Sabrina Wilson, CPA, FLMI
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 15 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 met November 12, 2020 to discuss items pertinent to statutory accounting. The following items are specifically updates for investment accounting and reporting.
RESPONSE TO COVID-19 EXPIRING THIRD QUARTER 2020: INT 20-02: EXTENSION OF THE NINETY-DAY RULE FOR THE IMPACT OF COVID-19; INT 20-04: MORTGAGE LOAN IMPAIRMENT ASSESSMENT DUE TO COVID-19; INT 20-05: INVESTMENT INCOME DUE AND ACCRUED
During the summer 2020 meeting, the SAPWG extended three interpretations in response to COVID-19 to the third quarter. These include INT 20-02: Extension of the Ninety-Day Rule for the Impact of COVID-19, INT 20-04: Mortgage Loan Impairment Assessment Due to COVID-19, and INT 20-05: Investment Income Due and Accrued.
NAIC staff asked the SAPWG to provide comments on whether they should consider a further extension of these interpretations into the fourth quarter of 2020. NAIC staff said they had not heard any comments supporting extension from the working group and thus recommended not to extend these interpretations. It was decided not to extend or seek public comment regarding the extension. All three of these interpretations were not extended beyond third quarter reporting. NAIC staff will update these three interpretations to state that no further action is anticipated.
INTERPRETATIONS IN RESPONSE TO COVID-19 EXPIRING 60 DAYS AFTER THE END OF THE NATIONAL EMERGENCY OR DECEMBER 31, 2020: INT 20-03: TROUBLED DEBT RESTRUCTURING DUE TO COVID-19 AND INT 20-07: TROUBLED DEBT RESTRUCTURING OF CERTAIN INVESTMENTS DUE TO COVID-19
Two interpretations in response to COVID-19, INT 20-03: Troubled Debt Restructuring Due to COVID-19 and INT 20-07: Troubled Debt Restructuring of Certain Investments Due to COVID-19, are due to expire 60 days after the end of the COVID-19 national emergency or December 31, 2020, whichever comes first.
Since the national emergency has not ended and these INTs will be effective through 2020 year end, NAIC staff said an extension is not needed at this time.
All adopted items are non-substantive and effective immediately.
REF #2020-21: SSAP NO. 43R – DESIGNATION CATEGORIES FOR RMBS/CMBS INVESTMENTS
During a spring conference call, the VOSTF adopted an amendment to the P&P Manual to map financial modeled residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). This affects the NAIC designations produced by the financial model and will now be mapped to a final NAIC designation category, which will be used for accounting and reporting purposes by reporting entities. The edits proposed by this item would update the final NAIC designation category mapping instructions in SSAP No. 43R—Loan-Backed and Structured Securities for RMBS/CMBS investments.
Interested parties expressed support and suggested editorial changes to remove redundant language from SSAP No. 43R Para 27 a(iii) Step 3. NAIC staff recommended the working group support the changes along with interested parties’ edits.
REF #2020-20: CASH EQUIVALENT DISCLOSURES
This item would make edits to SSAP No. 2R—Cash, Cash Equivalents, Drafts and Short-Term Investments as a follow-up to changes adopted in May on Ref #2019-20: Rolling Short-Term Investments. The item referenced cash equivalent investments but did not include them in the final disclosure. To remedy that, this item makes two revisions:
Interested parties supported the measure and suggested adding a qualifier to avoid irrelevant data being captured: “Identification of cash equivalents (excluding money market mutual funds as detailed in paragraph 7) and short-term investments, (or substantially similar investments), which remain on the same reporting schedule for more than one consecutive reporting period.”
NAIC staff recommended the working group support the changes with interested parties’ edits.
REF #2020-19: CLARIFYING EDITS – PARTICIPATING IN MORTGAGES
This item affects participation in loan agreements in scope of SSAP No. 37— Mortgage Loans. NAIC staff noted questions regarding the scope of “financial rights and obligations” in a participation agreement for a reporting entity lender, and if these extend beyond the right to receive contractual cash flows.
