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  • June 3, 2021

NAIC May Meeting Update: Statutory Accounting Principles Working Group

The Statutory Accounting Principles Working Group of the NAIC held a meeting on May 20, 2021. The following items pertain to investment accounting.

Adopted Nonsubstantive Items Effective Immediately


ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, requires amortization of premium to the next effective call price/date.

As ASU 2020-08 precludes statutory accounting’s yield-to-worst concept, NAIC staff recommends revising SSAP No. 26R—Bonds to reject ASU 2020-08 for statutory accounting, because premiums amortized to the maturity value/date may yield a lower asset value than premiums amortized to the next effective call value/date (as is required in ASU 2020-08) under the current statutory accounting.


This item proposes additional disclosures and to data-capture certain elements of SSAP No. 103R —Transfers and Servicing of Financial Assets and Extinguishments of Liabilities in response to SAPWG’s deliberation of item 2019-21: SSAP No. 43R Project. That project is intended to determine which investments are eligible for reporting on Schedule D 1: Long Term Bonds.

NAIC staff recommends that the SAPWG adopt this item which incorporates additional disclosure elements and a data-capture template for certain disclosures in SSAP No. 103R. It will help regulators in assessing the situations where an entity has transferred or sold assets but still retains a material participation in the transferred asset. Minor editorial changes to the current Blanks proposal is also expected (2021-05BWG MOD).


The FASB issued ASU 2020-04 and ASU 2021-01 in March 2020 and January 2021 respectively for Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This is to ensure a continuation of the original contract and hedging relationship during the market-wide transition to alternative reference rates and provide the optional expedients by stating that a change to the interest rate used for margining, discounting or contract price alignment for a derivative is not considered to be a change to the critical terms of the hedging relationship that requires dedesignation.

The interested parties suggested adding additional language to INT 20-01 that the following derivative contracts are eligible for the exception guidance afforded in ASU 2020-04:

  • Clarifies all derivative contracts (e.g., those qualifying for hedge accounting, those that do not qualify for hedge accounting and replication (synthetic asset) transactions (RSAT)) that are modified by changing the reference rate as a result of reference rate reform, regardless of whether the reference rate being modified is expected to be discontinued
  • Centrally cleared swap contracts are automatically transitioned at a cessation date or voluntarily executed prior to cessation

NAIC staff incorporated this language in paragraph 13 of INT 20-01. Both the SAPWG members and the interested parties are comfortable with the edits, and they don’t think there is a need to re-expose this agenda item.

NAIC staff recommends the SAPWG adopt this item with the additional revisions suggested by interested parties.


This item was exposed March 15 to clarify that cryptocurrencies do not meet the definition of cash under SSAP No. 2R —Cash, Cash Equivalents, Drafts, and Short-Term Investments, because the transactions are verified and recorded by a decentralized system using cryptography (e.g., Blockchain) rather than by a centralized authority like the Federal Reserve System, and they are not admitted under SSAP No. 4 Paragraph 3. The exposure also included a request for input on the extent to which the cryptocurrencies are held directly by the insurers or indirectly through a SCA.

Delaware Insurance Department (Delaware) recommends expanding the scope of INT 21-01T to consider the indirect investments in cryptocurrencies through mutual and other securities funds as some captive insurers are currently investing in such funds, and it is likely that commercial insurers will follow their footsteps soon. Captive insurers typically adopt GAAP instead of SSAP for financial reporting, and they report mutual fund investments at market value under GAAP.

Other interested parties agree that cryptocurrencies currently do not meet the definition of cash under SSAP, but they do meet the definition of an asset. They think cryptocurrencies should be admitted, because there is an active market for this type of assets, and they can be purchased and/or redeemed in an open market at readily determinable fair values. Besides, the use of cryptocurrencies has been evolving. PayPal now allows users to buy, sell, and hold cryptocurrencies, and some banks have shown interest in stablecoins that are pegged to existing government-backed currencies (e.g., US dollars).

