Updates from the SAPWG at the NAIC Summer 2020 National Meeting

Authored by Dan Buttke and Jeff Maffitt

The National Association of Insurance Commissioners (NAIC) Summer 2020 National Meeting was held in a virtual-only format as a result of the COVID-19 pandemic. Baker Tilly’s team of insurance industry Value Architects™ attended these virtual meetings to monitor regulatory updates.

This report summarizes key activities of the Statutory Accounting Principles (E) Working Group (SAPWG) conference call on July 30, 2020, who met to discuss a variety of topics, including preferred stock, possible extension of interpretations in response to COVID-19, levelized and persistency commissions, 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. 86 – Derivatives

Ref #2019-38: Financing Derivatives

Adopted revisions require gross reporting of derivative activity for financing derivative transactions. A financing derivative transaction is one in which the premium to acquire the derivative is paid throughout the derivative term or at maturity of the derivative. The revisions are also intended to ensure consistency in reporting amounts owed to/from the reporting entity from the acquisition or writing of derivatives. The effective date of Jan. 1, 2021 is intended to allow companies to implement changes in their investment systems prior to adoption as the revisions represent a significant change to how certain companies account for derivatives.

SSAP No. 26R – Bonds and SSAP No. 30R - Unaffiliated Common Stock

Ref #2020-01: Update/Remove References to SVO Listings

SAPWG received a referral from the Valuation of Securities (E) Task Force (VOSTF) regarding two proposed amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual), the corresponding agenda item was adopted by the VOSTF on July 1, 2020. The adopted nonsubstantive revisions to SSAP No. 26R and SSAP No. 30R eliminate references to the NAIC Bond Fund List and nonsubstantive revisions to SSAP No. 30R add reference to the “NAIC Fixed Income-Like SEC Registered Funds List.” The adopted revisions are effective immediately.

SSAP No. 51R – Life Contracts, SSAP No. 52 – Deposit-Type Contracts and SSAP No. 54R – Individual and Group Accident and Health Contracts

Ref #2020-04: Commissioner Discretion in the Valuation Manual

The Valuation Manual became operative on Jan. 1, 2017 and is required to be used for all applicable products effective Jan. 1, 2020. The adopted nonsubstantive revisions are drafted to maintain comparability by providing guidance within SSAP No. 51R, SSAP No. 52 and SSAP No.54R regarding the use of commissioner discretion pursuant to the Valuation Manual. The revisions note that voluntary decisions to choose one allowable reserving methodology over another, which require commissioner approval under the Valuation Manual, shall be reported as a change in valuation basis. The adopted revisions are effective immediately.

SSAP No. 106 – Affordable Care Act Section 9010 Assessment

Ref #2020-05: Repeal of Affordable Care Act Section 9010 Assessment

The Affordable Care Act (ACA) Section 9010 assessment, also known as the health insurer’s tax (HIT), was repealed for calendar years beginning Jan. 1, 2021. The adopted substantive revisions supersede SSAP No. 106 and nullify INT 18-02: ACA Section 9010 Assessment Moratoriums and are effective Jan. 1, 2021. There are no changes to required disclosures for year end 2020 reporting, however, additional instructions will be posted to the SAPWG website.

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

Ref # 2020-16EP: Editorial Maintenance Update

Adopted editorial revisions, effective immediately, update the reporting line for cash pools and edit guidance for readability. The adopted revisions are effective immediately.

SSAP No. 32 – Preferred Stock

Ref #2019-04: SSAP No. 32 – Investment Classification Project

The SAPWG adopted substantive revisions to SSAP No. 32, and corresponding Issue Paper No. 164 -Preferred Stock, which are effective Jan. 1, 2021. The revisions include:

• Improved preferred stock definitions for classifying preferred stock as redeemable or perpetual. The revisions also incorporate a new exhibit to capture various terms prevalent in preferred stock.
• Revised 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.
• Clarified impairment guidance as well as guidance for dividend recognition and redemption of preferred stock with the issuer.

