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This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) at the fall 2023 national meeting that took place on Dec. 1, 2023.

Insurance organizations should take note of these changes as they may significantly impact their accounting in 2024 and beyond. Check out our insurance services page to learn more about Baker Tilly’s practice.

This report summaries key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) at the fall 2023 national meeting that took place on Dec. 1, 2023.

SAPWG discussed a variety of topics including debt securities that do not qualify as bonds, current expected credit losses (CECL), tax credits, interest maintenance reserve (IMR), asset valuation reserves (AVR) and more. Insurance organizations should take note of these changes as they significantly affect their accounting in 2023 and beyond.

Adopted revisions to statutory guidance

All adopted revisions to statutory guidance noted below are classified as Statutory Accounting Principle (SAP) clarifications and considered effective immediately after adoption by SAPWG, unless specifically noted otherwise.

Annual statement instructions:

This agenda item addresses one of the specific discussion topics from agenda item 2023-14, discussed below. The adopted revisions, classified as a new SAP concept, remove guidance from the annual statement instructions that permits the specific allocation of non-interest related losses to IMR. NAIC staff believe these revisions clarify the principal concept of the IMR and AVR, which is that interest related losses go to IMR, and non-interest related losses go to AVR. The revisions are, however, a distinct change in practice to reduce the allocation of non-interest related losses to the IMR and because of this are classified a new SAP concept. The revisions address mortgage loans with valuation allowances and debt securities with known credit events:

Mortgage loans – directs AVR reporting for mortgage loans meeting any of the following criteria:

  • Any mortgage loan sold/disposed with an established valuation allowance under SSAP No. 37 – Mortgage Loans, or
  • Interest is more than 90 days past due, or
  • The loan is in the process of foreclosure, or
  • The loan is in course of voluntary conveyance, or
  • The terms of the loan have been restructured during the prior two years

Debt securities: directs AVR reporting if there is an acute credit event that negatively impacts the price of the security that has not yet been reflected in the Credit Rating Provider (CRP) ratings/Securities Valuation Office (SVO) feed at the time of the sale where the resulting gain/loss was predominantly credit related.

Continued discussion on the allocation between IMR and AVR for debt instruments will occur as part of the long-term IMR project.

The revisions are effective Jan. 1, 2024.

SSAP No. 54R – Individual and group accident and health contracts

Revisions to SSAP No. 54R clarify that gross premium valuation, under Appendix A-010, and cash flow testing, under Actuarial Guideline LI: The application of Asset Adequacy Testing to Long Term Care Insurance Reserves (AG) 51, are both required if indicated. The clarifications are in response to a request from the Financial Reporting and Solvency Committee of the Health Practice Council of the American Academy of Actuaries who had observed diversity in practice across issuers of long term care insurance.

SSAP No. 30R – Unaffiliated common stock, SSAP No. 32R – Preferred stock

Adopted revisions to SSAP No. 30R and SSAP No. 32R clarify that investments which are in substance residual interests shall be reported on Schedule BA on the dedicated reporting line for residuals. These principles were previously adopted and are already reflected in the annual statement instructions. These revisions are effective immediately for year-end 2023 reporting.

Exposed revisions to statutory guidance

All exposed revisions to statutory guidance noted below are classified as SAP clarifications and with the public comment period ending Feb. 9, 2024, unless specifically noted otherwise.

SSAP No. 21R – Other admitted assets, SSAP No. 26R – Bonds and SSAP No. 43R – Loan-backed and structured securities

During the 2023 summer national meeting, SAWPG exposed revisions, classified as a new SAP concept, to SSAP No. 21R to provide guidance for the accounting for debt securities that do not qualify as bonds as well as measurement guidance for residuals.

At the 2023 fall national meeting, SAPWG exposed revisions to the measurement method for residual tranches to incorporate the ‘effective yield with a cap’ method along with a practical expedient that allows use of the ‘cost recovery’ method.

  • The ‘effective yield with a cap’ method uses the existing effective yield method but with a cap on income, such that income can only be recognized to the extent that there is a receipt of cash. Further, the carrying value of the asset may not be accreted above the consideration paid.
  • Under the ‘cost recovery’ method, distributions received reduce the book adjusted carry value (BACV) prior to the recognition of interest income. This method is more conservative than the ‘effective yield with a cap’ method, and also requires less extensive work and manual calculation. The revisions detail limitations if electing the practical expedient.

Revisions were also exposed for other than temporary impairment (OTTI) guidance which would require OTTI to be assessed on an ongoing basis and shall be considered to have occurred if the present value of expected cash flows is less than the BACV, with a realized loss recognized for the difference.

SAPWG directed NAIC staff to continue to update the bond project issue paper with the SSAP No. 21R discussion, which will subsequently be exposed.

