Updates from the SAPWG at the NAIC November 2020 Conference Call

This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) conference call on Nov. 12, 2020. SAPWG met via conference call to discuss its fall business as the working group will not be meeting during the virtual-only format NAIC Fall 2020 National Meeting. Our insurance Value Architects™ attended this virtual meeting to monitor regulatory updates.

SAPWG discussed a variety of topics, including possible extension of interpretations in response to COVID-19, levelized and persistency commissions, affiliates and related party transaction disclosures; credit tenant loans (CTLs) and more.

Insurance organizations should take note of these changes as they may significantly affect their accounting in 2020 and beyond.

Adopted revisions to statutory guidance

SSAP No. 37 – Mortgage Loans

Ref #2020-19: Clarifying Edits – Participating in Mortgages Process

Adopted nonsubstantive revisions to Statements of Standard Accounting Practice (SSAP) No. 37 clarify the requirements for participation loans. The proposed revisions clarify that a participant’s financial rights may include the right to take legal action against the borrower (or participate in the determination of legal action), but do not require that the participant have the right to solely initiate legal action, foreclosure, or under normal circumstances, require the ability to communicate directly with the borrower.

SSAP No. 19 – Furniture, Fixtures, Equipment and Leasehold Improvements and SSAP No. 73 – Health Care Delivery Assets and Leasehold Improvements in Health Care Facilities

Ref #2020-23: Leasehold Improvements

Adopted nonsubstantive revisions to SSAP No. 19 and SSAP No. 73 update the amortization guidance for leasehold improvements to allow lives that match the associated lease term, which agrees with U.S. Generally Accepted Accounting Principles (GAAP) in Accounting Standards Codification Topic 842.

SSAP No. 5R – Liabilities, Contingencies and Impairment of Assets and SSAP No. 62R – Property and Casualty Reinsurance

Ref #2020-25EP: Editorial Updates

Adopted nonsubstantive maintenance updates revise SSAP No. 5R and SSAP No. 62R for clarity and readability.

SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities

Ref #2020-17: Updating the SCA Review Process

Adopted nonsubstantive revisions to SSAP No. 97 update the current SCA filing review process and eliminate many of the manual steps required to annually review each submitted SCA.

Ref #2020-18: SSAP No. 97 Update

Adopted nonsubstantive changes to SSAP No. 97 update language to remove a superseded statement that guarantees or commitments from the insurance reporting entity to the SCA can result in a negative equity valuation of the SCA.

Interested parties commented on the potential negative valuation of foreign insurance subsidiaries (sometimes referred to as 8.b.iv entities), which was not in scope of this agenda item. A separate agenda item will be added to review if some of the provisions (i.e., potential negative valuation) of SSAP No. 97, which require limited statutory basis of accounting adjustments, should no longer apply to foreign insurance subsidiary entities.

SSAP No. 2R – Cash, Cash Equivalents, Drafts and Short-Term Investments

Ref #2020-20: Cash Equivalent Disclosures

Adopted nonsubstantive revisions to SSAP No. 2R expand current disclosure requirements to include cash equivalent investments. The revisions require the identification and disclosure of cash equivalents (excluding money market mutual funds) and short-term investments, or substantially similar investments, which remain on the same reporting schedule for more than one consecutive reporting period. The disclosure is satisfied through the use of a code on the investment schedules.

SSAP No. 43R – Loan-backed and Structured Securities

Ref #2020-21: SSAP No. 43R – Designation Categories for RMBS/CMBS Investments

Adopted nonsubstantive revisions to SSAP No. 43R reflect the updated final designation guidance for RMBS/CMBS securities which was previously adopted for the Purposes and Procedures Manual of the NAIC Investment Analysis Office.

Possible extensions of previously adopted interpretations

The below interpretations were previously extended to the third quarter of 2020 with an automatic expiration on Dec. 30, 2020 (and not effective for year-end). SAPWG discussed possible extension of these interpretations; however, regulators noted a lack of support for continuing to defer impairment recognition. These interpretations were not extended and will expire on Dec. 30, 2020.

