asset and (2) a residual that does not fit into any of the asset sectors specified by LPS 6.03 for resilience purposes, or where a non-standard resilience risk has been modelled in accordance with paragraph 10.9 of LPS 6.03.

4.2. Assets with no resilience requirement

This is for assets that are admissible but do not have resilience requirements.

4.3. Total Admissible Assets

The sum of Item 4.3 and the Inadmissible Amounts items 3.1, 3.2, 3.3 and 3.5 should be equal to the total assets in LRF 300.2.

4.4.2. Effective borrowings

These are to be calculated on a look through basis.

Introduction

Form LRF 120.0 Management Capital (LRF 120.0) provides APRA with the necessary information on the management capital requirement of the shareholders’ fund, as well as management capital reserve & ratio, component details, and the prudential capital requirement & coverage, to undertake an assessment of the adequacy of a life insurance company’s capital position outside of its statutory funds. It also assists APRA in the supervision of compliance with the requirements of the Life Insurance Act 1995.

This Instruction Guide is designed to assist reporting entities in the completion of LRF 120.0. The Instruction Guide provides:

• general directions and notes regarding preparation and lodgement; and
• instructions relating to specific items.

Reporting Form LRF 120.0

Management Capital

Instruction Guide

Introduction

Form LRF 120.0 Management Capital (LRF 120.0) provides APRA with the necessary information on the management capital requirement of the shareholders’ fund, as well as management capital reserve & ratio, component details, and the prudential capital requirement & coverage, to undertake an assessment of the adequacy of a life insurance company’s capital position outside of its statutory funds. It also assists APRA in the supervision of compliance with the requirements of the Life Insurance Act 1995.

This Instruction Guide is designed to assist reporting entities in the completion of LRF 120.0. The Instruction Guide provides:

• general directions and notes regarding preparation and lodgement; and
• instructions relating to specific items.

General directions and notes

Reporting levels

LRF 120.0 must be completed by all life insurance companies, including friendly societies.

The form is to be completed for the shareholders’ fund (management fund) only.

LRF 120.0 contains four sections:

1. Management Capital Requirement;
2. Management Capital Reserve/Ratio/Coverage;
3. Management Capital Inadmissible Assets; and
4. Management Capital Resilience Requirement.

Within each section, reporting items are to be completed at total fund level.

Unit of measurement

LRF 120.0 is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.

Definitions

Definitions for data reporting items required by this form have been provided where appropriate in the instructions under the section headed ‘Instructions for specific items’.

Definitions, unless specified, apply to all life insurance companies, including friendly societies as if each reference to a statutory fund, or shareholders’ fund, were a reference to an approved benefit fund, or management fund, respectively. Likewise, reference to shareholders should be taken to embrace ‘members’ of a mutual association and/or a society. The term ‘life companies’ or ‘life insurance companies’ includes friendly societies unless stated otherwise. This is in line with the usage of terms in the Life Insurance Act 1995.

Reporting period

Life companies are required to report the information in the reporting form on a quarterly and annual basis.

• The quarterly information is to be completed as at the end of each quarter based on the financial year of the life company, not the calendar year.
• The annual information is to be completed as at the end of the financial year of the life company.
• The financial information requested in this form is to be reported as at the close of business for the last day of the reporting period.

Basis of preparation

In completing this form, unless specifically stated otherwise, institutions are to follow the basis that is used for the preparation of the annual financial statements in accordance with the Australian accounting standards.

Asset values are to include interest or dividend income accrued but not received. All assets of a statutory fund are to be reported in this form at Fair Value, with movements in Fair Values recognised in Profit or Loss. NB this treatment differs from Australian accounting standards, which do not allow assets to be valued at Fair Value in all circumstances eg owner occupied property.

Actuarial valuations and calculations included in, or used in the preparation of, the form must be in accordance with prudential standards.

Whilst maintaining that the requirements of Prudential Standard LPS 6.03 Management Capital Standard (LPS 6.03) apply on a continuous basis, APRA recognises that for some periods life insurance companies (including friendly societies) may not carry out full accounting, actuarial valuation, and audit procedures or do so in sufficient time to report on the return (for quarterly returns). Where this applies, some estimation could be applied reasonably at the current quarter to determine an approximation to the results that would be obtained if full detailed valuations had been carried out.

APRA expects that all life insurance companies (including friendly societies) will utilise their best endeavours to ensure that any estimations adopted are a good and reasonable basis of approximation. The estimation process needs to be sufficiently rigorous in order to be acceptable and at a minimum should be of a standard that would be considered appropriate for use in reporting to management and the Board of directors. APRA generally expects that the approximation methodology used will be approved by the Appointed Actuary; this provides an assurance that he or she is satisfied that the methods should be reasonably acceptable and consistent with the requirements in LPS 6.03.

