Market Insight Paper
NAIC Fall 2019 National Meeting Update
The NAIC held its Fall 2019 National Meeting on December 7-10 in Austin, Texas.
Clearwater is dedicated to keeping insurers updated on the latest regulatory guidance changes as they pertain to investment accounting and reporting. Our insurance experts attend NAIC national meetings and pertinent calls to monitor regulatory updates and provide proactive education on adopted and proposed items. The Blanks Working Group held a conference call December 17. Clearwater's Sabrina Wilson joined the call and will provide relevant updates and commentary on Clear Insights, Clearwater's digital publication.
Statutory Accounting Principles Working Group
The following items were adopted with nonsubstantive revisions and are effective immediately.
Ref #2019-19: SIRI Line 13 – Equity Interests
This proposal is not related to any SSAP changes but is a carryover from a prior agenda item related to SSAP No. 30R wherein SEC-registered and non-SEC-registered foreign mutual funds were added to the scope.
During the Summer National Meeting, the working group exposed revisions that clarify what is captured in Line 13: 10 Largest Equity Interests of the Supplemental Investment Risk Interrogatories (SIRI).
Adopted revisions include:
- Clarification that a look-through should only occur for non-diversified funds and that investments within a diversified fund investment shall be excluded from an aggregation requirement to other equity investments
- Clarification that any equity interest, regardless of if the fund is diversified or not, that individually qualifies as one of the largest equity interests shall be captured in SIRI Line 13
- Expand the guidance to exclude SVO-identified bond exchange-traded funds and SVO-identified fund investments with underlying characteristics of fixed-income instruments that do not contain underlying equities from this equity listing
Additionally, a referral was sent to the CADTF during the Summer National Meeting with a request for clarification on whether the proposed revisions will have inadvertent impact to risk-based capital charges. The CADTF exposed the referral November 8 but hasn’t sent comments to SAPWG yet.
NAIC staff recommended the working group adopt the proposed revisions and sponsor a Blanks Working Group proposal to incorporate the guidance for 2020 year-end.
Ref #2019-22: Wash Sale Disclosures
This proposal clarifies what would be subject to the wash sale disclosure: only investments that meet the definition of a wash sale in accordance with SSAP No. 103R, which are purchased or sold prior to a reporting period-end and sold or repurchased after that reporting date.
The revisions were exposed at the Summer National Meeting. Interested parties commented that they support the proposed revisions.
This item stems from revisions to the wash sale disclosure captured in 2017 in SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. At the time, the guidance was revised to 1) clarify what types of investments are subject to the wash sale disclosure, 2) respond to several comments from interested parties, and 3) clarify what investments are subject to and what investments were exempt from this disclosure.
This proposed change eliminates the need to report transactions that meet the wash sale criteria in SSAP No. 103R that are sold and repurchased within the same reporting period.
Since the 2017 revisions, industry has told NAIC staff that the tracking of wash sales can be very time-consuming and uses a large amount of resources while not necessarily responding to the main risks associated with these transactions. The investments sold and repurchased within the same reporting period do not pose any greater risk than if the investments had been held throughout the reporting period and at the period-end date. The real risk is investments that are sold prior to the period-end date and repurchased shortly after that date.
NAIC staff recommended the working group adopt the exposed revisions. It is important to note that, with these revisions, only wash sales that cross reporting period-end dates will be subject to the wash sale disclosure.
Ref #2019-23: Going Concern
The working group exposed revisions to SSAP No. 97 — Investments in Subsidiary, Controlled and Affiliated Entities at the Summer National Meeting.
The going concern is the assumption that a company will continue into the foreseeable future. Under current statutory guidance, the investment in a subsidiary with a going concern audit opinion must be nonadmitted in the reporting entity’s financial statements. It doesn’t specify any action to be taken if going concern is noted in any other part of the audit report other than the audit opinions.
NAIC staff noticed there have been few instances in which the audit opinions did not explicitly mention going concern, but the notes in the audited financial statements identified there was a going concern.
This change to SSAP No. 97 is to make a SCA value nonadmitted if an unalleviated going concern is mentioned in any part of the audit report, accompanying financial statements, or notes.
NAIC staff recommended the working group adopt the exposed revisions. With these revisions, nonadmittance will be required when there is unalleviated substantial doubt about a SCA’s ability to continue as a going concern identified in any part of the audit report, accompanying financial statements or notes to financial statements.
Ref #2019-28: ASU 2019-05, Targeted Transition Relief
The working group at the Summer National Meeting exposed revisions to SSAP No. 100R — Fair Value to reject ASU 2019-05 for statutory accounting. The reason for this rejection is that an election to utilize fair value in lieu of the stipulated measurement method (e.g., amortized cost) is not allowed under statutory accounting.
The Federal Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in June 2016 to introduce the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost to replace incurred loss methodology. ASU 2016-13 also modified the accounting for available-for-sale debt securities.