This agenda item has a public comment deadline of Jan. 22, 2024.

SSAP No. 93 – Investments in tax credit structures and SSAP No. 94R – State and federal tax credits

This agenda item was initially exposed during the 2022 fall national meeting. The agenda item, classified as a new SAP concept, was exposed along with a discussion document on potential statutory accounting concepts for tax equity investments (i.e., expansion of SSAP No. 93). The discussion document recommended that the guidance to be developed not name specific designs or other specific tax credits so that it can be applicable for all qualifying tax equity investments (i.e., not just low-income housing tax credits).

SAPWG exposed additional revisions at the 2023 fall national meeting, which include:

SSAP No. 93

  • Editorial changes to the admittance test to clarify technical aspects of the assessment
  • Addition of a glossary of key terms
  • Proposed effective date of Jan. 1, 2025, applied prospectively without option to early adopt
  • New paragraph to the ‘Impairment of Tax Credit Investments’ section to provide guidance on tax credit programs which allocate variable amounts of tax credits
  • Clarification that tax credit strips derived from tax equity investments are not an example of an investment structure exempt from the audit requirement
  • Added disclosures for unused tax credits allocated from tax credit investments as these tax credits would not be within the scope of SSAP No. 94R disclosures

SSAP No. 94R

  • Proposed effective data of Jan. 1, 2025, with early adoption permitted
  • Added language to clarify that awarded tax credits (neither purchased nor allocated from an investment) are not within the scope of SSAP No. 94R
  • Added commitment and contingency guidance to the ‘Accounting’ and ‘Disclosure’ sections

Other SSAPs

  • SSAP No. 34 – Investment income due and accrued: Clarification that tax credits earned or purchased are not within the scope of SSAP No. 34
  • SSAP No. 48 – Joint ventures, partnerships and limited liability companies: Updates to paragraph two for the new tax credit investment language

Readers are encouraged to review the exposed agenda item and the exposed SSAP revisions on SAPWG’s website, which include tracked changes since the prior exposure in August 2023. SAPWG will continue to work with the industry to address concerns that the new guidance may nonadmit previously admitted tax credit investments. The agenda item also requests comments on the annual statement reporting categories for tax credit investment risk-based capital (RBC).

This agenda item intends to improve the annual statement instructions for Schedule BA and examples for the allocation of investments based on the underlying characteristics of assets, it does not propose statutory accounting revisions.

During the 2023 fall national meeting, SAPWG re-exposed this agenda item with proposed revisions to the Schedule BA instructions. Under the exposed revisions non-registered private funds would be included in the reporting lines for joint ventures, partnerships and limited liability company interests as there is no SSAP for non-registered private funds and they would be captured in SSAP No. 48. SAWPG noted that some of the descriptions are broad, and requests additional regulator and industry feedback during the exposure period on whether more specification is needed.

This agenda item has a public comment deadline of Jan. 22, 2024.

SAPWG re-exposed INT 23-04T. This INT is specific to a life reinsurer, Scottish Re, which is in liquidation, and provides accounting and reporting guidance for ceding entities. Under the proposed INT:

  • Unpaid claims and other amounts that are in dispute or not collateralized by an A-785 compliant trust are nonadmitted
  • Undisputed claims incurred before contract cancellation, and paid before the reporting period, and undisputed amounts which are secured by an A-785 compliant trust may be admitted

This agenda item has a public comment deadline of Dec. 29, 2023.

Various SSAPs and INT 06-07: Definition of phrase “other than temporary”

Federal Accounting Standards Board (FASB) ASU No. 2016-13, Financial instruments – credit losses (topic 326), together with subsequent related ASUs often collectively referred to as CECL, changed the methodology for estimating allowances for credit losses. The purpose was to improve recognition and measurement of credit losses on certain financial instruments. CECL requires entities to immediately record the full amount of expected credit losses in their balance sheets instead of waiting until the losses qualify as “probable.” CECL was effective for private companies for fiscal years beginning after Dec. 15, 2022.

NAIC staff and SAPWG have now completed their evaluation of CECL, and for a number of factors, including in part the conservatism principles within SAP which already incorporate a prospective view of credit risk and concepts such as AVR and RBC (which do not exist in GAAP), did not recommend adopting CECL for statutory accounting.

Exposed revisions reject ASU 2016-13, and five other ASUs issued by FASB to amend CECL. The revisions are within fifteen applicable SSAPs and INT 06-07: Definition of phrase “other than temporary.” Three other FASB ASUs to amend CECL had previously been rejected for statutory accounting purposes.

Appendix D – Nonapplicable GAAP pronouncements

Exposed revisions to Appendix D propose to reject the referenced ASU as not applicable to statutory accounting.

