Updates from the NAIC Spring 2019 National Meeting
The National Association of Insurance Commissioners (NAIC) Spring 2019 National Meeting occurred from April 6-9, 2019, in Orlando, Florida. During the meeting, the Statutory Accounting Principles (E) Working Group (SAPWG) and the Blanks Working Group (BWG) met to discuss a variety of topics, including asset valuation reserve factors, fair value measurements, electronic data processing equipment and leasehold improvements, and more.
Insurance organizations should take note of these changes as they may significantly affect their accounting in 2019 and beyond.
Statutory Accounting Principles Working Group
The SAPWG adopted several substantive and non-substantive revisions to statutory guidance, including:
SSAP No. 100R—Fair Value
Revisions adopted with modifications to the disclosure amendments in Accounting Standards Update (ASU) 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement and clarifications to prior actions about U.S. generally accepted accounting principles (GAAP). Among other things, these updates will eliminate the requirement to disclose information about transfers between levels 1 and 2, and reflect the U.S. GAAP disclosure changes related to the calculation of net asset value. As a non-substantive change, the revisions will be effective when adopted, and the deleted disclosures will not be required in the 2019 statutory financial statements. Technically, this may be earlier than U.S. GAAP. However, U.S. GAAP allows all entities to early-adopt any removed disclosures upon issuance of the ASU, and delay adoption of any revised disclosures until Jan. 1, 2020.
SSAP No. 16R—Electronic Data Processing Equipment and Leasehold Improvements
Revisions adopted with modifications to ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This will allow the capitalization of implementation costs from a cloud hosting service contract as non-operating system software with amortization not to exceed five years. Adopted revisions also clarify the accounting for cloud hosting arrangements that are not service contracts. The effective date is Jan. 1, 2020.
SSAP No. 2R—Cash, Cash Equivalents, Drafts and Short-Term Investments, SSAP No. 26R—Bonds, SSAP No. 43R—Loan-backed and Structured Securities, and SSAP No. 86—Derivatives
Revisions, effective Dec. 31, 2019, clarify the accounting and reporting for structured notes. A structured note is defined as 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. Structured notes reflect derivative instruments (e.g., put option or forward contract) that are wrapped by a debt structure. The adopted revisions include the following:
- SSAP No. 2R—Cash, Cash Equivalents, Drafts and Short-Term Investments: Derivative instruments shall not be reported as cash equivalents or short-term instruments regardless of their maturity date.
- SSAP No. 26R—Bonds: Structured notes are explicitly excluded from the scope of SSAP No. 26R.
- SSAP No. 43R—Loan-backed and Structured Securities: Structured notes that are mortgage-referenced securities are in scope of SSAP No. 43R.
- SSAP No. 86—Derivatives: Structured notes, excluding those in scope of SSAP No. 43R, are considered derivative instruments and shall be captured in scope of SSAP No. 86.
With the adoption action, the SAPWG directed referrals to the BWG, the Valuation of Securities (E) Task Force and the Capital Adequacy (E) Task Force to update the definitions for structured notes, and considered asset valuation reserve (AVR) and risk-based capital (RBC) revisions to reflect the adopted statutory accounting revisions. The SAPWG also directed a new agenda item proposing revisions to SSAP No. 86 to specify the valuation of “other” derivatives when state investment law permits admittance.
SSAP No. 30R—Unaffiliated Common Stock
Revisions explicitly capture foreign open-end fund investments in scope with a Jan. 1, 2019, effective date. The SAPWG directed a blanks proposal to identify foreign open-end funds on the investment reporting schedule to incorporate revisions to the Supplemental Investment Reporting Interrogatory (SIRI) to clarify what should be captured in Line 2 (i.e., top 10 issuers) and to add a new disclosure for investments with fund managers. The SAPWG also directed NAIC staff to draft a new agenda item to consider revisions to Line 13 of SIRI (i.e., 10 largest equity interests).