The working group decided not to expand indirect investments in cryptocurrencies through SEC registered or non-SEC registered funds, because indirect investments through SEC registered funds are admitted regardless of the fund’s underlying assets under SSAP No. 30R Paragraph 4(c) and non-SEC registered funds receive treatment as a joint venture under SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies.

Delaware asked the working group to observe these ever-evolving assets. Captive insurers will allow policy holders to pay premiums with cryptocurrencies soon. New guidance may be needed to allow custodians to hold this asset class for the insurers under Model Law 295. The working group agrees, and they will monitor this asset class development closely.

NAIC staff recommends the working group adopt the exposed nonsubstantive interpretative guidance provided by INT21-01 with minor edits that clarify only directly held cryptocurrencies are considered nonadmitted assets, and this does not impact the guidance for investments in funds that may hold cryptocurrencies in SSAP No. 30R, SSAP No. 48 or SSAP No. 97. NAIC staff asked the regulators if restriction on indirect investment in cryptocurrencies, should be considered.

Items Exposed with Comment Deadline Ending July 15, 2021


In November 2020, the SAPWG adopted item 2020-18 – SSAP No. 97 Update. While that item was being discussed, industry asked for specific consideration of “whether 8.b.iv entities (i.e., Subsidiary, Controlled and Affiliated Entities (SCA) that are foreign insurers) should be subject to the provisions of SSAP No. 97, specifically that paragraph 9 adjustments may result in a negative equity valuation.” Industry’s primary feedback was that foreign insurance operations are subject to foreign regulatory bodies and should stand independent of a domestic insurer, and the equity valuation should not go negative and should stop at zero in the absence of guarantee or commitment. Although negative equity is uncommon now, their concern is it may arise in the future.

The interested parties also expanded the discussion to include SSAP No. 48 investments that are 8.b.iv entities. Under the current guidance, those investments are using an equity method and reported on Schedule BA. NAIC staff explained SSAP No. 97 Paragraph 13 equity method adjustments, which intentionally do not stop at zero, and an audit (i.e., audited US GAAP or an audited footnote reconciliation to US GAAP reconciliation if the 8.b.iv entities use non-US basis GAAP) is required for SSAP No. 48 investments to be admitted.

NAIC staff said “paragraph 9 adjustments” are to prevent assets held by a SCA from receiving more favorable accounting treatment, e.g., avoid being non-admitted or higher value than had the assets been held directly by the insurer. It was an intentional decision that the outcome of these adjustments can result in a negative equity valuation of the investment.

NAIC staff recommends adding changes to the following guidance. SSAP No. 48 Paragraph 6 is more of an editorial change.

  • SSAP No. 97 Paragraph 9 footnote that the paragraph 9 adjustments can result in a negative equity valuation to 8.b.iv foreign insurer subsidiaries only if those subsidiaries provide services (e.g., reinsurance transactions) to or hold assets on behalf of the reporting entity or its affiliates
  • SSAP No. 48 Paragraph 6 that the equity method calculation may result in a negative valuation and thus, SSAP No. 97 equity method calculation shall occur regardless of whether the investment is supported by an audit and will be non-admitted

The working group members agreed to re-expose this item that incorporates the interested parties’ comments.


The SAPWG started to discuss the proposed changes to SSAP No. 43R – Loan-Backed and Structured Securities in 2019. After the initial proposal to exclude collateralized fund obligations (CFOs) and similar structures that reflect underlying equity interests from the scope of SSAP No. 43R and the exposure of an issue paper, the working group received industry comments and determined a holistic principles-based approach to define a bond eligible for reporting on Schedule D-1 is necessary. A small group comprised of the Iowa Department of Insurance, NAIC staff, and industry representatives have been meeting regularly to develop a draft proposal for bond definition.

