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NAIC Spring 2019 National Meeting Update

April 6-9 in Orlando, Florida

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Clearwater Analytics 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.

Statutory Accounting Principles Working Group

ADOPTED ITEMS

Ref #2019-02: Single Security Initiative

The NAIC was contacted by Freddie Mac regarding the upcoming exchange of certain securities into nearly identical securities with two exceptions: the associated coupon payments will be delayed an additional 10 days, and the securities will be assigned a new CUSIP number.

In response, an agenda item was exposed by the SAPWG on February 6, 2019, with a tentative interpretation to incorporate a limited-scope exception to SSAP No. 26R – Bonds and to prescribe guidance in SSAP No. 43R – Loan-backed and Structured Securities for securities exchanged as part of the Freddie Mac Single Security Initiative. This requires a continuation of the amortized cost basis of a security surrendered to the new security received in the exchange, and is an exception to guidance that requires gains or losses to be recognized.

The interpretation also allows reporting entities to adjust the security’s basis for the float compensation received.

Interested parties supported the exchange and conversion guidance and the NAIC staff’s proposed changes.

As this type of exchange has no end date, the NAIC will continue monitoring if other changes are needed.

Ref #2018-36: ASU 2018-13: Changes to the Disclosure Requirements for Fair Value Measurement

Non-substantive revisions to SSAP No. 100R – Fair Value Measurement were adopted and became effective immediately. As a result, the deleted disclosures will not be required in the 2019 statutory financial statements.

The revisions were exposed during the Fall 2018 National Meeting to adopt with modification the disclosure amendments in ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. The revisions include: describing the disclosure objective, eliminating information on transfers between hierarchy level 1 and level 2 for items measured and reported at fair value, incorporating changes that eliminate the disclosure of the reporting entity’s policy for determining when transfers between the levels have occurred, and revisions to reflect the GAAP disclosure changes related to the calculation of net asset value from ASC 820-10-50-6A.

These revisions also clarify previous actions on related US GAAP pronouncements.

Interested parties supported the revisions in this item.

Ref #2018-18: Structured Notes

The SAPWG adopted revisions to require structured notes for which the contractual principal amount to be paid at maturity is at risk for other than failure of the borrower to pay the contractual amount due to be reported as derivatives under SSAP No. 86. This excludes mortgage-referenced securities (i.e., STACR, CAS), which will be included in the scope of SSAP No. 43R.

Revisions with modifications to SSAP No. 26R, paragraph 2c, and SSAP No. 86 paragraph 5g, were adopted as non-substantive changes with a December 31, 2019, effective date. This resulted in the following changes:

SSAP No. 2–Cash, Cash Equivalents, Drafts and Short-Term Investments: Clarification that derivative instruments should not be reported as cash equivalents or short-term instruments regardless of their maturity date and should be reported as derivatives regardless of maturity

SSAP No. 26R–Bonds: Removes securities from the bond definition when 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 and deletes the structured note disclosure

SSAP No. 43R–Loan-backed and Structured Securities: Captures mortgage-referenced securities in scope, which is an explicit exception to the definition of a loan-backed and structured security (LBSS)

SSAP No. 86–Derivatives: Captures structured notes within scope when there is a risk of principal loss based on the terms of the agreement (in addition to default risk)

The SAPWG also directed a proposal to the BWG and the Capital Adequacy (E) Task Force to consider reporting  AVR and RBC revisions for structured notes. A referral was directed to the VOSTF to revise its definition of structured notes to mirror the definition adopted by the SAPWG. Finally, NAIC staff were directed to prepare a separate agenda item to consider whether additional guidance is needed within SSAP No. 86 for derivatives that are not hedging, income generation, or replications. If there is no explicit reporting guidance for structured notes, these structured notes can be reported as “Other” derivatives on Schedule DB - Part A, Section 1.

Ref #2018-34: SSAP No. 30R – Foreign Mutual Funds

The SAPWG adopted revisions to SSAP No. 30R — Unaffiliated Common Stock to expressly permit foreign open-end investment funds with a January 1, 2019, effective date. Based on feedback from interested parties, the revision refers to investment funds rather than mutual funds. The foreign mutual funds were previously included in the scope of SSAP No. 30 prior to the adoption of Ref #2017-32. The January 1, 2019, effective date prevents reporting entities from having reporting changes for these securities simply to move them back to Schedule D - Part 2, Section 2.

Revisions to include foreign mutual funds in the scope of SSAP No. 30R were exposed during the Fall 2018 National Meeting. Interested parties agreed with the recommendation to include foreign open-end investment funds in the scope.