The FASB noted companies have begun to elect the fair value options on newly purchased investments when the existing investments are still reported at amortized cost. This has made comparison impossible between instruments measured at fair value and other identical investments measured at amortized cost.
In order to get rid of the dual measurement methodologies, this update proposes an alternative accounting treatment to elect the fair value option for certain financial assets previously measured at amortized cost.
NAIC staff recommended the working group adopt the exposed revisions to reject ASU 2019-05 in SSAP No. 100R.
Ref #2019-18: “Other” Derivatives
Following comments from interested parties, the working group re-exposed revisions at the Summer National Meeting to incorporate guidance for “other” derivatives to SSAP No. 86 – Derivatives. This was to allow interested parties extra time to examine the revisions.
Current guidance only addresses derivatives involved in hedging, income generation, or replication transactions. Under SSAP No. 86, derivatives used for purposes other than hedging, income generation, or asset replication do not qualify as admitted assets. This proposal recognizes “other” derivatives at fair value but specifies they are nonadmitted under SSAP No. 4 – Assets and Nonadmitted Assets and would be subject to state investment law. If permitted under state laws, they would be admitted under a prescribed practice.
Interested parties stated they are still concerned about potential, unintended consequences of the cliff effect (potential nonadmission of a bond with a trivial embedded derivative) as capital markets develop. They suggested that if and when problems develop, interested parties may re-examine this issue.
NAIC staff recommended the working group adopt the revisions. Staff added that interested parties are always welcome to provide for review information or scenarios regarding evolving investments and the impact of statutory accounting.
Ref #2019-12: ASU 2014-17, Business Combinations, Pushdown Accounting
This proposal would reject ASU 2014-17, Business Combinations – Pushdown Accounting, and explicitly prohibit pushdown accounting in SSAP No. 97. At the Summer National Meeting, the working group requested comments on whether pushdown accounting should be rejected (Option 1), permitted for noninsurance entities (Option 2), or permitted only for US Securities and Exchange Commission (SEC) registrants (Option 3). The proposal also clarifies that goodwill resulting from an insurer’s acquisition of a subsidiary when pushdown is applied shall be captured in the goodwill admittance limitation (i.e., 10%).
Insurers that are SEC filers have historically used pushdown accounting when acquiring a subsidiary. Thus, US GAAP allowed pushdown to prevent differences between the SEC and US GAAP. With ASU 2014-17, more insurers may have elected to use pushdown, but it is unknown how extensive pushdown accounting has been applied.
Several groups provided comments on the proposed revisions and the question of what to do about pushdown accounting.
With ASU 2014-17, more insurers may have elected to use pushdown, but it is unknown how extensive pushdown accounting has been applied.
Interested parties stated that they do not recommend complete rejection of pushdown accounting (Option 1) and requested additional time to consider whether Options 2 or 3 are feasible, as well as the operational mechanics of a goodwill admittance limitation and the impact on insurers’ capital and surplus. Interested parties stated that they would like to present a recommendation to the working group at the NAIC Spring 2020 National Meeting to address these issues.
Interested parties also noted that since Ref #2019-14 includes specific SCA entity goodwill and admitted value amounts, they would include those proposed changes in their evaluation. Overall, they believed the changes proposed in Ref #2019-12 and Ref #2019-14 are substantive and do not believe they can be applied to year-end 2019 reporting.
NAIC American Institute of Certified Public Accountants (AICPA) Task Force provided informal comments on the issue consistent with its comments on the draft exposed at the Spring National Meeting. The proposed revisions could be a significant change to current SAP and the task force requested clarification as to what is meant by "audited reconciliation" and "audited support" in the proposed new paragraph 20 of SSAP No. 97. The AICPA also commented on goodwill and suggested the working group clarify whether it is subject to amortization under SSAP No. 68, since it is not amortized under US GAAP. The AICPA suggested the working group may want to consider whether to adopt any changes for year-end 2019.
Members of industry strongly encouraged the NAIC to thoroughly engage with industry on the exposure draft and recommended it be classified as substantive. They expressed support for Option 2; proposed working with the NAIC on an industry impact assessment; and encouraged the NAIC to discuss transitional guidance with the industry and consider responses to the FASB’s proposed treatment of goodwill.
NAIC staff ran a data query of the results of the goodwill table in Footnote 3 – Business Combinations and Goodwill of the 2018 Annual Statement. There are 123 companies that have admitted goodwill and eight of them had admitted goodwill close to the 10% limitation of adjusted surplus. The majority of the companies had admitted goodwill below 1% of adjusted surplus. NAIC staff believes the proposed change will not impact most insurers.
NAIC staff recommended the working group discuss and consider adopting the exposed edits to SSAP No. 68, to require goodwill resulting from the acquisition of a SCA by the insurance reporting entity to be subject to the 10% admittance limit based on the insurer’s capital and surplus. Staff recommended the clarification be required for year-end 2019 given the edit clarifies existing guidance and is intended to prevent situations in which pushdown has occurred to prevent nonadmittance.
