Sabrina Wilson, CPA, FLMI
Global Regulatory Policy Expert
Sabrina serves as a subject matter expert for regulatory filings at Clearwater. In this role, she works with internal teams for the ongoing enhancement of NAIC reports. Sabrina has over 20 years’ of statutory accounting and reporting experience and uses her background to communicate industry best practices and comment on regulatory guidance and procedures. She also handles complex statutory accounting and analytics questions posed by our user community.
Sabrina is a certified public accountant, has earned the designation of Fellow, Life Management Institute (FLMI), and has a master’s degree in accounting and taxation from Boise State University.
The Statutory Accounting Principles Working Group (SAPWG) met March 24 at the NAIC Spring 2018 National Meeting in Milwaukee, Wisconsin, to discuss numerous items that were reviewed and exposed.
Adopted Items
REF #2016-48: IMPACT OF FUTURE SETTLED PREMIUMS ON OPTION VALUATIONS
NAIC staff proposed non-substantive revisions to SSAP No. 86 – Derivatives and disclosure enhancements. While Interested Parties agreed with the additional disclosure enhancements, they disagreed with the proposed changes to SSAP No. 86, and expressed concern regarding the potential impact on RBC and AVR reporting. During the Spring 2018 National Meeting, NAIC staff noted Interested Parties’ concerns but disagreed with several of the arguments made, including impacts of fair value level. The disclosure revisions to SSAP No. 86 were adopted.
REF #2017-21: DOUBLE-COUNTING OF SURPLUS NOTES
NAIC staff proposed additional revisions to SSAP No. 41R – Surplus Notes to extend previous guidance for double-counting of surplus notes to surplus notes issued by a parent and held by a Subsidiary, Controlled, or Affiliated (SCA) entity. During the Spring 2018 National Meeting, Interested Parties spoke in favor of protecting surplus notes, and expressed their opinion that the proposal was codifying the spirit of the existing SSAP. The revisions to SSAP No. 41R were adopted.
REF #2017-31: WASH SALE DISCLOSURE
On November 6, 2017, the SAPWG exposed for comment revisions to the wash sale disclosure to exclude the following security types:
- Cash equivalents
- Derivative investments
- Short-term investments with NAIC 1 or NAIC 2 designations
Despite the overall support from Interested Parties during the subsequent comment period, the SAPWG received requests for clarification about potential additional exclusions of common stock from the wash sale disclosure due to the securities being reported at fair value during the holding period. NAIC staff noted Interested Parties’ concerns, but recommended revisions be adopted to exclude only cash equivalents, derivative investments, and short-term investments with NAIC 1 or NAIC 2 designations. The clarified exclusions were adopted.
Exposed Items
REF# 2016-03: SPECIAL ACCOUNTING TREATMENT FOR LIMITED DERIVATIVES
This item was last exposed during the Summer 2017 National Meeting. Since then, the SAPWG worked with the American Council of Life Insurers (ACLI) to address concerns raised regarding the previous proposal and to draft an updated issue paper. During the Fall 2017 National Meeting, NAIC staff discussed the updates that were made and requested regulators review the changes during a short comment period prior to exposing for further general comment. The ACLI advised they were supportive of the shorter comment period and stated it is more important for regulators to understand the requested changes at this time.
A motion to expose the drafted issue paper for regulator review was carried. The deadline for comment is May 18, 2018.
REF #2016-20: ASU 2016-13, CREDIT LOSSES
ASU 2016-13 was adopted by the FASB in 2016 and resulted in substantial changes to previous US GAAP. During their November 6, 2017 conference call, the SAPWG directed NAIC staff to begin drafting substantive changes to adopt ASU 2016-13 with modifications. As a result of the directive, the SAPWG received comment letters from Interested Parties expressing concern, despite the agenda item not being exposed for comment.
NAIC staff recommended exposing an issue paper reflecting a discussion of US GAAP guidance and working with both Interested Parties and regulators to get an idea of how to move forward. Staff advised there could be many situations regulators are not familiar with, and as a result, changed some wording from “proposed” to “potential.” Regulators agreed with this statement and advised that they want to get as much feedback as possible from Interested Parties on the issue during the exposure period.
A motion to expose this proposal for Interested Parties’ comment was carried. The deadline for comment is May 18, 2018.
REF #2017-33: ASU 2017-12, DERIVATIVES AND HEDGING
As a result of improvements to derivatives for US GAAP made in ASU 2017-12, the SAPWG considered additional changes to statutory accounting procedures. During their November 6, 2017 conference call, NAIC staff were directed to move forward with an issue paper to review FASB guidance. During the spring meeting, staff explained the need for some companies to address potential US GAAP and statutory accounting differences as soon as possible, due to an effective date of January 1, 2019 for US GAAP reporting. Staff recommended exposing the issue paper and gathering input from Interested Parties to identify key areas applicable to statutory accounting. Interested Parties requested additional time to review the changes.