The SAPWG moved forward with interested parties’ recommendation that non-US registered foreign open-end investments be coded as “foreign” on Schedule D - Part 2, Section 2 and the Supplemental Investment Risk Interrogatory (SIRI) with a new code to identify the funds. It also took recommendations to exclude diversified funds under the Investment Company Act of 1940 from the “10 largest exposures to a single issuer/borrower/investment” listing in Line 2 of the SIRI.

Further, the SAPWG considered two options for adding a new agenda item for SIRI – Line 13.

One option is to include equity funds that qualify individually as one of the largest equity interests regardless of look- through and a look-through of mutual funds even though it is diversified.

Revisions to include foreign mutual funds in the scope of SSAP No. 30R were exposed during the Fall 2018 National Meeting. Interested parties agreed with the recommendation to include foreign open-end investment funds in the scope.

The other option is to include equity funds that qualify individually as one of the largest equity interests regardless of look-through and a look-through of non-diversified mutual funds and ETF.

NAIC staff said a blanks proposal has been drafted to incorporate changes to SIRI – Line 2 (e.g., exclude all SEC and foreign registered funds and common trust funds that are diversified within the meaning of the 1940 Act and the insurers are required to identify actual exposures and aggregate those exposures with directly held investments to determine the top 10 exposures for those non-diversified funds) and create a new disclosure in SIRI to identify the top 10 fund managers, the total amount invested, and the portion of the amount invested that is in diversified funds and a non- diversified fund.

Ref #2018-17: Structured Settlements

The SAPWG adopted Issue Paper No. 160 – Structured Settlements, which was exposed during the Fall 2018 National Meeting. The paper documents for historical purposes the substantive revisions to SSAP No. 21R – Other Admitted Assets that were adopted during the Fall 2018 National Meeting and were effective for year-end 2018.

Changes outlined in the issue paper include:

  • Periodic-certain structured settlements acquired in accordance with state and federal laws are admitted assets
  • Life-contingent structured settlements and periodic-certain structured settlements not acquired pursuant to state and federal laws are non-admitted assets (e.g., the insurer did not properly transfer the title from the original beneficiary to its name)

BWG exposed as associated item, #2019-06BWG, which stipulates that these structured settlements would be reported as “any other class of assets” on Schedule BA.

Ref #2018-33: SSAP No. 30R – Pledges to Federal Home Loan Banks

The SAPWG adopted revisions to SSAP No. 30R – Unaffiliated Common Stock to clarify that assets pledged to a Federal Home Loan Bank (FHLB) on behalf of an affiliate should be non-admitted pursuant to SSAP No. 4 – Assets and Nonadmitted Assets. The revisions provide clarification that the FHLB guidance in SSAP No. 30R is restricted to reporting entities that are FHLB members, and that any transaction that is entered into on behalf of an affiliate, but is completed in a manner to exclude the affiliate involvement, will be considered a related party transaction under SSAP No. 25 – Affiliates and Other Related Parties.

Ref #2018-46: SSAP No. 86 Benchmark Interest Rates

The Securities Industry and Financial Markets Municipal Swap Rate and Secured Overnight Financing Rate Overnight Index Swap Rate were added as US benchmark interest rates for hedge accounting.

The SAPWG exposed the revisions on December 12, 2018. With the adoption, the above rates along with interest rates on direct treasury obligations of the US government, the London Interbank Offered Rate (LIBOR), and Federal Funds Effective Rate Overnight Index Swap Rate will be considered US benchmark interest rates for hedge accounting.

EXPOSED ITEMS

Comment deadline is June 12, 2019, unless otherwise specified. 

Ref #2018-32: SSAP No. 26R – Prepayment Penalties

The SAPWG exposed updated revisions to SSAP No. 26R – Bonds with modifications suggested by interested parties and staff.

Revisions were exposed during the Fall 2018 National Meeting to provide guidance to determine investment income for prepayment penalties or acceleration fees and realized gain/loss where bonds are prepaid for consideration less than par.

Interested parties supported the revisions, but did not think it necessary to require that each bond be reviewed individually.

Staff proposed additional revisions to SSAP No. 26R paragraph 17b to require a consistent treatment if a reporting entity has a process in place to identify prepayment penalty or acceleration fees. The reporting entity is required to maintain a process once a process is in place.

Staff also proposed revisions to clarify that in instances where consideration received is less than book-adjusted carrying value, the entire difference should be reported through investment income, which is consistent with reporting when a bond had been amortized under the yield-to-worst concept.

The comment deadline is May 10.