After considering adoption of the edits to SSAP No. 68, NAIC staff also recommended re-exposure of the remainder of the agenda item to allow interested parties additional time to provide specific examples and for staff to consider comments received on pushdown accounting.
The following items were exposed with substantive revisions and a comment deadline of January 31, 2020, unless otherwise stated.
Ref #2019-04: SSAP No. 32 — Investment Classification Project
The NAIC has been working on the asset classification initiative over the past few years, (e.g., bonds, common stocks). An issue paper was exposed at the Summer National Meeting to document the underlying rationale and illustrate proposed revisions to SSAP No. 32 – Preferred Stock.
The paper reflects the following key elements:
- Improve preferred stock definitions, with inclusion of information from US GAAP for classifying preferred stock as redeemable or perpetual. The revisions also incorporate a new exhibit to capture various terms prevalent in preferred stock.
- Revise the measurement guidance to ensure appropriate, consistent measurement based on the type of preferred stock held and the terms of the preferred stock. The revisions also incorporate guidance for mandatory convertible preferred stock.
- Clarify impairment guidance as well as guidance for dividend recognition and redemption of preferred stock with the issuer.
Interested parties commented that at times the paper references instruments as securities, and the use of the term “security” is not interchangeable when it comes to preferred stock. Interested parties recommended all references to security be changed to interest or directly reference the type of stock under discussion. They provided edits to the paper to that effect.
NAIC staff incorporated a variety of revisions to the document, though not all of the revisions proposed by industry were incorporated because NAIC staff is proposing to maintain consistency between US GAAP and statutory accounting provisions on the definitions of redeemable and perpetual preferred stock.
Interested parties recommended all references to security be changed to interest or directly reference the type of stock under discussion. They provided edits to the paper to that effect.
Additional comments from interested parties suggested the removal of certain definitional language for differentiating between redeemable and perpetual preferred stock. The interested parties’ proposed edits included removing language indicating “redemption was outside the control of the issuer” or has “conditions for redemption which are not solely within the control of the issuer, such as stock which must be redeemed out of future earnings.”
NAIC staff did not incorporate these edits, as the changes would result in differences from the FASB definitions. Although these definition aspects are written from the perspective of the issuer, the holder must classify preferred stock for accounting and reporting in a manner that is consistent with the asset issuer. As such, for consistency and to prevent confusion on whether there is intended to be a change in definitions from FASB, the FASB definition of preferred stock has been retained.
NAIC staff recommended the working group expose a revised issue paper, which includes discussion on aspects of interested parties’ comments, as well as a draft SSAP proposing substantive revisions to SSAP No. 32. NAIC staff said the revised issue paper shows track changes while the SSAP is the clean version.
Ref #2019-25: SSAP No. 105 – Working Capital Finance Investments
Substantive revisions to SSAP No. 105 – Working Capital Finance Investments were exposed. Staff also recommended an issue paper for discussion at the NAIC Spring 2020 National Meeting.
During the Summer National Meeting, the SAPWG received a referral from the VOSTF to draft and expose substantive revisions to SSAP No. 105 — Working Capital Finance Investments using six of the industry-proposed concepts supported by NAIC staff.
The revisions include:
- Functionally equivalent foreign regulators: Removes the requirement that the SVO determine if the International Finance Agent is the functional equivalent of the US regulator
- Commingling prohibitions: Removes the finance agent prohibitions on commingling
- Investor rights edit: Removes duplicative text regarding exercise of investor rights
- Requirements for filer to certify perfected interest: Removes requirements, with revisions allowing the SVO to determine if a first priority perfected interest has been obtained
- Default date: Changed the default provisions from 15 to 30 days so the default date and the cure period are consistent. This has the effect of changing the date of nonadmission for an investment in default for a period up to 30 days instead of up to 15 days.
Exposed items with nonsubstantive revisions and comment deadline of January 31, 2020, unless otherwise stated
Ref #2019-41: SSAP No. 43R – Financial Modeling
Revisions to SSAP No. 43R – Loan-backed and Structured Securities have been exposed that eliminate the multi-step financial modeling designation guidance in determining final NAIC designations for residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS).
The current guidance for RMBS and CMBS is the only remaining approach that uses breakpoints. In March, the multi-step modeling approach was removed for modified filing exempt securities. This change removed the carrying value from the designation determination analysis and now utilizes the original NAIC designation, without adjustment, to determine the measurement method under SSAP No. 43R and corresponding risk-based capital charges.
The current guidance may result in two identical reporting entities with the same security having different NAIC designations. With this change, identical securities will have an identical NAIC designation.
Ref #2019-20: Rolling Short-Term Investments
This proposal would affect 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. Proposed revisions restrict 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 applies to all investments that would be captured on Schedule BA in the event that:
- The reporting entity does not reasonably expect that the investment will actually terminate or mature within the timeframe permitted for cash equivalent or short-term investment classification.
