Advisors meet to review financial performance results

Updates from NAIC Spring 2018 National Meeting

Accounting adoptions and exposed revisions

During the National Association of Insurance Commissioners (NAIC) Spring 2018 National Meeting, the Statutory Accounting Principles Working Group (SAPWG) adopted and exposed various revisions to statutory accounting guidance. Topics addressed include surplus notes, derivatives, expected credit losses, income taxes, leases accounting and more.

Adopted (effective dates vary)

SSAP No. 9—Subsequent Events

The SAPWG adopted Interpretation (INT) 18-01: Updated Tax Estimates Under the Tax Cuts and Jobs Act to provide a limited-time, limited-scope exception to Statement of Statutory Accounting Principles (SSAP) No. 9 – Subsequent Events to not require recognition of changes in reasonable estimates as Type 1 subsequent events after the issuance of statutory financial statements. The INT also provided instruction for reporting changes in deferred taxes.

SSAP No. 41R—Surplus Notes

Revisions to SSAP No. 41R clarify that the existing concept that restricts the “double-counting” of surplus notes issued by subsidiary, controlled and affiliated (SCA) entities shall also apply to surplus notes that are issued by the parent and held by an SCA entity. In response to prior comments received from interested parties, the revisions were expanded to clarify that an SCA’s acquisition of a surplus note issued by the parent shall always be eliminated in the SCA’s value reported by the parent insurance company.

SSAP No. 68—Business Combinations and Goodwill

Revisions to SSAP No. 68 incorporate additional disclosure items that will enable regulators to review goodwill admission for each SCA and add transparency to the value claimed for an SCA for year-end 2018. A referral will be sent to the Blanks (E) Working Group to capture the adopted disclosures within footnote 3 of the annual statement as opposed to footnote 10, which had been the original proposed location of the disclosure.

SSAP No. 86—Derivatives

On the heels of a Nov. 6, 2017 SAPWG adoption of revisions to SSAP No. 86 to capture aggregate disclosures related to derivative contracts with deferred or financing premiums in narrative format for year-end 2017, additional revisions incorporate individual contract disclosures for derivative contracts with financing premiums. A Blanks (E) Working Group proposal will consider Schedule DB changes for year-end 2018 reporting.

As a result of interested party comments received with respect to proposed asset valuation reserve (AVR) changes, particularly the fact that AVR does not inaccurately reflect the risks associated with the aforementioned derivative contracts, as well as the position that the costs of modifying AVR guidance would not exceed any perceived benefit from making changes, SAPWG directed NAIC staff to reassess the issue once the adopted disclosures can be reviewed with 2018 financial data via a new agenda item.

SSAP No. 92—Postretirement Benefits Other than Pensions and SSAP No. 102—Pensions

Revisions remove the level 3 fair value reconciliation disclosure for pension and other post-retirement plan assets as SAPWG determined that reconciliation of the fair value categories was not necessary for statutory financial statements, noting that plan assets are not reported as assets in the balance sheet, but rather the fair value of plan assets is compared to the plan liability to determine whether the plan is over or underfunded.

SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

Revisions to SSAP No. 103R exclude cash equivalents, derivatives and short-term investments with credit assessments equivalent to an NAIC 1 or NAIC 2 designation from the wash sale disclosure and clarify that the wash sale disclosure should be in the financial statements for the period in which the security is sold.

Exposed revisions (comment periods vary)

SSAP No. 86—Derivatives

The issue paper details the U.S. GAAP revisions in ASU 2017-12, Derivatives and Hedging with initial NAIC staff assessments for an extended comment period ending June 22. The exposure requests comments on the assessments, the revisions needed to incorporate suggested modifications, and differences between statutory accounting principles and U.S. GAAP that should be retained. The following were key elements noted by NAIC staff with the initial presentation of this item:

  • Existing guidance in SSAP No. 86 identifies an “adoption of the framework” of select U.S. GAAP guidance, but this “framework” adoption has been cited as confusing as the four cornerstones of U.S. GAAP derivative accounting are not captured under statutory accounting principles. The review of ASU 2017-12, with a review of SSAP No. 86, intends to improve the statutory accounting guidance for derivatives, and further identify the areas that reflect or diverge from U.S. GAAP.
  • Questions have been received on the completion of Schedule DB, and the use of SSAP No. 86 Exhibit C, in completing Schedule DB. These questions have highlighted that potential inconsistencies may exist between the guidance in the body of the SSAP, the SSAP exhibit and the annual statement instructions. The consideration of ASU 2017-12, as well as the review of existing statutory derivative guidance, intends to encompass a review of the derivative schedule to eliminate inconsistencies and improve overall reporting.