Ref #2018-03: Reporting NAIC Designations as Weighted Averages

Revisions were exposed to SSAP No. 43R – Loan-backed and Structured Securities that clarify accounting and reporting guidance for securities acquired in lots. It specifically addresses whether securities acquired at different purchase prices can report NAIC designations under a weighted average method under the financial modeling or modified filing exempt process.

Action was taken during the Fall 2018 National Meeting to remove the modified filing exempt approach from SSAP No. 43R. With that, only securities captured in the financial modeling process may be subject to differing NAIC designations by lot.

The proposed revisions require securities with differing NAIC designations by lot to be reported at either the lowest NAIC designation or be reported separately by purchase lot.

Ref #2018-04: VOSTF Bank Loan Referral

A review of guidance in the P&P Manual determined that the referenced bank loan structures may go beyond the scope of bank loans permitted within SSAP No. 26R, and some structures may be more appropriately classified as collateral loans within the scope of SSAP No. 21 – Other Admitted Assets. That includes revolving lines of credit, debtor-in-possession financing, and borrowing base loans.

Staff recommended collateral loans continue to be separated from bonds with separate reporting schedules and admittance restrictions. However, a security should not be reclassified as a “collateral loan” simply because the security has additional protection in the form of collateral (e.g., a bank loan is backed by operations of the entity or has a first lien against inventory of the issuer.)

A proposed new footnote for SSAP No. 21 has been exposed that states a collateral loan does not include investment securities captured in scope of other statements. Securities captured in SSAP No. 26R that are also secured with collateral should continue to be captured within scope of SSAP No. 26R.

The SAPWG will assess a referral response to the VOSTF after comments are received.

Ref #2018-22: SSAP No. 37 – Participation Agreement in a Mortgage Loan

Proposed revisions to SSAP No. 37 – Mortgage Loans, were exposed first on August 4 to clarify that a mortgage loan acquired through a mortgage loan participation agreement is limited to a single mortgage loan agreement with a sole borrower, and again on November 15 to exclude “bundled” mortgage loans. Bundled mortgage loans are interest in mortgage loans with various unrelated borrowers and collateral. However, a bundle of mortgage loans does not include a “bulk purchase” where the reporting entity’s interest in each mortgage loan is legally separate and divisible and the purchase simply facilitates the acquisition of multiple single mortgage loan agreements.

Proposed revisions that incorporate both regulator and interested parties’ comments will be exposed. Staff received informal regulator comments requesting additional clarity to ensure structures captured in SSAP No. 37 are compliant with the intent that acquisition through a participation agreement results in the same ownership and protections that a reporting entity would have if they had directly acquired a mortgage loan. SSAP No. 37 is limited to single mortgage loan agreements which can have more than one lender (e.g., co-lenders/participations and more than one borrower, a tenancy-in-common arrangement).

Ref #2019-05: Repurchase Disclosures

The SAPWG proposed revisions to reduce and clarify the disclosure requirements in SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and adding Annual Statement instructions.

The proposed revisions to SSAP No. 103R would remove the counterparty information from disclosure and remove the default disclosure from the data-captured disclosure. The proposal also recommends removing “minimum balances” and “average daily balance” from the disclosure.

Proposed revisions to the Annual/Quarterly Statement instructions includes adding guidance that all aspects of the disclosure should be completed throughout the year, and a response of “yes,” to indicate that a reporting entity that engages in repo activity would be required to include details on that activity.

There is also a concurrent blanks proposal (Item #2019- 11BWG) to incorporate the changes.

Ref #2019-03: Affiliated Transactions

The SAPWG exposed revisions to statutory accounting principles that clarify affiliate reporting when underlying investments continue to reflect affiliate transactions.

Principal concepts are proposed for SSAP No. 25 – Affiliates and Other Related Parties intending to highlight that although they include an unrelated intermediary, transactions that involve affiliates, or risks of an affiliate, should be reported as a related party transaction or an investment in an affiliate for statutory accounting principles.

Ref #2019-07: Bonds Received as Property Dividends or Capital Contributions

Revisions to SSAP No. 26R – Bonds and SSAP No. 72 – Surplus and Quasi-Reorganization were exposed to clarify the reporting when an insurance reporting entity receives a bond as a property dividend or as a capital contribution. This is meant to explicitly direct the initial reported value by the recipient insurance reporting entity and the calculation of gain/loss upon disposal.

The comment deadline is May 10.

Ref #2019-13: Clarification of a Look-Through Approach

Due to an inconsistency in the understanding and application of the look-through approach for valuation of subsidiary, controlled, and affiliated entities, the SAPWG proposed revisions be exposed to SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities that would clarify the guidance.