• INT 20-02: Extension of the Ninety-Day Rule for the Impact of COVID-19
• INT 20-04: Mortgage Loan Impairment Assessment Due to COVID-19
• INT 20-05: Investment Income Due and Accrued

The below interpretations are effective for the period beginning on March 1, 2020 and ending on the earlier of Dec. 31, 2020, or the date that is 60 days after the date on which the national emergency concerning the novel coronavirus disease terminates, and are thus still in effect and will be in effect through fourth quarter 2020.

• INT 20-03: Troubled Debt Restructuring Due to COVID-19
• INT 20-07: Troubled Debt Restructuring of Certain Investments Due to COVID-19

Exposed revisions to statutory guidance

SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities

Ref #2020-35: SSAP No. 97 – Audit Opinions

This agenda item proposes nonsubstantive changes to SSAP No. 97 to allow U.S. GAAP SCA entities (sometimes referred to as 8.b.iii entities) that depart from a U.S. GAAP provision that has been rejected for statutory accounting to be admitted SCAs without quantification if the departure from U.S. GAAP results in a more conservative position (i.e., fewer assets or greater liabilities), as a result of the departure. This would require auditor certification that the departure from U.S. GAAP results in a more conservative position. Comments are requested on the extent to which situations exist that hinder admittance of U.S. GAAP SCA entities due to the departure of U.S. GAAP as a result of the inability to quantify the departure.

SSAP No. 26R – Bonds

Ref #2020-22: Accounting for Perpetual Bonds

This agenda item proposes nonsubstantive revisions to SSAP No. 26R to clarify the accounting treatment for perpetual bonds. A perpetual bond is a fixed income security, with a fixed schedule of future payments, however it does not contain a maturity date. These bonds are typically not redeemable at the option of the holder but generally possess call options for the benefit of the issuer. Due to the similarities between perpetual bonds and perpetual preferred stock, this agenda item originally proposed similar accounting and reporting treatment be applied for these two instruments and reflected the accounting and reporting guidance for perpetual preferred stock in conjunction with agenda item 2019-04. The current proposed revisions have been modified to specify bond treatment for perpetual bonds which have an upcoming, scheduled call date – these perpetual bonds thus would be subject to amortized cost treatment (utilizing the yield-to-worst concept) in instances where a termination date (i.e., call date) is known. Perpetual bonds that do not possess, or no longer possess, a call feature shall be reported at fair value.

Ref #2020-32: SSAP No. 26R – Disclosure Update

This agenda item proposes nonsubstantive revisions to SSAP No. 26R to expand the called bond disclosures to also include bonds which are terminated early through a tender offer.

SSAP No. 25 – Affiliates and Other Related Parties

Ref #2019-34: Related Parties, Disclaimer of Affiliation and Variable Interest Entities

This agenda item was originally exposed during the 2019 Fall National Meeting and re-exposed at the 2020 Summer National meeting. The proposed revisions clarify identification of related parties and affiliates in SSAP No. 25 and incorporate new disclosures to ensure regulators have the full picture of complicated business structures. In its Nov. 12, 2020 conference call, the SAPWG exposed nonsubstantive revisions to SSAP No. 25 to address the following aspects:

• Clarify the identification of related parties and ensure that any related party identified under U.S. GAAP or SEC reporting requirements would be considered a related party under statutory accounting principles.
• Clarify that non-controlling ownership over 10% results in a related party classification regardless of any disclaimer of control or disclaimer of affiliation.
• Clarify the impact of a disclaimer of control or disclaimer of affiliate under statutory accounting principles. As detailed, such disclaimers impact holding company group allocation and reporting as an SCA under SSAP No. 97, but do not eliminate the classification as a “related party” and the disclosure of material transactions as required under SSAP No. 25.
• Propose rejection of several U.S. GAAP standards addressing variable interest entities.
• Add new disclosure, listed below, within Schedule Y of ownership interest of the reporting entity. The intent of this disclosure is to capture information related to active ownership and is not intended for passive fund owners to be reported.
  – Disclosure is required for all owners with greater than 10% ownership of the reporting entity.
  – Reporting entity must disclose each owner’s ultimate controlling party and must provide a listing of other U.S. insurance groups or entities under that ultimate controlling party’s control.

