Updates from the NAIC SAPWG Dec. 28, 2020 and Jan. 6, 2021 “evotes” 

This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) “evotes” on Dec. 28, 2020 and Jan. 6, 2021 for interpretations on credit tenant loans (CTLs) and troubled debt restructurings (TDRs).

Insurance organizations should take note of these changes as they may significantly affect their accounting for 2020 and beyond.

Adopted interpretation of statutory guidance

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

INT 20-10: Reporting Nonconforming Credit Tenant Loans

This interpretation addresses questions received regarding the actions SAPWG directed at its Nov. 12, 2020 conference call on agenda item 2020-24 Accounting and Reporting of Credit Tenant Loans. In order to provide timely guidance, it was previously identified that this issue needed to be considered separately outside of the substantive Statement of Statutory Accounting Principles (SSAP) No. 43R project. On Nov. 12, 2020, SAPWG discussed and deferred final decision on inconsistencies in the reporting of “nonconforming” CTLs. This deferral was supported as the SSAP No. 43R project will assess investments that are captured on Schedule D-1. With this project, it was identified that it would be undesirable to require an investment that is currently being reported on Schedule D-1 to be moved to a different schedule if there was potential for that investment to subsequently qualify for Schedule D-1. At its Dec. 18, 2020 conference call, SAPWG revised Interpretation (INT) 20-10 in response to industry concerns that there would not be sufficient time for insurers to file nonconforming CTLs and for the NAIC Securities Valuation Office (SVO) to provide NAIC designations on them in time for 2020 reporting. On Dec. 28, 2020, SAPWG adopted INT 20-10; the following summarizes the provisions:

• CTLs that qualify per the provisions of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) are considered to be “conforming” CTLs and shall be reported on Schedule D-1 with the NAIC designation obtained from the SVO.
• CTLs that do not qualify per the provisions of the P&P Manual as “conforming” CTLs shall follow the accounting and reporting provisions detailed in the following subparagraphs. These CTLs are noted as “nonconforming CTLs.”
• Nonconforming CTLs that have previously been reported on Schedule D-1 may continue to be reported on Schedule D-1 for year-end 2020 if they have filed for an SVO-assigned NAIC designation. This provision only requires that an entity file the security with the SVO by Feb. 15, 2021, not that the entity receive the SVO-assigned designation prior to submitting their 2020 annual statutory financial statements. If an entity does not file the security with the SVO by Feb. 15, 2021, the investment shall be reported on Schedule BA. If reporting on Schedule BA, these CTLs shall not be reported with a credit-rating provider (CRP) determined NAIC designation. For nonconforming CTLs that have been filed with the SVO and retained on Schedule D-1, the reporting entity is required to disclose the total amount of nonconforming CTLs reported on Schedule D-1 in Note 1 as if it were a permitted practice. The reporting entity shall complete the permitted practice disclosures required by SSAP No. 1 - Accounting Policies, Risks & Uncertainties, and Other Disclosures, with two separate entries that detail the nonconforming CTLs.
• Nonconforming CTLs that have been previously reported on a different reporting schedule (e.g., Schedule B or Schedule BA) shall remain on the prior reporting schedule. There is no requirement for reporting entities to pursue SVO-assigned designations for these CTLs or disclose these nonconforming CTLs in Note 1. Furthermore, reporting entities that have previously reported nonconforming CTLs on Schedule D-1 that do not want to file with the SVO or that do not want to disclose in Note 1 are permitted to reclassify these CTLs to Schedule B or Schedule BA without NAIC designations. 

These provisions are designed to ensure that nonconforming CTLs are not afforded better reporting treatment than conforming CTLs and to provide regulators with information to identify the magnitude of nonconforming CTLs held by reporting entities. This INT is applicable for the year-end 2020 statutory financial statements and through the first three quarters of 2021, expiring on Oct. 1, 2021. SAPWG noted that the exceptions provided in this INT shall not be interpreted to indicate its likely conclusion in determining the appropriate reporting schedule for nonconforming CTLs. Accordingly, reporting entities with nonconforming CTLs should be prepared to make adjustments to comply with the reporting schedule utilized for nonconforming CTLs upon final conclusion by SAPWG.

Exposed extensions of previously adopted interpretations

On Dec. 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021, which slightly modified and extended the original Coronavirus Aid, Relief, and Economic Security (CARES) Act. These modifications included extending the provisions for temporary relief from TDRs. Accordingly, on Jan. 6, 2021, SAPWG exposed tentative extended effective dates for previously adopted interpretations related to TDRs:

• INT 20-03: Troubled Debt Restructuring Due to COVID-19
• INT 20-07: Troubled Debt Restructuring of Certain Investments Due to COVID-19

Proposed revisions in each interpretation above would extend their effective dates through the earlier of Jan. 1, 2022 or the date that is 60 days after the date on which the national emergency concerning the COVID–19 outbreak, declared by the President on March 13, 2020 under the National Emergencies Act, terminates. With this extension, the interpretation’s effective dates correspond with the current effective dates of the CARES Act. Unless the outbreak under the National Emergencies Act terminates, both interpretations will automatically expire on Jan. 2 , 2022 (to include year-end 2021 financial statements reporting).

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