Accounting Standard Updates

12 DAYS OF SSAP: SAPWG 4th Quarter Update

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Hot Take:

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 2023 and beyond.

The Statutory Accounting Principles Working Group (SAPWG) meets regularly to discuss new and evolving topics for statutory financial reporting. In today’s 12 Days of SSAP post, we discuss the events occurring in the November 16, 2022, meeting, focusing primarily on the revised bond definition, which has garnered much of the SAPWG resources this past year. Also covered is American Council of Life Insurers’ (ACLI) unusual turnabout concept on reporting negative IMR.

Full Article

It is time to review some of the current changes for statutory accounting principles and discuss reporting requirements for the future. (Additional updates will be published for the 2022 NAIC Fall National Meeting.) The Statutory Accounting Principles Working Group (SAPWG) published two memorandums on their website on July 21, 2022, regarding related party reporting and the principles-based bond definition, as well as updated their issue paper comments and information for the Bond Project on November 16, 2022.

Bond Definition

A large number of edits and suggestions have been proposed to the bond definition and supporting documentation by regulators and industry (Interested Parties Group).  Highlights from the meeting are as follows:

  • Replace reference to “structure” to “investment(s)” throughout the guidance where appropriate.
    • The “structure” reference could imply that all tranches of an ABS would be disqualified from bond treatment if one tranche was determined to lack substantive credit enhancement, which is not the intent. The change to ‘investment’ has been reflected in the bond definition recommended by interested parties. Similar edits were made in SSAP No. 26R to revise instances of “security structures” to reflect “securities” to use consistent terminology throughout.
  • Incorporate Examples 1 & 2 of Appendix 1 into the bond definition.
  • SSAP No. 26R & SSAP No. 43R
    • Industry comments recommended deleting several new terms proposed for the glossary. Although it is recommended to retain the bank loan definition, they also note that other legacy terms likely do not need to be retained and that the glossary is not needed. The comments suggest that the bank loan definition could be incorporated within the standard.
  • Clarity to the guidance in the revised SSAP No. 43R about assessing cash flows and changes in cash flow projections.
    • Key changes from the prior exposure pertain to the use of GAAP language in determining the ability to use the prospective method (high credit quality), how the assessment is completed at the time of initial acquisition, and clarification of the OTTI recognition when there is an adverse change in expected cash flows when the investment is impaired (FV is less than AC).
  • Industry identified that transition guidance needs to be further developed, noting questions on the impact to various schedules and the need to align with the new guidance in SSAP No. 21R for securities that do not qualify as bonds.
  • NAIC staff recommended exposing the revised SSAP No. 26R and SSAP No. 43R, as well as the proposed changes to other SSAPs after this discussion. NAIC staff also anticipates presenting a revised issue paper and updated reporting documents at the Fall National Meeting for exposure.
  • Further revision and clarity on Schedule D-1 Columns and Instructions: specifically including transition guidance for ABS reported as short-term and cash equivalents as of January. 1, 2025, was needed. Clarification to Schedule DA and Schedule E2 is anticipated as part of the broader blanks proposal.
  • Comments recommended retaining the fair value hierarchy code that identifies that the amount reported was determined by the unit price published in the NAIC Valuation of Securities. The NAIC staff agrees with retaining the code as it is broadly used. However, NAIC staff proposed clarifying that the data comes from AVS+ (not Valuation of Securities) to reflect the current product. For clarity, the information is not derived from the SVO but is included in the AVS+ product from information received from the Intercontinental Exchange (ICE). NAIC staff also recommend removing this option from Schedule A – Real Estate and Schedule B – Mortgage Loans, as the AVS+ product would not include info for those investments. From the data pull, there were instances in which this code was used on Schedule A.  NAIC staff will recommend removal from Schedule A and Schedule B instructions in a separate proposal.
Interest Maintenance Reserve

Additional discussion at the meeting included a review of the Interest Maintenance Reserve (IMR) and a comment letter presented by the American Council of Life Insurers (ACLI) suggesting that it is a pressing matter for the industry due to the rapid rise in interest rates – the allowance of a net negative balance for IMR within statutory accounting standards.  Negative IMR balances are expected to become more prevalent in a higher interest rate environment, and their continued disallowance will only serve to project misleading optics on insurers’ financial strength (e.g. inappropriate perception of decreased financial strength through lower surplus and risk-based capital even though higher rates are favorable to an insurer’s financial health) while creating uneconomic incentives for asset-liability management (e.g. discourage prudent investment transactions that are necessary to avoid mismatches between assets and liabilities just to avoid negative IMR). This will be discussed by SAPWG and added to the 2022 Fall National Meeting agenda, which just concluded on December 15.