Collateral Damage: The NAIC’s Sale-Leaseback Clarification

• NAIC clarifies sale-leaseback rules for insurers: New 2026 guidance changes how insurance companies must account for sale-leaseback deals that involve pledged collateral.
• Pledged collateral disqualifies sale-leaseback treatment: If an insurer pledges assets as backup collateral, the deal no longer counts as a true sale-leaseback under the new rule.
• Insurers must put assets back on the books: Companies now have to reinstate the assets and record a liability for the bank’s financing, reversing the surplus benefit the deal used to provide.
• Two options for insurers to consider: Unwind existing sale-leaseback agreements and take the surplus hit or ask the state of domicile for permission to keep using the old accounting method on existing deals.
• Insurers should review their exposure now: The guidance is already in effect, so companies with sale-leasebacks on software, furniture, or equipment should assess their options soon.

On March 23, 2026, the NAIC Statutory Accounting Principles Working Group (SAPWG) adopted a clarification to the accounting methodology for recording sale-leaseback transactions on an insurance entity’s books. It has created quite a rumbling among entities that have executed sale-leasebacks involving computer software, furniture and equipment, and other types of assets that would otherwise be nonadmitted assets on an insurance carrier’s books. Sale-leasebacks became a common practice a number of years ago as a way to preserve an insurance company’s surplus by moving those assets off its balance sheet through a sale to a third party (or, in some instances, a related party) and then leasing them back under an operating lease.

OK…so far so good.

So, how was this accomplished?  The sale leaseback transaction was commonly initiated through the sale of those targeted assets by the insurance company to a third party bank in exchange for cash. The bank would then lease the assets back to the insurance company under an operating lease while holding legal ownership of the assets outside the insurance group.  This preserved (increased) the insurance company surplus by removing the nonadmitted assets from its books.  To protect its investment, the bank logically required collateral in the form of pledged assets in the event the agreement terminated early, whether due to default or for any other reason.

OK…so far so good.

Once the sale-leaseback agreement was executed, the insurance company removed the nonadmitted assets from its books, received the cash from the bank, and pledged certain assets as blanket collateral for the term of the lease.  These pledged assets remained on the insurance company’s balance sheet and essentially became an off-balance-sheet commitment and a promise to satisfy the bank’s claim only in the unlikely event of early termination of the sale-leaseback agreement.

Here’s the kicker.

Past accounting by most (if not all) insurance entities for sale-leaseback transactions treated the pledged assets as off-balance sheet coverage and nothing was recorded on the insurance entity’s books in the form of a liability for those pledged asset promises, likely because it was assumed that feature of collateral back-up would never be invoked.

Enter the NAIC SAPWG.

Though the NAIC SAPWG has long been aware that sale-leaseback transactions have been occurring, they realized recently that handling the transaction by requiring the insurance entity to pledge assets as collateral taints the solvency concept via the fact that pledged assets are essentially restricted in nature for full use by policyholders and therefore represent an unrecorded liability on the insurance entity’s books.

Accordingly, SAPWG’s clarification that became effective in 2026 provides that sale-leaseback agreements that involve pledged asset collateral from the insurance company do not qualify as sale-leaseback transactions. Instead, the original assets that had been removed from the books must be reinstated, and a liability must be recognized for the financing provided by the bank. Because this clarification has been formally adopted by the NAIC, it is authoritative statutory accounting guidance unless and until the NAIC modifies or reverses it.  So, we look for alternative avenues.

What are the solutions?

So, where do we go from here? There are two paths forward that we could think of at this time.

The first is the straightforward approach to exit the sale-leaseback arrangements altogether. While this brings the insurance company into alignment with the NAIC clarification, it also means being prepared to absorb the resulting surplus hit. It may not be the outcome anyone was hoping for, but it is the cleanest path under the clarified guidance.

The second alternative is to seek a permitted accounting practice from the insurance company’s state of domicile. Under this approach, the insurer would request permission to continue applying the historical operating lease accounting for sale-leaseback agreements that were already in place, while agreeing not to enter into any new arrangements of this type going forward. Rather than forcing an immediate reversal of long-standing arrangements, the domiciliary regulator may determine that allowing those existing agreements to run their course is appropriate, provided the practice is not continued for future transactions.

Neither solution is perfect. One results in an immediate surplus impact, while the other requires regulatory approval that is granted on a case-by-case basis. However, for insurers with existing sale-leaseback arrangements, these are the two most practical avenues worth exploring.

We’re Here to Help

If you would like to discuss how this might impact your insurance entity, contact your JLK Rosenberger team member, call 818-334-8646, or click here to contact us. We look forward to speaking with you soon.