The revisions state goodwill may be admitted for an entity if the SCA value has been supported by an audit report.

Additionally, the look-through provision can be applied to the non-insurance holding company SCA entity under SSAP No. 97 paragraph 8(b)(iii) and can only be applied to the downstream level directly below the non-insurance holding company SCA entity rather than to multiple levels below the non-insurance holding company SCA entity.

Consideration is being given to companies with multiple shell holding companies within their group structure.

Ref #2018-26: SCA Loss Tracking – Accounting Guidance

The SAPWG exposed updated proposed revisions to SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities to update existing reporting requirements when a reporting entity has a negative equity value in a SCA investment and there is a guarantee or commitment to provide financial support.

This would remove stipulations that result in double-counting the impact of the parent insurer’s guarantee or commitment of SCA’s obligations on the parent insurer’s surplus, and incorporates existing language from the INT 00-24 to provide examples of how losses in a SCA shall be applied to other investments once the SCA equity investment has been halted at zero.

DISPOSED ITEM

Ref #2018-06: Regulatory Transactions Referral from Reinsurance (E) Task Force

Since March 2018, the working group has discussed an agenda item to address the accounting and reporting of regulatory transactions as defined in the P&P Manual. Guidance in the P&P Manual states regulatory transactions are not permitted to be reported as filing exempt or assigned NAIC designations and do not qualify for other NAIC designation reporting mechanisms (e.g., 5GI). These securities shall always be self-assigned as NAIC 6 securities. Reporting entities with bond/LBSS instruments considered regulatory transactions do not have any current reporting options and need prescribed guidance to avoid inadvertent reporting that is not permitted under the P&P Manual.

Staff recommended the SAPWG move this item to the disposed listing without statutory revisions and send a referral to the VOSTF to add the codes “RTS” and “RT” to the P&P Manual with a corresponding referral to the BWG to add these codes to the administrative list in the instructions once it is adopted by the VOSTF. This will enable reporting entities that have regulatory transactions structured as bonds to report the investment in accordance with the limitations prescribed by the P&P Manual.

The recommendation does not propose any statutory accounting revisions.

OTHER MATTERS

Ref #2016-20: Credit Losses

The SAPWG has continuously exposed an issue paper regarding proposed modifications to ASU 2016-13: Credit Losses to ensure a consistent understanding of the changes. The FASB has since taken on additional projects to clarify guidance and improve transition to the credit loss standard. There was also discussion by the US House Committee on Financial Services on December 11, 2018, that highlighted banks’ concerns with impact and cost analysis.

Staff recommended deferring consideration of the credit loss standard for statutory accounting principles until the new FASB standards are finalized, but staff will continue to provide FASB updates to the SAPWG.

Ref #2019-04: Investment Classification Project

The SAPWG directed NAIC staff to draft revisions for SSAP No. 32 – Preferred Stock to consider items in accordance with the initiatives of the Investment Classification Project. A referral was also sent to the VOSTF with a request for information on preferred stock and the suggested actions.

Staff intends to proceed with drafting revisions to SSAP No. 32 and a corresponding issue paper for subsequent exposure once information is received.

With this item, proposed revisions include retaining the definitions for redeemable and perpetual preferred stock that mirror FASB terminology. The definitions for mandatory sinking fund preferred stock, payment-in-kind preferred stock, and step-up preferred stock would be deleted as these terms do not impact valuation or reporting. New guidance to define and provide accounting guidance for mandatory convertible preferred stock would be incorporated that mirrors the mandatory convertible guidance in SSAP No. 26R – Bonds.

In addition, all references to “cost” as a measurement method would be deleted. Mandatory convertible redeemable preferred stock would be valued at the lower of amortized cost or fair value without impact by an NAIC designation.

Revisions to clarify the reporting of PIK dividends and PIK interest would also be incorporated and clarification for OTTI assessment when dividends for redeemable preferred stock are not received or when other redemption protections are not met by an issuer.

Further, the revisions would clarify that preferred stock issued by a SSAP No. 48 entity is in the scope of SSAP No. 32.

Ref #2016-03: SSAP No. 108 – Derivatives Hedging Variable Annuity Guarantees

Staff was directed to work with industry representatives to develop a new Schedule DB - Part E and notes to the financial statements following the adoption of the new SSAP No. 108 - Derivatives Hedging Variable Annuity Guarantees. These will capture information on the derivatives and related financial statement impact from the new SSAP. It is expected that consideration of the blanks proposal will occur during the BWG June conference call to allow both Schedule DB - Part E and notes to the financial statements to be in place for the 2019 Annual Statement.

