In our first article on the net negative IMR, we discussed some IMR background. The history is somewhat interesting, so refer to that link for a refresher. The goal in this writing is to provide the final decision parameters from SAPWG for the 2023/2024/2025 handling of net negative IMR.
So, What’s the Rub – SAPWG’s Final Temporary Solution?
We had noted in our original May 10, 2023 discussion that SAPWG’s initial impressions appeared mixed at the 2023 Spring National meeting when the proposed IMR change was kicked off. The group was willing to give the matter further consideration and proposed additional study and potential involvement of other NAIC committees (actuarial, RBC).
On April 10, 2023, the SAPWG e-voted to expose for public comment by May 5, 2023. This date was further extended to June 9 in a subsequent notice.
The Final INT 2023-01 issued August 13, 2023, provides a 2023-2025 “limited exception” reprieve to the original long-standing IMR net negative IMR handling, which in its original form required non-admitted handling. This temporary, optional statutory accounting change will be incorporated into SSAP 7 – Asset Valuation Reserve and Interest Maintenance Reserve and to the statutory annual statement instructions. Net negative IMR will now be allowed admitted status under the following qualifying guardrails and/or parameters:
- RBC must be greater than 300% authorized control level (ACL) after adjusting total adjusted capital (TAC) to remove net positive goodwill, EDP equipment and operating software, net DTAs and admitted net negative (disallowed) IMR; if adjusted RBC is less than 300% ACL the reporting entity is disqualified from admitting net negative IMR;
- Net negative IMR can be admitted up to 10% of the reporting entity’s adjusted general account capital and surplus of the most recently filed statutory balance sheet, adjusted to exclude net positive goodwill, EDP equipment and operating software, net DTAs and admitted net negative (disallowed) IMR; (Note: the original proposal from the Spring meeting called for a limitation of 5% of adjusted C&S);
- The RBC qualification calculations noted above must be maintained in detail for all quarterly and annual periods in which the net negative IMR is admitted, and must be available for regulatory scrutiny if requested;
- Note that additional rules apply in the event separate accounts are maintained and reported within a reporting entity’s general account – those rules are not detailed here due to the narrowness of entities that maintain separate account programs;
- There are limited net negative IMR admittance rules for derivative losses, but for the most part net negative IMR is not to include losses from derivatives except in very specific circumstances;
- The recognized portion (admitted) of net negative (disallowed) IMR is to be reflected in the asset page as an aggregate write-in to miscellaneous invested assets (currently line 25) and named “Admitted Disallowed IMR”;
- Once the admitted net negative IMR asset is established on the asset page, the reporting entity is required to manually allocate (reclassify) an amount equal to the admitted net negative IMR directly from unassigned funds to a specific surplus write-in line for special surplus funds and name it “Admitted Disallowed IMR; [Note: the key point of this exercise is to preclude the ability of admitted negative IMR to be included as funds available for dividends – makes sense]
Are Disclosures Required? You bet…:
- Net negative IMR in the aggregate, and if applicable, the amount allocated between the general account and separate accounts;
- Amounts of negative IMR admitted in the general account, and if applicable, reported in the separate accounts;
- The calculated adjusted capital and surplus with the required excluded amounts;
- The calculated percentage of admitted net negative IMR to adjusted capital and surplus to make sure the 10% limitation rule is maintained;
- Disclosure attestation from management that fixed income investments that created the IMR losses are in line with existing documented investment management policy; any deviation from the established policy that caused the IMR loss must explain the departure and further clarify the unusual temporary nature for the departure;
- Disclosure attestation from management that derivative losses sustained from fixed-income derivatives are in full accordance with prudent and documented risk management procedures as spelled out in management’s use-of-derivatives plan, and further reflect equilibrium with the entity’s historic treatment of derivatives.
Time Frame and Side Caveat
The final interpretation calls for this short-term IMR solution to be in effect until December 31, 2025, and formally nullifies it on January 1, 2026. But not so fast! It further provides an interesting wiggle-room paragraph (¶15) stating the interpretation “may be adjusted via early nullification or extension of effective date timeframe” …guess this depends on how the interest rate winds are blowing at the time and the status of portfolio unrealized losses? Stay tuned…