Special Accounting Treatment for Limited Derivatives Hedging Variable Annuity Guarantees

The issue paper details substantive statutory accounting revisions to allow special accounting treatment for limited derivatives hedging variable annuity guarantees benefits subject to fluctuations as a result of interest rate sensitivity. The provisions within the issue paper are proposed to be separate and distinct from the guidance in SSAP No. 86—Derivatives, as the items subject to the scope of this guidance, and the provisions within, would not qualify for hedge effectiveness under SSAP No. 86. Eligibility for the special accounting provision is strictly limited to variable annuity contracts and other contracts involving certain guaranteed benefits similar to those offered with variable annuities that are reserved for in accordance with Actuarial Guideline XLIII, CARVM for Variable Annuities (AG 43).

The guidance within the issue paper is anticipated to be included as a new SSAP applicable to the limited derivative situations addressed within. Upon adoption of the issue paper, SAPWG will conclude on the location of this guidance within statutory accounting.

Expected Credit Losses

Discussion document reviews ASU 2016-13, Financial Instruments – Credit Losses, identifies U.S. GAAP concepts and provides possible concepts for statutory accounting principles consideration. The exposure specifically requests input on other elements that should be assessed for statutory accounting principles. This is anticipated to be a hotly debated topic for SAPWG, as evidenced by the comment letters received from interested parties prior to the Spring National Meeting despite nothing having been formally exposed for comment prior to the meeting.

SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures and SSAP No. 32—Preferred Stock

Nonsubstantive revisions were adopted by the Valuation of Securities (E) Task Force and are being considered by the Blanks (E) Working Group on the reporting of NAIC designations and related administrative symbols. Under the Valuation of Securities (E) Task Force / Blanks (E) Working Group revisions, the NAIC designation (NAIC 1-6) will be reported with the appropriate administrative symbol. The manner in which administrative symbols are displayed has been redesigned by the Valuation of Securities Task Force. Some administrative symbols have been deleted and some new administrative symbols have been added. Not all symbols are applicable for each type of investment, therefore the Annual Statement Instructions identify the administrative symbols that would apply to each reporting schedule.

SSAP No. 4—Assets and Nonadmitted Assets

Nonsubstantive revisions indicate that items acquired as part of “regulatory transactions,” as defined in the Purposes and Procedures Manual of the Investment Analysis Office, that meet the definition of an asset shall only be admitted with approval of the domestic state insurance department as a prescribed or permitted practice. It also identifies that regulatory transactions shall also be identified with a new administrative symbol (RT) in the investment schedules. This exposure requests comments whether all “regulatory transactions” shall be reported on Schedule BA – Other Long Term Invested Assets. Once adopted, a referral will be sent to the Blanks (E) Working Group and the Valuation of Securities (E) Task Force to incorporate this new administrative symbol for reporting purposes.

SSAP No. 26R—Bonds

Nonsubstantive exposed agenda item requests comments on the proposed response to the Valuation of Securities (E) Task Force on its draft guidance for bank loans. This response suggests revisions to indicate that investments shall follow the guidance in the Accounting Practices and Procedures Manual, which would classify borrowing base loans and debtor in possession (DIP) financings as collateral loans.

SSAP No. 26R—Bonds, SSAP No. 30—Unaffiliated Common Stock, SSAP No. 32—Preferred Stock, SSAP No.43R—Loan-backed and Structured Securities and SSAP No. 100R—Fair Value

Nonsubstantive revisions reject ASU 2018-03, Recognition and Measurement of Financial Assets and Financial Liabilities.

SSAP No. 41R—Surplus Notes

Nonsubstantive revisions indicate that surplus notes linked to other structures are not subordinate and do not qualify for reporting as statutory equity by the issuer. Furthermore, the revisions indicate that assets linked to issued surplus notes are not available for policyholder claims and shall be nonadmitted.

The revisions stem from a review of an investment product by the Reinsurance (E) Task Force that appeared to be a surplus note but included multi-layered / linked transactions that “embed” the risk of the domiciliary state regulator not approving payment of the surplus note’s stipulated principal and interest. It was identified that the statutory accounting provisions to allow equity reporting (rather than debt reporting) may not fully consider the possibility for subsequent, complex transactions that could influence whether the note continues to be in compliance with the strict provisions of SSAP No. 41R.

It was identified that the guidance in SSAP No. 41R did not address “linked” transactions in determining whether an insurer’s issued debt instrument should qualify as a surplus note. For example, if payments made by an insurer under a surplus note influences whether the insurer would receive payment under a separate note held by the insurer (shown as an asset), or if payments “approved” under a surplus note (owed by the insurer) would be netted against other amounts due to the insurer, it was identified that the surplus note may not be actually subordinate to policyholders and other claimants. If this issued debt instrument is not considered subordinate, then it should not be considered a surplus note, and reported by the issuing insurer as equity. This agenda item intends to clarify the guidance in SSAP No. 41R to exclude debt instruments that relate to multi-layered / linked transactions from the surplus note guidance in SSAP No. 41R.

