Authored by: Jason Jacobs
At the National Association of Insurance Commissioners (NAIC) Summer 2016 National Meeting, the Statutory Accounting Principles (E) Working Group (SAPWG) adopted several nonsubstantive revisions to statutory accounting and exposed various substantive and nonsubstantive revisions, as well as directed staff to draft issues paper related to certain projects. A summary of many of these topics are highlighted below.
Investment Classification Review
Significant conversation was held over Investment Classification Review related to bond-approved exchange-traded funds (ETFs) and bond mutual funds in scope of SSAP No. 26. The crux of the discussion surrounded the impact of using a fair value methodology vs. systematic valuation for these securities. The NAIC staff were directed to write an issue paper for ETFs and bond mutual funds in scope of SSAP No. 26 to require measurement at fair value (using net asset value as a practical expedient) as the default accounting, unless the reporting entity elects to use a domiciliary state approved documented “systematic value” approach. This issue paper will also include the definition of a “security,” as well as definitions for non-bond items (e.g., loan participation, loan syndication). The Committee reviewed the “systematic value” approach as proposed by BlackRock. The Committee referred the assessment of the systematic value to the Securities Valuation Tax Force for consideration. Interested parties representing small and mid-size insurers noted that stopping using the systematic valuation would result in significant surplus volatility. Despite interested parties’ concerns, the SAPWG responded with their recommendation to move forward with a revised Issue Paper proposing the use of fair value for SVO — designated equity instruments — AND to consider the use of the systematic valuation option once a revised calculation is derived, by taking into account the comments received during exposure period.
As U.S. GAAP has recently released an update to accounting for leases, the SAPWG has directed staff to draft an issue paper to consider the guidance recently issued under Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) (see more information related to the lease standard). The discussion was fairly straight forward with comments summarizing the treatment of all leases as operating leases for statutory reporting. It was noted that leasing activities are often immaterial to insurers. The SAPWG discussed three possible options when considering the adoption of the revised gap requirements for SAP:
- maintain existing statutory guidance included in SSAP No. 22 with potential new disclosures to capture information about the leased asset and liability required under GAAP,
- adopt ASU 2016-02, with modification, to recognized the lease asset and lease liability with the lease asset being non admitted in accordance with SSAP No. 4, and
- adopt ASU 2016-02, with modification, to recognize leased assets and lease liabilities for operating and financing leases, although modifications from GAAP are anticipated, this option would allow the lease asset to be admitted under SSAP No. 4.
The SAPWG recommended to move forward with option 1, "Maintain existing statutory accounting guidance within SSAP No. 22, Leases, for the treatment of operating and financing leases with potential new disclosures to capture information on the lease asset and liability required under GAAP." It was then noted and echoed by members of the SAPWG that existing disclosures are robust and may not require enhancement, and that SAPWG will continue to evaluate ASU 2016-02 for consideration of possible future revisions to statutory accounting for leverage leases and sale and leaseback transactions.
Quarterly reporting of full investment schedules
There was also continued discussion regarding quarterly reporting of full investment schedules. Interested parties continued to express concern regarding this issue. The SAPWG discussed alternatives for quarterly investment reporting, expanded from previously exposed options, to include the possibility of a mid-year collection of investment data and a data-only (non-PDF) submission of Schedule D investments, with information detailing CUSIP, par value, book/adjusted carrying value and fair value to be received with the second quarter statutory financial statements. These proposed non-substantive revisions to statutory accounting have been exposed for comment. (Ref #2015-27)
Short duration contracts
The SAPWG provided an update on its consideration of ASU 2015-09 Disclosures about Short Duration Contracts. The NAIC’s SAP Maintenance Process requires that the NAIC consider all newly issued U.S. GAAP guidance. Accordingly, auditors and preparers of statutory financial statements are expected to consider GAAP disclosures in instances where GAAP and SAP accounting are similar. Interested parties have drafted papers recommending that the majority of the disclosures required by the ASU are redundant with information included in Annual Statement Schedule P. The AICPA/NAIC is currently reviewing the industry proposal and provided feedback, as well as proposed related audit guidance for consideration by the AICPA Insurance Expert Panel and the Auditing Standards Board.