The proposed bond definition focuses on substance over form – investments that qualify as an issuer credit obligation or asset-backed security, are considered as bonds. A bond must represent a credit relationship in substance. Investments with equity-like characteristics are not bonds. However, recharacterization of the underlying equity risks into bond risk through structuring and diversification of collateral, allows investments (e.g., CFOs) to be reported as bonds on D 1 if the analysis was properly conducted and documented by the insurer at the time the investment was acquired.

Issuer credit obligations are supported by the credit worthiness of the issuers. They include project finance bonds issued by operating entities, bonds issued by REITs or similar property trusts, bonds issued by closed-end funds and other operating entities registered under the 1940 Act, Equipment Trust Certificates (ETCs), Enhanced Equipment Trust Certificates (EETCs) and Credit Tenant Loans (CTLs).

Asset-backed securities (ABS) are issued by entities that have a main purpose of raising debt capital backed by either financial assets or cash-generating non-financial assets that provide meaningful cash flows to service the debt. Financial assets do not include assets for which the realization of the benefits depends on the completion of a performance obligation, whereas non-financial assets produce cash flows until the performance obligation has been satisfied.

To qualify as a bond, ABS must provide sufficient credit enhancement, overcollateralization or other forms of guarantees or recourse, and cash-generating non-financial assets shall generate a meaningful source of cash flows for repayment of the bond, other than through the sale or refinancing of the assets. Both sufficient credit enhancement and meaningful cash flows are determined at origination, and the insurers must maintain and provide regulators and auditors the documentation of this determination and analysis. For example, CTLs fully supported by a current lease would be considered an issuer obligation, but CTLs that have residual risk (not fully supported by a current lease) would be considered an ABS if they met the sufficiency and meaningful tests.

This update discloses the plans to revise the existing reporting lines or categories and a potential sub-schedule to identify investments that have underlying equity risk or that do not self-liquidate.

It also recommends investments that have currently been reported as bonds may be required to move to other schedules including BA if they are not qualified for bond reporting. It is noted that assessing legacy investments per historical origination date may not be feasible.

The full proposal can be accessed here.

Other Items


This item previously proposed two general options to address reporting mismatch for derivatives that are used for hedging Fixed Indexed Annuity and Indexed Universal Life Products. NAIC staff is open for additional commentary and suggestions and will send a formal referral to the Life Actuarial Task Force (LATF).

Interested parties expressed their concerns that this proposed change may also require change in the reserve framework. They requested that a referral be made to the Chair of the LATF as to whether there is interest in changing the reserve framework to accommodate the derivative approach. The response from LATF may influence their view on the approach to recommend.


The Life Risk-Based Capital Working Group sent a referral to SAPWG about the incorporation of an adjustment to the factor applied based, in part, on the fair value of real estate reported on Schedule A and Schedule BA.

NAIC staff said the use of fair value on these schedules has only been used to determine if an other-than-temporary impairment (OTTI) assessment is required, and it is served as supplemental information and not subject to audit or verification procedures. Although it is required to have an appraisal every five years for admittance if the real estate is income producing or held for sale, this requirement is not needed for Schedule A self-occupied properties or Schedule BA Real Estate. There is no requirement for a current appraisal when the insurers made changes to the reported fair value. Pursuant to SSAP No. 100 – Fair Value, the insurers can determine the fair value based on their own assumptions of what a market participant would assume in pricing the asset.

Of Schedule A properties, 29% have no fair value or matching BACV for Life filers, because there was no incentive to use resources to calculate a different fair value.

Pursuant to SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies, investments in a company that has real estate development interest can be reported on Schedule BA as “having underlying characteristics of real estate.” Some insurers report them in the Schedule BA “Other” category if the requisite details are not available for reporting. With a potential reduction of RBC based on fair value, it may result with an increase of SSAP No. 48 investments being classified from “Other” to “having underlying real estate interests.” As movement between reporting lines on the same schedule is not captured as disposals and reacquisitions, it doesn’t trigger any regulator indicator for assessment.

