NAIC 2019 Summer Meeting – SAPWG Hearing Summary
BKD National Insurance Services Practice representatives attended the National Association of Insurance Commissioners (NAIC) 2019 Summer National Meeting in New York City in August. This article summarizes key points deliberated during the Statutory Accounting Principles Working Group’s (SAPWG) meeting, including matters adopted, rejected or otherwise disposed and re-exposed.
Adoption of New Guidance
Ref #2017-28: SSAP No. 62R—Reinsurance Credit
Adoption of a previously exposed issue paper to document—for historical purposes—the revisions made to SSAP No. 62R—Property and Casualty Reinsurance during the NAIC 2018 Fall National Meeting.
Ref #2018-03: SSAP No. 43R—Reporting NAIC Designations as Weighted Averages
Requires securities with differing NAIC designations by lot to be reported in overall aggregate at the lowest NAIC designation or with separate aggregations by NAIC designation. This approach is considered consistent with existing annual statement instructions that require lower-level reporting if the information reported in the aggregate would be inaccurate.
Ref #2019-11: Reinsurance Credit Effective Date
Revisions to SSAP No. 62R—Property and Casualty Reinsurance were adopted to clarify that the January 1, 2019, effective date for previously adopted guidance applies to contracts that were in effect as of that date. If a change is required to prior application, then it shall be reported as a change in accounting principle.
Ref #2016-02: ASU 2016-02, Leases
During the spring meeting, SAPWG exposed a substantively revised Statement of Statutory Accounting Principles (SSAP) No. 22R and corresponding Issue Paper No. 16X—Leases to incorporate guidance from Accounting Standards Update (ASU) 2016-02, Leases, but still maintain the operating lease concept for statutory accounting purposes. SSAP No. 22R and the corresponding issue paper were adopted with an effective date of January 1, 2020, for all new leases entered into, and for existing leases reassessed due to a change in terms and conditions, with earlier adoption permitted.
Ref #2018-04: VOSTF Bank Loan Referral
SSAP No. 21R—Other Admitted Assets was adopted to clarify that a security in scope of another SSAP does not get reclassified as a “collateral loan” simply because it also is secured with collateral. NAIC staff agreed with interested parties’ comments that there may be fixed-income instruments captured within SSAP No. 26R’s scope that don’t specifically meet the “security” definition. As a result, the referencing within SSAP No. 26R was changed from “securities” to “investments.”
Ref #2018-22: Participation Agreement in a Mortgage Loan
SSAP No. 37—Mortgage Loans clarifies that the structure of mortgage loans acquired through a participation agreement is intended to be captured in scope and explicitly exclude “bundled” mortgage loans. The NAIC staff modified the language in the SSAP to indicate that reference to “lender of record” is more appropriate than “original lender” and clarify how participation agreements are recorded.
Ref #2019-03: Affiliated Transactions
SAPWG adopted previously exposed revisions to SSAP No. 25—Affiliates and Other Related Parties, clarifying the treatment of transactions for an “affiliated” classification when a transaction is in substance a related-party transaction. The guidance includes situations when a transaction between related parties is conducted through a nonrelated intermediary (Note: This action results in revisions adopted to SSAP No. 25, SSAP No. 26R—Bonds, SSAP No. 32—Preferred Stock, SSAP No. 43R—Loan-Backed and Structured Securities, and SSAP No. 48—Joint Ventures, Partnerships and Limited Liability Companies).
Ref #2019-09: SSAP No. 101—Q/A Updates—TCJA
Ref #2019-09 primarily includes modifications to the SSAP No. 101—Income Taxes Implementation Q&A for Tax Cuts and Jobs Act (TCJA) tax law changes such as reduction in the corporate tax rate (and elimination of the graduated corporate tax rates), repeal of the corporate alternative minimum tax, repeal of the small life insurance company deduction and elimination of the operating loss carryback for life insurance companies (but allowance of an unlimited carryforward period).
The exposed revisions to SSAP No. 101 were adopted with the clarification that a reporting entity shall apply any changes as a change in accounting principle for financial accounting years ending December 31, 2019.
Ref #2019-10: SSAP No. 101—Q/A Updates—DTA/DTL Offset
The revisions to the SSAP No. 101—Income Taxes Implementation Q&A related to the application of the deferred tax asset admissibility calculation with regard to offsetting liabilities were adopted with the clarification that a reporting entity shall apply the changes as a change in accounting principle for financial accounting years ending December 31, 2019.
Rejection of GAAP Guidance
Ref #2019-06: ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts
The SAPWG adopted previously exposed revisions to the Preamble—that updates U.S. generally accepted accounting principles (GAAP) references—and identified the rejection of ASU 2018-12 in the following SSAPs:
- SSAP No. 50—Classifications of Insurance or Managed Care Contracts
- SSAP No. 51R—Life Contracts
- SSAP No. 52—Deposit-Type Contracts
- SSAP No. 54—Individual and Group Accident and Health Contracts
- SSAP No. 55—Unpaid Claims, Losses and Loss Adjustment Expenses
- SSAP No. 56—Separate Accounts
- SSAP No. 71—Policy Acquisition Costs and Commissions
- SSAP No. 86—Derivatives
Ref #2019-16: ASU 2015-08, Business Combinations—Pushdown Accounting—SEC Paragraphs
The SAPWG adopted revisions to Appendix D—Nonapplicable GAAP Pronouncements to reject ASU 2015-08 as not applicable to statutory accounting.
Ref #2019-17: ASU 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials
The SAPWG also adopted revisions to Appendix D—Nonapplicable GAAP Pronouncements to reject ASU 2019-02 as not applicable to statutory accounting.
