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) and the Capital Adequacy Task Force (CADTF) of the NAIC both held meetings recently to discuss and adopt guidance updates.
Residuals Update
The SAPWG held a virtual meeting September 21, and the group adopted Ref #2023-12: Residuals in SSAP No. 48 Investments, effective December 31, 2023. This adds the definition of residuals to SSAP No. 48 and clarifies the reporting of in-substance residuals regardless of the structure of the investment vehicle.
Previously, the working group included the definition of residuals in SSAP No. 43R because they thought residuals were more like the securitization structure. It was later determined, when reviewing the 2022 reporting results, residuals could occur in other structures, e.g., limited partnerships, joint ventures, or other equity fund investments.
NAIC staff said residuals are different from equity interests, as the residuals exist in investment structures that are backed directly or indirectly through a feeder fund by a discrete pool of collateral which generates cashflows that provide interest and principal payments to debt holders. The resulting excess funds are then provided to the residual holder who may ultimately receive nothing, a reduced amount from the original projections, or large returns, based on the performance of the underlying collateral assets.
This update removes the reference to SSAP No. 43R from the Schedule BA annual statement instructions.
It clarifies investments are reported in the residual interest reporting category on Schedule BA if they reflect residual interests or predominantly hold residual interests, regardless of if they are not in asset-backed securities (ABS) form.
The SAPWG exposed agenda item 2023-23 with a comment deadline of November 17, 2023, via e-vote on October 31, 2023, and expects to adopt this at the NAIC Fall National Meeting, with an effective date of December 31, 2023. It proposes excluding residual security tranches from the scope of common stock under SSAP No. 30R paragraph 2 and preferred stocks under SSAP No. 32R paragraph 3. It emphasizes residual tranches in the common or preferred stock structure shall be reported as residuals on Schedule BA.
Capital Adequacy Task Force Adopts Procedure Changes
The Capital Adequacy Task Force of the NAIC held a virtual meeting on October 11. The task force adopted a procedure change to require an interested party to provide a completed proposal form and mocked-up changes to the appropriate NAIC support staff when they suggest reporting changes.
Any risk-based capital structure changes for the year-end must be exposed by January 31, which may be extended to March 15 if the structure change is deemed urgent. Super majority (two-third votes) consent applies only when the adoption occurs outside the standard RBC adoption deadlines of April 30 and June 30. It shortens the publishing timeline for meeting materials from ten to three business days prior to the next meeting, and interested party proposals filed with the appropriate NAIC staff from twenty to ten days prior to the next meeting in order for the CADTF and RBCWG to consider.
Exposed Items
The task force exposed a referral sent from the SAPWG regarding a Schedule BA proposal for non-bond debt securities with a comment deadline of November 13.
Dale Bruggeman, SAPWG Chairman, said the purpose of this referral was to inform the CADTF of the bond projects adopted at the summer national meeting. The new bond definition results in new asset classifications and the relevant reporting changes effective January 1, 2025.
The SAPWG broke out bonds into two buckets – Issuer Credit Obligations on Schedule D Part 1 Section 1 and Asset-Backed Securities on Schedule D Part 1 Section 2. Debt securities that don’t qualify as D-1 bonds will be reported as admitted assets on Schedule BA.
The Blanks Working Group exposed the reporting changes, and the goal is to adopt all reporting changes by the end of this year. Insurers are encouraged to move those securities from Schedule D to BA prior to the effective date of January 1, 2025, to smooth out the transition.
This referral does not intend to hinder the CADTF’s ability to assess those non-D-1 bonds and determine the appropriate RBC factor. It intends to provide an avenue for those bonds per se but not qualified as being reported on Schedule D Part 1 Sections 1 or 2 to get the same bond RBC factors if the security has an SVO-assigned NAIC designation, until it is warranted for the CADTF to create new RBC factors.
Tom Botsko, Chairman of the CADTF, asked the interested parties and regulators to review the referral and welcomed any feedback during the comment period.
In a separate item, the task force also exposed an update to remove the word “Common” from the heading of column 13 on PR003/XR002 and update pages PR007, PR031, XR010 and XR024 to clarify the line for the market value in excess affiliated stocks includes the affiliated amounts for both preferred and common stock (2023-12-CA).
This item proposes clarifying that both common and preferred stocks should be included in both column 13 on PR003 and XR002 and line 12 on PR007 and XR010. It also proposes adding market value excess affiliated stocks to total unaffiliated common stock in line 13 on both PR007 and XR010, line 42 on PR031, and line 21 on XR024.
RBC Charge for Companies Reporting Blank Affiliate Types in Details for Affiliated Stocks
In other matters, as the new revised 2023 RBC instructions do not specify what would happen when the affiliate code was left blank, insurers are able to input a blank instead of affiliate codes 1 through 10.
Tom Botsko said they may create rules to avoid a null value or default them to type 9 for P&C and health insurers, and 10 for life insurers so that the blank affiliate type will receive the same treatment of affiliate type 9 or 10. The RBC charge will then be 22.5% (P&C) or 30% (life or health). He asked the interested parties to provide comments by the end of November.
Collateral for Loans
The SAPWG adopted Ref#2022-11: Collateral for Loans during an October 23 virtual meeting.
This item was proposed by state regulators and originally exposed in July 2022. It was re-exposed during the summer national meeting this year.
It adds clarifying language to SSAP No. 21R paragraph 4b that a collateral loan is admitted only if the underlying collateral is admitted. For collateral that is joint venture, limited partnership, or LLC (SSAP No. 48 entities) or investments in subsidiary, controlled, or affiliated entities (SSAP No. 97 entities), the collateral loan is admitted only if audited financial statements for the investee are available and the collateral value is larger than the loan amount. Any excess of collateral loan over the pledged collateral shall be nonadmitted.
As some insurers haven’t obtained an audit for the collateral that is SSAP No. 48 or 97 entities, this adopted update adds transition language to SSAP No. 21R paragraph 22 that the audits need to be obtained for year-end 2023 in 2024 and the annual audit lag shall be consistent from period to period.
The Chairman of the SAPWG said the insurers will need to go through those three steps specified in SSAP No. 48 paragraph 9 if audited financial statements are not available.