Updates from the Statutory Accounting Principles Working Group’s August 2022 Summer National meeting

This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) since the Spring 2022 National Meeting.

SAPWG Updates

SAPWG discussed a variety of topics including the proposed bond definition, 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.

May, 24 2022 virtual meeting

Ref #2021-21: Related Party Reporting

SSAP No. 25 - Affiliates and Other Related Parties and SSAP No. 43R – Loan-Backed and Structured Securities

This agenda item adopts 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. A footnote was added in SSAP No. 43R to clarify, consistent with SSAP No. 97, that investments in an exchange traded fund (ETF) or a mutual fund (as defined by the SEC) does not reflect ownership in an underlying entity, regardless of the ownership percentage the reporting entity (or the holding company group) has of the ETF or mutual fund unless ownership of the ETF actually results in “control” with the power to direct or cause the direction of management of an underlying company.

The additional reporting elements will be captured outside of the current affiliate reporting requirements. These new reporting requirements, effective December 31, 2022 will 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.

Ref #2022-03: Premium Adjustments Allocated to Jurisdictions

Blanks

This agenda item sponsors and forwards a proposal to the Blanks Working Group, and does not result in SAP 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 #2022-08: INT 22-01T: Freddie Mac When-Issued K-Deal (WI Trust) Certificates

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

This statutory accounting interpretation clarifies that investments in the Freddie Mac When-Issued K-Deal program shall be captured in scope of SSAP No. 43R from initial acquisition.

August 10, 2022 Summer National Meeting

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. This agenda item adopts revisions to SSAP No. 86, classified as new SAP concepts, on assessing hedge effectiveness as well as new guidance on permitted excluded components and the appropriate measurement for those excluded items. The revisions are effective January 1, 2023, with early application permitted. These revisions adopt, with modification, U.S. GAAP.

SAPWG previously 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 also required consideration of ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method which was issued by the Financial Accounting Standards Board (FASB) in March 2022, see agenda item 2022-09 discussed below regarding this ASU.

SAPWG will detail these revisions along with other statutory derivative revisions currently being considered from U.S. GAAP in a single issue paper, which SAPWG anticipates would occur in 2023.

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 FASB’s two new chapters of its conceptual framework which FASB issued in December 2021, and reviews their potential impact on statutory accounting.

SAPWG adopted revisions to SSAP No. 4, an issue paper which documents the changes in definition of an asset and rationale for why the revisions are considered SAP clarifications in nature, and the Preamble to update reference to a superseded FASB concept statement.

SAPWG re-exposed the liabilities guidance to allow interested parties to perform a SSAP by SSAP review to identify if the adoption of the exposed liabilities guidance would create a specific concern regarding a particular situation that would be required to be reported as a liability. In other words, a scenario that is not reported as a liability or loss contingency currently that would be required to be reported as a liability or loss contingency under the new liability definition, and for which that liability or loss contingency reporting would be inappropriate. However, NAIC staff believes that if an instrument meets the current SAP or the new FASB definition for a liability, it should be reflected as a liability for statutory accounting purposes.

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

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

Revisions to SSAP No. 48 clarify that when valuing minority ownership interests, if U.S. GAAP financial statements are not available, an insurer is allowed to use audited U.S tax equity financial statements and that the U.S. tax basis audit is to reside at the investee level.

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

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

This agenda item incorporates 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

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

SAP clarification revisions to SSAP No. 104R 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

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

Exposed revisions to statutory guidance

The public comment period for all exposed agenda items noted below ends October 7, 2022.

July 18, 2022 Virtual Meeting

Ref #2019-21: Bond Proposal Reporting Revisions

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

During the Spring 2022 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 exposed for comment two documents, discussed below, which detail the proposed revisions to Schedule D-1. If these edits are supported, a full proposal of all necessary revisions to Schedule D-1 as well as other schedules would be subsequently exposed by SAPWG.

• Proposed Reporting Lines - Proposes annual statement general instructions (reporting line descriptions) for suggested reporting lines to capture issuer credit obligations and asset-backed securities on Schedule D-1. The existing general classifications are proposed to be deleted and new granular reporting lines are suggested.
• Schedule D-1 A/S Instructions – Details the overall approach to add a new Schedule D-1 schedule specific to asset-backed securities. Schedule D-1-1 would reflect issuer credit obligations (items captured in scope of SSAP No. 26R) and Schedule D-1-2 would reflect asset backed securities (items captured in scope of SSAP No. 43R). This separation of the schedules would enable different reporting columns based on the type of security. Columns that are proposed to be specific to issuer obligations and ABS are noted within the document. In addition to creating new columns, this document also details revisions, some of which are significant, to existing columns and instructions.