Clarifications include that a member of a participation agreement’s financial rights may include “the right to take legal action against the borrower or participate in the determination of legal action, but do not require that the participant have the right to solely initiate legal action, foreclosure, or under normal circumstances, require the ability to communicate directly with the borrower.”
This item was exposed for comment July 30, and interested parties supported it. NAIC staff recommended the working group adopt the revisions.
REF #2020-17: UPDATING THE SCA REVIEW PROCESS
This item would update the current SCA filing review process as is required by SSAP No. 97— Investments in Subsidiary, Controlled and Affiliated Entities, thereby removing manual steps.
NAIC Staff stated adoption of this item would generate significant savings for the NAIC on the administrative side. For example, NAIC staff reviewed more than 825 filings during the calendar year 2019. Moving forward, financial statement filers for Sub 1 & 2 filings would be responsible for retrieving their finalized SCA review information from VISION. As a benefit, this would result in fewer emails for regulators. They would still receive the review information from the NAIC staff in a monthly email. Regulator access to VISION would be unaffected.
This item in July was exposed for regulator feedback on whether this new process would adversely impact operations. Interested parties recommended two changes to the proposal:
NAIC staff recommended the working group accept the changes with the interested parties’ edits.
REF #2020-18: SSAP NO. 97 UPDATE
This item follows up on changes made by adopted agenda item 2018-26: SCA Loss Tracking – Accounting Guidance, for SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities. A minor revision would be made to paragraph 9 to corroborate the revisions made in that agenda item and remove a lingering reference to negative equity value that can result for a subsidiary controlled or affiliated entity (SCA). Specifically, the statement that “guarantees or commitments from the insurance reporting entity to the SCA can result in a negative equity valuation of the SCA” would be removed.
Interested parties submitted extensive comments and suggested edits to this item. They argued that the proposed change to paragraph 9 suggests a negative equity valuation of foreign insurance subsidiaries would be required. They requested the working group clarify whether the proposed modifications “intended to cause an insurer’s equity investment in a foreign insurance subsidiary to fall below zero,” and contended that it should not.
New York Life suggested wording changes to remedy the issue pointed out by the previous comments. They also discussed the potential negative valuation of 8.b.iv entities, e.g. when the parent insurer has committed to fund losses of the foreign insurance subsidiaries or the subsidiaries provide services to or hold assets on behalf of the parent insurer or affiliate.
NAIC staff recommended the working group adopt the proposed changes to SSAP No. 97 without the interested parties’ suggested edits. The proposed item removes “a superseded statement that guarantees or commitments from the insurance reporting entity to the SCA could result in a negative equity valuation of the SCA.” This item does not make modifications applicable to limited statutory basis adjustments for 8.b.ii and 8.b.iv entities.
Staff asked the working group to provide direction on whether to create a separate agenda item about making some of the provisions of paragraph 9 non-applicable to 8.b.iv.
The working group adopted this non-substantive item and agreed to have NAIC staff to create a separate agenda item.
Comment deadline of January 11, 2021
REF #2020-22: ACCOUNTING FOR PERPETUAL BONDS
This item proposes similar accounting and reporting treatment for perpetual bonds as perpetual preferred stock. As such, the guidance proposed by this agenda item is similar to Ref #2019-04: SSAP No. 32 – Investment Classification Project. This item would affect SSAP No. 26R—Bonds. NAIC staff clarified that “perpetual bonds shall be reported at fair value, not to exceed any current effective call price.”
During the July 30 working group phone call, NAIC staff suggested an effective date of January 1, 2021, with early application permitted; this would correlate with the expected updates to SSAP No. 32.
Interested parties stated that perpetual bonds “should continue to be accounted for as bonds under SSAP No. 26R (as currently written) and reported on Schedule D as hybrids.” They agreed that it is justifiable to report perpetual bonds as hybrids on Schedule D. However, the characteristics of the investments in question are similar to bonds substantially in how insurers invest and by the capital markets.