A blanks proposal (Item #2019-14BWG) was submitted to the BWG for Spring 2019 National Meeting exposure. No action is needed by the SAPWG.

Ref #2018-07: Surplus Note Accounting – Referral from the Reinsurance (E) Task Force

Staff is still requesting information on any insurance reporting entities that file statutory financial statements with the NAIC and would be impacted by proposed to revisions to SSAP No. 41R – Surplus Notes.

Revisions were exposed for an extended comment period that ended November 30, 2018, to incorporate accounting guidance that prevents situations in which an issued surplus note can be linked to a reported asset or agreement and still qualify for surplus note reporting. Interested parties and the Vermont Department of Financial Regulation submitted comments disagreeing with the exposed language.

Company-specific information on reporting entities that have linked surplus notes is being sought and will be discussed on a regulator-only call that is expected to happen in April. An item will be included on an open hearing agenda after the discussion to formally consider comments and action.

Staff is still requesting information on any insurance reporting entities that file statutory financial statements with the NAIC and would be impacted by proposed to revisions to SSAP No. 41R – Surplus Notes.
Working Capital Finance Investments

The VOSTF exposed a staff memo and an industry proposal on March 4 that includes proposed revisions to SSAP No. 105 - Working Capital Finance Investments. The SAPWG is expected to receive a referral from VOSTF after the task force considers comments from the spring meeting.

AP&P Manual Update – Printed and Electronic Versions

The printed AP&P Manual and new BookShelf electronic product became available March 18. The new BookShelf product is an online subscription service. It is available at any time with internet access, or it can be downloaded with more functionality to a total of four devices per purchaser. Additionally, updates to the AP&P Manual will be automatically uploaded to the BookShelf product as they become available.

Regulators have access to the enhanced PDF and updates on StateNet.

Some printed manuals are still available. The printed version must now be ordered in advance.

Blanks Working Group

ADOPTED ITEMS

Item #2018-23BWG: Add Questions to the General Interrogatories Part 2

Questions 34.1 and 34.2 in the General Interrogatories were inadvertently left out of the 2019 Annual General Interrogatories after the fraternal and life blanks were combined.

These questions were in the 2018 fraternal annual and quarterly General Interrogatories Part 2 prior to combining life and fraternal and remain in the quarterly version for 2019. This proposal adds the questions to the 2019 Annual General Interrogatories Part 2 in the combined life and fraternal statement.

Item #2018-24BWG: Adjust AVR Factors for the Tax Cuts and Jobs Act

On June 8, 2018, the Investment Risk-Based Capital (E) Working Group (IRBCWG) adopted changes to RBC factors to adjust for the Tax Cuts and Jobs Act. Because the AVR factors are linked to the after-tax RBC factors, this proposal would likewise adjust related AVR factors for the same reason.

Impacted securities include bonds (and others that receive bond-like treatment), common stock, and real estate.

Item #2018-27BWG: Modify Instructions for Note 5L(4)

This proposal relates to the guidance in SSAP No. 1 – Accounting Policies, Risks & Uncertainties, and Other Disclosures. The proposed change is intended to help insurers provide a clearer disclosure of separate account assets by adding additional lines for reporting separate accounts or protected cells to the instructions for Note 5L(4). This is in addition to the general account. A notation explains which lines should be applied to the general account and which lines should be applied to separate accounts or protected cells.

Item #2018-28BWG: Add Instructions to Note 9

Due to the guidance in INT 18-03: Additional Elements Under the Tax Cuts and Jobs Act, this proposal adds instructions to Note 9 (Income Taxes). The instructions are for new disclosures 9H — Repatriation Transition Tax (RTT) and 9I — Alternative Minimum Tax (AMT) Credit. An illustration will be added to Note 9I and will be data-captured.

Item #2018-29BWG: Remove a Line from the Separate Accounts Blank

At the Summer 2018 National Meeting, the SAPWG revised SSAP No. 49 – Policy Loans and SSAP No. 56 – Separate Accounts (Ref #2017-35) to clear up inconsistencies in the reporting of policy loans. While the change is not new, inconsistencies were noted in a review of policy loans (SSAP No. 56 states that all policy loans should be reported in the general account). This proposal falls in line with that change and removes Line 5, Contract Loans, from the separate accounts asset page of the Separate Accounts blank, then renumbers the remaining lines.

Item #2018-30BWG: Modify Note 10O to Include References to SSAP No. 48 and SSAP No. 48 Entities

This item proposes that the instructions and illustration Note 10O be modified to include references to SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies as well as SSAP No. 48 entities in order to include loss tracking disclosures. This is due to amendments the SAPWG made to loss tracking for entities in Ref #2018-27.