- The investment was previously reported as a cash equivalent/short-term investment and the initial maturity timeframes have passed.
- The investment was sold or matured and the same or substantially similar investment was reacquired within a one-year timeframe.
NAIC staff reminded the working group that the item, as drafted, is to consider statutory accounting guidance for short-term investment structures purposely designed to mature at or around 364 days (often with affiliates), with the full expectation that the investment structure would be renewed (rolled) continuously for subsequent years. The benefits of reporting investments as short-term investments or cash equivalents are lower RBC charges, no NAIC designation is required, and limited affiliate reporting. NAIC staff said collateral loans should always be reported on Schedule BA regardless of the maturity date and the RBC charge is not high (i.e., 6.8%).
Regulators and interested parties expressed concerns over some of the wording of the proposal and suggested modifications. NAIC staff recommended the working group expose the agenda item with limited revisions to exclude qualifying cash pools in scope of SSAP No. 2R from the short-term rolling provisions. Staff also referenced agenda item Ref #2019-42, which proposes to capture cash pools in scope of SSAP No. 2R.
Staff requested that since they do not initially support some of the proposed modifications, industry and regulators provide comments on the comments received to permit short-term lending structures, eliminate the “unaffiliated” exclusion from SSAP No. 26R, and permit reacquisition of a similar investment if certain criteria is met.
Ref #2019-14: Attribution of Goodwill
During the Summer National Meeting, the working group exposed revisions to SSAP 97 – Investments in Subsidiary, Controlled and Affiliated Entities. These revisions clarify that when a holdings company is acquired, the purchase price and goodwill should be attributed to the downstream entities directly owned by the holding company. Such an exercise is not intended to be pushdown accounting, but rather for purposes of documentation. The revisions also reflect a change in terminology from “allocation” to “assignment.”
Interested parties reiterated comments on Ref #2019-12, which included that the changes proposed in Ref #2019-12 and Ref #2019-14 are substantive and they cannot be applicable to year-end 2019 reporting.
NAIC staff requested additional time before the working group adopts this item because there would be limited time to complete the new disclosure before year-end 2019. Staff added that they believe the disclosure information requested under this agenda item will be needed regardless of the decision in Ref #2019-12 regarding pushdown accounting.
NAIC staff recommended the working group re-expose this agenda item, with no changes, and direct revisions to the Sub-1 filing template to capture this information for new SCA acquisitions.
Ref #2019-37: Surplus Notes – Enhanced Disclosures
This exposed item is the result of previous agenda item Ref #2018-07. The SAPWG considered new disclosures involving surplus notes to better identify certain surplus note situations in statutory financial statements.
Exposed revisions to SSAP No. 41R provide enhanced disclosures to identify when a surplus note has been issued in which anticipated or typical cashflows have been partially or fully offset through the terms of the asset provided by the note holder.
Surplus notes have characteristics of both debt and equity addressed in SSAP No. 41R – Surplus Notes. In statutory accounting, surplus notes are reported as equity because they are debt instruments required to be subordinated to policyholders, claimants, and all other creditors. Interest and principal repayments require approval by the domiciliary commissioner.
SSAP No. 41R requires proceeds received by the issuer of a surplus note to be in the form of cash or other admitted assets meeting both value and liquidity requirements of the state domicile’s commissioner.
Previous SAPWG discussions around surplus notes where an “associated” asset is received by the surplus note issuer have raised questions about whether a surplus note that does not result with an exchange of cash flows should be considered surplus under SSAP No. 41R. There was a separate discussion during the working group meeting about how to treat those surplus notes.
Ref #2019-38: Financing Derivatives
The SAPWG exposed revisions to SSAP No. 86 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.
SAPWG is also seeking comments on criteria for the right to offset in SSAP No. 64 regarding derivatives and related financial provisions that generally would not meet the criteria and if explicit guidance allowing for offset should be considered. This only impacts the amount reported on the balance sheet and does not impact the gross amount reported on Schedules DB – Part A or DB – Part B. The offset provision would impact RBC for property and casualty and health companies but would not impact the RBC for life reporting entities.
NAIC staff recommended the consideration of statutory accounting revisions to ensure consistency in the gross reporting of derivatives and in reporting amounts owed to or from the reporting entity from the acquisition or writing of derivatives.
There were some key concerns raised regarding the accounting and reporting of financing derivative transactions. First, reporting is inconsistent because not all insurers utilize the financing derivative report using the net approach. Insurers that acquire or write similar derivatives would represent the financial statement impact in substantially different ways based solely on when the cost to acquire the derivative is due.
Another concern is that the amounts reported when derivative assets and liabilities are netted with financing components do not reflect actual derivative assets or liabilities, and the corresponding unrealized gains/losses do not solely reflect changes in derivative value. Additionally, there are concerns about the impact financing derivatives can have on the reported derivative amounts, the assessment of derivatives, and the activity reported in regulator tools.