If additional clarification is required for specific items in this form, reference should be made to the section ‘Instructions for specific items’, which is provided as a guide.

Instructions for specific items

This form is designed to report items defined by the relevant LPS 6.03, as referred to above. Therefore the following instructions are largely intended to deal with matters not already defined or discussed in the Actuarial Standard or to highlight particular aspects of the reporting requirements.

While these instructions apply to all life insurance companies, including friendly societies, not all items may be applicable to both: some items may not be applicable to friendly societies while others may not be applicable to life insurers.

1. Management Capital Requirement

This part of the form consists of Items 1.1 to 1.9 inclusive. This section of the form aligns directly with the methodology of LPS 6.03 as set out in Section 6 of that standard. Note that some elements in this part of the form are applicable only in the case of friendly societies.

1.3. Total Amount of Liabilities for Management Capital purposes ( = L ) [derived item]

This is calculated automatically by derivations contained within the form and represents the sum of item 1.1.4 and item 1.2.3.

1.4. Management Capital Inadmissible Assets Reserve (see Section 3) [derived item]

This equals to the total inadmissible amount calculated under section 3. This item will be derived automatically by the form, i.e. no separate entry is required.

1.6. Solvency Requirement of the Shareholders’ Fund [derived item]

This is calculated automatically by derivations contained within the form, as the sum of total amount of liabilities (item 1.3), inadmissible assets reserve (item 1.4) and resilience reserve (item 1.5.3).

2.2. Management Capital Reserve [derived item]

This is calculated automatically by derivations contained within the form, as:

Total Management Capital Requirement (Item 1.9)

less

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve calculated in this manner relates only to the requirements of LPS 6.03, and is before consideration of the Prudential Capital Requirement established in accordance with Prudential Standards No. 3 (PS3). As such, it agrees with the description of ‘Management Capital Reserve’ included in Attachment E to APRA’s letter of 15 March 2006 to CEO’s of all registered life insurance companies other than friendly societies, titled ‘Updated Version of APRA Life Insurance Diskette (version 6) for IFRS’.

2.3. Management Capital Reserve Ratio (%) [derived item]

This is calculated automatically by derivations contained within the form, as:

Management Capital Reserve (Item 2.2)

divided by

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve Ratio (%) calculated in this manner again relates only to the requirements of LPS 6.03, and is before consideration of the Minimum Capital Amount established in accordance with PS3. While it is consistent with the corresponding reserve ratio calculated in LRF 100.0 Solvency and also with the reserve ratio calculated in LRF 110.0 Capital Adequacy in that it only reflects the capital requirement of the relevant actuarial standard, it differs from the description of ‘Management Capital Reserve %’ included in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Item 2.2). The latter included the Minimum Capital Amount before deriving the Reserve Ratio even though the description ‘Management Capital’ was still included.

2.4. Prudential Capital Requirement – Prescribed Minimum Capital Amount

This is the requirement established in accordance with PS3.

2.5. Prudential Capital Requirement [derived item]

This is calculated automatically by derivations contained within the form, as the greater of the Management Capital Reserve (Item 2.2) and the Minimum Capital Amount (Item 2.4).

2.6. Amounts Available for Prudential Capital Requirement

This is the amount that will be compared with the Management Capital Reserve to establish ‘coverage’. It should reconcile with the Shareholder Fund net assets in LRF 300.2 Statement of Financial Position (SF Total, SHF, SH Elim, Entity) (LRF 300.2).

2.7. Prudential Capital Coverage [derived item]

This is calculated automatically by derivations contained within the form, as:

Amounts Available for Prudential Capital Requirement (Item 2.6)

divided by

Prudential Capital Requirement (Item 2.5)

The Prudential Capital Coverage calculated in this manner is consistent with the corresponding calculation described as ‘Coverage of Capital Requirement’ in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Items 2.2 and 2.3).

3. Inadmissible Assets

In completing this section, life companies should refer to LPS 6.03 Section 9.

Amounts entered in the Value column are the full value of any asset which is wholly or partly inadmissible, and should be consistent with what is reported in LRF 300.2. A Value entry is not required for Item 3.4.

Amounts entered in the Inadmissible Amounts column represent the inadmissible portion of the assets reported in the Value column. These amounts add up to the Inadmissible Assets Reserve.

4. Resilience requirements

While the first ‘Adjustment’ column relates solely to the Yield change element of Credit Risk, the second ‘Adjustment’ column reflects not only the yield change, but also the application of Diversification benefit. The insertion of this further column assists in making the logical flow of this part of the form align more closely with the methodology in LPS 6.03.