These updates are not intended to change reporting in Schedule BA or Schedule D for any investments. The revised Schedule Y, incorporating the disclosures above, is anticipated to be exposed by the Blanks Working Group at their conference call in December 2020.

SSAP No. 71 – Policy Acquisition Costs and Commissions

Ref #2019-24: Levelized and Persistency Commission

During the Summer 2020 National Meeting SAPWG exposed revisions to SSAP No. 71 to clarify existing levelized commissions guidance and provide additional guidance regarding commission that is based on policy persistency. At its Oct. 15, 2020 conference call, SAPWG re-exposed revisions which require full recognition of funding agreement liabilities incurred for commission expenses obligated when an insurance policy is written. This guidance clarifies that writing the insurance policy is the obligating event for initial sales commission. The proposed revisions also distinguish traditional persistency commission from a funding agreement. The revisions re-exposed in October contain key changes from the prior exposure including:

• Improves the description of the funding agreements;
• Deletes previously proposed revisions regarding other types of commission;
• Removes the prior exposed reference to a correction of an error, reporting entities shall report a change resulting from adoption as a change in accounting principle.

SAPWG re-exposed this agenda item with minor clarifications from the October exposure, noting that the revisions apply to contracts in effect on the date of adoption. SAPWG also directed NAIC staff to draft an issue paper documenting the discussion.

SSAP No. 32R – Preferred Stock and SSAP No. 86 – Derivatives

Ref #2020-33: SSAP No. 32R – Publicly Traded Preferred Stock Warrants

This agenda item proposes nonsubstantive revisions to SSAP No. 32R to expand its scope to include publicly traded preferred stock warrants and require publicly traded preferred stock warrants to be reported at fair value. Nonsubstantive revisions are also proposed to SSAP No. 86 to identify this treatment. This proposed treatment would be similar to the treatment for publicly traded common stock warrants, which are scoped into SSAP No. 30R.

SSAP No. 43R – Loan-Backed and Structures Securities

Ref #2020-34: SSAP No. 43R – Government-Sponsored Enterprises – Credit Risk Transfer Transactions

This agenda item proposes nonsubstantive revisions to SSAP No. 43R to reflect changes to the Freddie Mac Structured Agency Credit Risk (STACR) and Fannie Mae Connecticut Avenue Securities (CAS) programs as it is anticipated that future Freddie Mac STACR and Fannie Mae CAS issuances will be solely conducted through a Real Estate Mortgage Investment Conduit (REMIC) trust (which remains functionally equivalent and retains the same material risk structure as the original STACR and CAS programs). The proposed revisions include STACR and CAS REMICs within the scope of SSAP No. 43R and align SSAP No. 43R guidance regarding the financial modeling of mortgage referenced securities to the requirements as directed in the Purposes and Procedures Manual of the NAIC Investment Analysis Office.

SSAP No. 86 – Derivatives and SSAP No. 108 – Derivatives Hedging Variable Annuity Guarantees

Ref #2020-36: Derivatives for Hedging Fixed Indexed Products

This agenda item proposes the development of new guidance for the accounting and reporting of derivatives that effectively hedge the growth in interest credited for fixed indexed products (e.g. fixed indexed annuity and indexed universal, reported in the general account). This agenda item is proposed to be substantive, with potential development of a new SSAP. NAIC staff identified two potential approaches to consider in their initial assessment:

• Approach 1: Establish guidance that permits effective hedge treatment that is in line with SSAP No. 86.
• Approach 2: Establish guidance that permits effective hedge treatment that is in line with SSAP No. 108.

SAPWG exposed this agenda item to solicit feedback and is open for additional commentary and suggestions beyond the two general approaches above.