Item #2018-31BWG: Add New Categories to the Schedule D According to SAPWG’s Proposed Changes to SSAP 30R

This proposal accommodates the expanded scope of SSAP No. 30 – Unaffiliated Common Stock, specific to changes the SAPWG adopted at the Fall 2018 National Meeting (Ref #2017-32). Blanks changes include adding categories for closed-end funds and unit investment trusts to the Schedule D, adding related categories to the Summary Investment Schedule, adding definitions for the new categories to the General Investment Schedule Instructions, modifying the definition of mutual fund, and adding related categories to the Schedule DL – Parts 1 and 2.

Revision to SSAP No. 49 and SSAP No. 56 – While the change is not new, inconsistencies were noted in a review of policy loans (SSAP No. 56 states that all policy loans should be reported in the general account). This proposal falls in line with that change and removes Line 5, Contract Loans, from the separate accounts asset page of the Separate Accounts blank, then renumbers the remaining lines.

EXPOSED ITEMS

Comment deadline: May 21, 2019

Item #2019-03BWG: Add Column to the Schedule D - Part 2, Section 2

This proposal was sent to the BWG by Charles Therriault, Director of the SVO, on behalf of VOSTF. This proposal is part of a broader effort to align treatment for funds that only, or predominantly, hold fixed income assets across schedules.

The working group considered changes that help identify fund investments assigned an NAIC designation and give insurers a mechanical process to report such investments and their designations. Changes include:

› Add a designation column for mutual funds to the annual Schedule D - Part 2, Section 2

› Modify Schedule D - Part 2, Section 2 instructions to reflect the added designation column

› Modify instructions for the NAIC Designation and Administrative Symbols column for the quarterly Schedule D - Parts 3 and 4 to reflect capturing designation for mutual funds

Item #2019-04BWG: Amend Inconsistencies Between Reporting for Bonds and Fixed Instruments in Schedule BA Instructions

This proposal was sent to the BWG by Charles Therriault on behalf of VOSTF. Currently, there is an inconsistency in reporting investments for Schedule BA across statement types for investments in the categories “Fixed or Variable Interest Rate Investments that Have the Underlying Characteristics of a Bond, Mortgage Loan or Other Fixed Income Instrument” and “Joint Ventures or Partnership Interests for Which the Primary Underlying Investments are Considered to Be Fixed Income Instruments.” This proposal would fix that inconsistency by doing the following:

› Removing the reference to “Life and Fraternal Only” from the Schedule BA instructions regarding investments that have the underlying characteristics of bonds or fixed instruments

› Removing the reference regarding CUSIP and NAIC Designation column from the Schedule BA instructions

› Adding lines to the two previously mentioned categories to distinguish between those that have SVO review and approval and those that do not

Item #2019-06BWG: Add Structured Settlements Reference to Schedule BA Instructions

This proposal would reflect changes made to SSAP No. 21 – Other Admitted Assets (Ref #2018-17), which permit payments from structured settlements as admitted assets when they were legally acquired in accordance with all state and federal requirements. In accordance to the SAPWG’s changes, the working group is considering adding a reference to structured settlements acquired by a reporting entity as an investment to the Schedule BA instructions. This reference would go in the “Any Other Class of Assets” definition.

Item #2019-07BWG: Modify Instructions to Note 20 (Fair Value) to Reflect Changes to Fair Value Guidance

The SAPWG recently adopted changes to SSAP No. 100R – Fair Value in response to recent FASB updates that reduced required disclosures around fair value. This proposal would modify the instructions to Note 20 (Fair Value) and reflect disclosure modifications adopted from US GAAP (ASU 2018- 13, Changes to the Disclosure Requirements for Fair Value Measurement). None of the disclosure templates are changed by these revisions.

Item #2019-09BWG: Add Reference to Mortgage-Referenced Securities

This proposal is in accordance to guidance being updated by the SAPWG on structured notes (Ref #2018-18). SAPWG moved mortgage-referenced securities (MRS) from SSAP No. 26R to SSAP No. 43R. Changes include adding a reference to MRS in the “U.S. Special Revenue and Special Assessment Obligations and All Non-Guaranteed Obligations of Agencies and Authorities of Governments and Their Political Subdivisions” category in the Investment Schedule General Instructions.

In addition, the proposal would delete Note 5O — Structure Notes and modify the bond characteristics definition for Schedule D - Part 1.