Ref #2019-39: Acceptable Collateral Value for Derivatives
The SAPWG exposed revisions to SSAP No. 86 to clarify that the fair value of collateral received or held, for derivative disclosure purposes, be reported net of collateral paid/pledged, in the event a counterparty has the legal right to offset against as defined in SSAP No. 64.
This change is intended to add clarification to avoid a potential misinterpretation of blank instructions on Schedule DB – Part D, section 1, column 4 (Fair Value of Acceptable Collateral) 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.
The original intent of net positive variation margin was to reflect net realizable margin, as articulated in SSAP No. 86. Minor clarifications to applicable annual statement instructions were proposed to the BWG.
Ref #2019-42: Cash Equivalent – Cash & Liquidity Pools
Revisions to SSAP No. 2R – Cash, Cash Equivalents, Drafts and Short-Term Investments were exposed that would allow specific types of cash pooling organization structures that strictly hold cash, cash equivalents, and short-term investments and other certain criteria, but do not meet the current requirements for cash equivalent reporting, to be reported as cash equivalents.
Limited Liability Company was used as the primary organization structure for a cash and liquidity pool. The working group needs comments from interested parties on whether there is a need to make any changes to SSAP No. 48.
These revisions would update the existing reporting requirements for when a reporting entity has a negative equity value in a SCA investment and has provided a financial guarantee or commitment.
Ref #2018-26: SCA Loss Tracking – Accounting Guidance
Revisions to SSAP No. 97 — Investments in Subsidiary, Controlled and Affiliated Entities were exposed at the Summer National Meeting. These revisions would update the existing reporting requirements for when a reporting entity has a negative equity value in a SCA investment and has provided a financial guarantee or commitment. The most recent revisions remove the guidance regarding financial guarantee or commitment from SSAP No. 97 and instead refer people to SSAP No. 5R and ensure the SCA will be reported at zero.
Changes to SSAP No. 97 were previously exposed at the Spring National Meeting, but further review and discussion identified that the existing guidance in SSAP No. 97, which requires negative SCA reporting when there are negative equity losses that go below “zero” and the insurer has provided a financial commitment or guarantee, could result with double-counting when the guarantee has also been reported under SSAP No. 5R.
Interested parties commented that additional clarifications are needed to revisions for paragraphs 18 and 24 of SSAP No. 5R. They proposed the following changes:
- In paragraph 18, more general wording to prevent the recognition of either an initial guarantee liability or a liability subsequent to the initial recognition.
- Reword language under paragraph 24, separate it into a new paragraph 25, and re-number the subsequent paragraphs. This new paragraph 25 would condense two sentences that recognize the greater of the guarantee liability or the negative equity of the SCA and clarify the guarantee liability shall not exceed the maximum amount of the guarantee. They also proposed clarifying the term “greater” refers to the greater negative impact to the reporting entity’s financial statements.
NAIC staff commented that the changes suggested by interested parties reflects the intent of what was exposed at the Summer National Meeting. In the interest of moving things forward because it is year-end, staff recommended exposing the revisions with the modifications suggested by interested parties. The exposure also includes the proposed Exhibit F, exposed during the Spring National Meeting but not explained in detail in the Summer National Meeting.
Ref #2019-32: Look-Through with Multiple Holding Companies
This proposal clarifies a look-through approach is permitted for more than one downstream company provided that each look-through entity complies with SSAP No. 97 – Investment in Subsidiary, Controlled and Affiliated Entities (e.g., downstream holding company is an 8.b.iii entity); it doesn’t own any other assets that are material to it other than the audited SCA entities and/or audited non-SCA SSAP No. 48 entities; and it is not subject to liabilities, commitments, contingencies, guarantees or obligations which are material to it.
Ref #2019-33: SSAP No. 25 – Disclosures
This item proposes to data-capture disclosures from SSAP No. 25 so regulators can aggregate and query related party relationships. If it is adopted by June 2020 (the BWG deadline), the proposed data-capture templates may be modified or expanded.
Ref #2019-34: Related Parties, Disclaimers of Affiliation and Variable Interest Entities
As currently written, the requirements for SEC filings do not allow for a disclaimer of affiliation as allowed in the Insurance Holding Company System Regulatory Act (#440), the Insurance Holding Company System Model Regulation (#450), and Appendix A-440. Consequently, the statutory financial statements do not provide the full picture of some complicated business structures when those related parties are only identified under US GAAP or SEC.
In order to capture more related parties, NAIC staff will bring in some SEC and US GAAP language regarding related parties. It also proposes changes to have related party identification in SSAP No. 25 – Affiliates and Other Related Parties regardless of any disclaimer of control or affiliation for non-controlling ownership over 10%. It will ensure regulators have the full picture of complicated business structures which can be common for those large insurers. A referral will be sent to the Group Solvency Issues (E) Working Group regarding the definition of affiliated.