NAIC staff agreed that perpetual bonds have similarities to “traditional” bonds but stated that “reporting a perpetual bond indefinitely at historical cost in instances where the bond does not have a remaining call feature, is not an appropriate measurement method.” Other-than-temporary-impairment assessment may not be required despite a decrease in market value because there is no contractual timing for repayment.
Staff recommended the item be exposed again with revisions clarifying that “perpetual bonds are within scope as a ‘bond’, therefore shall apply the yield-to-worst concept (i.e. applicable premium or discount shall be amortized or accreted for perpetual bonds with an effective call option). Additionally, for perpetual bonds that do not possess or no longer possess a call feature, fair value reporting is required.”
REF #2020-32: SSAP NO. 26R – DISCLOSURE UPDATE
This item expands an existing disclosure regarding called bonds to include bonds terminated early through a tender offer. The SAPWG previously clarified that the accounting and reporting of bond investment income and capital gains/losses due to early liquidation either through a call or a tender offer shall be similarly applied.
Staff recommended exposing nonsubstantive revisions to the disclosures in SSAP No. 26R—Bonds.
REF #2019-34: SSAP NO. 25 – RELATED PARTIES, DISCLAIMER OF AFFILIATION AND VARIABLE INTEREST ENTITIES
This item clarifies any related party identified under US GAAP or SEC reporting requirements would also be considered a related party under statutory accounting principles. Non-controlling ownership over 10% results in a related party classification despite disclaimer of control or affiliation. It emphasizes disclaimer of control or affiliation impact holding company group allocation and reporting as an SCA under SSAP No. 97, but it doesn’t eliminate the related party classification and the required disclosure of material transactions. Also, it proposes to reject seven GASB Accounting Standards Updates as not applicable for SSAP No. 25.
Interested parties recommended new Schedule Y Part 3 to be added for disclosure.
NAIC staff recommended this item be re-exposed for comments.
REF #2020-33: SSAP NO. 32R – PUBLICLY TRADED PREFERRED STOCK WARRANTS
This item proposes expanding the scope of SSAP No. 32R—Preferred Stock to include publicly traded preferred stock warrants, require publicly traded preferred stock warrants to be reported at fair value, and revise SSAP No. 86—Derivatives to identify this treatment.
Staff recommended exposing nonsubstantive revisions to SSAP No. 32R—Preferred Stock and SSAP No. 86—Derivatives with these updates.
REF #2020-36: DERIVATIVES FOR HEDGING FIXED INDEXED PRODUCTS
This item proposes two concepts to address reporting mismatch for derivatives that are used for hedging Fixed Indexed Products:
NAIC staff recommends notifying the Life Actuarial (E) Task Force of this proposal and plans to work on an issue paper as this is substantive guidance change and a potential new SSAP.
REF #2020-34: SSAP NO. 43R – GOVERNMENT-SPONSORED ENTERPRISE (GSE) CREDIT RISK TRANSFER (CRT) PROGRAM
Following recent changes to the Freddie Mac Structured Agency Credit Risk (STACR) and Fannie Mae Connecticut Avenue Securities (CAS) programs, a proposal was made to include STACR and CAS Real Estate Mortgage Investment Conduits (REMIC) into the scope of SSAP No. 43R – Loan-Backed and Structures Securities and align SSAP No. 43R guidance regarding the financial modeling of mortgage referenced securities to the requirements as directed in the P&P Manual. It is anticipated that future Freddie Mac STACR and Fannie Mae CAS issuances will be solely conducted through a REMIC trust.
Staff recommended exposing nonsubstantive revisions to SSAP No. 43R – Loan-Backed and Structures Securities to allow credit risk transfer securities from Freddie Mac and Fannie Mae to remain in scope when a REMIC structure is used in the STACR program or CAS program.