A motion to expose the issue paper for additional comments was carried. The comment deadline is June 22, 2018.
REF #2018-03: REPORTING NAIC DESIGNATIONS AS WEIGHTED AVERAGES
An agenda item was added in an attempt to further revise and clarify SSAP No. 43R for loan-backed and structured securities. This proposal would require the use of either of the following approaches for 43R securities with different NAIC designations by lot:
- Report a consolidated position using the lowest NAIC designation reported
- Report a listing of all lots of a security at the purchase lot-level
The updated guidance differs from guidance previously made available to insurers in the Question and Answer Implementation Guide (Q&A) within Exhibit A of SSAP No. 43R. Through 2017, the Q&A provided the following guidance in relation to the reporting of NAIC designations for 43R securities with differing lot-level designations:
SSAP No. 43R and several other statements of statutory accounting principle require use of the scientific (constant yield) method of amortization. In addition to purchase price, the purchase date is an inherent part of this method and will typically result in different amortization values for different lots. Therefore, [residential mortgage-backed securities] in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. Specific to the RMBS proposal only, for year-end 2009 and until an alternative long-term solution is developed, if companies’ accounting and reporting systems do not accommodate this approach, a weighted-average method on a legal entity basis can be used. To the extent that a different accounting method applies to a legal entity’s general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account.
The Q&A within Exhibit A was removed from guidance in 2017 in an attempt to clean up the guidance within SSAP No. 43R, leading insurers to question how to report their 43R securities on their financial statements. Due to the absence of further guidance, insurers previously relied upon the guidance in this section to report their 43R securities at either a purchase lot-level or weighted average. The new proposal would eliminate the option to report a single position using a weighted average report and would instead require single positions to be reported using the lowest NAIC designation.
A motion to expose this proposal for comment was carried. The deadline for comment is May 18, 2018.
REF #2018-04: VOSTF – BANK LOAN REFERRAL
As a result of proposed changes made to the Purposes and Procedures (P&P) Manual by the Valuation of Securities Task Force (VOSTF), the SAPWG received a referral requesting a review and comment on the bank loan classification indicated by the VOSTF for NAIC designation purposes. After reviewing the referral, the SAPWG found several scenarios where bank loans indicated by the VOSTF did not correspond with guidance under SSAP No. 26R – Bonds. These variations included borrowing base loans, DIP financing, and revolving credit facilities. The SAPWG advised these securities should instead be included under SSAP No. 21 – Other Admitted Assets. During the spring meeting, NAIC staff recommended exposing the agenda item, including the SAPWG’s position on the assets, for regulator and Interested Party comment.
A motion to expose this item for comment was carried. The deadline for comment is May 18, 2018.
REF #2018-05: VOSTF AND BWG SYMBOL CHANGES
The SAPWG received a referral from the VOSTF to review how the extensive FE Enhancements project undertaken by the task force throughout 2017 would impact statutory accounting guidance. Recommended changes included revisions to SSAP No. 32 – Preferred Stock to eliminate inapplicable guidance and the removal of duplicative securities, as well as revisions to SSAP No. 1 – Accounting Policies, Risks & Uncertainties, and Other Disclosures to remove references to 5* designations and include a reference to 5GI designations.
A motion to expose this item for comment was carried. The deadline for comment is May 18, 2018.
REF #2018-08: PRIVATE PLACEMENT VARIABLE ACCOUNTING
Questions were raised about how annuities not registered with the SEC should be reported in financial statements. Although these securities could be reported under SSAP No. 21 – Other Admitted Assets as an other-than-invested-asset, NAIC staff recommended that the investment products be reported as non-admitted under SSAP No. 4 – Admitted and Nonadmitted Assets on the Schedule BA. Regulators expressed concerns with both approaches, and asked for further input from Industry. The ACLI expressed that they look forward to working with staff on the proposal and asked to expose a pre-comment letter with the exposure.
A motion to expose this item for general comment was carried. The deadline for comment is May 18, 2018.
REF #2018-06: REGULATORY TRANSACTIONS
The SAPWG received a referral from the Reinsurance Task Force to improve the definition of “regulatory transactions.” During the spring meeting, staff noted little or no accounting guidance was available and recommended exposing for comments on the “appropriate reporting schedule.”
A motion to expose this item for comment was carried. The deadline for comment is May 18, 2018.