SSAP No. 26R – Bonds

Ref #2020-02: Accounting for Bond Tender Offers

Adopted nonsubstantive revisions to SSAP No. 26R clarify that the accounting and reporting of investment income and capital gain or loss, due to the early liquidation either through a call or a tender offer, shall be similarly applied. The guidance in SSAP No. 26R is currently not specific to called bonds. Rather, the existing guidance refers to “prepayment penalties or acceleration fees in the event the bond is liquidated prior to its scheduled termination date.” The revisions are effective Jan. 1, 2020 with early application permitted.

SSAP No. 68 – Business Combinations and Goodwill

Ref #2020-03: Enhanced Goodwill Disclosures

Adopted nonsubstantive revisions to SSAP No. 68, effective for the 2021 reporting year, add additional goodwill disclosures which are intended to improve the validity and accuracy of numbers currently being reported for goodwill and will assist with regulator review of reported assets not readily available for the payment of policyholder claims. The revisions only enhance disclosure granularity for existing reported goodwill and do not provide new guidance on the determination, calculation or admissibility of goodwill.

Schedule D-6-1 and D-6-2 are also revised, primarily focused on the current reference to intangible assets.

Adopted interpretation of statutory guidance

SSAP No. 86 – Derivatives

INT 20-09: Basis Swaps as a Result of the LIBOR Transition

This adopted interpretation addresses basis swaps which are compulsory derivatives issued by central clearing parties in response to the market wide transition away from the London Interbank Offered Rate (LIBOR). The interpretation directs that these basis swaps be reported as "hedging - other" and at fair value, thus qualifying for admittance. To be considered or reported as an "effective" hedging, the instrument must qualify as a highly effective hedge under SSAP No. 86.

Possible extensions of previously adopted interpretations

SAPWG exposed extensions to the third quarter of 2020 for the below interpretations with a shortened comment period ending Aug. 14, 2020. If this extension is supported by SAPWG, the INTs will be updated to reflect that one) they are applicable to the Sept. 30, 2020 financial statements and two) they will expire automatically on Dec. 30, 2020 (and not effective for year-end).

• 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. If the national emergency is not terminated prior to Aug. 1, 2020, these interpretations will be effective through the third quarter.

• 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. 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 additional discussion was deferred during the 2020 Spring 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. At the 2020 Summer National meeting 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 SAP. 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.
• Proposes rejection of several U.S. GAAP standards addressing variable interest entities.
• Adds new disclosure of ownership interest of the reporting entity and other significant relationships. The intent of this disclosure is to capture information related to active ownership and is not intended for passive fund owners to be reported.

These updates are not intended to change reporting in Schedule BA or Schedule D for any investments.

SSAP No. 71 – Policy Acquisition Costs and Commissions

Ref #2019-24: Levelized and Persistency Commission

Exposed revisions to SSAP No. 71 clarify existing levelized commissions guidance and provide additional guidance regarding commission that is based on policy persistency. The revisions clarify that a levelized commission arrangement requires the establishment of a liability for the full amount of the unpaid principal and accrued interest payable to a third party at the time the policy is issued. Additionally, persistency commission is required to be accrued proportionately over the policy period in which the commission relates to and is not deferred until fully earned.

Interested parties shared concerns regarding the risk based capital impact for entities who may be required to change their current accounting related to levelized and persistency commissions, as well as implementation challenges due to COVID-19.

The proposed revisions also clarify that reporting entities that have not complied with the original intent of SSAP No. 71 shall reflect any change in their accounting as a correction of an error, in accordance with SSAP No. 3 - Accounting Changes and Corrections of Errors, in the year-end 2020 financial statements.

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

Ref #2020-17: Updating the SCA Review Process

This agenda item proposes nonsubstantive changes to SSAP No. 97 to 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

This agenda item proposes nonsubstantive changes to SSAP No. 97, which updates language to remove the statement that guarantees or commitments from the insurance reporting entity to the SCA can result in a negative equity valuation of the SCA.

