Updates from the Statutory Accounting Principles Working Group’s March 15 virtual meeting

Authored by Dan Buttke and Jeff Maffitt

This report summarizes key activities of the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAPWG) virtual meeting on March 15, 2021. SAPWG met virtually to discuss its spring business as the working group will not be meeting during the virtual-only format NAIC Spring 2021 National Meeting. Our insurance Value Architects™ attended this virtual meeting to monitor regulatory updates.

SAPWG discussed a variety of topics including levelized and persistency commissions, affiliates and related party transaction disclosures, cryptocurrencies, Paycheck Protection Program (PPP) loans and more.

Insurance organizations should take note of these changes as they may significantly affect their accounting in 2021 and beyond.

Adopted revisions to statutory guidance

All adopted revisions to statutory guidance noted below are considered effective immediately after adoption by SAPWG unless specifically noted otherwise.

Ref #2019-24: Levelized and Persistency Commission 

SSAP No. 71 - Policy Acquisition Costs and Commissions

Adopted nonsubstantive revisions to SSAP No. 71 clarify existing levelized commissions guidance and provide additional guidance regarding commission that is based on policy persistency. This agenda item and clarified guidance was developed in response to state financial exams identifying a limited number of insurers that used third parties to pay acquisition costs and did not recognize the full liability to repay those third parties. Not recognizing the full liability to repay the parties who are paying acquisition costs on an insurer’s behalf is inconsistent with the guidance and original intent of SSAP No. 71.

At its March 15 meeting, SAPWG reaffirmed that while the limited number of insurers who are affected by the clarified guidance may have significant impacts to their surplus and risk-based capital, the revisions are nonetheless classified as nonsubstantive, as they are a clarification of existing guidance. The adopted revisions distinguish traditional persistency commission from a funding agreement and clarify that there should be full recognition of funding agreement liabilities when an insurance policy is written, as writing the insurance policy is the obligating event for initial sales commissions.

The adopted revisions would be effective Dec. 31, 2021, and apply to existing contracts in effect as of Dec, 31, 2021, and new contracts thereafter. Changes resulting from the adoption of these revisions shall be accounted for as a change in accounting principle in accordance with SSAP No. 3 - Accounting Changes and Corrections of Errors. Accordingly, the impacts of the change in accounting principle would still be calculated as of Jan. 1, 2021, but would not be initially reported until the year-end 2021 financial statements.

SAPWG directed NAIC staff to update an issue paper for exposure which will document the historical discussion on this agenda item and revisions.

SAPWG exposed a blanks proposal to incorporate a new general interrogatory to assist with identifying the use of funding agreements as a concurrent exposure with the Blanks (E) Working Group (BWG). This general interrogatory will require the identification of circumstances of when an insurer utilizes third parties to pay agent commissions in which the advances paid by the third party are not settled in full within 90 days. The 90-day threshold for reporting was selected to not require reporting when an insurer uses a third party for traditional payment processing.

This agenda item will be included as a specific agenda item for the Financial Condition (E) Committee, Executive (EX) Committee and Plenary, and therefore will not be formally adopted or effective until adopted by those committees. The Financial Condition (E) Committee is expected to discuss this agenda item at its meeting on April 13, 2021.

Ref #2019-34: Related Parties, Disclaimer of Affiliation and Variable Interest Entities

SSAP No. 25 – Affiliates and Other Related Parties

The adopted nonsubstantive revisions clarify identification of related parties and affiliates in SSAP No. 25 and incorporate new disclosures to ensure regulators have the full picture of complicated business structures. Below is a summary of the key aspects within the adopted revisions:

•  Clarify the identification of related parties and ensure that any related party identified under U.S. GAAP or SEC reporting requirements would be considered a related party under statutory accounting principles.
• Clarify that any direct or indirect ownership over 10% of the reporting entity results in a related party classification regardless of any disclaimer of control or disclaimer of affiliation.
• Clarify the impact of a disclaimer of control or disclaimer of affiliate under statutory accounting principles. As detailed, such disclaimers impact holding company group allocation and reporting as an SCA under SSAP No. 97, but do not eliminate the classification as a “related party” and the disclosure of material transactions as required under SSAP No. 25.
• Several rejections were made to U.S. GAAP standards addressing variable interest entities.
• Add new disclosure, listed below, within new Schedule Y Part 3, of ownership interest of the reporting entity. The intent of this disclosure is to capture information related to active ownership and is not intended for passive fund owners to be reported.

1. Disclosure is required for all owners with greater than 10% ownership of the reporting entity.
2. The reporting entity must disclose each owner’s ultimate controlling party and must provide a listing of other U.S. insurance groups or entities under that ultimate controlling party’s control.