Please refer to the instruction guide for LRF 300.1 and LRF 300.2 for definition of items under asset and liability category.

4.1.12. Assets with non-standard resilience factors

This asset class should only be used in rare cases. It is intended to cover situations where assets are disaggregated into (1) an identifiable sub-asset and (2) a residual that does not fit into any of the asset sectors specified by LPS 6.03 for resilience purposes, or where a non-standard resilience risk has been modelled in accordance with paragraph 10.9 of LPS 6.03.

4.2. Assets with no resilience requirement

This is for assets that are admissible but do not have resilience requirements.

4.3. Total Admissible Assets

The sum of Item 4.3 and the Inadmissible Amounts items 3.1, 3.2, 3.3 and 3.5 should be equal to the total assets in LRF 300.2.

4.4.2. Effective borrowings

These are to be calculated on a look through basis.

Reporting levels

LRF 120.0 must be completed by all life insurance companies, including friendly societies.

The form is to be completed for the shareholders’ fund (management fund) only.

LRF 120.0 contains four sections:

1. Management Capital Requirement;
2. Management Capital Reserve/Ratio/Coverage;
3. Management Capital Inadmissible Assets; and
4. Management Capital Resilience Requirement.

Within each section, reporting items are to be completed at total fund level.

Unit of measurement

LRF 120.0 is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.

Definitions

Definitions for data reporting items required by this form have been provided where appropriate in the instructions under the section headed ‘Instructions for specific items’.

Definitions, unless specified, apply to all life insurance companies, including friendly societies as if each reference to a statutory fund, or shareholders’ fund, were a reference to an approved benefit fund, or management fund, respectively. Likewise, reference to shareholders should be taken to embrace ‘members’ of a mutual association and/or a society. The term ‘life companies’ or ‘life insurance companies’ includes friendly societies unless stated otherwise. This is in line with the usage of terms in the Life Insurance Act 1995.

Reporting period

Life companies are required to report the information in the reporting form on a quarterly and annual basis.

• The quarterly information is to be completed as at the end of each quarter based on the financial year of the life company, not the calendar year.
• The annual information is to be completed as at the end of the financial year of the life company.
• The financial information requested in this form is to be reported as at the close of business for the last day of the reporting period.

Basis of preparation

In completing this form, unless specifically stated otherwise, institutions are to follow the basis that is used for the preparation of the annual financial statements in accordance with the Australian accounting standards.

Asset values are to include interest or dividend income accrued but not received. All assets of a statutory fund are to be reported in this form at Fair Value, with movements in Fair Values recognised in Profit or Loss. NB this treatment differs from Australian accounting standards, which do not allow assets to be valued at Fair Value in all circumstances eg owner occupied property.

Actuarial valuations and calculations included in, or used in the preparation of, the form must be in accordance with prudential standards.

Whilst maintaining that the requirements of Prudential Standard LPS 6.03 Management Capital Standard (LPS 6.03) apply on a continuous basis, APRA recognises that for some periods life insurance companies (including friendly societies) may not carry out full accounting, actuarial valuation, and audit procedures or do so in sufficient time to report on the return (for quarterly returns). Where this applies, some estimation could be applied reasonably at the current quarter to determine an approximation to the results that would be obtained if full detailed valuations had been carried out.

APRA expects that all life insurance companies (including friendly societies) will utilise their best endeavours to ensure that any estimations adopted are a good and reasonable basis of approximation. The estimation process needs to be sufficiently rigorous in order to be acceptable and at a minimum should be of a standard that would be considered appropriate for use in reporting to management and the Board of directors. APRA generally expects that the approximation methodology used will be approved by the Appointed Actuary; this provides an assurance that he or she is satisfied that the methods should be reasonably acceptable and consistent with the requirements in LPS 6.03.

If additional clarification is required for specific items in this form, reference should be made to the section ‘Instructions for specific items’, which is provided as a guide.

Instructions for specific items

This form is designed to report items defined by the relevant LPS 6.03, as referred to above. Therefore the following instructions are largely intended to deal with matters not already defined or discussed in the Actuarial Standard or to highlight particular aspects of the reporting requirements.

While these instructions apply to all life insurance companies, including friendly societies, not all items may be applicable to both: some items may not be applicable to friendly societies while others may not be applicable to life insurers.

1. Management Capital Requirement

This part of the form consists of Items 1.1 to 1.9 inclusive. This section of the form aligns directly with the methodology of LPS 6.03 as set out in Section 6 of that standard. Note that some elements in this part of the form are applicable only in the case of friendly societies.