SSAP No. 48 investments may be carried at cost with share of profits using the equity method or fair value. For investments that are carried at cost with share of profits, they would likely have a lower BACV and lower RBC requirement that could be further decreased based on the difference between BACV and potential higher fair value. For investments that are carried at fair value, they would likely have a high BACV and the RBC requirement would not be reduced when there are no difference between the BACV and the fair value.

Due to the inconsistent reporting of fair value on Schedule A and BA and the limited appraisal requirements in SSAP No. 40 – Real Estate Investments, the SAPWG expressed their concerns that using fair value to reduce RBC makes it susceptible for RBC optimization. NAIC staff noted Schedule BA assets may be carried at amortized cost or fair value. It requires audited financial statements, but it doesn’t require appraisal on fair value reported on Schedule BA. They do not want the insurers pumping up the fair value to reduce the RBC requirement. This proposal may potentially create a disparate impact in RBC calculation between large and small insurers if resources are not readily available. The SAPWG recommends Life RBC Working Group:

  • Delay the implementation of new adjustment factors until at least 2022 to ensure time for the examiners to assess the reported fair values on Schedule A and BA and the insurers to revise their procedures to obtain fair value; or
  • Restrict fair values used for RBC to the “lesser of” current or prior year reported fair values, or possibly average reported fair values across multiple years


The SAPWG received a response from the Valuation of Securities Task Force on May 1, 2021. NAIC staff recommends the SAPWG expose this item, contingent on the task force’s action.

VOSTF may expose the proposed changes to increase the residual risk of conforming credit tenant loans from 5% to 50%, in the SVO P&P Manual during their upcoming call meeting on May 24. The working group will expose the revised INT 20-10 that matches the exposed SVO P&P Manual changes by an e-vote for two weeks only if the proposed changes are exposed by the task force. The working group won’t take any actions if the task force withdraws or delays any action.

The proposed two new paragraphs will be added to INT 20-10:

  • No SVO-assigned NAIC Designation Category is needed if the CTLs do qualify as filing exempt under the P&P Manual
  • CTLs that do not qualify as filing exempt under the P&P Manual, may continue to be reported on Schedule D-1 if they are assigned SVO NAIC Designation
  • Nonconforming CTLs that have been reported on a different investment schedule, e.g., Schedule B or BA, shall remain on the prior reporting schedule regardless of whether they would qualify as filing exempt under the new P&P Manual

Once the changes are adopted by the working group, this interpretation will stay effective until subsequent statutory accounting guidance is adopted.

The Chair of the working group asked the SVO director if mitigating factors for CTLs that exceed the proposed 50% residual risk will be considered. The SVO director said he did not include mitigating factors in the proposed changes but will discuss that with the task force during the upcoming call meeting.

Post-Meeting Note

VOSTF had a regulator-only call on May 20 and introduced significant structural changes to the requirements where directly held mortgage loans in scope of SSAP No. 37 could be moved from Schedule B – Mortgage Loans to Schedule D 1 – Long-Term Bonds based on the structure and underlying credit risk of the tenant. SAPWG believes further revisions to the SVO P&P Manual, specifically to the structural assessment for CTLs and the existing 5% residual risk threshold, are not expected to be needed.

SAPWG sent a memo to the VOSTF on May 21 with the proposed modification to clarify the application of the CTL guidance in the P&P Manual. CTLs and Ground Lease Financing Transactions (GLFs) with mortgage loans in scope of SSAP No. 37 are required to be filed with the SVO for review and potential assignment of an NAIC Designation. All other real estate lease-backed transactions that meet the definition of a security would be eligible for filing exemption and have the option to file with the SVO for NAIC Designation.

VOSTF exposed the item, “Filing Exemption for Real Estate Lease-Backed Securities,” with a comment deadline of June 28, 2021.