Updates from the Statutory Accounting Principles Working Group’s Dec. 13 Fall National meeting

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

SAPWG Updates

SAPWG discussed a variety of topics including the proposed bond definition and Schedule D reporting, hedging, the Inflation Reduction Act, 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.

INT 22-02: Third Quarter 2022 through First Quarter 2023 Reporting of the Inflation Reduction Act - Corporate Alternative Minimum Tax

SSAP No. 9 - Subsequent Events and SSAP No. 101 - Income Taxes

On October 24, 2022, SAPWG adopted INT 22-02 Third Quarter 2022 Reporting of the Inflation Reduction Act – Corporate Alternative Minimum Tax (CAMT) which provided accounting and disclosure guidance for the third quarter 2022 financial statements related to the CAMT. The INT noted that because a reporting entity is unlikely to be able to make a reasonable estimate, the INT provides exceptions to reporting for Sept. 30, 2022, and also included disclosure information. INT 22-02 was originally to be automatically nullified on Dec. 1, 2022.

During the Fall 2022 National Meeting, SAPWG adopted revisions to INT 22-02 (including its name) to extend it to December 31, 2022, and first quarter 2023 statutory financial statements. The main provisions of the INT are:

• A reasonable estimate of the CAMT is not determinable for December 31, 2022, and March 31, 2023, therefore impacts related to the CAMT in the year-end 2022 and March 31, 2023, financial statements are not required.
• The reporting entity shall include the following disclosures in the year-end 2022 and March 31, 2023, financial statements:

1. The Inflation Reduction Act (the Act) was enacted during the reporting period on August 16, 2022.
2. A statement regarding whether the reporting entity (or the controlled group of corporations of which the reporting entity is a member) has determined if it expects to be liable for CAMT in 2023.

• In addition, the reporting entity shall disclose the following:
  If, based on information regarding the projected adjusted financial statement income for 2023, the entity or the controlled group of corporations of which the reporting entity is a member has determined if it is an “applicable corporation” to determine if CAMT exceeds the regular federal income tax payable. That is, disclose if the reporting entity (or the controlled group of corporations of which the reporting entity is a member) has determined if average “adjusted financial statement income” is above the thresholds for 2023 tax year that they expect to be required to perform the CAMT calculations. Note – this threshold is average adjusted financial statement income in excess of $1 billion for the three prior tax years, which is reduced to $100 million in the case of certain foreign parented corporations. This disclosure is about being an applicable corporation, not if the entity is required to pay.
• CAMT updated estimates or other calculations affected by the Act determined subsequent to filing the December 31, 2022, and March 31, 2023, financial statements shall not be recognized as Type I subsequent events.
• For year-end 2022 financial statements, the subsequent event exception is expanded to encompass events that occur prior to the issuance of statutory financial statements as well as events that occur before the date the audited financial statements are issued, or available to be issued. This provision intends to prevent reporting entities from having to amend statutory financial statements from material Type I subsequent events as a result of updated information / estimates received after the reporting date of year-end 2022 statutory financial statements pertaining to the accounting for the enactment of the Act.

NAIC staff will continue to coordinate the development of CAMT guidance, expected to be provided after first quarter 2023. INT 22-02 will be automatically nullified on June 15, 2023.

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

SSAP No. 86 - Derivatives

Adopted revisions, classified as a new SAP concept, 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. These revisions are effective January 1, 2023, with early adoption permitted.

• 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 also 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.

An issue paper has been prepared to detail statutory accounting revisions related to derivatives for historical purposes. This issue paper is discussed in the section below for exposed revisions to statutory guidance.

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.

Adopted 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.

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, adopted on May 24th, this agenda item adopts 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.

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 adopted revisions clarify that amortization of leasehold improvements will immediately end when a lease is terminated and require that any remaining, unamortized leasehold improvement balance be immediately expensed. The adopted revisions also include 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.

Exposed revisions to statutory guidance

The public comment period for all exposed agenda items noted below ends February 10, 2023.

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.

On November 16, 2022 SAPWG re-exposed revisions to SSAP No. 26R and SSAP No. 43R, and exposed revisions to various SSAPs, including:

• SSAP No. 2R - Cash, Cash Equivalents, Drafts and Short-Term Investments to exclude asset-backed securities from short-term/cash equivalent classification and
• SSAP No. 21R - Other Admitted Assets to establish guidance for debt securities that do not qualify as bonds.

The revisions in the re-exposure include proposed transition guidance, which includes identification of January 1, 2025, as the proposed effective date.

Readers are encouraged to review these documents on the SAPWG website for further information. The documents detailing the proposed revisions to SSAP No. 26R and SSAP No. 43R each include a section summarizing changes since the prior exposure.

