Accounting Standard Updates
12 Days of SSAP: Bond Project – Guide to Final SSAP Revisions
Hot Take:
JLK Rosenberger is carrying on our holiday tradition of taking a new perspective on a holiday classic – the Twelve Days of Christmas. Rather than filling your head with turtle doves and gold rings, we are focusing on the latest changes to SSAP and how they will impact your insurance entity in 2024 and beyond.
What began as a smaller project has evolved into a major review and refinement of the definition of a bond and what qualifies as a bond to be reported on Schedule D-1 of the annual statement. Its impact is pervasive to all insurance entities investing in the bond markets. Interested parties (industry) were highly involved in the final outcome of this pervasive reassessment. It also has equal repercussions for investment firms advising their insurance industry clientele. Advisory firms will now have accountability for ensuring their investment offerings to their insurance clients clearly qualify within the eventual bond definition refinement.
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Below is a recap of changes made under the project and where the new guidance can be found in SAPs. Please note that we removed “Revised” and “R” identifiers from SSAP titles. The NAIC considered them no longer useful, and any references are being removed from the AP&P manual moving forward.
SSAP Nos. 26 – Bonds and 43 – Asset-Backed Securities
The final revisions to SSAP No. 26 reflect the principle-based bond definition. SSAP No. 43 provides revised accounting and reporting guidance for investments that qualify as asset-backed securities under the revised bond definition.
The regulators emphasized that the investments that do not qualify as bonds after new guidance is adopted will not be permitted to be reported as bonds on Schedule D-1 thereafter, as there will be no grandfathering for existing investments that do not qualify under the revised SSAPs. However, it was further clarified that certain accommodations may be made to prevent undue hardship for reporting entities complying with the new guidance.
SSAP No. 21 – Other Admitted Assets
Revisions to SSAP No. 21 provide guidance for the accounting for debt securities that do not qualify as bonds. For such securities, the revisions clarify that if the primary source of repayment is derived through underlying collateral, the investment will only be admitted if the underlying collateral itself qualifies as admitted invested assets.
Revisions also prescribe accounting guidance (measurement method) for all residual interests regardless of legal form (this specific guidance can be adopted early, for 2024). The industry initially recommended the effective yield method. However, pursuant to the subsequent discussions with the industry, it was identified that some companies would prefer the “cost recovery method” (where distributions received reduce the BACV prior to the recognition of interest income) due to the extensive work and non-automation that would be required for the “Effective Yield with a Cap” method. As the cost recovery method is more conservative, regulators agreed to the final revisions to SSAP No. 21 to incorporate the “Effective Yield with a Cap Method” and provide a practical expedient for companies to use the “Cost Recovery Method.” The revisions detail limitations if electing the practical expedient, which requires its use for all residual holdings and a prospective approach for new acquisitions only if a company wants to move away from the cost recovery method once elected. With this revision, other aspects of the residual guidance, including the other-than-temporary impairment guidance, have been revised.
Effective Date: January 1, 2025
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