REF #2018-07: SURPLUS NOTE ACCOUNTING, REFERRAL FROM THE REINSURANCE (E) TASK FORCE
An additional referral from the Reinsurance Task Force to the SAPWG requested revisions to surplus note determination for “linked” transactions. NAIC staff advised that these subsequent transactions should not result in classification as surplus notes and recommended exposing for comments revisions made to SSAP No. 41R – Surplus Notes.
A motion to expose this item for comment was carried. The deadline for comment is May 18, 2018.
REF #2018-09: SCA LOSS TRACKING
NAIC staff recommended clarifying existing language in SSAP No. 9 – Subsequent Events and drafting an additional disclosure for tracking an SCA’s losses. These revisions would better capture those SCA losses that resulted in either zero or negative equity in an SCA and allow for better information regarding an entity’s share of losses.
A motion to expose this item for comment and refer a proposal for an additional disclosure to the Blanks Working Group (BWG) was carried. The deadline for comment is May 18, 2018.
REF #2018-12: ASU 2018-03: RECOGNITION AND MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
NAIC staff recommended fully rejecting ASU 2018-03 as not applicable to statutory accounting. A motion to expose this item for comment was carried. The deadline for comment is May 18, 2018.
Rejected Items
REF #2017-25: WHOLLY-OWNED ULTRA-SHORT BOND PORTFOLIO IN AN LLC SERIES
During their November 6, 2017 conference call, the SAPWG reviewed a request for the consideration of a “look-through” approach for underlying bond investments in an LLC. As a result of the request and comments received from Interested Parties, the SAPWG sent referrals to the VOSTF, Capital Adequacy (E) Task Force (CATF), and BWG to consider reporting NAIC designations on the Schedule BA for P&C insurers, similar to the approach allowed for Life insurers. During the spring meeting, NAIC staff recommended disposing of the statutory accounting revisions.
A motion to dispose of the agenda item without statutory account modifications was carried.
REF #2017-34: FASB CODIFICATION REFERENCES
During their November 7, 2017, conference call, the SAPWG exposed a proposal to identify and update FASB codification references within individual SSAPs. This proposal would expand the documentation currently shown within the Accounting Practices & Procedures (AP&P) Manual and allow for greater insight into variances between US GAAP and statutory accounting principles. As a result of this exposure, comments were received from Interested Parties indicating the proposed cross referencing was not necessary.
NAIC staff agreed with Interested Parties and advised that they did not have the resources to allocate to this highly detailed and time-consuming project. Three suggestions for future work were raised:
- Disposing the comprehensive project
- Deferring the project for future consideration
- Proceeding with the project
NAIC staff recommended disposing the comprehensive project, with both California and Texas regulators in support of this position. The proposed solution would include the disposal of both the comprehensive project and agenda item 2009-11, which was directed to allocate NAIC staff resources to the necessary research. A motion to dispose items 2017-34 and 2009-11 was carried.
Additional Items
REF# 2017-32: SSAP NO. 30 – INVESTMENT CLASSIFICATION PROJECT
The SAPWG’s ongoing Investment Classification Project began to shift its focus to common stocks in 2017, as reported in SSAP No. 30 – Unaffiliated Common Stock. During a November 6, 2017, conference call, the SAPWG exposed two options for revisions:
- Keeping the existing definition of common stocks within SSAP No. 30, but clarifying that those securities should be excluded from the definition
- Modifying the existing definition of common stocks within SSAP No. 30 to clarify that those securities are included in the definition
The SAPWG received a number of comments from Industry after the November 6, 2017 conference call. A proposal was made to include all bond mutual funds under SSAP No. 26R, which was supported by several other insurers. NAIC staff recommended moving forward with the changes and incorporating the comments. However, staff did not advise revisions to move bond mutual funds to SSAP No. 26R, as requested.
Members of Industry expressed support for NAIC staff and the issues they described, which allowed consistency with other changes made by the VOSTF and the Security Valuations Office (SVO). In addition, they clarified that the proposed changes would not require the reopening of SSAP No. 26R, as this could result in unintended consequences.
Members of Industry requested that the SAPWG move to expose the issue for further review. In addition, other Industry members advised that they would submit a more extensive comment letter to further support their position and allow for a more consistent methodology for bond mutual funds. Staff responded to the comment and noted the purpose of the Investment Classification Project was to break out the types of investments being requested. However, due to a perceived benefit from a risk-based capital (RBC) adjustment, the CATF would likely need to make a recommendation to proceed. As a result of no comments being received from regulators to move forward with bond mutual funds being included in SSAP No. 26R, staff was not directed to move forward with expanding the scope of the project to include them.
A motion to direct staff to draft SSAP No. 30 to improve the definition of common stock was carried.