These updates are not intended to change reporting in Schedule BA or Schedule D for any investments.

Ref #2020-22: Accounting for Perpetual Bonds

SSAP No. 26R – Bonds

Nonsubstantive revisions to SSAP No. 26R clarify the accounting treatment for perpetual bonds. A perpetual bond is a fixed income security, with a fixed schedule of future payments, however it does not contain a maturity date. These bonds are typically not redeemable at the option of the holder but generally possess call options for the benefit of the issuer. Due to the similarities between perpetual bonds and perpetual preferred stock, this agenda item originally proposed similar accounting and reporting treatment be applied for these two instruments and reflected the accounting and reporting guidance for perpetual preferred stock in conjunction with agenda item 2019-04.

The adopted revisions were modified to specify bond treatment for perpetual bonds which have an upcoming, scheduled call date – these perpetual bonds thus would be subject to amortized cost treatment (utilizing the yield-to-worst concept) in instances where a termination date (i.e., call date) is known. Perpetual bonds that do not possess, or no longer possess, a call feature shall be reported at fair value.

Ref #2020-32: SSAP No. 26R – Disclosure Update

SSAP No. 26R – Bonds

Nonsubstantive revisions to SSAP No. 26R expand the called bond disclosures to also include bonds which are terminated early through a tender offer.

Ref #2020-33: SSAP No. 32R – Publicly Traded Preferred Stock Warrants

SSAP No. 32R – Preferred Stock and SSAP No. 86 – Derivatives

Nonsubstantive revisions to SSAP No. 32R expand its scope to include publicly traded preferred stock warrants and require publicly traded preferred stock warrants to be reported at fair value. Nonsubstantive revisions to SSAP No. 86 identify this treatment. This treatment is similar to the treatment for publicly traded common stock warrants, which are scoped into SSAP No. 30R.

Ref #2020-34: SSAP No. 43R – Government-Sponsored Enterprises – Credit Risk Transfer Transactions

SSAP No. 43R – Loan-Backed and Structures Securities

Nonsubstantive revisions to SSAP No. 43R reflect changes to the Freddie Mac Structured Agency Credit Risk (STACR) and Fannie Mae Connecticut Avenue Securities (CAS) programs as it is anticipated that future Freddie Mac STACR and Fannie Mae CAS issuances will be solely conducted through a Real Estate Mortgage Investment Conduit (REMIC) trust (which remains functionally equivalent and retains the same material risk structure as the original STACR and CAS programs). The revisions include STACR and CAS REMICs within the scope of SSAP No. 43R and align SSAP No. 43R guidance regarding the financial modeling of mortgage-referenced securities to the requirements as directed in the “Purposes and Procedures Manual of the NAIC Investment Analysis Office.”

Ref #2020-39: Interpretation Policy Statement Updates

Appendix F – Policy Statements

This agenda item adopts nonsubstantive revisions to NAIC Policy Statement on Maintenance of Statutory Accounting Principles in Appendix F, which document the adoption and review process of interpretations of statutory accounting principles. The revisions also clarify that interpretations that conflict with existing SSAPs shall be temporary guidance and restricted to circumstances arising from the need to issue guidance for circumstance requiring immediate, temporary guidance.

Ref #2020-40: Prescribed Practices

Preamble – Accounting Practices and Procedures Manual

This agenda item adopts nonsubstantive revisions to the Preamble Implementation Questions and Answers to clarify prescribed practices. These revisions clarify that while any state in which a company is licensed can issue prescribed practices, the prescribed practices directed by the domiciliary state shall be reflected in the financial statements filed with the NAIC and are the financial statements subject to the independent auditor requirements.

Ref #2020-41: ASU 2020-06: Convertible Instruments

SSAP No. 5R – Liabilities, Contingencies and Impairment of Assets, SSAP No. 72 – Surplus and Quasi-Reorganizations and SSAP No. 86 – Derivatives

Adopted revisions to SSAP No. 5R, SSAP No. 72, and SSAP No. 86 reject ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity for statutory accounting.

Ref #2020-42: ASU 2020-07: Presentation and Disclosures by Not-for-Profit Entities

Appendix D – Nonapplicable GAAP Pronouncements

Adopted revisions in this agenda item reject ASU 2020-07 as not applicable to statutory accounting.

