At the NAIC Fall 2016 meeting, the Statutory Account Principles Working Group (SAPWG) met to discuss money market fund (MMF) reform, quarterly reporting, proposed changes to credit loss impairments, updates from the investment classification project, and more.
The SAPWG adopted a proposal to classify Money Market Mutual Funds (MMFs) as cash equivalents effective on December 31st, 2017. This item originated during SAPWG’s review of Class 1 Mutual Funds. Industry had argued that MMFs function more like cash equivalents than short-term assets or common stocks, and MMFs are usually classified as cash equivalents in GAAP. After review, NAIC staff agreed with Industry and adopted the change. The SAPWG made referrals to the Blanks Working Group (BWG) and Capital Adequacy Task Force to implement the changes.
The SAPWG has also adopted Ref #2016-35, clarification that all MMFs will be measured at fair value (with NAV as a practical expedient). This was a new issue caused by the SEC’s Money Market Reform, as many companies were not sure whether to report their prime MMFs at cost or fair value.
Currently, Industry and the SAPWG are working on a compromise that will require a semi-annual Schedule of Owned Holdings on Schedule D assets containing four columns. This proposal was referred to the Accounting Practices and Procedures Task Force for further feedback. At this point, the earliest this proposal would be effective is for June 30th, 2018 quarterly reporting.
Industry does not believe the “Current Expected Credit Loss” methodology adopted by FASB is appropriate for statutory accounting for three reasons:
For those unfamiliar with the GAAP update, ASU 2016-03 moves from an “incurred losses” to an “expected losses” model for credit impairment due to concerns that losses reflected in financial statements were “too little, too late.” NAIC staff will continue this discussion with the AICPA, but active discussion by the SAPWG is on hold until the second half of next year.
Work continues on the proper measurement of SVO-approved bond funds. Prior to the meeting, the SAPWG requested Industry comments on the measurement methods (fair value or systematic value). Several comment letters were received and are available on the NAIC website. The SAPWG will discuss the comment letters on a January conference call.
Insurers with Subsidiary and Controlled Affiliates (SCAs) should take advantage of a free filing period adopted by the SAPWG. The Sub-1 form for SCA’s acquired before 2016 can be filed at no charge until September 30th, 2017. This is part of an effort by the NAIC to ensure guidance for SSAP 97 is followed without creating an undue burden on insurance companies.
The SAPWG adopted a definition of notional value for Schedule BA reporting. The 2017 AP&P Manual will incorporate the definition of notional into SSAP 86, as there had been confusion from Industry on how to report notional amount and insurers previously did not have ubiquitous practices or definitions.
The SAPWG clarified that INT 01-25, which covers Treasury Inflation Protected Securities (TIPS), applies to only US TIPS. Foreign inflation-linked securities—even if foreign government-backed—should be accounted for in accordance within SSAP No. 26. The SAPWG also asked for clarification on whether additional guidance should be added for foreign TIPS if they become a more common asset class.
A potential definition of loan-backed and structured securities was referred to the SAPWG by the Valuation of Securities Task Force (VOSTF) for exposure. Under the current guidance, unintended items like certificates of participation are technically included in the scope of SSAP 43R.
The SAPWG asked for comments from Industry on how OTTI is currently handled on the AVR and IMR. The SSAPs suggest that insurers should bifurcate impairment between both credit and interest components, but IMR instructions suggest the loss should be either interest or credit related, but not both. No action is planned at this point.
The SAPWG exposed a clarification that multiple-lender mortgage loans should still be accounted for by SSAP No. 37.
Exposed items have a comment period of 60 days, which ends February 10th.