REF #2020-35: SSAP NO. 97 – QUALIFIED/ADVERSE AUDIT OPINIONS
This item proposes to expand the quantification exception guidance to 8.b.iii entities in limited situations.
Under the existing guidance, this exception is only permitted for US insurance subsidiaries (aka 8.b.i entity). US subsidiary received qualified or adverse audit opinion due to departure from US GAAP. If the departure is consistent with SAP accounting that resulted in a more conservative financial statement representation, the investment in this subsidiary is admitted.
REF #2020-24: ACCOUNTING AND REPORTING OF CREDIT TENANT LOANS
This item considers a referral from VOSTF to permit non-conforming CTLs that receive an NAIC designation from the SVO to be considered in scope of SSAP No 43R Loan-Backed and Structured Securities. This item intends to clarify the reporting of CTLs outside of the SSAP No. 43R project, which may extend past when CTL clarity is needed.
NAIC recently identified that some insurers include CTLs that did not qualify under the SVO’s structural and legal analysis, or were not filed with the SVO, in Schedule D with filing exempt designations under SSAP No. 43R. These are other lease-backed transactions, or “non-conforming CTLs.”
Two options include:
Multiple interested parties submitted comments with reasoning as to why CTLs should continue to be reported on Schedule D Part 1. Interested parties also felt that the exposure’s suggestion to report all CTLs in Schedule BA was random and potentially cause companies to run afoul of state investment limits. Interested parties said 5% residual risk for CTLs to be classified as conforming is not appropriate while asset backed securities can have up to 65% residual risk. They felt it was in the best interest of insurance companies, and ultimately policyholders, to continue reporting conforming CTLs on Schedule D Part 1 and raise the residual risk threshold for non-conforming CTLs. Others commented on the fact that many investors have strict policies prohibiting investments in Schedule BA assets and that putting them under that schedule would disfavor an investment with excellent credit performance.
In light of these comments, NAIC staff provided two recommendations to the SAPWG:
NAIC staff said the residual risk for those non-conforming CTLs is significantly higher than 5% threshold. However, the number of non-conforming CTLs have been dropping because some were adjusted to become conforming by including the mitigation plan in the CTLs. They don’t think this type of investment is prevalent now and also pointed out non-conforming CTLs should be reported in line 22-28 on Asset Valuation Reserve Equity Component.
Kevin Fry said if there is a potential opportunity for non-conforming CTLs go back to Schedule D Part 1, and they should be able to be reported on Schedule D until the 43R Investment Classification Project is finalized. Blanks will need to be modified so, non-conforming CTLs will be easily identified on Schedule D Part 1.
The working group chair asked the SVO director if it is feasible to assign a NAIC Designation to non-conforming CTLs. The SVO Director said they will need CRP ratings and to develop a methodology on NAIC Designation Category for this asset type. The latter is more challenging because it is in the middle of November and 2020 year end is approaching, but he will try.
The working group directed 2020 year-end reporting guidance as a limited-time provision that non-conforming CTLs stay on D-1 but the insurers will need to submit them to SVO for a NAIC Designation Category by March 1, 2021. They will be reported on Schedule BA if they don’t get SVO assigned NAIC Designation Category for 2020 Year End.
Post-meeting news: Due to subsequent questions after the meeting, INT 20-10T was exposed through e-vote with comment deadline December 4 to detail the provisions provided and clarify the reporting of CTLs in the year-end 2020 statutory financial statements. The direction given by the Working Group is not intended to require or permit non-conforming CTLs that have been previously reported as mortgage loans on Schedule B or as other invested assets on Schedule BA to be moved to Schedule D Part 1. Non-conforming CTLs that have been reported on Schedule B or BA shall remain on that reporting schedule for the duration of this interpretation.
REF #2019-21: SSAP NO. 43R – UPDATE
The Working Group previously exposed the Iowa Insurance Proposal to define which securities should be captured in scope of Schedule D Part 1 – Long-term Bonds for a comment deadline ending December 4 and is expected to have several focused calls beginning in 2021.