Updates from the Statutory Accounting Principles Working Group’s April Spring National Meeting

This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) who met on April 4, 2022 during the NAIC’s Spring National Meeting to discuss revisions to statutory accounting guidance. Our insurance Value Architects™ attended these meetings to monitor regulatory updates.

SAPWG Updates

SAPWG discussed a variety of topics including hedging, related party reporting, Schedule D reporting and more. Insurance organizations should take note of these changes as they may significantly affect their accounting in 2022 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.

Ref #2021-22: Schedule D-6-1, Supplemental Reporting

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

SAPWG adopted this agenda item, which does not include statutory revisions, to express support for the Blanks (E) Working Group (BWG) exposure 2022-02BWG which will expand the reporting of SCA investments in Schedule D-6-1. The supplemental data to be captured is consistent with current requirements in SSAP No. 97.

Ref #2021-23: SSAP No. 43R – Financial Modeling – Updated Guidance

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

Adopted revisions reflect updated NAIC designation/NAIC designation category guidance, which was adopted on October 20, 2021, by the Valuation of Securities (E) Task Force (VOSTF), for residential mortgage-backed securities and commercial mortgage-backed securities. The agenda item also affirms the current practice of including summarized modeling guidance in SSAP No. 43R, which will be updated for any subsequent modeling modifications when adopted by the VOSTF.

Ref #2021-24: General Interrogatory for Cryptocurrencies

SAPWG adopted this agenda item, which does not include statutory revisions, to express support for the BWG exposure 2022-01BWG which proposes to add a new general interrogatory to the annual blanks to require the disclose of when cryptocurrencies are directly held or permitted for the remittance of premiums.

Ref #2021-26EP: Editorial Updates

Preamble, Volume I and II’s Table of Contents, and Appendix F

Agenda item 2021-14, adopted in December 2021, addressed updating the source definition of the terms “substantive” and “nonsubstantive”. This agenda item adopts revisions to all remaining uses of these terms in the current AP&P manual with the Preamble, Volume I and II’s Table of Contents and the Summary of Changes, and Appendix F.

SAPWG previously adopted agenda item 2021-14 in December 2021 which revised terminology within the AP&P Manual, a revision that would have previously been considered “substantive” is now referred to as a “New SAP Concept” and a revision that would have previously been considered as “nonsubstantive” is now referred to as a “SAP Clarification.”

Ref #2021-27: ASU 2021-04 - Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options

SSAP No. 72 - Surplus and Quasi-Reorganization

Adopted revisions incorporate guidance from ASU 2021-04 to clarify that an entity shall treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option as an exchange of the original instrument for a new instrument. Adopted revisions reject other elements (namely guidance related to if the modification/exchange is related to a debt instrument or line-of-credit) of ASU 2021-04 for statutory accounting.

Ref #2021-28: ASU 2021-03, Intangibles – Goodwill and Other (Topic 350) – Accounting Alternative for Evaluating Triggering Events

SSAP No. 68 - Business Combinations and Goodwill

Adopted revisions to SSAP No. 68 reject ASU 2021-03 for statutory accounting.

Ref #2021-29: ASU 2021-05 - Variable Lease Payments

SSAP No. 22R - Leases

Adopted revisions to SSAP No. 22R reject ASU 2021-05 for statutory accounting.

Ref #2021-30: ASU 2021-06 – Amendments to SEC Paragraphs

Appendix D

Adopted revisions to Appendix D reject ASU 2021-06 as not applicable to statutory accounting.

Exposed revisions to statutory guidance

The public comment period for all exposed agenda items noted below ends June 3, 2022, except agenda items 2021-21, 2022-03 and 2022-08, which have a May 6, 2022, comment deadline.

Ref #2021-20: Effective Derivatives – ASU 2017-12

SSAP No. 86 - Derivatives

SAPWG previously adopted agenda item 2018-30: SSAP No. 86 – Hedge Effectiveness Documentation which contained limited scope revisions in consideration of ASU 2017-12: Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. Agenda item 2018-30 noted further consideration of ASU 2017-12 would subsequently occur. Regulators and industry representatives requested further consideration of ASU 2017-12 to address the disconnect between U.S. GAAP and SAP regarding certain types of effective hedging relationships. The agenda item notes that the revisions will likely result in changes from the original intent of SSAP No. 86, and thus would be a change in SAP concepts that would be documented in an issue paper. At the Fall National Meeting, SAPWG directed NAIC staff to work with regulators and industry in assessing and developing revisions to facilitate effective hedge assessments consistently between SAP and U.S. GAAP. NAIC staff has continued to meet with industry representatives and has reviewed comments, including proposed edits to SSAP No. 86, on the previous exposure received from interested parties. At the Spring National Meeting SAPWG took the following actions:

