Accounting Standard Updates

NAIC SAPWG July 30, 2020 Summer Meeting Highlights

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Hot Take:

Hot Take

On July 30, 2020, the NAIC conducted its 2020 summer national meeting via virtual technology. The Statutory Accounting Principles Working Group (SAPWG) made several adoptions during its meeting. In this summary, we highlight those adopted items that we feel will impact the broader insurance spectrum.

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SSAP No. 32 – Investment Classification Project

Substantive revisions were adopted through Issue Paper 164 – Preferred Stock, effective for P&C, Life, and Health entities.  The SAPWG adoption decisions include refined definitions of preferred stock categories to more closely mirror GAAP definitions for certain categories of preferred stock.  It further modernizes definitions to better coincide to the evolution within the preferred stock arena over recent years. Also updated were accounting and valuation guidance for certain categories of preferred stock.  The revised SSAP No. 32R – Preferred Stock is effective January 1, 2021.

Background – SSAP No. 26R – Accounting for Bond Tender Offers –

Industry constituents have posed questions on how to account for bonds retired early due to a tender offer.  Tender offers are more prevalent in an environment where interest rates are decreasing.  They generally involve a one-time offer to bondholders of higher interest issues in an attempt to retire a majority amount of the outstanding debt of a specific credit. Bondholders generally see no significant difference between a called bond and a tendered bond other than in a tender situation, the bondholder must accept the tender offer for it to be valid. In either instance, some form of incentive for the bondholder to sell is offered through higher yields or a prepayment penalty.

SSAP 26R – Bonds provide the industry direction for reporting investment income and capital gain or loss associated with callable bonds.  However, there is no specific guidance with respect to tender offer situations.

So, what’s the rub?

The NAIC staff recognized the similarity between the call and tender circumstances and proposed that accounting for investment income and capital gain or loss under either situation should be applied similarly.  On July 30, 2020, SAPWG adopted this change as final.  An effective date of January 21, 2021, is permitted but is only relevant to entities that had historically utilized differing accounting practices and will be required to make system changes to handle tender offers in their reporting process.

Background – SAPWG Reference 2020-03 – Enhanced Goodwill Disclosures

Through its quarterly and annual review of insurance industry filings, the NAIC staff has observed that many companies do not calculate the amortization of goodwill correctly, which can result in overstating the value of the SCA. This was noted during the assessment of industry filings of past SCA Sub 2 filings. Additionally, it was pointed out that supplementary information to verify beginning goodwill and purchase price was also not being consistently reported. Unsupported goodwill amounts are not allowed to be admitted as part of the SCA’s value.

So, what’s the rub?

SSAP No. 68 – Business Combinations and Goodwill (SSAP 68) addresses the goodwill calculation and limitations on admissibility.  This SAPWG agenda item would require additional disclosure information through the collection of detailed admissibility evidence to verify goodwill admissibility and further enhance regulators’ ability to properly assess properly reported assets.  The additional information appears minimal and should not be an onerous burden on reporting entities.  It does, however, add another table disclosure under Note 3E of the annual statement.  Further, changes were proposed for Schedule D – Part 6 – Section 1 – Valuation of Shares of SCA Companies column presentation to clarify goodwill amounts.

On July 30, 2020, SAPWG adopted, as final, revisions to SSAP 68 to add the NAIC staff suggested disclosures to be effective for years beginning January 1, 2021.

Parting Comments:

The SAPWG placed a number of items on the exposed inventory for eventual review and discussion prior to final adoption.  We have not addressed those transition items here, as we anticipate further working group action prior to becoming formal adoptions, modifications, or rejections.