Disposed agenda items

Ref #2020-35: SSAP No. 97 – Audit Opinions

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

This agenda item proposed nonsubstantive changes to SSAP No. 97 to allow U.S. GAAP SCA entities (sometimes referred to as 8.b.iii entities) that depart from U.S. GAAP a provision that has been rejected for statutory accounting to be admitted SCAs without quantification if the departure from U.S. GAAP results in a more conservative position (i.e., fewer assets or greater liabilities), as a result of the departure. This would have required auditor certification that the departure from U.S. GAAP results in a more conservative position. Based on feedback received on the proposal, NAIC staff believes the nonadmittance due to the inability to quantify a departure from U.S. GAAP is not prevalent, and therefore, changes to SSAP No. 97 are not needed. At its March 15 virtual meeting, SAPWG disposed of this agenda item without revision to statutory accounting.

Exposed revisions to statutory guidance

The comment deadline on all exposed agenda items below is April 30, 2021.

Ref #2020-36: Derivatives for Hedging Fixed Indexed Products

SSAP No. 86 – Derivatives and SSAP No. 108 – Derivatives Hedging Variable Annuity Guarantees

This agenda item proposes the development of new guidance for the accounting and reporting of derivatives that effectively hedge the growth in interest credited for fixed indexed products (e.g., fixed indexed annuity and indexed universal, reported in the general account). This agenda item is proposed to be substantive, with potential development of a new SSAP. NAIC staff identified two potential approaches to consider in their initial assessment:

• Approach 1: Establish guidance that permits effective hedge treatment that is in line with SSAP No. 86.
• Approach 2: Establish guidance that permits effective hedge treatment that is in line with SSAP No. 108.

SAPWG re-exposed this agenda item during its March 15 virtual meeting to provide additional time for interested parties to develop a proposal.

Ref #2020-37: Separate Account – Product Identifiers

SSAP No. 56 – Separate Accounts

This agenda item proposes increased granularity within the separate account general interrogatories in response to the recent growth of pension risk transfer (PRT) transactions and registered indexed linked annuity (RILA) products that are generally held in insulated separate accounts. The agenda item does not propose revisions to SSAP No. 56 but does result in a proposal to the BWG. SAPWG exposed this agenda item during its March 15 virtual meeting to allow for a concurrent exposure with the BWG. The BWG proposal would modify the current General Interrogatory instructions and require that a distinct disaggregated product identifier be used for each product represented. The disaggregation will require that each separate account product filing or policy form be separately identified.

Ref #2020-38: Pension Risk Transfer – Separate Account Disclosure

SSAP No. 56 – Separate Accounts

This agenda item proposes increased product identification and disclosure of PRT transactions in the separate account financial statements. Regulators have requested improved reporting, in response to the recent growth of PRT, so regulators can more readily identify and analyze such transactions. Regulators requested several enhancements, including separated PRT reporting and improved PRT disclosure regarding reserves, associated assets, and general account exposure. SAPWG exposed this agenda item during its March 15 virtual meeting to allow for a concurrent exposure with the BWG. The BWG proposal clarifies reporting by each separate product filing or policy form and adds product identifiers, specifically for PRT and RILA transactions in the Separate Account General Interrogatories.

Ref #2021-01: ASU 2021-01, Reference Rate Reform

INT 20-01: ASU 2020-04 – Reference Rate Reform

SAPWG previously issued INT 20-01 to adopt ASU 2020-04 Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Subsequent to that interpretation FASB issued ASU 2021-01, Reference Rate Reform, which expands the scope of ASU 2020-04 by allowing an entity to apply the optional expedients, by stating that a change to the interest rate used for margining, discounting or contract price alignment for a derivative is not considered to be a change to the critical terms of the hedging relationship that requires dedesignation. This agenda item proposes nonsubstantive revisions to INT 20-01 to provide temporary (optional) expedient and exception interpretative guidance, with an expiration date of Dec. 31, 2022. Derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment (regardless of whether they reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform) would be in scope of INT 20-01. This exception would allow for continuation of the existing hedge relationship and thus not require hedge dedesignation.

Ref #2021-02: ASU 2020-08 – Premium Amortization on Callable Debt Securities

SSAP No. 26R – Bonds

Exposed revisions to SSAP No. 26R would reject ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs for statutory accounting.

Ref #2021-03: SSAP No. 103R – Disclosures

SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

This agenda item proposes nonsubstantive revisions for additional disclosures and to data-capture certain existing disclosure elements in SSAP No. 103R as a result of SAPWG’s continued work on the substantive project in agenda item 2019-21: SSAP No. 43R - Equity Instruments. With inclusion of the data templates, narrative reporting will still occur to provide additional information regarding transfers accounted for as a sale when the transferor maintains continuing involvement in the transferred financial assets.