SSAP No. 43R—Loan-Backed and Structured Securities

Nonsubstantive revisions clarify if a loan-backed or structured security has different NAIC designations by lot, then the reporting entity shall either report the entire investment on a single reporting line with the lowest applicable NAIC designation or report separately by purchase lot. Upon adoption, a blanks proposal would be sponsored to further expand the guidance in the annual statement instructions to reflect the guidance incorporated into SSAP No. 43R.

SSAP No. 49—Policy Loans and SSAP No. 56—Separate Accounts

Nonsubstantive revisions, taking into consideration a number of comments received from interested parties since original exposure of the agenda item during a Nov. 6, 2017 conference call, update the guidance for policy loans related to a separate account and specify that all policy loans related to separate account policies shall be “funded” in order to be admitted. This would mean that policy loans related to separate account insurance policies that are not settled (transfer of cash or assets to the general account to fund the loan) are nonadmitted in the general account. The exposure requests comments on an expected future Blanks (E) Working Group proposal to remove the “contract loan” line from the Separate Account blank.

SSAP No. 56—Separate Accounts

Nonsubstantive revisions capture information on the insurer issuance of private placement life insurance and private placement variable annuities. A concurrent Blanks (E) Working Group proposal will request the disclosure for year-end 2018 reporting. The exposure also requests comments from industry on characteristics differentiating private placement products that are investment-focused and the traditional life products intended to be captured under SSAP No. 21—Other Admitted Assets when the insurer holds the product as owner and beneficiary. This information will assist in developing subsequent revisions to exclude investment-focused products from SSAP No. 21.

SSAP No. 97—Investments in Subsidiary, Controlled Entities and Affiliates

Nonsubstantive revisions clarify SCA guidance when a company’s share of losses exceeds its investment and adds a loss-tracking disclosure. A concurrent Blanks (E) Working Group proposal will request adoption for year-end 2018.

SSAP No. 101—Income Taxes

Nonsubstantive revisions to SSAP No. 101 – Income Taxes were exposed to update proposed edits in response to the TCJA, including new or updated footnote disclosures to provide clarification on the recording of changes in tax rate, the different provisions for companies taxed as either a life or nonlife company, and minor changes to the Q&A to conform with the new tax provisions. These revisions have been exposed for a shortened comment period ending April 23, 2018. In addition, comments were specifically requested on the assessment of reversal patterns of deferred tax items under the TCJA. NAIC staff were also directed to draft separate agenda items on global intangible low taxed income (GILTI) and alternative minimum tax credit carryforwards under the TCJA.

Appendix D—Nonapplicable GAAP Pronouncements

Nonsubstantive revisions reject ASU 2017-15, U.S. Steamship Entities, Elimination of Topic 995 as not applicable to statutory accounting.

Appendix B—Interpretations

Nonsubstantive revisions address Public Law No: 115-120, which was signed into law on Jan. 22, 2018 and imposes a moratorium on the Affordable Care Act 9010 fee for calendar year 2019 by amending the effective date of ACA Section 9010(j) to exclude calendar year 2019. Revisions provide guidance for the 2019 moratorium and future moratoriums in INT 18-02—ACA Section 9010 Assessment Moratoriums and removes the reference to 2019 fee accruals payable from INT 16-01—ACA Section 9010 Assessment 2017 Moratorium and proposes Dec. 31, 2018 nullification of INT 16-01.

Additional nonsubstantive revisions add a description of the Coverage Gap Discount Program, amend existing guidance on program payments and update definitions in INT 05-05: Accounting for Revenues Under Medicare Part D Coverage.

Statutory accounting items

During the meeting, SAPWG also discussed the following items impacting statutory accounting:

Investment Classification Project

SAPWG directed NAIC staff to draft an issue paper proposing substantive revisions to SSAP No. 30—Unaffiliated Common Stock in order to:

  • improve the common stock definition;
  • include closed-end funds and unit-investment trusts within scope; and
  • incorporate enhancements to capture NAIC designations on Schedule D-2-2 – Common Stocks.

SAPWG discussed comments received from Vanguard, proposing to provide additional bond mutual funds with bond-like treatment. SAPWG stated that it does not support the Vanguard proposal and directed NAIC staff to document the discussion and decisions in the issue paper.


NAIC staff anticipates having an updated issue paper addressing SSAP No. 22R—Leases for exposure at the summer national meeting.

For more information on these topics, or to learn how Baker Tilly insurance industry specialists can help, contact our team.

Daniel E. Buttke

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