SSAP No. 56 – Separate Accounts

Ref #2020-37: Separate Account – Product Identifiers

This agenda item proposes increased granularity within the separate account general interrogatories. The agenda item does not propose revisions to SSAP No. 56 but may result in a proposal to the Blanks (E) Working Group for annual statement instruction modifications. The proposed additional granularity addresses requests from regulators for improved reporting so that regulators can more readily identify and review the products captured in the separate account. Comments are requested from state insurance regulators and industry regarding the degree of product identifying details needed to adequately assess the product features and reserve liabilities, as well as if a threshold should be established for when aggregate reporting would be permitted.

Ref #2020-38: Pension Risk Transfer – Separate Account Disclosure

This agenda item proposes increased product identification and disclosure of pension risk transfer (PRT) transactions in the separate account financial statements. Regulators have requested improved reporting, in response to the recent growth of PRT, so regulators can more readily identify and analyze such transactions. Regulators requested several enhancements, including separated PRT reporting and improved PRT disclosure regarding reserves, associated assets, and general account exposure. SAPWG exposed this item, categorized as nonsubstantive, to solicit comments from state insurance regulators and industry regarding possible modifications to SSAP No. 56.

Appendix F – Policy Statements

Ref #2020-39: Interpretation Policy Statement Updates

This agenda item proposes nonsubstantive revisions to the NAIC Policy Statement on Maintenance of Statutory Accounting Principles in Appendix F which documents the adoption and review process of interpretations of statutory accounting principles.

Preamble – Accounting Practices & Procedures Manual

Ref #2020-40: Prescribed Practices

This agenda item proposes nonsubstantive revisions to the Preamble Implementation Questions and Answers to clarify prescribed practices. These revisions clarify that while any state in which a company is licensed can issue prescribed practices, the prescribed practices directed by the domiciliary state shall be reflected in the financial statements filed with the NAIC and are the financial statements subject to the independent auditor requirements.

SSAP No. 5R – Liabilities, Contingencies and Impairment of Assets, SSAP No. 72 – Surplus and Quasi-Reorganizations and SSAP No. 86 – Derivatives

Ref #2020-42: ASU 2020-06: Convertible Instruments

Exposed revisions to SSAP No. 5R, SSAP No. 72, and SSAP No. 86 reject ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity for statutory accounting.

Appendix D – Nonapplicable GAAP Pronouncements

Exposed revisions in the following agenda item reject the referenced Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) as not applicable to statutory accounting:

• Ref #2020-42: ASU 2020-07: Presentation and Disclosures by Not-for-Profit Entities

Directed actions

SSAP No. 43R – Loan-backed and Structured Securities

Ref #2020-24: Accounting and Reporting of Credit Tenant Loans

This agenda item clarifies the reporting of credit tenant loans (CTL) for statutory accounting. In order to provide timely guidance, it was previously identified that this issue needs to be considered separately outside of the substantive SSAP No. 43R project (see “Other updates provided”). SAPWG discussed and deferred final decision on inconsistencies in the reporting of “nonconforming” CTLs. This deferral was supported as the SSAP No. 43R project will assess investments that are captured on Schedule D-1. With this project, it was identified that it would be undesirable to require an investment that is currently being reported on Schedule D-1 to be moved to a different schedule if there was potential for that investment to subsequently qualify for Schedule D-1. SAPWG directed year-end 2020 reporting guidance to clarify the inclusion of “conforming” CTLs in scope of SSAP No. 43R and the reporting of “nonconforming” CTLs that do not have NAIC Securities Valuation Office (SVO) assigned designations on Schedule BA. This guidance provides a limited-time provision to permit nonconforming CTLs to be reported on Schedule D-1 if they have SVO-assigned NAIC designations. SAPWG also directed a referral to the SVO and the Capital Markets Bureau requesting comments on whether it is appropriate to change the existing 5% residual risk threshold in determining whether a CTL is conforming.