The SAPWG adopted substantive revisions to SSAP No. 51—Life Contracts to provide guidance on how to determine the change in valuation basis for principle-based reserving (PBR). Updates to SSAP No. 51 are effective Jan. 1, 2016, while the Valuation Manual provides for a three-year period, starting from the operative date, during which companies are able to continue using the current reserve methodologies.
Other non-substantive revisions to statutory guidance adopted have been summarized by the NAIC as follows (view the reference material).
- SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures
Revisions clarify that disclosure of permitted or prescribed practices shall include practices that result in different statutory accounting reporting, such as gross or net presentation or different financial statement reporting lines. Also adopted an example to provide clarity on completing the permitted practice disclosure. (Ref #2015-52)
- SSAP No. 55—Unpaid Claims, Losses and Loss Adjustment Expenses
Revisions, modified during the meeting, clarifies the reporting of anticipated and received salvage and subrogation amounts should be net of associated expenses. (Ref #2015-21)
- SSAP No. 86—Derivatives
Revisions incorporate information on swaptions. (Ref # 2016-14)
- SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities
Revisions incorporate a new appendix to bring in the filing guidance on subsidiary, controlled or affiliated (SCA) entities, modified to remove conflicts with the SSAP, from the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual). With this action, the Working Group directed a referral to the Valuation of Securities (E) Task Force requesting modifications to the P&P Manual to retain a filing requirement and reference to SSAP No. 97, but to remove the detailed SCA filing instructions, consistent with the approach proposed in the Task Force’s Feb. 23 correspondence. The Working Group also directed NAIC staff to develop a new agenda item to consider revisions to the filing requirements for nonadmitted or immaterial SCAs. (Ref #2015-25)
- SSAP No. 100—Fair Value
Revisions exclude deposit liabilities with no defined or contractual maturities from the fair value financial instruments disclosure. Also, ASU 2016-01: Financial Instruments was rejected in SSAP No. 26—Bonds, SSAP No. 30—Unaffiliated Common Stock, SSAP No. 32—Preferred Stock, SSAP No. 43R—Loan-Backed and Structured Securities and SSAP No. 100. (Ref #2016-06)
Substantive revisions for exposure
The SAPWG moved to expose the following substantive revisions as summarized by the NAIC (reference material can be found here).
- SSAP No. 2—Cash, Drafts, and Short-Term Investments
Issue paper and substantively revised SSAP to classify money market mutual funds as cash equivalents, with prospective application as of Jan. 1, 2018. (Ref #2016-18)
- Implementation of Principle-Based Reserving
Issue paper to document the substantive revisions to SSAP No. 51 and other changes to facilitate the implementation of PBR. (Ref #2015-47)
- Variable Annuities
Issue paper to propose special accounting treatment for certain limited derivatives related to variable annuity products for a 90-day exposure period to correspond with an exposure on a related topic at the Variable Annuities Issues (E) Working Group. This accounting treatment is proposed to be separate and distinct from the guidance in SSAP No. 86 and is proposed to reside in a new SSAP. (Ref #2016-03)
- Credit Losses
Exposed agenda item detailing ASU 2016-13: Credit Losses for a 90-day exposure period, with a request for comments on how the ASU should be considered for statutory accounting and on specific discussion points identified in the agenda item. (Ref #2016-20)
Non-substantive revisions for exposure
The SAPWG also moved to expose the following non-substantive revisions as summarized by the NAIC (reference material can be found here).
