NAIC working groups held a series of conference calls after the cancellation of the 2020 Spring National Meeting. The following is a summary of the Statutory Accounting Principles Working Group's updates pertinent to investment accounting and reporting.
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The following items were adopted March 18, 2020 with nonsubstantive changes and are effective immediately unless specified otherwise.
Ref #2018-26: SCA Loss Tracking – Accounting Guidance
The working group adopted revisions to SSAP No. 5R – Liabilities, Contingencies and Impairments of Assets and SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities so equity losses of the SCA will stop at zero and not go negative. Guaranteed liabilities would be reported to the extent that there is a financial guarantee or commitment.
The revisions were exposed during the Fall 2019 National Meeting. The working group considered adopting the revisions at the fall meeting, but extended the exposure period to avoid adoption immediately before year-end and to allow more time to review edits from interested parties who commented that additional clarifications were needed to revisions for paragraphs 18, 24, and 25 of SSAP No. 5R. The recommendations from interested parties were included in the adopted revisions.
Ref #2019-32: Look-Through with Multiple Holding Companies
Revisions to SSAP No. 97 – Investment in Subsidiary, Controlled and Affiliated Entities to emphasize that a look-through is permitted through more than one downstream noninsurance holding company if each look-through entity complies with the requirements in SSAP No. 97, paragraph 27.
Interested parties had no comments.
The following item was adopted effective January 1, 2021
Ref #2019-33: SSAP No. 25 – Disclosures
This item allows for data-capture of disclosures from SSAP No. 25 – Affiliates and Other Related Parties, which would allow regulators to aggregate and query related party relationships.
Interested parties agreed the clarifications are necessary and proposed minor edits.
The working group adopted the exposed data capture templates for SSAP No. 25 with the interested party edits. A Blanks proposal (2020-08BWG) will be considered for 2020 annual reporting. With this adoption, disclosures will still be made in a narrative (PDF) format to provide additional information regarding related party transactions.
The following items were adopted May 20, 2020 and are effective immediately unless specified otherwise.
Ref #2019-20: Rolling Short-Term Investments
During the fall meeting, the working group exposed revisions to SSAP No. 2R – Cash, Cash Equivalents, Drafts and Short-Term Investments and SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The proposed revisions restricted the classification as a cash equivalent or short-term investment for all affiliated SSAP No. 26R – Bond Investments and all affiliated and nonaffiliated investments in scope of SSAP No. 43R – Loan-backed and Structured Securities. It also applied to all investments that would be captured on Schedule BA in the event that:
1. The reporting entity does not reasonably expect the investment will actually terminate or mature within the time frame permitted for cash equivalent or short-term investment classification.
2. The investment was previously reported as a cash equivalent/short-term investment and the initial maturity time frames have passed.
3. The investment was sold or matured and the same or substantially similar investment was reacquired within a one-year time frame.
Cash equivalents subject to SSAP No. 2R paragraph 7 are not allowed to be subsequently reported as short-term investments, even if the updated or reacquired maturity date is within one year. They shall be reported as long-term investments regardless of the initial maturity date.
An additional disclosure was also proposed to identify short-term investments that remain on the short-term schedule for more than one consecutive year (Schedule DA) or one consecutive quarter (Schedule E Part 2).
An Interested party recommended the removal of “substantially similar investments” from SSAP No. 2R paragraph 16e. For example, the reporting entity may get a similar US Treasury bill within a year after the last one was matured. Based on the proposed guidance, a US Treasury bill would be classified as a long-term bond. NAIC staff said a US Treasury Bill is guaranteed by a sovereign government and thus, it is excluded from the definition of “substantially similar investments” pursuant to SSAP No. 103R paragraph 52.a.
Interested parties suggested two changes; the first was an editorial change needed for SSAP No. 2R paragraph 16.e. Cash equivalents are missing in paragraph 16.e. The second was a revision to SSAP No. 103R paragraph 28.l., which states all affiliated investments including items originally classified as cash equivalents and short-term investments, and non-affiliated investments with an NAIC designation of 3 or below, or those that do not have an NAIC designation, are required to be disclosed in the wash sales footnote.
Ref #2019-42: Cash Equivalent – Cash & Liquidity Pools
This item was drafted after feedback was received from interested parties regarding Ref #2019-20 (Rolling Short-Term Investments). Feedback was received that cash pooling could potentially be inadvertently scoped into short-term rolling guidance. Therefore, this item recommended revisions to allow specific structures that strictly hold cash, cash equivalents, and short-term investments and meet certain other criteria, to be captured under SSAP No. 2R.
