Accounting Standard Updates

NAIC Fall Meeting Highlights: SAPWG Adoptions Hot off the Press

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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.

As regulators wrapped up the Fall Meeting in December, the Statutory Accounting Principles Working Group (SAPWG) adopted some changes that can still impact 2023 financial reporting.

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Adopted Changes

SSAP No. 30R – Unaffiliated Common Stock
SSAP No 32R – Preferred Stock

Adoption includes minor revisions clarifying that investments that are, in substance, residual interests should be reported on Schedule BA on the dedicated reporting line for residuals. No revisions to the annual statement instructions were made, as the Schedule BA instructions already specify that investment structures that are in substance residuals should be reported within the residual line category.

These revisions were deemed necessary because investment structures have been recently designed to refer to a redesigned residual as a ‘preferred share,’ and without the explicit guidance in SSAP No. 30R or SSAP No. 32R, regulators expressed a concern that there could be reporting inconsistencies among insurers.

Effective date: Immediately

SSAP No. 54R – Individual and Group Accident and Health Contracts

The revisions here were a result of a request from the Financial Reporting and Solvency Committee of the Health Practice Council (the Council) requesting clarifications regarding some observed diversity in practice across issuers of long-term care insurance (LTCI) with regard to how the guidance in Actuarial Guideline LIThe Application of Asset Adequacy Testing to Long Term Care Insurance Reserves (AG 51), specifically Section 4.C, on determining when additional reserves may be necessary interacts with existing guidance on accident and health insurance reserve adequacy in SSAP No. 54R— Individual and Group Accident and Health Contracts, and Appendix A-010, Minimum Reserve Standards for Individual and Group Accident and Health Insurance Contracts.

The Council referenced a survey that provided examples of the diversity of practices that have been observed. The fundamental question was whether gross premium valuation, cash-flow testing, or both cash-flow testing and gross premium valuation are required.

ASA adopted revisions to clarify that gross premium valuation (under A-010, Minimum Reserve Standards for Individual and Group Health) and cash-flow testing (under Actuarial Guideline LI—The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves) are both required if indicated.

Effective date:  Immediately

Annual Statement Instructions

The original intent of this change was to establish a long-term project to capture accounting guidance for AVR and IMR in SSAP No. 7. Thus, any revisions from the annual statement instructions when incorporating SAP guidance would be captured as a new SAP concept.

Adopted revisions update and remove guidance that has permitted allocation of non-interest-related losses to the interest maintenance reserve (IMR). The revisions address mortgage loans with valuation allowances and debt securities with known credit events.

Effective date:  January 1, 2024

SSAP No. 2R – Cash, Cash Equivalents, Drafts, and Short-Term Investments

Adopted revisions further restrict the investments permitted for cash equivalent and short-term reporting.

The revisions exclude the following securities from cash equivalent / short-term reporting:

  1. Asset-backed securities captured in scope of SSAP No. 43R
  2. All investments that are reported on Schedule BA, including but not limited to:
    • All debt securities that do not qualify as bonds in scope of SSAP No. 21R.
    • Collateral / Non-Collateral loans captured in scope of SSAP No. 21R.
    • Working capital finance investments in scope of SSAP No. 105R.
    • Surplus notes in scope of SSAP No. 41R
  3. Mortgage loans captured in scope of SSAP No. 37
  4. Derivative instruments in scope of SSAP No. 86 or SSAP No. 108
  5. Securities with terms that are reset at predefined dates (e.g., an auction-rate security that has a long-term maturity and an interest rate that is regularly reset through a Dutch auction) or have other features an investor may believe results in a different term than the related contractual maturity shall be accounted for based on the contractual maturity at the date of acquisition, except where other specific rules within the statutory accounting framework currently exist.

Effective date:  January 1, 2025

Fun Fact

Interestingly, as private companies are working on implementing ASU 2016-13 – Financial Instruments – Credit Losses for reporting period ending December 31, 2023, SAPWG finally rejected the initial agenda item that addressed the ASU. The group replaced it with a new agenda item that rejects the current expected credit loss (CECL) within Interpretation (INT) 06-07: Definition of Phrase “Other Than Temporary” and fifteen applicable SSAPs. Does it make GAAP more conservative than STAT in this area? Maybe – but not according to NAIC. When reviewing the ASU for exposure, the group provided the following rationale for the rejection:

The statutory framework has long incorporated concepts with a prospective view of future credit risk that historical GAAP has not. The first is the Asset Valuation Reserve (AVR). AVR requires life insurance companies to establish a reserve to account for future impairment losses on all assets (with some minor exceptions). While this is much more formulaic than the allowance required under CECL, it is intended to accomplish the same objective.

The second is that SSAP No. 26R—Bonds requires insurance companies that do not maintain AVR to report bonds at fair value if the bond is not considered high-quality (NAIC designations 3 to 6). While this requirement does not result in credit loss reserves, it does have a similar effect by requiring non-life companies to report lower-quality bonds at fair value or convert previously highest or high-quality bonds to fair value in the event of credit quality degradation.

Further, the RBC formula factors the credit risk of each individual asset in calculating the amount of capital required to be held. These mechanisms incorporate an expectation of future credit losses. Therefore, while GAAP has just begun recognizing an expectation of future credit losses with the advent of CECL, the statutory framework has recognized and incorporated future credit loss potential for decades.

Ultimately, we don’t need to worry about CECL for statutory reporting.

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