NAIC Fall 2017 National Meeting Update – Statutory Accounting Principles Working Group

The Statutory Accounting Principles Working Group (SAPWG) held a conference call on November 6, in lieu of attending the NAIC Fall 2017 National Meeting to discuss credit losses, the investment classification project, and more.

Exposed Items

REF #2016-20: ASU 2016-13 – CREDIT LOSSES

This agenda item is in response to ASU 2016-13, which requires companies to move from a “recognized credit loss” where losses are recognized when incurred, to an “expected credit loss model,” where valuation allowances need to be established for available-for-sale and held-to-maturity securities.

The SAPWG believes that statutory accounting (STAT) should incorporate an expected credit loss model similar to the GAAP model. They also acknowledge that there are many measurement differences between GAAP and STAT (most investments are held at fair value for GAAP and amortized cost for STAT) as well as complexities like RBC and AVR. These complexities would need to be addressed to transition to a model similar to GAAP so insurers can avoid double-counting expected losses in their AVR or RBC.

The SAPWG directed NAIC staff to prepare a suggested framework that would move STAT to an expected loss model, and indicated that they would evaluate that model and expose it for comment next year.

REF #2017-31: WASH SALE DISCLOSURE

This item originally clarified that money market funds are exempt to the wash sale disclosure. Interested Parties want this to expand to have D-2.2 assets excluded from the disclosure as well. Regulators did not comment on whether they have agreed to do this on the call, but the group exposed the proposal and asked for feedback.

REF #2017-25: WHOLLY OWNED ULTRA-SHORT BOND PORTFOLIO IN AN LLC SERIES

This item started as a sponsored request to create a list similar to SVO-identified funds for limited partnerships. NAIC staff was averse to creating another list of certain assets allowed to be carried on a special schedule and came up with another solution they believe addresses the core issue. They proposed allowing P&C companies to report a designation on Schedule BA for fixed income-like investments, just as Life companies currently can. Since this recommendation affects more than just the SSAPs, the group sent referrals to the Valuation of Securities Task Force (VOSTF) and Blanks Working Group (BWG) to discuss the proposal further.

REF #2017-32: SSAP NO. 30 — INVESTMENT CLASSIFICATION PROJECT

The investment classification project continues after spending three years reviewing SSAP No. 26. The SAPWG now wants to focus on common stock. NAIC staff has recommended that the SAPWG review:

1. The definition of common stock
2. The treatment of closed-ended funds and unit investment trusts
3. Reporting/RBC enhancements in response to referrals from the VOSTF, primarily regarding identification and RBC charges on fund investments

Fewer substantive changes are expected from SSAP No. 30 than the changes resulting from SSAP No. 26. The anticipated changes will likely be related to funds, enabling insurers to reduce their RBC charges on those assets in certain situations.

REF #2016-48: IMPACT OF FUTURE SETTLED PREMIUMS

There are several components to this item, which concerns accounting and reporting on derivative contracts using deferred premium payments rather than up-front premiums, as is the case with most derivative contracts.

This item was partially adopted to add aggregate disclosures in a narrative format for year-end 2017. These disclosures will provide data to be captured for 2018.

The second part of the item concerns adding additional columns to Schedule DB and/or revising guidance within SSAP No. 86 to capture these amounts on a more granular level and clarify treatment, including AVR calculation. This item will be heavily discussed, as Interested Parties have differing opinions on what is necessary for these contracts than the SAPWG.

REF #2017-33: ASU 2017-12 — DERIVATIVES AND HEDGING

This item was drafted in response to ASU 2017-12, which simplifies hedge accounting requirements, the presentation of hedged items, and the process of hedging instruments in financial statements. Industry is questioning where STAT and GAAP guidance on hedge accounting deviates, especially regarding futures. While changes to align STAT and GAAP hedge accounting can be anticipated, the motion the SAPWG made on the call was to re-open SSAP No. 86 to clarify reporting instructions and discrepancies between STAT and GAAP hedge accounting. The ASU is effective for public companies in 2019, allowing time to work on this item.

Adopted Items

REF #2016-13: POLICY STATEMENT ON COORDINATION WITH PURPOSES & PROCEDURES MANUAL

This adoption adds an appendix to the Accounting Practices & Procedures (AP&P) Manual that details the relationship between the AP&P Manual and the Purposes & Procedures (P&P) Manual of the NAIC Investment Analysis Office. Interested Parties had no comment on this item.

REF #2017-04: SETTLEMENT OF VARIATION MARGIN

This agenda item clarifies that changes in variation margin are not “settlements” until the derivative contract has been sold, matured, and expired. The adoption is effective January 1, 2018 on a prospective basis so entities will not have to reclassify any activity.

REF #2017-08: EXTENSION OF SCA FILING DEADLINES

This adopted item extends the deadline for Sub-1 filings from 30 days to 90 days and Sub-2 filings from June 30 to August 31. It also adds a provision for companies that regularly receive their audited financial reports after August 31; those companies will have one month from the date they received their reports to file their Sub-2. The new deadlines will be in effect January 1, 2018.

REF #2017-24: USE OF NET ASSET VALUE INSTEAD OF FAIR VALUE

This agenda item mirrors GAAP updates that allow use of Net Asset Value (NAV) as a practical expedient to fair value. This guidance primarily applies to mutual funds and will be effective for year-end 2018, although companies will be permitted to use NAV for 2017 year-end reporting as well.