• Exposed two documents which reflect aspects of a future issue paper

1. Assessment of Hedging Effectiveness: This document proposes a new Exhibit A (which will replace both Exhibit A and Exhibit B of SSAP No. 86) that details the current U.S. GAAP guidance in determining hedge effectiveness.
2. Measurement of Excluded Components: This document proposes revised guidance in SSAP No. 86 to detail the measurement method required for the different types of components of a derivative excluded from the assessment of hedge effectiveness. .

• Directed NAIC staff to work with industry on other elements of ASU 2017-12 which were not included in the scope of the exposed documents noted above. These other elements include partial term hedging and the last-of-layer (portfolio) method. The evaluation of the portfolio method will also require consideration of ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method which was issued by FASB in March 2022.

Ref #2021-21: Related Party Reporting

SSAP No. 25 - Affiliates and Other Related Parties and SSAP No. 97 - Investments in Subsidiary, Controlled and Affiliated Entities

This agenda item proposes SAP clarification revisions to SSAP No. 25 and SSAP No. 43R to clarify application of the existing affiliate definition and to incorporate new disclosure requirements for investments acquired through, or in, related parties, regardless of if they meet the affiliate definition. The additional reporting elements will be captured outside of the current affiliate reporting requirements. These new reporting requirements would occur through a reporting code, detailed below, and new column in the yearend investment schedules.

1. Direct loan or direct investment (excluding securitizations) in a related party, for which the related party represents a direct credit exposure.
2. Securitization or similar investment vehicles such as mutual funds, limited partnerships and limited liability companies involving a relationship with a related party as sponsor, originator, manager, servicer, or other similar influential role and for which 50% or more of the underlying collateral represents investments in or direct credit exposure to related parties.
3. Securitization or similar investment vehicles such as mutual funds, limited partnerships and limited liability companies involving a relationship with a related party as sponsor, originator, manager, servicer, or other similar influential role and for which less than 50% (including 0%) of the underlying collateral represents investments in or direct credit exposure to related parties.
4. Securitization or similar investment vehicles such as mutual funds, limited partnerships and limited liability companies in which the structure reflects an in-substance related party transaction but does not involve a relationship with a related party as sponsor, originator, manager, servicer, or other similar influential role.
5. The investment is identified as related party, but the role of the related party represents a different arrangement than the options provided in choices 1-4.

The agenda item does not intend to make any changes to what is reported as affiliated or unaffiliated or the reporting lines in the investment schedules.

Interested parties expressed concern with the proposals look-through requirement on investment funds wherein insurers would have to identify instances where the investment fund owns more than 10% of the common stock of its underlying investees. Interested parties believe this look-through requirement could create a significant operational burden that may have little or no benefit. During discussion at the Spring National Meeting, NAIC staff noted they have discussed adding language referencing existing guidance in SSAP No. 97 which would remove ETFs and mutual funds from this look-through requirement.

Ref #2022-01: Conceptual Framework - Updates

Preamble, SSAP No. 4 - Assets and Nonadmitted Assets and SSAP No. 5R - Liabilities, Contingencies and Impairment of Assets

This agenda item summarizes each of the Financial Accounting Standards Board’s (FASB) two new chapters of its conceptual framework which FASB issued in December 2021, and reviews their potential impact on statutory accounting. The exposed revisions to the Preamble, SSAP No. 4, and SSAP

No. 5R incorporate updates from Chapter 4, Elements of Financial Statements and Chapter 7, Presentation of the FASB’s Conceptual Framework for Financial Reporting.

Ref #2022-02: SSAP No. 48 – Alternative Valuation of Minority Ownership Interests

SSAP No. 48 - Joint Ventures, Partnerships and Limited Liability Companies

SAPWG exposed two possible options for revisions to the provision within SSAP No. 48 which allows an insurer to use audited U.S tax equity financial statements, if U.S. GAAP financial statements are not available, when valuing minority ownership interests. NAIC staff noted that this exception does not appear to be utilized by insurers in practice.