Item #2019-10BWG: Add Instructions Regarding Called Bonds

This proposed item concerns call prices that are less than par and the calculation of investment income for prepayment penalty and/or acceleration fees for bonds liquidated prior to scheduled termination. The guidance currently focuses around excess par, not less than par. The SAPWG addressed this issue and also the call prices that are less than book adjusted carrying value at the Spring 2019 National Meeting (Ref #2018-32).

The proposal before the BWG would modify how to report a prepayment penalty and/or acceleration fee for a called bond when consideration is less than par. If approved by the working group, instructions would be added to determine the gain/ loss reported in Column 18 and the prepayment penalty and/or acceleration fee amount in Column 20 on Schedule D - Parts 4 and 5.

Item #2019-11BWG: Modifications to Reflect Changes to SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishment of Liabilities

This proposal would modify Notes 5F, 5G, 5H, and 5I to accommodate changes to SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishment of Liabilities that are being considered by SAPWG (Ref #2019-05). Such changes include removing counterparty information from disclosure and removing the default disclosure from the data-captured disclosure.

This proposal would modify the instructions of the appropriate notes to accommodate changes made by SAPWG (e.g., removing minimum balances and average daily balance).

NAIC staff said in some instances, the reporting entities answered “yes,” but didn’t provide details on the repo activity.

Item #2019-12BWG: Modifications for Foreign Mutual Funds and Foreign Open-End Investment Funds

This proposal would accommodate changes being made by the SAPWG to SSAP No. 30R regarding investments (Ref #2018-34). If approved, a code would be added to Schedule D - Part 2, Section 2, Column 3 regarding foreign mutual funds. Additionally, instructions for foreign open- end investment funds would be added to the Investment Schedule General Instructions. Non-SEC registered foreign open-end investment funds governed and authorized in accordance with regulations established by the applicable foreign jurisdiction are reported on Schedule D - Part 2, Section 2, but other foreign funds are excluded.

Item #2019-13BWG: Modifications for Diversified Foreign Mutual Funds

This proposal would modify the instructions for Line 2 of the Supplemental Investment Risks Interrogatories to exclude diversified funds within the meaning of the Investment Company Act of 1940, and add a disclosure of top 10 fund managers for Line 14. This proposal stems from comments received by the SAPWG on the application of diversified funds (Ref #2018-34).

Item #2019-14BWG: Modifications to Note 8 – Derivatives Regarding Schedule DB

The development of a new Schedule DB reporting schedule and notes requires appropriate reporting changes. This proposal would modify the instructions and illustration Note 8 — Derivatives. If approved, the following changes would take place:

› Add categories for Variable Annuity Guarantees to the instructions for Schedule DB - Parts A and B

› Add instructions and blank pages for Schedule DB - Part E

› Modify the instructions for the details of write-in for Line 25 of the Asset page and Lines 25 and 34 of the Liability page

Item #2019-15BWG: Modifications for Bonds Received as Property Dividend or Capital Contribution

If approved, this proposal would modify certain schedules to include guidance for the amount to enter when bonds are received as a property dividend or capital contribution. Such modifications would apply to instructions for the “Actual Cost” column for Schedule D - Parts 1, 3, 4, and 5, and Schedule DA. 

This proposal reflects the changes to SSAP No. 26R – Bonds, for when bonds are received as a property dividend or capital contribution.

Item #2019-17BWG: Additions for Affiliated Bank Loans

The purpose of this proposal is to capture affiliated bank loans in Schedule D - Part 1; Schedule DA; Schedule DL - Parts 1 and 2; and Schedule E - Part 2. If approved, two new lines would be added for affiliated bank loans to the parent, subsidiaries, and affiliates category. It would also modify the existing lines for bank loans to reference those that are unaffiliated.

With these changes, the subtotal line for bank loans under the total bond category will be the sum of the affiliated and unaffiliated lines.

Valuation of Securities Task Force

ADOPTED ITEMS

Amendment to the P&P Manual to Clarify the Stand-Alone Status of an Investment Security Used in a Regulatory Transaction

Amendments were added to the 2019 edition of the P&P Manual to clarify the status of an investment security that is used as a component in a regulatory transaction. The amendments were proposed by the American Council of Life Insurers and the Securities Valuation Office.

The amendments include a broader definition of a regulatory transaction as, “a transaction engineered to address a regulatory concern one or more insurers have or may have that should be submitted to a state insurance department for approval and that has as a component a security or other instrument which on a stand-alone version may be an investment security, as defined in this manual, eligible for assignment of an NAIC designation.”

