Accounting Standard Updates

NAIC SAPWG May 2021 Virtual Meeting Highlights – Adoptions and Proposals

Article reading time: 5 glorious minutes

Hot Take:

Hot Take

On May 20, 2021, the Statutory Accounting Principles Working Group (SAPWG) conducted its regularly scheduled virtual meeting with regulators and interested parties.  This series highlights decisions impacting statutory accounting principle applications rather than basic format changes or additions to the annual and quarterly convention blanks and includes cryptocurrency treatment and final reference rate reform for LIBOR reporting. The working group briefly addressed the long-running project on defining the parameters for a bond and what will qualify for Schedule D-1 fixed income reporting. This is addressed in a longer article here.

SAPWG accepted and/or rejected seven non-contested, non-substantive adoptions during its meeting.  Several topics were placed on the exposed items list for additional discussions.  In this summary, we provide updates on selected substantive and non-substantive adoptions, as well as exposed items that require further discussion.

Full Article

The Star of this SAPWG Meeting

The exposure of a revised definition of what qualifies as a bond was brief but drew great interest: What will be allowed as a bond carried in Schedule D-1, a culmination of discussions that started in 2013. This topic deserves its own article, and you can find it here.

 Selected Non-contested / Non-substantive Adoptions:

  • #2021-02: SSAP No. 26R – ASU 2020-08 – Premium Amortization on Callable Debt SecuritiesASU 2020-08 requires that to the extent the amortized cost basis of callable debt security exceeds the amount repayable by the issuer, any associated premium (above the call price) is to be amortized to the next effective call price/date. While the amortization requirements closely imitate existing guidance in SSAP No. 26R, it does preclude statutory accounting’s yield-to-worst concept, which requires amortizing premiums to the call or the maturity value/date that produces the lowest asset value.  SAPWG adopted the full rejection of ASU 2020-08 for statutory accounting purposes.
  • #2021-03: SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – includes revisions to install additional disclosure elements and data capture for various disclosures in SSAP No. 103R. The purpose is to better guide regulators in their analysis of transactions where an insurance company transfers (or sells) assets but still retains substantial participation in the asset transferred.  The intention is to have this in place for the 2021-year-end annual statement reporting.  Adopted by SAPWG.
  • #2021‐08: ASU 2021‐02, Franchisors – Revenue from Contracts with Customers (Subtopic 952‐606): Practical Expedient– SAPWG adopted formal rejection for statutory accounting.

Selected Exposed Revisions to Statutory Accounting Guidance – with Review Comments:

  • #2020‐36: SSAP 108—Derivatives Hedging Fixed Index Products – This agenda item proposes new guidance for the accounting and reporting of derivatives that effectively hedge the growth in interest credited for fixed indexed products (for example, indexed universal life (IUL) and fixed indexed annuity (FIA)) reported in the general account. Further, NAIC staff is also examining the classification of structured/registered indexed-linked annuities (RILA) in the separate account reporting. In addition, it is assessing the use of derivatives in the separate account to hedge risk related to these products.  It is expected this item will be a component of the separate account agenda item and is anticipated to be substantive, with a new SSAP possible. At the request of Interested Parties, SAPWG approved sending this item to the Life Actuarial Task Force (E) inquiring whether the Task Force is considering changes to reserving of fixed index annuity products with the further reasoning that, if reserving changes are made, they would likely impact the accounting options for derivatives hedging these products.
  • #2021‐01: ASU 2021‐01, Reference Rate Reform (Topic 848): Scopeinterpretative revisions to SSAP No. 86 were exposed in the March 15, 2021, SAPWG meeting to provide an optional temporary expedient and exception guidance with a set expiration date of Dec. 31, 2022. Interested parties provided additional feedback and suggested language adjustments to INT 20-01 for the unusual statutory reporting requirements for non-qualifying hedging relationships and replication synthetic asset (RSAT) transactions.

INT 20‐01: ASU 2020‐04 – Reference Rate Reform would provide “optional expedients” that expand certain exceptions provided under the INT.  Those exceptions permit the continuance of the prevailing hedge relationship, and as such, would not require hedge de-designation for derivative instruments affected by changes to interest/reference rates due to reference rate reform.  These exceptions include references to the London Interbank Offered Rate (LIBOR) or another rate that is expected to be discontinued. The exception in INT 20‐01 would apply for derivatives used for discounting, margining, or contract price alignment. SAPWG adopted INT 20-01, including the language revisions suggested by Interested Parties to update paragraph 13 of INT 20-01.

  • #2021‐04: SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities – Valuation of Foreign Insurance SCAs – NAIC staff observed the required statutory adjustments to SSAP No. 97, paragraph 8.b. iv. – Foreign Insurance SCA Entities have the potential to result in negative equity valuation. Assets held in a foreign subsidiary should not be valued more favorably than had they been held directly by the insurer. In the March 15, 2021, meeting, SAPWG requested further industry comments regarding detailed instances of negative value SCAs.  This is a highly unique situation primarily relegated to one large insurer, and the resolution of which the NAIC staff considers more theoretical at this juncture. However, NAIC staff provided several suggested clarification edits to SSAP 97, paragraph 9 and SSAP No. 48, paragraph 6.  SAPWG agreed to expose the suggested edits for a final comment period ending July 15, 2021.
  • #2021‐05: SSAP No. 2R – Accounting for Cryptocurrencies: Guidance was exposed in the March 15, 2021 SAPWG meeting with respect to Interpretation INT 21‐01T: Statutory Accounting Treatment for Cryptocurrencies. The INT clarifies that cryptocurrency does not meet the definition of cash in SSAP No. 2R.  Accordingly, they are non-admitted assets under statutory accounting. Comments were received from regulators (Delaware) requesting that INT 21-01T be expanded to include investments in cryptocurrency mutual funds by insurers.  The INT currently only addresses insurers directly investing in cryptocurrencies.  Delaware has experienced some of its captive insurers investing in these types of mutual fund investments.  Captives generally report on GAAP in contrast with statutory accounting principles for which most insurance carriers are required to report.  As such, the captive entities report the investments at market value.  Interested parties concurred that, though highly volatile, cryptocurrencies do have future economic benefit as well as being readily marketable, albeit potentially explosive.

The NAIC staff recommended that SAPWG adopt the INT to clarify that directly held cryptocurrencies do not meet the definition of cash in SSAP No. 2R – Cash, Cash Equivalents, Drafts, and Short-Term Investments.  Moreover, when directly held, these investments do not meet the definition of an admitted asset per SSAP No. 4 – Assets and Nonadmitted Assets.  With the comments submitted, the INT clarifies that only directly held cryptocurrencies are considered nonadmitted assets, and that this does not impact the direction for investments in funds that may hold cryptocurrencies via SSAP No. 30R, SSAP No. 48 or SSAP No. 97.  The NAIC staff did not suggest future modifications be made to SSAP No. 30R, SSAP No. 48 or SSAP No. 97 to restrict cryptocurrencies in funds or through indirect ownership such as SCAs or partnerships.

We’re Here to Help

If you have questions about the impact these topics, adoptions and proposals might have on your insurance company, JLK Rosenberger can help. Call me at 972-331-5909, or click here to contact us. I look forward to speaking with you soon.

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