Ref #2021-04: SSAP No. 97 – Valuation of Foreign Insurance SCAs

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

This agenda item was added to consider whether revisions should be made to SSAP No. 97 which currently requires specific adjustments to 8.b.ii (insurance-related SCA) and 8.b.iv (foreign insurance SCA) entities as these adjustments can result in a negative equity valuation of the investment. NAIC staff reviewed all SCA filings for the last three years, noting that less than 7% of all SCA filings were 8.b.iv entities and that there was not a single instance of an 8.b.iv entity in a negative equity situation. Therefore, SAPWG exposed the intent to move this item to the disposal listing without statutory edits.

Ref #2021-05: Cryptocurrencies

INT 21-01T: Statutory Accounting Treatment for Cryptocurrencies

SAPWG exposed INT 21-01T: Statutory Accounting Treatment for Cryptocurrencies which clarifies that cryptocurrencies do not meet the definition of cash in SSAP No. 2R - Cash, Cash Equivalents, Drafts, and Short-Term Investments, and are nonadmitted assets for statutory accounting. Cryptocurrencies do not meet the definition within SSAP No. 2R because these they are not able to be deposited or exchanged

with most U.S. banks and financial institutions. With this exposure, SAPWG requested information from insurers on:

• Extent to which companies currently hold cryptocurrencies
• How the acquisition in cryptocurrency is held (held directly by the insurer or indirectly through an SCA)
• Which cryptocurrencies they are acquiring (Bitcoin, Ethereum, Litecoin, etc.)
• General level of interest for future acquisition by both companies that currently do and do not own cryptocurrencies

Ref #2021-06EP: Editorial Updates

SSAP No. 53 – Property and Casualty Contracts - Premiums, SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities, and SSAP Glossary

Exposed nonsubstantive changes propose editorial corrections and reference changes to the above referenced SSAPs for ease of readability.

Ref #2021-07: ASU 2020-11 – Financial Services – Insurance: Effective Date

Appendix D – Nonapplicable GAAP Pronouncements

Exposed revisions in this agenda item reject ASU 2020-11 as not applicable to statutory accounting.

Ref #2021-08: ASU 2021-02 – Franchisors Revenue from Contracts with Customers

SSAP No. 47 – Uninsured Plans

Exposed revisions to SSAP No. 47 – Uninsured Plans reject ASU 2021-02.

Ref #2021-09: State ACA Reinsurance Program

SSAP No. 107 – Risk-Sharing Provisions of the Affordable Care Act

While the transitional reinsurance program under the Affordable Care Act (ACA) has ended, several states have received approval from the Department of Health and Human Services to run similar state ACA reinsurance programs under what are known as Section 1332 waivers. This agenda item proposes nonsubstantive revisions to SSAP No. 107 to include state ACA reinsurance programs which are using Section 1332 waivers in its scope. The intent of the proposed accounting revisions is to continue to follow the SSAP No. 107 hybrid accounting approach for the state ACA programs as they operate in a similar manner.

Other updates provided

Ref #2019-21: SSAP No. 43R

At its October 13 conference call, SAPWG exposed a proposal to define what should be captured in scope of Schedule D-1: Long-Term Bonds. A small group of industry reps, Iowa and NAIC staff have been working to develop that definition and are nearing the time in which the proposed Schedule D-1 definition will be exposed publicly to allow for broader comments and discussion.

INT 19-02: Freddie Mac Single Security Initiative

INT 19-02 remains in full effect as the Freddie Mac Single Security Initiative remains an ongoing program and does not appear to be subject to termination in the foreseeable future.

Ref #2019-49: Retroactive Reinsurance Exception

NAIC staff has held discussion with members of the Casualty Actuarial and Statistical (C) Task Force on this topic. NAIC staff’s preliminary recommendation is that the premium and losses transferred under such transactions should be allocated to the prior Schedule P calendar year premiums and the losses allocated to the prior accident year incurred losses. NAIC staff anticipates having proposed revisions for SAPWG review for exposure either in the interim or at the Summer National Meeting.

Paycheck Protection Program (PPP) – SAP guidance

NAIC staff has received inquiries regarding the reporting and extinguishment of loans received from the PPP. While the AICPA has issued some technical guidance regarding treatment of the PPP loans,

NAIC staff note that for statutory accounting, the authoritative guidance is SSAP No.15 - Debt and Holding Company Obligations. The PPP program requires applying for loan forgiveness after meeting certain criteria. Therefore, under statutory accounting, PPP loans should be reflected as debt until legally released. Once legally released, the debt forgiveness is reported as a capital gain.

To learn more about Baker Tilly’s PPP solutions, including loan forgiveness assistance, click here.

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