Disposal of Existing Matter
Ref #2019-13: Clarification of a Look-Through Approach
During the spring meeting, the SAPWG exposed revisions to clarify the guidance for look-through entities. These revisions specified that goodwill may be admitted only if its value has been supported by an audit report, and the look-through provision only applies to the downstream level directly below the noninsurance holding company.
The SAPWG elected to dispose of this item, stating that existing guidance already addresses the issue. NAIC staff agrees that the existing guidance in SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities only permits the look-through approach when an unaudited downstream holding company is an 8.b.iii entity without any material assets or liabilities other than the audited/unaudited subsidiaries, controlled and affiliated (SCA)/SSAP No. 48 entities that the downstream holding company holds. As such, a more-than-one look-through is not concerning when the look-through entities comply with SSAP No. 97’s existing provisions (Note: The NAIC staff highlights that information when a more-than-one look-through is proposed to be captured in the disclosure enhancements being considered under agenda item 2019-14).
Items for Exposure
Ref #2019-08: Reporting Deposit-Type Contracts
During the spring meeting, the SAPWG exposed this agenda item with a request for comments on why guaranteed investment contracts, or other deposit-type contracts, are reported in Exhibit 5—Aggregate Reserves for Life Contracts or Exhibit 6—Aggregate Reserves for Accident and Health Contracts instead of Exhibit 7—Deposit-Type Contracts. This item is being re-exposed with a request for additional comments from industry and regulators based on comments received from interested parties.
Ref #2018-26: SCA Loss-Tracking Accounting Guidance
During the spring meeting, the SAPWG exposed revisions to SSAP No. 97 to update the existing reporting requirements for when a reporting entity has a negative equity value in an SCA investment and has provided a financial guarantee or commitment.
With the exposed revisions, if the entire SCA equity loss is recognized under SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets (under the guarantee guidance), then the obligation to provide further commitments does not need to be recognized under SSAP No. 97. However, if there’s a guarantee or commitment, and the entire loss is not recognized under SSAP No. 5R, the reporting entity shall not stop at zero in valuing the SCA and shall recognize a negative value for the SCA.
NAIC staff voted to re-expose this item, highlighting that the guarantee guidance in SSAP No. 5R includes two key elements:
- Liability recognition at the inception of a guarantee at an amount that represents the greater of a) the fair value of the guarantee or b) the contingent liability
- Subsequent recognition of the guarantee liability
The proposed revisions from interested parties have focused on the SSAP No. 5R initial liability recognition of a guarantee (at the fair value of the guarantee), whereas the situations being addressed in SSAP No. 97 are scenarios in which the SCA incurred losses that resulted in a negative equity value of the SCA by the insurance reporting entity.
The SAPWG voted to re-expose proposed revisions to SSAP No. 5R and SSAP No. 97 for comment.
Ref #2018-38: Prepayments to Service and Claims Adjusting Providers
During the spring meeting, the SAPWG exposed revisions to SSAP No. 55 to provide guidance regarding prepayments to providers of claims and adjusting services. This proposal strengthens the existing guidance that provides that prepayments to third parties don’t reduce the reporting entity’s liabilities for unpaid claims/losses or claims/loss adjusting expenses but are recognized as nonadmitted prepaid expenses. This exposure doesn’t change the reporting of incurred losses and loss adjusting expenses, which are expensed as incurred.
The SAPWG voted to re-expose SSAP No. 55 with additional revisions to reflect edits in response to some of the interested parties’ concerns that some of the exposed text was perceived as changing the timing of claims and claims adjusting expense recognition for health entities (the current guidance that claims and claims adjustment expense is expensed as incurred is unchanged).
Ref #2019-12: ASU 2014-17, Business Combinations—Pushdown Accounting
During the spring meeting, the SAPWG exposed revisions to SSAP No. 68—Business Combinations and Goodwill to reject ASU 2014-17 for statutory accounting. The exposed revisions also explicitly prohibited pushdown accounting in SSAP No. 97 for SCAs reported under audited U.S. GAAP.
Interested parties had concerns about the proposal to reject pushdown accounting in determining the valuation of a subsidiary of an insurance entity that uses GAAP as its basis of accounting. Overall, interested parties disagree with the approach to addressing goodwill in the suite of proposals as the proposed changes would cause a significant number of insurers to change their accounting for subsidiaries and incur additional audit costs.
The options being considered during this re-exposure period include:
- Complete rejection of pushdown accounting
- Permission to use pushdown for all noninsurance entities
- Permit pushdown if elected by SEC registrants, excluding noninsurance entities
In addition, to ensure that goodwill resulting from an insurance reporting entity’s acquisition of an SCA when pushdown is applied is captured within the goodwill admittance limitation, the exposure includes limited revisions to reference this goodwill in SSAP No. 68, paragraph 9.
Ref #2019-14: Attribution of Goodwill
During the spring meeting, the SAPWG exposed revisions to SSAP No. 68 and SSAP No. 97 to clarify that the acquisition of a holding company requires the purchase price and goodwill to be attributed to the downstream entities that the holding company directly owns. (This attribution is a documentation exercise and isn’t “pushdown accounting.”) By attributing the goodwill to the downstream entities at acquisition, when a downstream entity is sold or nonadmitted, the reporting entity has documentation to support the amount of goodwill that’s eliminated or nonadmitted accordingly.
The SAPWG elected to expose revisions to SSAP No. 97, clarifying that the “assignment” of goodwill is a disclosure element, with revisions to the disclosure requirements for downstream holding companies. The revisions also reflect a change in terminology from “allocation” to “assignment.”
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