12 Days of SSAP: Elimination of Investment Subsidiaries Concept
Our 10th day of SSAP brings clarification to inconsistent reporting practices that involve affiliated or controlled entities and how Risk-based Capital (RBC) parameters come into play to level the playing field when classifying Schedule BA type assets in the RBC development process. The clarified changes address the presentation of potentially overly generous RBC credits being applied to misclassified investment subsidiaries and thereby obtaining preferential RBC treatment. This exercise cleans up existing outdated Statutory Annual Statement Instructions that appear to have been creating user confusion in application. Quarterly and annual statutory statement preparers will want to take heed.
Questions have arisen regarding the classification of “investment subsidiaries” in Schedule D-6-1 and the Life RBC formula. Historically, SSAP No. 46 – Investments in Subsidiary, Controlled, and Affiliated Companies (later superseded by SSAP 88 and further superseded by SSAP 97) allowed for investment subsidiaries (entities holding assets solely for the benefit of the reporting insurer or its affiliates) to be measured using an equity method adjusted to the statutory basis. However, this concept was eliminated with the adoption of SSAP No. 88 (2005) and SSAP No. 97 (2007) – the successor promulgations for SCA investments.
Under current guidance in SSAP No. 97, an SCA that only holds assets for the insurer or affiliates is not recognized as an investment subsidiary. Instead, unless the entity qualifies as an insurance subsidiary or meets specific revenue/transaction tests, it is reported using the audited US GAAP equity value, provided admittance criteria are met.
A recent regulatory review indicated that there is significant diversity in practice regarding the classification and RBC/AVR treatment of investment subsidiaries, highlighting the need for consistent application of SSAP No. 97. Some companies reported Schedule BA items (SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies) as “investment subsidiaries” for RBC purposes, even though these investments do not meet the criteria. Questions have arisen about whether the “investment sub” classification was being used to bypass statutory accounting rules while still receiving favorable RBC treatment, such as applying bond RBC factors or Credit Rating Provider (CRP) ratings without verifying statutory eligibility. The RBC charge for investment subsidiaries was intended to reflect the risk as if the insurer held the underlying assets directly. There is uncertainty about whether underlying assets were converted to statutory accounting values before RBC calculation and how covariance adjustments were applied. Practices also varied in applying the required look-through approach for Asset Valuation Reserve calculations.
The investment subsidiary concept was previously removed from SSAPs due to ongoing difficulties distinguishing investment subsidiaries from operating subsidiaries and concerns that the classification was being used to obtain favorable RBC treatment. Although SSAP guidance was eliminated years ago, the related Annual Statement Instructions were never updated, allowing insurers to continue reporting investment subsidiaries and effectively bypass statutory measurement and RBC requirements. This has resulted in inconsistent reporting, reliance on company-provided “imputed statutory values” (an undefined concept), and limited regulatory transparency.
As a result, earlier in a month, the regulators approved the changes to remove the investment subsidiary concept from the Annual Statement Instructions, effective December 31, 2026. The Statutory Accounting Principles Working Group also directed a referral to the Capital Adequacy (E) Task Force to implement corresponding changes to the RBC instructions. No revisions to the SSAPs were required as part of this action.
This change does not prohibit insurers from owning investment subsidiaries, Model Law 280 allows the structure, but clarifies that statutory accounting and reporting must follow SSAP guidance. Under the changes adopted, entities previously reported as investment subsidiaries would instead be accounted for under SSAP No. 97 using existing SCA guidance, based on their activities.
Effective Date
December 31, 2026
Deep Dive
You can read more at the NAIC here.