Interested parties proposed further modifications to paragraph 8 to address the varied characteristics of pools outlined by each company. The reporting entity may look through the ownership structure and report the assets as either cash equivalents or short-term assets based on the predominant characteristics of the underlying assets.
The NAIC recommended the working group adopt the exposure along with the recommended revisions.
Staff emphasized cash liquidity pooling not be allowed to be reported as cash equivalents or short-term investments prior to January 1, 2021, unless approved by the domicile. The reason for this is because they do not meet the requirements for reporting within current scope of SSAP No. 2R.
The item was adopted with an effective date January 1, 2021 with early adoption allowed.
Ref #2019-25: Working Capital Finance Investments
During the fall meeting the working group exposed substantive revisions to SSAP No. 105—Working Capital Finance Investments, using six of the 10 industry-proposed concepts: functionally equivalent foreign regulators, commingling prohibitions, investor rights edit, requirements for filer to certify perfected interest, finance agent validation requirements, and for default date.
The ACLI commented that the implementation of SSAP 105 was not successful and adoption had been low. The ACLI also offered markups to the P&P Manual with what they’re calling “10 required items” to increase adoption.
Interested parties appreciated that SAPWG and VOSTF incorporated six of their 10 items into SSAP No. 105, but they believed WCFI will remain under invested until the remaining four items were approved. They asked the working group to consider incorporating those four industry-requested changes into SSAP No. 105.
It was adopted with a friendly amendment. The sentence, “Initial permission to invest in Working Capital Finance Investment Programs may be required by the domiciliary commissioner,” was removed from SSAP No. 105 paragraph 16.
Notification will be sent to VOSTF of this adoption.
Ref #2019-37: Surplus Notes – Enhanced Disclosures
The SAPWG discussed SSAP No. 41R – Surplus Notes during previous national meetings. This item is meant to consider new disclosures involving surplus notes to better identify these situations in the statutory financial statements.
Interested parties provided extensive revisions to the exposed item on SSAP No. 41R paragraphs 18-20.
The working group essentially agreed with interested parties’ revisions.
This item was adopted effective December 31, 2020. NAIC staff will do the data capture from the 2020 financial statements and report to the working group in 2021.
Ref #2020-07: Change to the Summary Investment Schedule
The working group exposed revisions to Appendix A-001, Section 3, Summary Investment Schedule to add a line for total valuation allowance.
Staff became aware of a crosscheck error in the Annual Reporting Blanks where total mortgage loans reported on the Summary Investment Schedule do not tie to the amounts reported in Schedule B, Part 1. It was found to be caused by the total valuation allowance being excluded from the Summary Investment Schedule. The revisions would add in valuation allowance so the schedules tie together.
The item was adopted.
Ref #2020-14: Assessment of OTTI Based on Original Contract Terms
This item fixes a disconnect between SSAP No. 26R, SSAP No. 36 and SSAP No. 103R. Pursuant to SSAP No. 26R, other-than-temporary impairment (OTTI) assessments were based on the original acquisition terms whereas OTTI assessments were based on the modified contractual terms per SSAP No. 36 or 103R.
A new footnote was added to SSAP No. 26R paragraph 13. It states the subsequent OTTI assessments shall be based on the modified contractual terms if a bond has been modified from the original acquisition.
Ref# 2019-39: Acceptable Collateral for Derivatives
Proposed revisions were exposed during the Fall 2019 National Meeting to address possible misinterpretation of Blank instructions on Schedule DB-D, section 1, column 4 (Fair Value of Acceptable Collateral). The issue exists as collateral is reported as the fair value of collateral pledged by a counterparty, or for central clearinghouses as the net positive variation margin received by the reporting entity.
Discussion with interested parties revealed this is a rare event that would occur in a series of unlikely adverse actions. NAIC staff concluded third-party derivative exposure through centrally cleared exchanges is appropriately captured in the existing disclosure requirements and in the Blanks.
The item was disposed without statutory revision.
Ref #2019-41: Eliminating Financial Modeling Process
The SAPWG exposed revisions to eliminate the “financial modeling” process from SSAP No. 43R—Loan-backed and Structured Securities during the fall meeting. This item corresponds to a VOSTF proposed item and will not be acted upon by the SAPWG until after VOSTF makes its decision.
The current RMBS/CMBS modeling practices, financial modeling, is the only approach that still uses breakpoints to determine NAIC designations. In March 2019, the multi-step modeling process for modified filing exempt (MFE) securities was removed. With the elimination of the MFE approach, identical securities captured under that guidance now have identical NAIC designations.