SSAP No. 37 – Mortgage Loans

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

This agenda item proposes nonsubstantive changes to SSAP No. 37 to 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. 2R – Cash, Cash Equivalents, Drafts and Short-Term Investments

Ref #2020-20: Cash Equivalent Disclosures

This agenda item proposes nonsubstantive changes to SSAP No. 2R to expand current disclosure requirements to include cash equivalent investments. The proposed revisions require the identification and disclosure of cash equivalents 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 the 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

This agenda item proposes nonsubstantive revisions to SSAP No. 43R to reflect the updated final designation guidance for RMBS/CMBS securities, which was recently adopted for the Purposes and Procedures Manual of the NAIC Investment Analysis Office.

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

This agenda item intends to clarify the reporting of credit tenant loans (CTL) for statutory accounting. In

order to provide timely guidance, it was identified that this issue needs to be considered separately outside of the substantive SSAP No. 43R project (see “Other updates provided”). SAPWG exposed the agenda item to solicit comment before directing NAIC staff on the desired guidance for CTLs. The two general options being considered are:

• Option 1: SSAP No. 43R for conforming CTLs (this includes CTLs With SVO-Identified Bond Characteristics Acquired Prior to Jan. 1, 2020 as detailed in the P&P Manual) – With this option, statutory accounting would continue with historical application and keep CTLs that are identified to have bond characteristics, after review by the SVO, in scope of SSAP No. 43R and reported on Schedule D as bonds.
• Option 2: SSAP No. 21 for all CTLs – With this option, statutory accounting revisions will be proposed to capture all CTLs in scope of SSAP No. 21 - Other Invested Assets and reported on Schedule BA. With this approach, all CTLs will be reported on the same schedule, and revisions will be proposed to allow CTLs that are reviewed and approved by the NAIC SVO to be reported with an NAIC designation.

This agenda item is not proposing that structures that do not conform to current requirements be considered in scope of SSAP No. 43R. This agenda item also inquires whether structures that are not conforming CTLs should be reported as mortgage loans or whether these structures should be captured in SSAP No. 21R. This agenda item is not proposing to reconsider the existing SVO guidelines in determining whether a CTL is “conforming” and in determining what is considered to be a suitable amount of “residual risk.”

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 proposes similar accounting and reporting treatment be applied for these two instruments and reflects the accounting and reporting guidance for perpetual preferred stock in conjunction with agenda item 2019-04, discussed above. The proposed revisions clarify that perpetual bonds shall be reported at fair value, not to exceed any current effective call price.

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

This agenda item proposes nonsubstantive revisions to SSAP No. 19 and SSAP No. 73 to update the amortization guidance for leasehold improvements to allow lives that match the associated lease term, which agrees with U.S. GAAP in ASC Topic 842.

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

Ref #2020-25EP: Editorial Updates

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

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 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.

Appendix D – Nonapplicable GAAP Pronouncements

Exposed revisions in the following agenda items reject the referenced FASB ASUs as not applicable to statutory accounting:

• Ref #2020-26: ASU 2015-10, Technical Corrections and Improvements
• Ref #2020-27: ASU 2019-09, Financial Services – Insurance, Effective Date
• Ref #2020-29: ASU 2020-05, Revenue from Contracts with Customers and Leases, Effective Dates for Certain Entities

SSAP No. 48 - Joint Ventures, Partnerships and Limited Liability Companies, SSAP No. 97 -Investments in Subsidiary, Controlled and Affiliated Entities and SSAP No. 86 - Derivatives

Ref #2020-28: ASU 2020-01, Investments ASU 2020-01, Investments - Equity Securities, Investments – Equity Method and Joint Ventures, and Derivatives and Hedging

Exposed revisions to SSAP No. 48, SSAP No. 97 and SSAP No. 86 reject ASU 2020-01 for statutory accounting.

Other updates provided

Ref #2019-21: SSAP No. 43R

An issue paper was exposed on March 18, 2020 to review and consider substantive revisions to SSAP No. 43R. While NAIC staff has continued to work on this topic, the comment deadline regarding the initial issue paper is July 31, 2020. A subsequent conference call will be scheduled to consider comments and continue discussion.

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

• Ref #2018-07: Surplus Note Accounting – Referral from the Reinsurance (E) Task Force
• Ref #2019-12: ASU 2014-17, Business Combinations, Pushdown Accounting
• Ref #2019-49: Retroactive Reinsurance Exception

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