1.3. Total Amount of Liabilities for Management Capital purposes ( = L ) [derived item]

This is calculated automatically by derivations contained within the form and represents the sum of item 1.1.4 and item 1.2.3.

1.4. Management Capital Inadmissible Assets Reserve (see Section 3) [derived item]

This equals to the total inadmissible amount calculated under section 3. This item will be derived automatically by the form, i.e. no separate entry is required.

1.6. Solvency Requirement of the Shareholders’ Fund [derived item]

This is calculated automatically by derivations contained within the form, as the sum of total amount of liabilities (item 1.3), inadmissible assets reserve (item 1.4) and resilience reserve (item 1.5.3).

2.2. Management Capital Reserve [derived item]

This is calculated automatically by derivations contained within the form, as:

Total Management Capital Requirement (Item 1.9)

less

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve calculated in this manner relates only to the requirements of LPS 6.03, and is before consideration of the Prudential Capital Requirement established in accordance with Prudential Standards No. 3 (PS3). As such, it agrees with the description of ‘Management Capital Reserve’ included in Attachment E to APRA’s letter of 15 March 2006 to CEO’s of all registered life insurance companies other than friendly societies, titled ‘Updated Version of APRA Life Insurance Diskette (version 6) for IFRS’.

2.3. Management Capital Reserve Ratio (%) [derived item]

This is calculated automatically by derivations contained within the form, as:

Management Capital Reserve (Item 2.2)

divided by

Total Liabilities of Shareholders’ Fund (Item 2.1)

The Management Capital Reserve Ratio (%) calculated in this manner again relates only to the requirements of LPS 6.03, and is before consideration of the Minimum Capital Amount established in accordance with PS3. While it is consistent with the corresponding reserve ratio calculated in LRF 100.0 Solvency and also with the reserve ratio calculated in LRF 110.0 Capital Adequacy in that it only reflects the capital requirement of the relevant actuarial standard, it differs from the description of ‘Management Capital Reserve %’ included in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Item 2.2). The latter included the Minimum Capital Amount before deriving the Reserve Ratio even though the description ‘Management Capital’ was still included.

2.4. Prudential Capital Requirement – Prescribed Minimum Capital Amount

This is the requirement established in accordance with PS3.

2.5. Prudential Capital Requirement [derived item]

This is calculated automatically by derivations contained within the form, as the greater of the Management Capital Reserve (Item 2.2) and the Minimum Capital Amount (Item 2.4).

2.6. Amounts Available for Prudential Capital Requirement

This is the amount that will be compared with the Management Capital Reserve to establish ‘coverage’. It should reconcile with the Shareholder Fund net assets in LRF 300.2 Statement of Financial Position (SF Total, SHF, SH Elim, Entity) (LRF 300.2).

2.7. Prudential Capital Coverage [derived item]

This is calculated automatically by derivations contained within the form, as:

Amounts Available for Prudential Capital Requirement (Item 2.6)

divided by

Prudential Capital Requirement (Item 2.5)

The Prudential Capital Coverage calculated in this manner is consistent with the corresponding calculation described as ‘Coverage of Capital Requirement’ in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Items 2.2 and 2.3).

3. Inadmissible Assets

In completing this section, life companies should refer to LPS 6.03 Section 9.

Amounts entered in the Value column are the full value of any asset which is wholly or partly inadmissible, and should be consistent with what is reported in LRF 300.2. A Value entry is not required for Item 3.4.

Amounts entered in the Inadmissible Amounts column represent the inadmissible portion of the assets reported in the Value column. These amounts add up to the Inadmissible Assets Reserve.

4. Resilience requirements

While the first ‘Adjustment’ column relates solely to the Yield change element of Credit Risk, the second ‘Adjustment’ column reflects not only the yield change, but also the application of Diversification benefit. The insertion of this further column assists in making the logical flow of this part of the form align more closely with the methodology in LPS 6.03.

Please refer to the instruction guide for LRF 300.1 and LRF 300.2 for definition of items under asset and liability category.

4.1.12. Assets with non-standard resilience factors

This asset class should only be used in rare cases. It is intended to cover situations where assets are disaggregated into (1) an identifiable sub-asset and (2) a residual that does not fit into any of the asset sectors specified by LPS 6.03 for resilience purposes, or where a non-standard resilience risk has been modelled in accordance with paragraph 10.9 of LPS 6.03.

4.2. Assets with no resilience requirement

This is for assets that are admissible but do not have resilience requirements.

4.3. Total Admissible Assets

The sum of Item 4.3 and the Inadmissible Amounts items 3.1, 3.2, 3.3 and 3.5 should be equal to the total assets in LRF 300.2.

4.4.2. Effective borrowings

These are to be calculated on a look through basis.