The amendments also clarify that insurance companies should not report a regulatory transaction as a filing exempt security, nor should the NAIC staff assign a designation or add them to the filing exempt securities process.

Amendment to the P&P Manual to Improve and Expand Disclosure on Transactions Not Eligible for Filing Exemption

Guidance from Part Three, Section 1 (b) (v) will be deleted and transferred to Part Three, Section 1 (b) (i) of the P&P Manual. This includes a list of eight security types that are not eligible for filing exemption. Those security types include residential mortgage-backed securities/commercial mortgage-backed securities, SCA investments, catastrophe-linked bonds, shares of funds, regulatory transactions, credit tenant loans, replication (synthetic asset) transactions, and working capital finance investments.

The amendments were added to the P&P Manual to resolve industry concerns with the inclusion of subsidiary controlled and affiliated, regulatory transactions, and credit tenant loans as securities ineligible for filing exemption.

The SVO will work with the interested parties on their concerns over the following items:

› Non-financially modeled securities to be eligible to use PL ratings as MFE process is removed

› CTL-like instruments that are not currently expressly contemplated by the P&P Manual to be Schedule D eligible

Amendment to the P&P Manual to Provide Comprehensive Instructions for Fund Investments and to Make Referrals to the Capital Adequacy (E) Task Force, the SAPWG, and the BWG

The VOSTF exposed a report on a proposed comprehensive framework for all fund investments, including the ability to evaluate all fixed-income-like funds for NAIC designation and corresponding risk-based capital treatment. The intent of the proposal was to ensure all funds that hold underlying fixed income assets as portfolio assets are treated consistently.

The SVO proposed a new Part Three, Section 8 to house all guidance for fund investments. This new section would retain existing verification procedures for money market and bond funds and instructions for ETFs and Schedule BA private funds. It would expand fixed-income treatment to qualifying funds issued by any investment company type. The SVO also proposed restricting more favorable regulatory treatment to funds assigned NAIC designations and excluding credit rating provider credit ratings.

Adoption of the Text of the 2019 (Reformatted) P&P Manual

The SVO recommended the VOSTF adopt the content of the clean version of a draft 2019 P&P Manual, which will allow staff and others to focus on finalizing content for publication in December 2019. They will identify further changes, including amendments that the VOSTF may adopt in 2019.

OTHER ITEMS

Staff Report Pertaining to the Referral of the SAPWG on Foreign Mutual Funds

The SAPWG requested comments from the VOSTF on whether foreign mutual funds should be in the scope of SSAP No. 30R – Unaffiliated Common Stock.

In a report, the SVO concluded that although it is not common practice, a foreign fund sponsor can register an offering of its mutual funds with the SEC under the Securities Act of 1933, and the investment company that proposes to issue the foreign mutual fund can register with the SEC under the Investment Company Act of 1940. This would be in the scope of SSAP No. 30R, and the SVO concluded it would be prudent to clarify that.

The SVO reported that an insurance company can also purchase funds in the foreign country where it has domicile. The SVO recommended the SAPWG consider whether that asset would be available to meet obligations of the insurer in the US and modify SSAP to address those foreign exposures if applicable.

Staff Report and Referral Recommendations Pertaining to Working Capital Finance Investments (WCFIs)

Industry representatives asked the VOSTF to determine if working capital finance investments could be facilitated if the SVO were given analytical discretion to interpret its guidance on two recurring issues. The VOSTF was also asked to consider a referral to the SAPWG on two other requirements (e.g., moving from Schedule BA to Schedule DA, and other modifications for SSAP No. 105).

Since then, two conference calls took place, and the SVO was directed to prepare a referral for consideration by the VOSTF at the spring meeting.

The VOSTF will refer a marked-up copy of SSAP No. 105 to the SAPWG with materials produced by industry to identify and explain the concerns that led to the requested adjustments and recommendations for changes to the P&P Manual. It will also refer materials with the SVO’s opinions on the issues raised. The VOSTF recommends the SAPWG consider making the amendments.

The VOSTF will consider what changes should be made to the P&P Manual once the SAPWG has provided a response to this referral.

STAFF REPORTS

Staff provided reports on the status of several ongoing projects.

The status of the Japan Credit Rating Agency, Ltd. application to become a vendor of credit ratings to the NAIC is dependent upon the completion of the Business Entity Cross Reference Service/Global Identifier Cross Reference Service project, which is targeted for 2019 annual filing. The Japan Credit Rating Agency is the 10th Nationally Recognized Statistical Rating Organization.

Efforts to implement carry-over procedure, the YE/IF suffix, are expected to be ready for 2019 annual reporting.

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