Statutory Accounting Working Group – May Meeting Highlights

SSAPWG Reference 2018-32 – Issue – Prepayment Penalties – SSAP 26R:

The original guidance for the calculation of prepayment fees or acceleration fees liquidated prior to expected termination was established in Statement of Statutory Accounting (SSAP) 26R – Bonds. (“SSAP 26R). Following the original 26R circulation in 2016, a dichotomy arose in the industry regarding the proper presentation of accounting when the call price is below par, hence creating an over or under-inflation of the Asset Valuation Reserve and the Interest Maintenance Reserve. The SSAP 26R gross calculation examples worked well when the call price exceeded par, but did not anticipate the implications that occur when the gross method is applied to the less than par scenario.  This agenda update clarifies that situation by requiring when consideration is less than par, the reporting company is to separately allocate the amounts received between investment income and realized gain or loss in accordance with the terms of the callable bond.  The prepayment fee, or acceleration fee component, is reported as investment income.

The SSAP 26R modification provides specific examples within the final promulgation that are useful for gaining a grasp of the actual application.

SSAPWG Reference 2019-05 – Issue – Repurchase Disclosures:

This agenda item modifies the disclosure requirements of SSAP 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP 103R).  The NAIC staff has concluded that the original disclosures implemented in 2016 could be reduced and simplified.  Further, the annual statement instructions have been modified to incorporate the disclosure changes.

The changes made are listed below, along with the background of why the changes have been implemented:

• Remove the counterparty disclosure information. Reason – very few companies actually completed this disclosure in 2017; if necessary, regulators can specifically request this data directly from the entity;
• Remove the default disclosure from the data-captured disclosure. No insurance entities reported defaults in the 2017 filing, which are expected to be quite rare considering the nature of the item. Should a rare default occur, it will be reported narratively;
• Remove the disclosure requirements for minimum balances and average daily balances. Reporting requirements would now be limited to the maximum activity over the quarter and ending balance;
• Annual and quarterly statement instructions would be modified to require all components of the disclosure to be completed throughout the year at each quarter reporting period. Further, if the reporting entity acknowledges it is engaging in repo activity, then all repo activity is to be reflected in the annual and quarterly filing.

SSAPWG Reference 2019-07 – Issue – Bonds Received as Property Dividends or Capital Contributions:

This item was addressed to clarify and revise the statutory accounting and reporting guidance for bonds received as property dividends and/or capital contributions. Available reporting guidance does not clearly address the reporting of bonds received when no consideration accompanies the transaction. Mixed interpretations resulted in varying industry application.

To resolve the confusion, the NAIC approved revisions to SSAP No. 26R and Statement of Statutory Accounting Principles 72 – Surplus and Quasi-Organizations (“SSAP No. 72”) to report the transaction at fair value. Correspondingly, the annual statement instructions were proposed to be simultaneously revised to match the clarifications made in these SSAPs.