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. On July 18, 2022, SAPWG exposed for comment two documents, which detailed the proposed revisions to Schedule D-1. SAPWG noted that if these edits were supported, a full proposal of all necessary revisions to Schedule D-1 as well as other schedules would be subsequently exposed by SAPWG. During the Fall National Meeting SAPWG:

• Exposed an updated Issue Paper – The issue paper has been revised to detail the revisions reflected from the last exposure period as well as to incorporate the updated SSAP guidance into the issue paper. The issue paper has also been revised to update the guidance for feeder funds pursuant to interim discussions with industry reps.
• Exposed Reporting Changes – NAIC staff reviewed the full blank and annual statement instructions and has identified all areas that may need to be revised to reflect the more granular reporting under the bond project. This document identifies all such areas and an NAIC staff recommendation. Comments are requested on 1) whether any aspects have been missed and if a different approach should be considered and 2) whether additional edits are needed.
• Sponsored a blanks proposal to incorporate the blanks reporting changes with an effective date of Jan. 1, 2025.

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.

During the Summer National Meeting, 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.
• re-exposed the liabilities guidance.

During the Fall National Meeting, SAPWG re-exposed the liabilities guidance and the related Issue Paper No. 16X - Updates to the Definition of a Liability, intending to provide additional time for industry to review the changes. SAPWG also directed NAIC staff to work with interested parties on proposed clarifying language.

Ref #2022-11: Collateral for Loans

SSAP No. 21R - Other Admitted Assets

Re-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.

SAPWG re-exposed this item during the Fall National Meeting to allow for further discussion.

Ref #2022-14: New Market Tax Credits / Tax Equity Investments

SSAP No. 93—Low Income Housing Tax Credit Property Investments

Exposed agenda item, classified as a new SAP concept, along with a discussion document on potential statutory accounting concepts for tax equity investments (i.e., expansion of SSAP No. 93) along with potential discussion elements and questions. The discussion document recommends 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. SAWPG anticipates that SSAP No. 93 will be renamed to “SSAP No. 93 - Equity Investments in Tax Credits”. The agenda item also recommends a review of SSAP No. 94R - Transferable and Non-Transferable State Tax Credits to ensure the guidance reflects items that should be captured in scope and admittance provisions. Proposed statutory revisions are expected to be exposed early in 2023.

Ref #2022-15: Affiliate Reporting Clarification

SSAP No. 25 - Affiliates and Other Related Parties

This exposed agenda item intends to clarify elements which were adopted in agenda item 2021-21: Related Party Reporting. The exposed revisions clarify that any invested asset held by a reporting entity which is issued by an affiliated entity, or which includes the obligations of an affiliated entity, is an affiliated investment.

Ref #2022-16: ASU 2022-03, Fair Value Measurement of Restricted Securities

SSAP No. 100R - Fair Value

Exposed SAP clarification revisions to SSAP No. 100R adopt ASU 2022-03 with modification to be consistent with statutory language in the respective SSAPs. This agenda item does not recommend incorporating the new proposed GAAP disclosures on sales restrictions, but identifies that items restricted as to sale would be captured as restricted assets per SSAP No. 1 and be subject to admittance considerations under SSAP No. 4.

Ref #2022-17: Interest Income Disclosure Update

SSAP No. 34 - Investment Income Due and Accrued

Exposed agenda item, classified as SAP clarification, proposes revisions to SSAP No. 34 to add additional disclosures to data capture the gross, non-admitted and admitted amounts for interest income due and to add disclosure of the cumulative amount of paid-in-kind (PIK) interest included in the current principal balance.

Ref #2022-18: ASU 2022-04, Disclosure of Supplier Finance Program Obligations

SSAP No. 105R - Working Capital Finance Investments

Exposed SAP clarification revisions to SSAP No. 105R reject ASU 2022-04 as insurance reporting entities are not the buyers (obligors) of supplier chain finance programs.

Ref #2022-19: SSAP No. 7 – IMR

SSAP No. 7 - Asset Valuation Reserve and Interest Maintenance Reserve

SAPWG exposed this agenda item, classified as a new SAP concept, on negative interest maintenance reserve (IMR) guidance with the intent to facilitate SAPWG discussion. In order to facilitate that discussion, the agenda item provides information on the background of IMR, current accounting guidance, recent discussions of the Life Actuarial (A) Task Force and some broad financial results from year-end 2021 and interim 2022 financial statements.

Comments are requested on potential guardrails and details on unique considerations. SAPWG directed NAIC staff to coordinate a joint regulator discussion with the Life Actuarial (A) Task Force and to develop a memorandum regarding considerations for state insurance regulators. SAPWG intends to document the discussion, resulting decisions, and conclusion of this agenda item in an issue paper.

Ref #2017-33: ASU 2017-12 – Derivatives and Hedging

Issue Paper No. 16X - Derivatives and Hedging

SAPWG exposed as issue paper that details the consideration of ASU 2017-12 within the three agenda items noted below and the adopted statutory revisions.

• Ref #2018-30 - Hedge Effectiveness Documentation: Adopted November 15, 2018 with a January 1, 2019 effective date.
• Ref #2021-20 - Effective Derivatives - ASU 2017-12: Adopted August 10, 2022, with a January 1, 2023 effective date (early adoption permitted).
• Ref #2022-09 - ASU 2022-01 – Fair Value Hedging – Portfolio Layer Method: Adopted December 13, 2022, with a January 1, 2023 effective date (early adoption permitted). See discussion in the section above for adopted revisions to statutory guidance.

Upon adoption of this issue paper, SAPWG will dispose this agenda item as the review of ASU 2017-12 is considered complete.

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