NAIC Summer 2017 Meeting Update – Statutory Accounting Principles Working Group

At the NAIC Summer 2017 National Meeting, the Statutory Accounting Principles Working Group (SAPWG) met to review and discuss numerous items that were adopted and exposed.

Adopted Items

Ref #2016-41: AVR/IMR in SSAP No. 26

This item addresses an inconsistency in guidance between SSAP No. 26 and the AVR/IMR statement instructions. The SAPWG adopted revisions to SSAP No. 26R to bring it into alignment with the annual statement instructions for allocating gains and losses to the AVR and IMR. A proposal will also be sent to the Blanks Working Group (BWG) to clarify instructions for bifurcating between AVR and IMR.

Ref #2017-02: ASU 2016-18, Statement of Cash Flows: Restricted Cash

This item adds minor changes to the Statement of Cash Flows for restricted cash, and clarifies in SSAP No. 1 that restricted asset disclosures should include restrictions on cash, cash-equivalents, and short-term investments.

Exposed Items

Ref #2017-24: Use of Net Asset Value instead of Fair Value

The Financial Accounting Standards Board (FASB) has passed several standards updates recently that allow the use of Net Asset Value (NAV) as a substitute for fair value as a practical expedient in certain situations (primarily for investment companies without a readily determinable fair value). NAIC staff is proposing SSAP No. 100 be amended to specify when NAV is allowed as an expedient for fair value, and to add a new level to the fair value hierarchy to specify when investments are reported at NAV. Feedback is requested from Industry and regulators on this exposure, as it may result in substantive changes to SSAP No. 100.

Ref #2016-48: Impact of Future Settled Premiums on Option Valuations

This item concerns the appropriate accounting and reporting treatment of deferred premiums on derivatives. With many derivative contracts, the reporting entity pays a small fee or premium upon origination to enter into the contract. How that premium is accounted for when it is deferred over the term of the derivative or paid upon expiration/settlement is not clear. Industry has provided feedback and the SAPWG exposed revisions that request a narrative disclosure in 2017 and the possibility of a data capture disclosure in 2018. The nature of the data capture disclosure would include the aggregate amount of financing premiums, and could also request contract-level detail on premiums. Industry maintains this approach could prove burdensome for some companies, and questions the value of providing contract-level detail. How these amounts should be accounted for is still undetermined.

Ref #2017-04: Settlement of Variation Margin

Recent changes by the Chicago Mercantile Exchange and London Clearing House allow entities to have daily margin movements considered legal settlement, rather than margin amounts. In response, the SAPWG requested feedback from Industry considering the treatment of variation margin, and whether it should be recognized as a realized gain or loss before the derivative contract expires. Industry commented that they believe the current treatment as an unrealized gain/loss is appropriate, and SAPWG exposed revisions to clarify this in SSAP No. 86.

Ref #2017-10: Bank Loans

Discussion continues around developing additional guidance for bank loans. When SAPWG members met, they were still waiting for a response from the Valuation of Securities Task Force (VOSTF) on whether reporting entity-issued bank loans carries additional risk concerns as opposed to bank loans acquired through another method, such as syndication. VOSTF responded that insurer-issued bank loans should not pose different risks than other bank loans. Therefore, they will likely be included in the same guidance that is proposed for other bank loans.

The SAPWG exposed a proposed definition from interested parties for comment and questioned whether a separate line in Schedule D to identify entity-originated bank loans is necessary. The exposed definition would not cause substantive changes to the current industry practices of accounting and reporting on bank loans.

Ref #2017-25: Wholly-Owned Ultra-Short Bond Portfolio in an LLC Series

Payden Active Cash Management submitted a request to the SAPWG for the Securities Valuations Office (SVO) to create a new list of investments similar to fixed-income funds that are currently reporting on Schedule BA because they are structured as partnerships or LLCs. The list would function similar to the current list of SVO-identified funds, where they are approved to be reported on Schedule D – Part 1 in a separate category. Payden Active Cash Management proposed a list of six requirements to receive Schedule D – Part 1 classification, which are available on SAPWG’s website.

NAIC staff expressed concern with creating a new list and sent a referral to the VOSTF with the proposal. NAIC staff sent three options for the VOSTF to consider. Two of the options move the proposal forward and one rejects it entirely. NAIC staff also proposed an idea to allow P&C companies to report a designation on Schedule BA and receive more favorable capital treatment than an asset without a designation. Life companies currently are allowed to do so, and the NAIC believes this would address the problem of an unfavorable capital charge on an investment that has similar risks and characteristics as a bond. SSAP No. 26 already contains enough exceptions to the general definition for assets within its scope, and while entities may have to update their systems to allow for designations on Schedule BA for non-AVR companies, this proposal solves the problem of capital charges not reflecting the risk of the asset, rather than tacking on an additional exception to address one scenario and structure that an investment could take.

Update from Industry on ASU 2016-13: Credit Losses

The SAPWG continues to request feedback regarding the recent US GAAP update to move to the “Current Expected Credit Loss” framework for impairment of loans and securities. ASU 2016-13 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 GAAP guidance is not required until 2020. Although this guidance was passed last year, it has not been at the top of the NAIC’s agenda. Industry has not provided much comment, and whether the framework is also adopted for Statutory Accounting (STAT) is still unclear. The new guidance is more conservative than the current impairment guidance; since the statutory basis is intended to be more conservative than US GAAP, it appears that at least part of the framework will be adopted. Rejecting the standard would result in situations where impairment losses should be recognized for GAAP but not STAT, which contradicts the principles of STAT. However, STAT already has a provision for unrealized credit losses (e.g., AVR) as well as capital requirements based on the default risk of assets. For this reason, it’s possible that some modifications will be made to those mechanisms in place of, or in addition to, modifying impairment guidance within the SSAPs.

Ref #2017-08: Extension of SCA Filing Deadlines

NAIC staff has noted current SCA filing deadlines are likely causing some of the noncompliance issues around SCAs. It was noted that many companies, in order to meet the 30-day deadline for Sub-1 or the June 30 deadline for Sub-2, do not submit a complete filing. This causes issues with the VISION system and gets in the way of the NAIC automating its SCA processes. This exposure proposes the Sub-1 deadline be extended to 90 days after purchase, and the Sub-2 deadline to be extended to August 31 every year afterward, or 30 days after the receipt of audited financials if the financials are received later.

Ref #2017-23: Wash Sales Involving Money Market Mutual Funds

This exposure clarifies that money market mutual funds (MMFs) are not subject to the wash sale disclosure; this mirrors the Tax treatment which generally excludes MMFs from wash sale rules.

Rejected Items

Ref #2017-13: ASU 2017-18: Purchased Amortization on Purchased Callable Debt Securities

This item would set GAAP guidance for premium callable securities to be amortized to the call date. Since statutory accounting already has more detailed guidance concerning the amortization of callable bonds, this item was rejected.

Ref #2016-40: Definition of Loan-Backed and Structured Securities

The SAPWG and the VOSTF had a joint project to consider revising the definition of loan-backed and structured securities that would narrow the scope of SSAP No. 43R.

Feedback from Industry was that the current scope of SSAP No. 43R does not need revision, so the revised definition was rejected.