The NAIC's Statutory Accounting Principles Working Group (SAPWG) met April 15 and May 20 to discuss and approve temporary interpretations due to current market conditions affecting regulatory guidance.
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The following temporary interpretations were adopted April 15, 2020, and SAPWG will continue to monitor and may extend the effective date.
INT 20-01: Reference Rate Reform - LIBOR
NAIC staff actively monitored the FASB discussion on reference rate reform. ASU 2020-04, issued in March, references LIBOR in hedging instruments and other financial instruments. It allows the continuation of those instruments without remeasurement or reassessment if certain criteria are met. As the reference rate changes are a market-wide initiative, it is outside the control of an entity to make modifications to the hedging instruments.
This was adopted effective from March 12, 2020 to December 31, 2022.
INT 20-03: Troubled Debt Restructuring “TDR” Due to COVID-19
This item clarifies that a debt restructuring (e.g. modification of mortgage loans or bank loans that were current prior to December 31, 2019) is not necessarily considered a troubled debt restructuring within SSAP No. 36. It is not a concession if the payment due delay is insignificant. The creditors may presume that borrowers current on payments are not experiencing financial difficulties at the time of the loan modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.
The item was adopted effective March 1, 2020 to December 31, 2020, or the date that is 60 days after the COVID-19 national emergency terminates.
INT 20-04: Mortgage Loan Impairment Assessment Due to COVID-19
This item provides temporary relief for the assessment of impairment for bank loans, mortgage loans, and investments which predominantly hold underlying mortgage loans, e.g. SEC registered investments (mortgage-backed mutual funds), loan-backed and structured securities (e.g. residential and commercial mortgage-backed securities, credit risk transfers issued through government-sponsored enterprises), and joint ventures, partnerships and limited liabilities companies (e.g. private equity mortgage loan funds). It would not delay the recognition of other-than-temporary impairments (OTTI) if the entity decided to sell the investment or there is evidence that it would not recover the reported carrying value of the investment, e.g. the debtor filed for bankruptcy.
NAIC staff stated that future impairment assessments shall be based on the modified instead of original contractual terms.
The item was adopted and will expire September 29, 2020.
The following temporary interpretations were adopted May 20, 2020 and are effective immediately.
INT 20-05T: Investment Income Due and Accrued
This item stipulates that no evaluation on collectability would be needed for Q1 and Q2 2020 financial statements unless other events occurred, e.g. bankruptcy that investment income would not be collected are known. This item affects mortgage loans, bank loans, and investments with underlying mortgage loans impacted by forbearance or modifications that were current as of December 31, 2019, and the borrowers didn’t have financial difficulties when the loan was modified.
It allows accrued investment income that is deemed collectible to be admitted even though it may be 90 days overdue in Q2 2020. It does not provide an exception for accrued interests for mortgage loans in default, but it adds that the determination of whether a loan is in default should be based on the modified contractual terms of the loan and not the original contractual terms in paragraph 10c, per interested parties’ comments.
Interested parties stated they appreciate that staff included this clarification in paragraph 10c.
This interpretation will be considered for extension in August 2020, or it will be automatically nullified on September 29, 2020.
INT 20-06T: Participation in the 2020 Term Asset-Backed Securities Loan Facility “TALF” Program
The Federal Reserve reestablished the Term Asset-Backed Securities Loan Facility (TALF) in March 2020. Under this program, the Federal Reserve will lend on a non-resource basis to the holders of certain AAA-rated ABS backed by eligible ABS issued on or after March 23, 2020. The loans will have a term of three years and will be fully secured by eligible ABS.
This applies when the reporting entity is either a direct borrower or investor in the 2020 TALF Loan Program.
Under this item, reporting entity borrowers shall report ABS pledged as restricted assets, and the assets pledged are subject to the underlying asset risk-based capital “RBC” charge but are excluded from an additional “restricted asset” RBC charge. The borrowers can continue reporting pledged ABS as admitted assets if the asset was qualified as an admitted asset before it was pledged to the TALF program and the borrower has not committed an uncured contract default. This interpretation provides an exception to INT 01-31, which requires a pledged asset be readily substitutable to be admitted. ABS that are pledged to this program can be admitted even though they are not substitutable.
Reporting entity investors do not directly receive the TALF loan, but are investors to borrowers that receive the TALF loan. They are not allowed to admit assets pledged to the TALF program if they are not the direct borrower because the return of the assets would be contingent on the action of the borrower to the TALF program and not the reporting entity. This provision is consistent with SSAP No. 4, footnote 2.
Interested parties recommended removing the last sentence from paragraph 13. Staff originally proposed that language for clarity but agreed with the interested parties and removed that sentence.
This interpretation will be effective for the duration of the TALF program.
INT 20-07T: Troubled Debt Restructurings of Certain Debt Instruments Due to COVID-19
The SAPWG adopted INT 20-03 and INT 20-04 for temporary accounting relief provided to mortgage loans and bank loans on April 15, 2020. After this adoption, interested parties asked the working group to consider the expansion of the same accounting relief to all SSAP No. 26R and 43R debt securities and private placement debt securities.
The following are considered insignificant modifications, i.e. non-troubled debt restructurings:
- Extending maturity by three years or less
- Debt security restructurings in response to COVID-19 that solely impact covenant requirements
- Modification in response to COVID-19 that exceeds the practical expedient of a 10% cash flow shortfall but is deemed insignificant under SSAP No. 36 paragraph 10. It is recommended that reporting entities shall work with auditors and regulators to confirm if the shortfall qualified as insignificant.
The item was adopted with edits in response to some of the interested parties’ comments.
It will only be applicable from March 1, 2020 to December 31, 2020, or the date that is 60 days after the national emergency concerning COVID-19 terminates.