SSAP No. 21R – Other admitted assets

Exposed revisions would add a new disclosure in SSAP No. 21R, beginning with year-end 2024 reporting, with the disclosure being made in a new note and an expanded Schedule BA. The new note disclosure would identify, by the type of collateral that secures the loan, 1) the total amount of collateral loans and 2) the collateral loans admitted and nonadmitted by qualifying investment type.

Schedule BA is proposed to be expanded with new reporting lines to separate collateral loans by the type of collateral investment that secures the loan. This agenda item has a public comment deadline of Jan. 22, 2024.

Annual statement instructions:

When measurement method for perpetual preferred stock was revised, effective in 2021, the IMR/AVR annual statement instructions were not updated to correspond. Exposed revisions to the annual statement instructions correspond to those previously adopted revisions to SSAP No. 32R by removing guidance that directs all preferred stock to be allocated between IMR/AVR based on NAIC designation and adding new guidance that corresponds to the accounting and reporting differences under SSAP No. 32R for redeemable and perpetual preferred stock.

With these exposed revisions, all unrealized gains or losses on perpetual preferred stock would reverse to realized gains or losses in the AVR formula. The exposed revisions additionally clarify that SVO-Identified Preferred Stock Exchange Traded Funds (ETFs) shall be treated as perpetual preferred stock (equities), consistent with SSAP No. 32R.

SSAP No. 97 – Subsidiary, controlled and affiliated entities

Exposed revisions are intended to clarify the interaction between paragraph 24 and paragraph 27 in SSAP No. 97 and to remove any perceived contradiction between those two paragraphs.

SSAP No. 58 – Mortgage guaranty insurance and Appendix A-630 guaranty insurance

Updates to the Mortgage Guaranty Insurance Model Act (model #630) were adopted in August 2023. This agenda item exposes the intent to review model #630 for incorporation into SSAP No. 58 and Appendix A-630 as applicable.

Other actions

INT 03-02: Modification to an existing intercompany pooling arrangement

INT 03-02 addresses the valuation of bonds in instances when bonds are used instead of cash for the payment among affiliates for amounts due on modifications to existing intercompany reinsurance pooling contracts. The recent deliberations on related party transactions highlighted a discrepancy between INT 03-02 and SSAP No. 25 - Affiliates and other related parties. This agenda item proposed to nullify INT 03-02, as it is inconsistent with SSAP No. 25 guidance regarding economic and non-economic transactions between related parties. The guidance in INT 03-02 can result in unrecognized gains (dividends) or losses through the use of statutory book valuation when using assets (bonds) to make payments to affiliates for modifications to existing intercompany reinsurance pooling agreements. SAPWG believes the treatment of transfers of assets between affiliates should be consistent for all intercompany transactions and that there is not a compelling need for a difference when valuing assets for intercompany reinsurance transactions.

Interested parties believe the nullification of INT 03-02 could have unintended consequences and lead to diversity in application. Interest parties noted that if this INT were nullified, insurance liabilities would be transferred at book value while the assets supporting those liabilities would be transferred at fair value – which can produce problematic results depending on if market interest rates are rising vs. falling at the time of the transfer.

NAIC staff has continued to discuss these issues with the industry and reviewed examples presented by industry. During the 2023 fall national meeting, SAPWG deferred action and directed NAIC staff to continue to work with industry on a proposal for discussion at the 2024 spring national meeting.

SSAP No. 7 – Asset valuation reserve and interest maintenance reserve

This agenda item is a broad concept agenda item which will ultimately incorporate accounting guidance for the AVR and the IMR into SSAP No. 7. This will be a long term project and is classified as a new SAP concept. Historically, the specific guidance for AVR and IMR has been included in annual statement instructions with a brief overview included in SSAP No. 7. Separate interim revisions, within specific agenda items, will be proposed over the course of the long term project. Discussion topics expected to be part of the broad project, include but are not limited to: 

  • Absolutes in allocating between IMR and AVR – see above for discussion of agenda item 2023-15 
  • Bond IMR/AVR allocation 
  • Allocation of perpetual preferred stock 
  • Delineation of non-interest (credit)/interest and realized/unrealized 
  • Derivative guidance 
  • Reinsurance ceded/assumed 
  • AVR/IMR cross checks 
  • Overall IMR and AVR reporting in the general and separate accounts 

During the fall national meeting, SAPWG established a long-term project to capture accounting guidance for AVR and IMR in SSAP No. 7.  

SSAP No. 51R – Life contracts, SSAP No. 59 – Credit life and accident and health insurance contracts and SSAP No. 61R – Life, deposit-type and accident and health reinsurance

SAPWG moved this agenda item to the disposed listing with no statutory revisions. A replacement proposal sponsored by the Blanks (E) Working Group (2023-15BWG) was developed which does not include any SSAP revisions.

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