SSAP No. 55—Unpaid Claims, Losses and Loss Adjustment Expenses
Revisions clarify the reporting of interest on accident and health claims, with a Jan. 1, 2020, effective date with early adoption permitted. Interest paid on accident and health claims shall be classified as other claim adjustment expenses when paid to policyholders and regulatory fines and fees when remitted to regulators. Initial discussions were that this adoption would be effective for the year ending Dec. 31, 2019. However, based on concerns expressed by interested parties around sufficient lead-time for carriers to implement changes, particularly the fact that interest paid on claims is embedded in health company claims processing systems and any changes must be done in a controlled fashion and will take some time to implement, the effective date was deferred until Jan. 1, 2020. This will allow sufficient time for health insurers to make the necessary changes to their claims processing systems.
SSAP No. 21R—Other Admitted Assets
The working group adopted Issue Paper No. 160—Structured Settlements Acquired as Investments, which documents the substantive revisions, adopted in 2018, to SSAP No. 21R—Other Admitted Assets.
SSAP No. 30R, Unaffiliated Common Stock—Pledges to FHLBs
Revisions provide clarification that assets pledged to a Federal Home Loan Bank (FHLB) on behalf of an affiliate shall be nonadmitted. Additionally, transactions entered into on behalf of an affiliate shall be considered a related party transaction if the transactions are structured to exclude the affiliate.
SSAP No. 86, Derivatives—Benchmark Interest Rates
Revisions add the Securities Industry and Financial Markets (SIFMA) Municipal Swap Rate and the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as U.S. benchmark interest rates for hedge accounting.
SSAPs No. 92 and 102, Postretirement Benefits Other Than Pensions and Pensions; ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans
Revisions adopt substantially all of ASU 2018-14. This adds, clarifies and removes some current disclosures. Because the NAIC requires the same disclosures for public and non-public entities, changes related to the removal of disclosures for non-public entities were not adopted.
SSAPs No. 95 and 104R, Nonmonetary Transactions and Share-Based Payments; ASU 2018-07, Improvements to Share-Based Payment Accounting
Revisions adopted ASU 2018-07, with modification, to better align the statutory guidance with new U.S. GAAP guidance. The new guidance now applies the same requirements to employee and non-employee share-based payments. The current SSAP No. 104R section on non-employee share-based payment guidance was eliminated with this adoption.
INT 19-01—Extension of Ninety-Day Rule for Impact of California Camp Fire, Hill Fire and Woolsey Fire
Adoption provides a temporary extension to the 90-day rule under SSAP No. 6, Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due from Agents and Brokers, for uncollected premiums of California policyholders that were affected by the November 2018 wildfires. The interpretation was automatically nullified on April 24, 2019.
INT 19-02—Freddie Mac Single Security Initiative
Interpretation allows companies exchanging “45-day securities” for “55-day securities” not to recognize any gain or loss on the exchange. The interpretation is meant to act as a limited-scope exception to SSAP No. 26R, Bonds and instead prescribe SSAP No. 43R, Loan-Backed and Structured Securities for securities exchanged under the Freddie Mac Single Security Initiative.
Not Applicable GAAP Guidance
Revisions reject the following U.S. GAAP guidance as not applicable:
- ASU 2017-13, Amendments to SEC Paragraphs
- ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
- ASU 2018-04, Debt Securities and Regulated Operations
- ASU 2018-05, Amendments Pursuant to SEC Staff Accounting Bulletin No. 118
- ASU 2018-06, Financial Services – Depository and Lending
In addition, the SAPWG also exposed several substantive and non-substantive revisions to statutory guidance, including:
Preamble, SSAP No. 50—Classifications of Insurance or Managed Care Contracts, SSAP No. 51R—Life Contracts, SSAP No. 52—Deposit-Type Contracts, SSAP No. 56—Separate Accounts, SSAP No. 71—Policy Acquisition Costs and Commissions, and SSAP No. 86
Revisions update U.S. GAAP references and reject ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts for statutory accounting. With exposure, SAPWG requested comments on whether new disclosure reconciliations of liabilities should be captured. It was additionally noted by interested parties that efforts continue to defer the implementation date of the U.S. GAAP standard, which would continue to defer the timing of the NAIC taking action on ASU 2018-12.