The VOSTF decided to continue the financial modeling practice on May 14, 2020. The financial model output will be mapped to a specific NAIC Designation Category; for example, modifier D would be mapped to NAIC Designation 1 and mid-point modifier (i.e., B) for NAIC Designations 2 through 5.
The proposal was disposed. A new agenda item will be proposed to reflect the new approach adopted by the VOSTF.
Exposed with a comment deadline of May 29, 2020
Ref #2019-04: SSAP No. 32 – Investment Classification Project
Interested parties provided comments on an issue paper and substantial revisions to SSAP No. 32R – Preferred Stock that were exposed during the fall meeting. The revisions apply to the definitions, measurements, and impairment guidance for preferred stock pursuant to the investment classification project.
Although interested parties substantially agreed with the objectives of the proposal, they provided additional comments on the issue paper. They proposed edits to the definitions of redeemable and perpetual preferred stocks, arguing the change would create a difference between the GAAP ASC 480 and NAIC guidance in multiple ways, and proposed edits to those definitions. NAIC staff agreed with the edits.
In addition, staff agreed with language regarding the fair value reporting being capped by any currently effective call price proposed by the interested parties. Interested parties asked for clarification around or removal of the term “qualifying” in paragraph 14, where it stated, “dividends on preferred stock shall be recorded as investment income for qualifying preferred stock on the ex-dividend date with a corresponding receivable to be extinguished upon dividend settlement.” Staff changed “qualifying” to “dividend eligible.”
This proposal adds the investments in preferred stock of entities captured in SSAP No. 97 or SSAP No. 48 to the scope. Certain legal entities captured in SSAP No. 48 do not issue preferred stock in legal form but label those instruments as preferred units, interests, or shares instead.
The working group exposed the issue paper and substantively-revised draft SSAP No. 32 with the changes proposed by interested parties with a January 1, 2021, effective date to allow the guidance to take effect at the start of a reporting year.
Ref #2019-14: Attribution of Goodwill
During the summer and fall meetings, the SAPWG exposed revisions to SSAP 97 – Investments in Subsidiary, Controlled and Affiliated Entities to clarify that the “assignment” of goodwill is a disclosure element, with revisions to the disclosure requirements for downstream holding companies. The revisions did not outline how the assignment should be made, but that it should be disclosed upon acquisition and not changed after that time. The revisions also changed the terminology from “allocation” to “assignment.”
Interested parties had extensive comments regarding the attribution of goodwill, and recommended that “the disclosure of GAAP goodwill attributed to downstream SCAs of downstream holding companies focus on actual GAAP goodwill that was pushed down to the downstream SCAs and any statutory goodwill that occurred when the insurer is the acquirer, subject to the existing 10% admittance limitation as illustrated and discussed in the examples above.”
The working group replied that they believe interested parties misunderstood the changes and reiterated that the agenda item “does not necessarily pertain to pushdown accounting.” Therefore, the working group has proposed to specifically exclude “pushdown” goodwill until that issue is addressed. Edits to reflect this change were exposed.
Ref #2019-38: Financing Derivatives
The working group exposed revisions to SSAP No. 86—Derivatives to clarify the reporting of derivatives with financing premiums and to allow the present value of the derivative premium receivable (and payable) for financed derivatives to be factored into the counterparty risk assessment for life RBC.
Interested parties asked that the effective date be set as January 1, 2021, as it represents “a significant change to how certain companies account for derivatives and must be implemented in our investment systems prior to adoption.” Interested parties also indicated that they do not believe the assets and liabilities under the exposure meet the right offset criteria in SSAP 64—Offsetting and Netting of Assets and Liabilities.
NAIC staff recommended incorporating the proposed edits from interested parties, involving the deletion of paragraph 19c and adoption of the exposed nonsubstantive revisions to SSAP No. 86—Derivatives with the suggested effective date of January 1, 2021.
Ref #2020-02: Accounting for Bond Tender Offers
Revisions to SSAP No. 26R – Bonds were exposed that clarify that the accounting and reporting of investment income and capital gain/loss, due to the early liquidation either through a call or a tender offer, shall be similarly applied.
The revisions come after questions were raised around the accounting treatment for when a held bond is retired early through the acceptance of a “bond tender offer,” which occurs when the bond issuer repurchases some, or all, of a particular bond issuance prior to its scheduled maturity date. SSAP No. 26R—Bonds has guidance for the reporting and allocation of investment income and/or capital gain/loss associated with callable bonds, but guidance is not reflected for when a bond is retired early through a tender offer. Called and tendered bonds are similar, but with a bond tender offer, the holder may elect to accept the offer; otherwise, the original terms of the bond are not modified.