Subsequent to its Nov. 12, 2020 conference call, SAPWG exposed for comment INT 20-10T Reporting Nonconforming Credit Tenant Loans to address questions received regarding the actions directed in its Nov. 12, 2020 conference call. The public comment period for INT 20-10T ends Dec. 4, 2020. INT 20-10T proposes the following summarized provisions:

• CTLs that qualify per the provisions of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) are considered to be “conforming” CTLs and shall be reported on Schedule D-1 with the NAIC designation obtained from the SVO.
• CTLs that do not qualify per the provisions of the P&P Manual to be “conforming” CTLs shall follow the accounting and reporting provisions detailed in the following subparagraphs. These CTLs are noted as “nonconforming CTLs.”
• Nonconforming CTLs that have previously been reported on Schedule D-1 may continue to be reported on Schedule D-1 for year-end 2020 if they receive an SVO-assigned NAIC designation. If an SVO-assigned NAIC designation cannot be obtained for any reason, which includes situations in which the SVO determines that it cannot provide an NAIC designation on the investments, the investment shall be reported on Schedule BA. If reporting on Schedule BA, these CTLs shall not be reported with a credit-rating provider (CRP) determined NAIC designation.
• Nonconforming CTLs that have been previously reported on a different reporting schedule (e.g., Schedule B or Schedule BA) shall remain on the prior reporting schedule. There is no requirement for reporting entities to pursue SVO-assigned designations for these CTLs.  

This INT will be applicable for the year-end 2020 statutory financial statements and through the first three quarters of 2021. SAPWG noted that the exceptions provided in this INT shall not be interpreted to indicate its likely conclusion in determining the appropriate reporting schedule for nonconforming CTLs. Accordingly, reporting entities with nonconforming CTLs should be prepared to make adjustments to comply with the reporting schedule utilized for nonconforming CTLs, which may be Schedule BA, upon final conclusion by SAPWG.

SSAP No. 53 – Property Casualty Contracts – Premiums, SSAP No. 54R – Individual and Group Accident and Health Contracts and SSAP No. 66 – Retrospectively Rated Contracts

Ref #2020-30: Premium Refunds and Other Adjustments

The discussions during the exposure period for INT 20-08: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends, highlighted the need for more explicit guidance regarding policyholder refunds and other premium adjustments for accident and health and property and casualty lines of business. One such example that highlights the need for principles-based guidance are data telematics policies. Data telematics policies are property and casualty products that provide premium adjustments for other reasons than what is included in the current guidance (e.g., an automobile plug-in to determine driving habits of the insured for purposes of policy pricing). SAPWG exposed this agenda item during the 2020 Summer National Meeting with request for comment and input on the following:

• The preliminary recommendation is that the proposed guidance should follow the existing principles of adjustable premium and shall be recognized as adjustments to premium based on experience to date.
• Examples of existing products that have premium adjustments for reasons other than the existing guidance or how the existing guidance can be expanded.
• If accounting treatment that is being applied is different from premium adjustments, an overview of key attributes.

Comments and recommendations from industry and interested parties were consistent with the overall guidance in INT 20-08 and noted that providing examples within guidance regarding timing of the recognition for adjustments would be helpful.

On its Nov. 12, 2020 conference call, SAPWG directed NAIC staff to draft revisions for future review, prior to exposure of proposed revisions.

Other updates provided

Ref #2019-21: SSAP No. 43R

At its Oct. 13, 2020 conference call, SAPWG exposed a proposal to define what should be captured in scope of Schedule D-1: Long-Term Bonds for a public comment period ending Dec. 4, 2020. It is anticipated that a series of focused calls will occur beginning in 2021.

The following agenda items continue to be deferred for discussion to a later meeting or call:

• Ref #2019-12: ASU 2014-17, Business Combinations, Pushdown Accounting
• Ref #2019-14: Allocation of Goodwill

NAIC staff has proposed a project to holistically review the business combination and goodwill guidance in SSAP No. 68 - Business Combinations and Goodwill. If approved, the outstanding items in these agenda items will likely be addressed in this new project.

Ref #2019-49: Retroactive Reinsurance Exception

NAIC staff anticipates proposing revisions for SAPWG review for exposure either in an interim call or at the Spring National Meeting.

For more information on these topics, or to learn how Baker Tilly’s insurance industry Value Architects™ can help, contact our team.