SSAP No. 62R—Property and Casualty Reinsurance
Revisions clarify the effective date of guidance adopted Nov. 15, 2018. In particular, the revised guidance applies to contracts in effect as of Jan. 1, 2019. If a change is required to prior application, it shall be applied as a change in accounting principle.
ASU 2014-17, Business Combinations – Pushdown Accounting
Several revisions affect business combinations, particularly those involving subsidiary, controlled and affiliate (SCA) entities. Revisions reject ASU 2014-17, Business Combinations – Pushdown Accounting for statutory accounting and prohibits pushdown accounting for SCA entities that are reported under audited U.S. GAAP. Revisions clarify that the acquisition of a holding company requires the purchase price and goodwill to be attributed to the downstream entities that the holding company directly owns, and clarify the guidance for look-through entities. These revisions specify that goodwill may be admitted only if its value has been supported by an audit report and that the look-through provision only applies to the downstream level directly below the noninsurance holding company. The exposure requests information on multiple-level shell holding companies for specific consideration.
SSAP No. 22—Leases
Exposed a substantively revised SSAP No. 22R and corresponding Issue Paper No. 16X—Leases to incorporate guidance from ASU 2016-02, Leases. The updates generally reject as not applicable to statutory accounting the information in the ASU and maintain the operating lease concept.
SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities
Revisions to SSAP No. 97 update the existing reporting requirements for when a reporting entity has a negative equity value in an SCA investment; SSAP No. 97 is currently written that if a reporting entity has a guarantee or commitment to provide financial support and the SCA equity drops below zero, the reporting entity could be double counting. Exposed guidance clarifies that the reporting entity should not have to record the negative equity if an accrual has already been established under SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets.
SSAP No. 25, Affiliates and Other Related Parties and Investment SSAPS, Affiliated Transactions
The proposed guidance, which appears to be in response to regulatory scrutiny over the alleged $2 billion of investments made by insurance companies of ELI Global, LLC to other affiliated entities through intermediaries, clarifies the classification of related party transactions. These proposed revisions note that transactions with affiliated entities or with investments issued by affiliates that involve an unrelated intermediary are still considered related party transactions in accordance with SSAP No. 25.
SSAPs No. 21 and 26R, Other Admitted Assets and Bonds
Revisions clarify that securities in scope of SSAP No. 26R are not reclassified as collateral loans if the securities are secured with collateral. This includes “borrowing base loans” and “DIP financing loans.”
SSAP No. 26R, Bonds—Prepayment Penalties
Proposed revisions provide guidance to SSAP 26R for determining prepayment penalties for called bonds when the consideration received is less than par. The revisions will only require prepayment penalty classification for these situations when a reporting entity has a process in place to identify the prepayment penalty. The revisions also clarify that if consideration received was less than the book/adjusted carrying value (BACV), the entire difference shall be reported as investment income. This issue is exposed until May 10, 2019.
SSAP No. 72, Surplus and Quasi-Reorganizations—Bonds Received as Property Dividends or Capital Contributions
Proposed clarifications would value bonds received as dividends or capital contributions at fair value at the transaction date when they are considered economic transactions under SSAP No. 25, Affiliates and Other Related Parties. This issue is exposed until May 10, 2019.
SSAP No. 37, Mortgage Loans—Participation Agreements
Proposed revisions would refine the investments included in the scope of SSAP No. 37, including revisions to the exclusion of “bundled” mortgage loans as well as provide clarification around the requirements of participating interests.
SSAP No. 43R, Loan-Backed and Structured Securities—Reporting NAIC Designations as Weighted Averages
The re-exposed revisions to SSAP No. 43R require that, for securities with different NAIC designation by lot, the reporting entity either report the entire investment in a single reporting line at the lowest NAIC designation applicable to that lot, or report the investments individually by purchase lot.
SSAP No. 52, Deposit-Type Contracts
The working group requested clarification and comments from industry as to why some guaranteed investment contracts or other deposit-type contracts are reported in Exhibit 5—Aggregate Reserves for Life Contracts or Exhibit 6—Aggregate Reserves for Accident and Health Contracts as opposed to Exhibit 7—Deposit-Type Contracts.