August 10, 2022 Summer National Meeting

Ref #2019-21: Proposed Bond Definition

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

SAPWG began the “Investment Classification Project” in 2013 with the intent to undertake a comprehensive project to review the investment SSAPs. The purpose was to clarify definitions, scope and the accounting methods and related reporting. On March 2, 2022, SAPWG exposed an updated version of the principles-based bond proposal and a draft issue paper. On July 18, 2022, SAPWG directed NAIC staff to incorporate further revisions into these documents. During the Summer National Meeting, SAPWG exposed the updated bond definition, issue paper and revisions, classified as new SAP concepts, to SSAP No. 26R and SSAP No. 43R. NAIC staff noted that additional revisions to other SSAPs and reporting schedules impacted by the changes are still pending and are anticipated to be proposed for exposure during the 2022 Fall National Meeting.

Readers are encouraged to review these documents on the SAPWG website for further information.

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

SAPWG previously 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 Summer National Meeting, SAPWG exposed further revisions which add a limited, specific exclusion in SSAP No. 73 - Health Care Delivery Assets and Leasehold Improvements in Health Care Facilities that allows leasehold improvements necessary for the functionality of specific health care delivery assets to be excluded in some cases from the purchase cost of the real estate.

Ref #2022-09: ASU 2022-01: Fair Value Hedging – Portfolio Layer Method

SSAP No. 86 - Derivatives

Exposed revisions, classified as new SAP concepts, to SSAP No. 86 incorporate elements of ASU 2022-01 for portfolio layer method hedges, as well as on the U.S. guidance for partial term derivatives issued in ASU 2017-12.

• SSAP No. 86: Revisions detail criteria for portfolio and partial-term hedges, including disclosure edits and guidance for reporting when the hedge is discontinued within Exhibit C. Revisions are also proposed to identify the adoption of ASU 2022-01 to adopt with modification the guidance for partial-term hedges from ASU 2017-12. The partial term hedge guidance is limited to hedged assets and does not extend to liabilities. This is different from U.S. GAAP, but SAPWG noted further statutory discussion is needed on basis adjustments when hedging liabilities, especially under partial term. SAPWG intends to move forward with incorporating the guidance for hedged assets and consider guidance for hedged liabilities subsequently. Portfolio layer method hedges are limited to recognized assets under U.S. GAAP, so proposed guidance for SAP for those hedges is consistent.
• Exhibit A – Assessment of Hedge Effectiveness: Limited revisions mirror updated U.S. GAAP guidance and add a new section.

Ref #2022-10: ASU 2022-02: Troubled Debt Restructurings and Vintage Disclosures

SSAP No. 36 - Troubled Debt Restructuring

The referenced ASU eliminates prior U.S. GAAP guidance for troubled debt restructurings (TDRs) by creditors and instead requires an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan as losses are captured in the allowance for credit losses under ASU 2016-13: Measurement of Credit Losses on Financial Instruments. ASU 2022-02 expands U.S. GAAP disclosures for modifications provided to debtors experiencing financial difficulty and revises the ASU 2016-13 vintage gross write-off disclosures for public business entities. Consideration of ASU 2016-13 is still pending statutory accounting review by SAPWG.

Exposed revisions to SSAP No. 36 retain existing guidance, identify the rejection of ASU 2022-02, and detail the GAAP to SAP differences for the accounting of TDRs for creditors.

SAPWG has requested comments on the following:

• whether the expanded U.S. GAAP disclosures with modifications should be considered for statutory accounting,
• whether the revisions for “vintage gross write-offs” for public business entities should be considered as part of the review of ASU 2016-13,
• whether the disclosures should be considered in advance of reviewing ASU 2016-13 for statutory accounting.

Ref #2022-11: Collateral for Loans

SSAP No. 21R - Other Admitted Assets

Exposed revisions to SSAP No. 21R clarify that the invested assets pledged as collateral for admitted collateral loans must qualify as admitted invested assets.

Ref #2022-12: Review of INT 03-02: Modification to an Existing Intercompany Pooling Arrangement

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. This agenda item proposes 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.

Ref #2022-13: Related Party - Footnote Updates

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

Following on from agenda item 2021-21, discussed above, this agenda item proposes SAP clarification revisions to SSAP No. 25 and SSAP No. 97 to incorporate language to exempt foreign open-end investment funds from the look-through provisions included in SSAP No. 25.

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