This item also proposes to reject the ASU related to Variable Interest Entities (VIE).
Ref #2019-21: SSAP No. 43R – Equity Interests
A conference call is scheduled for 10 a.m. CT, January 8, 2020, to discuss this item. The working group received comments from interested parties, which they noted have been helpful. As the due date for the data call was December 31, 2019, and NAIC staff need a greater variety of interested parties to attend this meeting, they decided to have a conference call after the Fall National Meeting.
NAIC staff will try to send the agenda and materials out by December 24 or the week prior to the conference call.
Ref #2018-07: Surplus Notes
NAIC staff is collecting information from a data call on “linked” surplus notes. Responses from the data call are requested by December 31, 2019. Discussion on this agenda item will resume after the data call has taken place. Information on the data call, including the characteristics of surplus notes in scope, can be obtained directly from NAIC staff.
Ref #2016-20: Credit Losses
The SAPWG deferred discussion on ASU 2016-13: Credit Losses, and no significant consideration has occurred since the deferral.
NAIC staff continues to monitor the FASB discussions around this topic. On October 18, a decision from the FASB delayed implementation of the credit loss accounting standard until January 1, 2023, for small SEC reporting companies, financial institutions, and other public business entities. Large SEC filers are required to follow CECL beginning January 1, 2020.
Accounting Practices & Procedures Updates
There is a firm deadline of December 13, 2019, to reserve printed copies of the As of 2020 AP&P Manual.
Valuation of Securities Task Force
Substantive Proposed P&P Manual Amendment to Add Instructions for Ground Lease Transactions
As part of its ongoing review of credit tenant loans (CTL), the SVO became aware that some insurers have been filing CTL transactions for assets better characterized as ground lease financing (GLF) transactions.
The SVO defines a CTL as having the following components:
- Loan made to the owner of real property; primarily relies on the credit standing of the tenant on a long-term lease and generally has a high credit rating
- Loans are structured around the terms of the lease which requires the tenant to perform all obligations related to the premises regardless of what occurs to the leased property
The SVO defines a GLF as having two components:
- A ground lease for a long period (e.g., 99 years) between a ground lessor who owns the land and a ground lessee who attains a leasehold for the purpose of developing the land
- The subleasing of space or operation of a business such as a hotel, warehouse, intermodal facility, etc., in an existing or to-be-constructed building to one or more tenants (space tenants) under shorter (e.g., 5-15-year) leases (space leases) or to the operator of a business such as a hotel, warehouse, intermodal facility, etc., under a franchise agreement or other arrangement. GLF transactions are not eligible for filing exemption.
In response, the SVO directed the market that “all CTL structures must be submitted to the SVO for review” against Part One, Paragraph 106 and Part Three, Paragraph 4 of the P&P Manual. It also clarified that it considers GLF transactions distinct from CTLs. Because there are substantial differences between how CTLs and GLFs are structured, the SVO has proposed the P&P Manual be amended to include a “multi-pronged approach” for analyzing GLFs. This includes adding GLFs as a new asset class with an accompanying analytics process.
The process to analyze GLF transactions moving forward can be found on pages 3-4 of the task force’s meeting notes.
Industry representatives from CGA Capital, on behalf of the Lease-Backed Securities Industry Group, submitted a comment letter in full support of the SVO’s proposal, citing their extensive experience structuring and closing CTL transactions, and the need they see for regulatory oversight of the matter.
This item was exposed on October 31, 2019, with a comment period ended November 22, 2019. It was adopted with a referral sent to SAPWG to make applicable changes on statutory accounting.
Receive a Non-Substantive Proposed P&P Manual Amendment to Reflect the US SEC’s Adoption of a New Rule to Modernize Regulation of Exchange-Traded Funds
On September 26, 2019, the SEC adopted a new rule with the aim of reducing expenses and delays in creating new ETFs, to “promote greater consistency, transparency and efficiency for ETFs,” and to increase competition among them. The new rule, which is rule 6c-11 under the Investment Company Act of 1940, is effective December 23, 2019.
Under the new rule, ETFs must satisfy the definition of an open-ended management company. Issued shares must be listed on a national securities exchange and traded at market determined prices. Companies must keep up-to-date disclosures on their website that includes holdings and baskets, NAV per share, market price, premiums or discounts, median bid-ask spread, and be in compliance with the adopted policies and procedures.
This new rule is expected to cover most ETFs but some exclusions will include leveraged and inverse ETFs, ETFs organized as unit investment trusts (UIT), share classes, and non-transparent active ETFs.
The SVO does not expect the rule to impact its analysis of ETFs and suggested non-substantive changes to the P&P Manual to accommodate the update.
This item was exposed for a 45-day comment period, ending January 23, 2020.