• Option #1 - deletion of the U.S. GAAP audit exception provided in SSAP No. 48, paragraph 9.b
• Option #2 - retain the U.S. GAAP audit exception in paragraph 9.b but clarify that the U.S. tax basis audit is to reside at the investee level

Ref #2022-03: Premium Adjustments Allocated to Jurisdictions

Blanks

This agenda item sponsors and forwards a proposal to the BWG, and does not result in SSAP revisions. The Blanks proposal would modify the instructions for Schedule T to clarify that all premium adjustments (both increases and decreases), including but not limited to Affordable Care Act premium adjustments related to the risk adjustment program, shall be allocated as premium in the respective jurisdiction.

Ref #2022-04: ASU 2021-10, Government Assistance

SSAP No. 24 - Discontinued Operations and Unusual or Infrequent Items

This agenda item proposes incorporating certain disclosures from ASU 2021-10, which will supplement existing disclosures, to require that if the unusual or infrequent item is as the result of government assistance, the transaction will require identification as well as a description of the terms and provisions of the assistance received.

Ref #2022-05: ASU 2021-09, Leases, Discount Rate for Lessees

SSAP No. 22R - Leases

Exposed revisions to SSAP No. 22R reject ASU 2021-09 for statutory accounting.

Ref #2022-06: ASU 2021-07, Compensation – Stock Compensation

SSAP No. 104R - Share-Based Payments

This agenda item proposes SAP clarification revisions to SSAP No. 104R to incorporate the referenced ASU’s practical expedient for the current price input, a required component for the option-pricing models which are utilized in the determination of fair value for share-based payments. This is consistent with previous SAPWG decisions to adopt practical expedients regarding option-pricing modeling input permitted by FASB.

Ref #2022-07: ASU 2021-08, Business Combinations

SSAP No. 47 - Uninsured Plans and SSAP No. 68 - Business Combinations and Goodwill

Exposed revisions to SSAP No. 47 and SSAP No. 68 reject ASU 2021-08 for statutory accounting.

Ref #2022-08: INT 22-01T: Freddie Mac When-Issued K-Deal (WI Trust) Certificates

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

This agenda item exposes a tentative statutory accounting interpretation to clarify that investments in the Freddie Mac When Issued K-Deal program shall be captured in scope of SSAP No. 43R from initial acquisition.

Other actions directed

Ref #2019-21: Proposed Bond Definition (Reporting Options)

SSAP No. 26R – Bonds and SSAP No. 43R - Loan-Backed and Structured Securities

Following SAPWG’s direction on August 26, 2020 for NAIC staff to use the exposed principles-based bond definition to develop an issue paper and proposed SAP revisions, a small group of regulator and industry representatives has continued to meet to discuss the concepts in order to develop proposed revisions. On March 2, 2022, SAPWG exposed an updated version of the principles-based bond proposal and a draft issue paper in which the change in terminology was reflected and discussed. During the Spring National Meeting, SAPWG directed NAIC Staff to proceed with developing a more robust illustration of the proposed changes intended to provide more granularity of investments on Schedule D-1: Long-Term Bonds. SAPWG plans to expose the more robust illustration at its May conference call.

Ref #2021-25: Leasehold Improvements After Lease Termination

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

On December 11, 2021, SAPWG exposed SAP clarification revisions to SSAP No. 19 and SSAP No. 73 to conform the guidance for leasehold improvements to the treatment provided in SSAP No. 40R - Real Estate Investments in response to questions received about the treatment of leasehold improvements in situations where a leased property is purchased by the lessee during the lease term. The exposed revisions clarify that amortization of leasehold improvements will immediately end when a lease is terminated and will require that any remaining, unamortized leasehold improvement balance be immediately expensed. During the Spring National Meeting, SAPWG directed NAIC staff to continue working with interested parties in refining this updated guidance.

Other updates provided

Update on SAPWG referral to CASTF

SAPWG received an update regarding its referral on agenda item 2019-49 noting that the Casualty Actuarial and Statistical (C) Task Force met on March 8th to discuss a recommendation regarding diversity in reporting for retroactive intercompany reinsurance contracts which meet the exception which allows for prospective reporting.

Update on Current Expected Credit Losses (CECL)

NAIC staff noted that SAPWG has not yet taken action on ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments or many of the subsequent related ASUs (collectively commonly referred to as CECL) which will be effective for all entities, other than SEC accelerated filers and large accelerated filers, for periods beginning after December 15, 2022. SAPWG plans to review the CECL standard during 2022 and is soliciting feedback from insurers who have adopted CECL on the impact of CECL to those insurers’ financial statements. This feedback will be informative to SAPWG’s consideration of the CECL standard and concepts in evaluating which elements, if any, may be incorporated into statutory accounting principles.

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