Ref #2020-03: Enhanced Goodwill Disclosures
To gather additional goodwill information and clarify reporting on Schedule D, Part 6, Section 1 – Valuation of Shares of Subsidiary, Controlled and Affiliated Companies, nonsubstantive revisions to SSAP No. 68 – Business Combinations and Goodwill were exposed.
A review of SCA Sub 2 filings found that many companies do not correctly calculate the amortization of goodwill.
The proposed disclosures will improve the validity and accuracy of numbers currently being reported and assist with the regulators’ review of reported assets not readily available for the payment of policyholder claims.
Exposed with a comment deadline of July 31, 2020
Ref #2019-21: SSAP No. 43R
The working group exposed a preliminary issue paper for initial assessment. NAIC staff will continue working with industry in discussing SSAP No. 43R investments.
NAIC staff said collateralized fund obligations (CFOs) are similar to collateralized debt obligations (CDOs). A CDO is a loan-backed security while a CFO is backed by equity interests (e.g., a Fund or Limited Liability Partnership). Although the CFO has bond-like cash flows and may receive credit rating from the NRSRO, the backing of the issued security is based on the equity performance of the underlying funds or equity interest.
Deferred until the 2020 Summer National Meeting
Ref #2019-12: ASU 2014-17, Business Combinations, Pushdown Accounting
During the fall meeting, the SAPWG adopted an update clarifying that “goodwill resulting from the acquisition of an SCA by an insurance reporting entity that is reported on the SCA’s financial statements admissibility of goodwill resulting from the application of pushdown accounting, is limited in the aggregate to 10% of the acquiring entity’s capital.” As a next step, the SAPWG exposed revisions to evaluate ASU 2014-17, Business Combinations – Pushdown Accounting for statutory accounting and requested comments. Comments pertaining to whether pushdown should be rejected, permitted for noninsurance entities, or permitted only for SEC-registrations was specifically requested.
Interested parties provided extensive feedback.
The working group recommended not taking any action on the item during the spring meeting and would like to hear additional comments from interested parties.
Ref #2019-34: Related Parties, Disclaimer of Affiliation and Variable Interest Entities
According to the meeting materials, “The intent of this agenda item is to clarify identification of related parties and affiliates in SSAP No. 25—Affiliates and Other Related Parties and to incorporate new disclosures to ensure regulators have the full picture of complicated business structures.”
The SAPWG outlined the following aspects they hoped to address via their revisions:
- Clarify the identification of related parties and ensure that any related party identified under U.S. GAAP or SEC reporting requirements would be considered a related party under statutory accounting principles.
- Clarify that non-controlling ownership over 10% results in a related party classification regardless of any disclaimer of control or disclaimer of affiliation.
- Clarify the impact of a disclaimer of control or disclaimer of affiliate under SSAP No. 25. As detailed, such disclaimers impact holding company group allocation and reporting as an SCA under SSAP No. 97, but do not eliminate the classification as a “related party” and the disclosure of material transactions as required under SSAP No. 25.
- Proposes rejection of several US GAAP standards addressing variable interest entities.
Interested parties shared extensive feedback on this item. They shared significant concerns that the proposal is not clear on its recommended changes to SSAP No. 25 and what will be required based on the expanded definition of a related party.
NAIC staff recommended the working group direct staff to work with interested parties to update the proposed revisions to SSAP No. 25.
Ref #2020-01: Update/Remove References to SVO Listings
The VOSTF referred two proposed amendments to the P&P Manual:
- Rename “The U.S. Direct Obligations/Full Faith and Credit Exempt List” to “NAIC U.S. Government Money Market Fund List”
- Discontinue the “NAIC Bond Fund List”
Staff recommended exposing nonsubstantive revisions to SSAP No. 26R – Bonds and SSAP No. 30R – Unaffiliated Common Stock to eliminate references to the NAIC Bond Fund List and add a reference to “NAIC Fixed Income-Like SEC Registered Funds List” in SSAP No. 30R.
The working group won’t take final action or determine an effective date until revisions have been adopted by VOSTF.
Ref # 2016-20: Credit Losses
NAIC staff continues to monitor the FASB discussions involving CECL. While large SEC filers are required to follow CECL in 2020, small SEC reporting companies, financial institutions, and other public business entities are granted a reprieve until 2023.