Substantive Proposed P&P Manual Amendment to Remove the Financial Modeling Instructions for RMBS/CMBS Securities and Direct IAO Staff to Produce NAIC Designation and NAIC Designation Categories for these Securities
During the Summer National Meeting, the Investment Analysis Office (IAO) recommended to the VOSTF that the NAIC should eventually “align the RMBS/CMBS modeling to provide a single NAIC Designation for modeled RMBS/CMBS.” This would differ from the current method of “providing a series of book adjusted carrying value price breakpoints to companies to determine the NAIC designation.” Another further reason to align to a single designation is that it would be expensive and complex, for both the NAIC and insurers, to incorporate the additional breakpoints with the pending move to 20 designation categories.
For these reasons, the IAO recommended the NAIC moves to a single designation for category for RMBS/CMBS. Considering the potential impact to SSAP 43R - Loan-Backed and Structured Securities, the VOSTF recommended a concurrent referral to the SAPWG for exposure.
This item was exposed with a 60-day comment period, ending February 7, 2020.
Updated Definition of Principal Protected Securities
Credit rating provider methodology on some securities classes do not, in NAIC staff’s opinion, meet NAIC needs. For that reason, they are excluded from the Filing Exempt eligible list. The SVO would like to apply a look-through methodology approach to capture the regulatory risk on these securities because these securities can come in a number of forms.
The task force chairperson said NAIC staff are still carefully looking at this asset type and working on the definition of Principal Protected Securities (PPS). They are open to any comments on the topic and hopefully will be able to expose this item at the Spring 2020 National Meeting. Interested parties asked the SVO for examples where the SVO disagrees with the CRP’s methodology.
The VOSTF said these securities can still be reported on the Schedule D but they are not Filing Exempt eligible.
Infrastructure Investments Study
Both NAIC’s Center for Insurance Policy and Research (CIPR) and Capital Markets Bureau are collaborating on an infrastructure study for the insurance industry. They performed an infrastructure investments study in late August after the VOSTF started the conversation on this topic during the Summer National Meeting. They received 14 comments in late September and had a meeting on October 18, 2019. The group determined that economic infrastructure will be included in the study but not the social infrastructure.
The study is expected to be released in spring 2020. It will cover two key topics: infrastructure investment as an asset class and the insurance industry’s participation in the infrastructure market, including barriers and opportunities.
Clarify that the Sovereign Rating Limitation Applies to Filing Exemption (FE)
This proposal caps the NAIC designations to individual foreign securities at the NAIC Foreign Sovereign Designation. It clarifies this sovereign limitation is required when an NAIC designation is produced through the filing exempt instructions.
The task force previously exposed this item for comment from October 31 to December 16 and did not discuss it during the Fall National Meeting.
Rename the U.S. Direct Obligations/Full Faith and Credit Exempt List
This proposal would change the name of the U.S. Direct Obligations/Full Faith and Credit Exempt Money Market Funds List to the NAIC U.S. Government Money Market Fund List. It would also remove the Bond Mutual Fund List.
The rename doesn’t change the reporting treatment for those money market funds that will still be reported as a cash equivalent on Schedule E Part 2. The removal of the Bond Mutual Fund List is because it is not cost effective for the SVO to maintain only four funds in a list. Also, those funds would be eligible for the NAIC Fixed Income-Like SEC Registered Funds List under the newly adopted Comprehensive Instructions for Fund Investments.
A referral was sent to the SAPWG for removal of the references “NAIC Bond Fund List” in SSAP No. 26R – Bonds.
- Status of the Application of the Japan Credit Rating Agency, Ltd. to Be a Vendor of Credit Ratings to the NAIC: This project is on hold because it is dependent on the GICRS project (see below).
- Status of Efforts to Implement Carry-Over Procedure in 2019: Administrative symbols YE/IF are ready for year-end. The identifier ND will replace NR.
- Integration of Securities Identifiers in the Filing Exempt Process (BECRS/GICRS): Both projects have been deferred. BECRS (Business Entity Linking) identifies the relationship between the issuer and the issuer parent while GICRS (Global Instrument Linking) link a security to its ISIN, CUSIP/CINS, SEDOL, Bloomberg FIGI, Barra, Markit LoanX and etc. The NAIC has spent much of its development resources on these two projects because it is required to provide Jumpstart reports, which show designation discrepancies between the NAIC schedules filed by the insurers and the NAIC record. Integrating BECRS and GICRS would eliminate false positives in Jumpstart reports.
- Report on the Implementation of CRP Data Feeds for Securities Subject to Private Rating Letters Component of Filing Exemption. Some CRPs have not sent their private letter ratings via data feed, but the SVO has been receiving physical private rating letters.
- NAIC designation categories will be implemented early next year for 2020 year-end reporting. No RBC factors changed, which means there is no RBC impact on these new NAIC designation categories.
- The Structured Securities Group finished analysis on RMBS/CMBS on Wednesday, December 4.