SSAP No. 55, Unpaid Claims, Loses and Loss Adjustment Expenses—Prepayments to Service and Claims Adjusting Providers
The re-exposed proposed changes to SSAP No. 55 relate to the reporting of prepayments to providers of claims and claims adjusting services. Industry comments indicate that insurers prefer to nonadmit the prepaid asset as opposed to expensing and reclassifying as amounts are paid. Additionally, insurers prefer flexibility in classifying prepayments as either underwriting or claim expenses depending on the nature of the payment.
SSAP No. 68, Business Combinations and Goodwill—Attribution of Goodwill
Proposed revisions clarify that the acquisition of a holding company requires the purchase price and goodwill to be attributed to the downstream entities that the holding company directly owns.
SSAP No. 97, Investments in Subsidiary, Controlled and Affiliated Entities—Clarification of a Look-Through Approach
Revisions provide clarification on the guidance for look-through entities to specify that goodwill may be admitted only if its value has been supported by an audit report. Additionally, revisions clarify that the look-through provision is only applicable to the downstream level directly below the noninsurance holding company.
SSAP No. 101, Income Taxes—Q&A Updates—Tax Cuts and Jobs Act of 2017 (TCJA) and Deferred Tax Asset (DTA)/Deferred Tax Liability (DTL) Offset
The working group exposed for comment proposed changes to reflect tax law changes and clarifying guidance related to the application of the deferred tax admittance calculation, particularly with regards to offsetting deferred tax liabilities.
SSAP No. 103R, Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—Repurchase Disclosures
Revisions reduce the disclosure requirements for repurchase and reverse repurchase agreements. This would remove the counterparty disclosures, default disclosures, and the minimum and average daily balance disclosure. This issue is exposed until May 10, 2019.
Not Applicable GAAP Guidance
Revisions reject the following U.S. GAAP guidance as not applicable:
- ASU 2015-08, Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115
- ASU 2019-02, Entertainment – Improvements to Accounting for Costs of Films and License Agreements for Program Materials (a consensus of the FASB Emerging Issues Task Force)”
Blanks Working Group
The BWG adopted eight proposals during the meeting that were previously exposed, including:
2018-24BWG
The Life Risk-Based Capital (E) Working Group has implemented appropriate changes to the life and fraternal RBC factors because of the Tax Cuts and Jobs Act of 2017; the AVR factors are linked to the after-tax RBC factors. These RBC factor changes were adopted for 2018 RBC filings on June 8, 2018. The AVR factors in the life, accident and health/fraternal blank for those where the related RBC factors have changed due to the TCJA were adjusted.
2018-28BWG
Add instructions to Note 9, Income taxes for new disclosures – Note 9H, Repatriation Transition Tax (RTT), and Note 9I, Alternative Minimum Tax (AMT) Credit, which is required by Interpretation (INT) 18-03: Additional Elements Under the Tax Cuts and Jobs Act and was adopted by the SAPWG. An illustration will be added for Note 9I and will be data captured.
2018-31BWG
Add two new categories (unit investment trusts and closed-end funds) to the common stock categories on Schedule D; add the new categories to the Summary Investment Schedule; add definition of “unit investment trusts” and “closed-end funds” to the Investment Schedules General Instructions and modify the definition of “mutual fund”; and add categories for “unit investment trusts” and “closed-end funds” to Schedule DL, Part 1 and Part 2.
In addition, the BWG exposed 17 new proposals with a comment deadline of May 21, 2019.
Other updates provided
ASU 2016-13 Financial Instruments (Topic 326) – Measurement of Credit Losses on Financial Instruments
The Financial Accounting Standards Board (FASB) has undertaken additional projects to clarify the guidance and improve the transition of ASU 2016-13, also commonly referred to as the current expected credit loss (CECL) standard. Further action by the SAPWG has been deferred until after the FASB updates.
For more information on these topics, or to learn how Baker Tilly’s insurance industry specialists can help, contact our team.