- SSAP No. 2, SSAP No. 26 and SSAP No. 43R
Clarifies the scope of the annual audited disclosure requirements on bond categories, bond maturity distributions and proceeds from sales of bonds. (Ref #2016-24)
- SSAP No. 3—Accounting Changes and Corrections of Errors
Clarifications to the guidance in SSAP No. 3 regarding the recognition of accounting errors. This proposed guidance clarifies that SSAP No. 3 applies to both accounting and reporting errors. The proposed guidance will also clarify that insurers should refile their statements unless instructed otherwise by their domiciliary regulator. (Ref #2015-46)
- SSAP No. 16R—Electronic Data Processing Equipment and Software
Requests comments on whether guidance on cloud computing arrangements is necessary for statutory accounting. (Ref #2015-15)
- SSAP No. 23—Foreign Currency Transactions and Translations
- Clarifies the translation of Canadian insurance operations (Ref #2016-25)
- Adopts, with modification, ASU 2013-05 – Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity to incorporate guidance on when a parent reporting entity shall realize foreign currency translation changes in an investment of a foreign entity. (Ref #2016-26)
- SSAP No. 56—Separate Accounts
Removes disclosure of total maximum guarantees for separate account products, as recommended by the Variable Annuities Issues (E) Working Group. (Ref #2016-27)
- SSAP No. 61R—Life, Deposit-Type and Accident and Health Reinsurance
Updates the variable annuities captive disclosure, and modifies the effective date to be for 2016 and thereafter (eliminating the prior sunset language) as recommended by the Variable Annuities Issues (E) Working Group. (Ref # 2016-28)
- SSAP No. 84—Health Care and Government Insured Plan Receivables
- Clarifies that receivables must originate from the government to qualify within the government plan exception and allowed admittance when 90 days past due. Requests comments on whether a longer time frame is needed for collection of performance network rebate receivables that do not originate from government plans, before nonadmittance. (Ref #2016-23)
- Agenda item pertaining to pharmacy rebates under Medicare Part D was re-exposed with a request on whether the issues originally documented still need to be addressed and/or if there are other issues involving pharmacy rebates that need to be considered for statutory accounting. (Ref #2011-44)
- SSAP No. 86
- Requested comments on two approaches to define “notional amount.” (Ref #2015-51)
- Adopts, with modification, ASU 2016-05 – Effective of Derivative Contract Novations on Existing Hedge Accounting Relationships, clarifying that a change in the counterparty to a derivative instrument does not, by itself, result in a termination of the derivative instrument. (Ref # 2016-29)
- Rejects ASU 2016-06 – Contingent Put and Call Options in Debt Instruments as embedded derivatives are not accounted for separately from the host contracts. (Ref #2016-32)
- Rejects ASU 2016-03 – Effective Date and Transition Guidance as the elimination of effective dates in specific Financial Accounting Standards Board (FASB) pronouncements will not impact application if the guidance is adopted for statutory accounting. Due to the FASB topics, this rejection will also be noted in SSAP No. 3 and SSAP No. 68—Business Combinations and Goodwill. (Ref # 2016-30)
- SSAP No. 97
- Updates references to the identified exchanges allowed under the market valuation method. (Ref #2016-21)
- Clarifies that SCA supporting documentation shall be provided in English. (Ref #2016-22)
- SSAP No. 103—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Proposes enhanced disclosure requirements for repurchase and reverse-repurchase agreements with disclosure templates referred by the Restricted Asset (E) Subgroup. (Ref #2016-16)
- Appendix A-010—Minimum Reserve Standards for Individual and Group Health Insurance Contracts
Incorporates the 2013 individual disability income valuation table with an effective date of Jan. 1, 2020, with early adoption allowed beginning Jan. 1, 2017. (Ref #2016-17)
- Appendix D—Nonapplicable GAAP Pronouncements
The following FASB pronouncements are proposed to be rejected as not applicable to statutory accounting:
- ASU 2014-09 – Revenue from Contracts with Customers: Partial rejection, revisions to Accounting Standards Codification (ASC) 606-10-55 and ASC 505-50 will be discussed in separate agenda items. (Ref #2016-19)
- ASU 2015-14 – Deferral of the Effective Date (Ref #2016-19)
- ASU 2016-04 – Recognition of Breakage for Certain Prepaid Stored-Value Products (Ref #2016-31)
- ASU 2016-10 – Identifying Performance Obligations and Licensing (Ref #2016-19)
- ASU 2016-11 – Rescission of SEC Guidance (Ref #2016-33)
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