Capital Adequacy (E) Task Force
Adoption of the Risk-Based Capital (RBC) Preamble
The task force received one comment from America’s Health Insurance Plans (AHIP) and incorporated all their comments into the preamble. The chairperson mentioned there are permitted practices that some states allow insurers to change the numbers that go into RBC reports from the annual statements. It explicitly states no state-permitted practices to modify the RBC formula are allowed, and all insurers are required to abide by the RBC instructions in the new preamble.
This agenda item was adopted, but the task force will revisit this topic on the next conference call to determine the next steps. The majority of the task force agreed these permitted practices are unfair to other insurers that follow the RBC instructions and increases risks in regard to state monitoring. Some task force members mentioned the risk is increased when one regulator allows the insurers to use permitted practices and the other regulators have no idea about this arrangement because there are currently no disclosure mechanisms.
NAIC Designations for Schedule D, Part 2, Section 2 – Common Stocks
The task force received a referral from the SAPWG in support of reporting revisions to allow NAIC designations for SEC-registered funds in the scope of SSAP No. 30 – Unaffiliated Common Stock. NAIC designations would only be permitted for SEC-registered funds comprised of bond or qualifying preferred stock investments.
The task force was asked to consider and determine the extent, if any, the reported NAIC designation for the SEC-registered investment should be factored into the RBC calculation.
Requests were made to move equity investments that have underlying bond investments from the scope of SSAP No. 30 to the scope of SSAP No. 26R – Bonds to obtain more appropriate RBC charges. SAPWG gave four reasons why it is not in favor of moving these equity investments to SSAP 26R.
First, SEC-registered funds in the scope of SSAP No. 30 are not bonds and do not represent a creditor relationship with a fixed schedule for one or more future payments. SAPWG also concluded the long-term bond schedule is not conducive to the reporting of funds. Further, existing guidance that allows SVO-identified exchange-traded funds to be reported in SSAP No. 26R on Schedule D-1 has resulted in inconsistent reporting for similar investments. Finally, the change to include equity investments within the scope of SSAP No. 26R is driven by RBC charges and not the investment structure or measurement method for the investment.
The SAPWG deferred to the BWG, VOSTF, and CADTF to determine whether the revisions to permit NAIC designations on Schedule D-2-2 are appropriate and feasible.
No comments were received from interested parties.
RBC Charges for Funds and Comprehensive Funds
The CADTF received a recommendation from VOSTF to conduct a comprehensive review of all funds that can be assigned NAIC designations by the SVO and consider how those NAIC designations should be included into the RBC calculation. VOSTF tasked the CADTF specifically with considering what RBC changes to make once NAIC designations are added to Schedule D-2-2.
This effort began in 2017 to develop a comprehensive proposal that ensures consistent treatment for investments involving funds that invest in bond portfolios.
The Comprehensive Fund Proposal would unify guidance for all fund investments into a new section of the P&P Manual. This effort began in 2017 to develop a comprehensive proposal that ensures consistent treatment for investments involving funds that invest in bond portfolios.
Five interested parties presented their comment letters. The American Academy of Actuaries said it may not be appropriate to apply C1 Bond factors on bond mutual funds. They said they understood the need to be consistent, but they are not sure if bond factors are the best factors. Ignoring the accounting and materiality elements, it would be wise to look at the risk related to investing on a single bond. Other interested parties said open-ended funds are equity share and they are not fixed income shares.
Two asset managers expressed support for this agenda item. They said it would be beneficial (e.g., better price and liquidity) to the small- and medium-sized insurance companies getting access to the bond market. As funds can be designated by the SVO only, it is consistent with the current conservative investment RBC approach.
The SAPWG adopted revisions during the Spring National Meeting to clarify the accounting and reporting guidance for structured notes. The adopted definition of structured notes is an investment that is structured to resemble a debt instrument, where the contractual amount of the instrument to be paid at maturity is at risk for other than the failure of the borrower to pay the contractual amount due.
The SAPWG directed a referral to the task force requesting consideration of appropriate RBC charges, and the elements used in determining the RBC, for structured notes and determination on how gains and losses on these derivatives shall be reported through interest maintenance reserve/asset valuation reserve.
The SAPWG identified that the book/adjusted carrying value of a structured note reported on Schedule DB will be fair value, and RBC will be determined based on the reported BACV.
The American Council of Life Insurers strongly encouraged the task force to take whatever steps necessary for any security that is non-admitted and not be piled onto RBC. In order to ensure consistent handling of non-admitted amounts across all asset classes within the life RBC formula, they suggested the life RBC forms and instructions be reviewed and modified to eliminate instances where an RBC charge is applied to a non-admitted asset carry value, or simply mirror the P&C company rules. As the structured notes are reported at fair value and have equity elements, they should get equity-like RBC charges (i.e., 30%) if the insurer receives a permitted practice to admit structured notes.