SAPWG Adopted Guidance for Summer 2020
The National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles Working Group (SAPWG) met on July 30, 2020, to discuss matters on its hearing agenda.
The following agenda items were adopted by the SAPWG during the meeting and represent statutory accounting guidance that will be effective on the specified dates.
Ref #2019-38: Financing Derivatives (effective January 1, 2021)
The SAPWG adopted nonsubstantive revisions to Statement of Statutory Accounting Principles (SSAP) No. 86—Derivatives with an effective date of January 1, 2021, which require gross reporting of derivative activity for financing derivative transactions (a financing derivative transaction is one in which the premium to acquire the derivative is paid throughout the derivative term or at maturity of the derivative). The revisions are intended to drive consistency (a) in the gross reporting of derivatives—that is, without inclusion of financing components, and (b) in reporting amounts owed to/from the reporting entity from the acquisition or writing of derivatives.
Under the accounting and reporting that has been used by some companies, the associated “cash flows” (related to the derivative obtained versus the premium liability owed) were netted, which generally resulted in zero-value reporting at inception. Over the course of the derivative term, an unrealized loss was recognized for changes in the present value of the premium liability (increase), which may have been offset by any value change in the underlying derivative (increase or decrease). As a result, with derivative financing, a gain would only ever be recognized if the fair value change of the derivative exceeded the cost of the derivative. When the derivative matures, the calculation of realized gains and losses would reflect the deferred cost (amount owned), adjusted for any actual fair value change.
(Note: A blanks proposal to capture the “present value of financing premium” in calculating the net exposure is exposed and planned to be considered during the Blanks August call for 2021.)
Ref #2020-04: Commissioner Discretion in the Valuation Manual (effective immediately)
The SAPWG adopted nonsubstantive revisions to SSAP No. 51R—Life Contracts, SSAP No. 52—Deposit-Type Contracts, and SSAP No. 54R—Individual and Group Accident and Health Contracts to specify that voluntary decisions to choose one allowable reserving methodology over another, which require commissioner approval under the Valuation Manual, shall be reported as a change in valuation basis. This is a nonsubstantive change and is effective immediately.
Ref #2020-03: Enhanced Goodwill Disclosures (effective for the 2021 blanks)
The SAPWG adopted nonsubstantive revisions to SSAP No. 68—Business Combinations and Goodwill, adding additional disclosure elements for existing goodwill (Note: This will not be effective until the preparation of the 2021 blanks). The disclosures will improve the validity and accuracy of numbers currently being reported and will assist with the regulators’ review of reported assets not readily available for the payment of policyholder claims.
NAIC staff highlighted that this item only proposes enhanced disclosure granularity for existing reported goodwill. It does not provide new guidance on the determination, calculation, or admissibility of goodwill. As such, omitting any goodwill from the goodwill disclosures would result in incomplete information being provided to regulators and financial statement users as the disclosures would only contain partial information. Accordingly, pushdown goodwill should continue to be included in the goodwill disclosures.
Ref #2019-04: SSAP No. 32 – Investment Classification Project (effective January 1, 2021)
The SAPWG adopted the previously exposed issue paper and substantively revised SSAP No. 32R—Preferred Stock to revise the definitions, measurement, and impairment guidance for preferred stock pursuant to the investment classification project. In addition, footnote 1 has been amended to clarify that legal entities captured in SSAP No. 48 include LLCs that are corporate-like, in order not to introduce a change in accounting or diversity in practice since the issuance of preferred units that are similar to preferred stock of a corporation generally occur in LLCs that are more corporate-like. The substantively revised SSAP No. 32R is effective January 1, 2021.
Ref #2020-02: Accounting for Bond Tender Offers (effective January 1, 2021, early application permitted)
From a bond holder’s perspective, the only material difference between a called and tendered bond is that with the tender offer, the bond holder must elect to accept the repurchase offer. If the tender offer is not accepted, the bond’s terms (including scheduled maturity date) remain unchanged. As a result, the Working Group has previously exposed revisions to SSAP No. 26R—Bonds to clarify that the guidance for “called” bonds also is applicable to “tender offers.”
Specific guidance for the reporting and allocation of investment income and/or capital gain/loss associated with callable bonds (where the issuer, at its sole discretion, can redeem a bond before it scheduled maturity date) is noted in SSAP No. 26R—Bonds; however, guidance is not reflected for when a bond is retired early through a tender offer. As previously discussed, called bonds and bond tender offers are similar in the fact that the issuer can retire a bond early; however, with a bond tender offer, the holder must elect to accept the offer. If the offer is not accepted, the original terms of the bond are not modified.
The SAPWG adopted nonsubstantive revisions to SSAP No. 26R—Bonds to clarify that the accounting and reporting of investment income and capital gain/loss, due to the early liquidation either through a call or a tender offer, should be similarly applied. The revised guidance is effective January 1, 2021, with early application permitted.
Ref #2020-01: Update/Remove References to SVO Listings
The SAPWG adopted nonsubstantive revisions to:
- SSAP No. 26R—Bonds and SSAP No. 30R—Unaffiliated Common Stock to eliminate references to the NAIC Bond Fund List, and
- Add reference to the “NAIC Fixed Income-Like SEC Registered Funds List” in SSAP No. 30R.
This item was made to update the Accounting Practices and Procedures (AP&P) Manual to reflect a related recent adoption to the P&P Manual.
Ref #2020-05: Repeal of the Affordable Care Act Section 9010 Assessment
The SAPWG adopted a proposal to supersede SSAP No. 106—Affordable Care Act Section 9010 Assessment and to nullify INT 18-02: ACA Section 9010 Assessment Moratoriums. This guidance was proposed to be eliminated as the Affordable Care Act (ACA) insurer fee, addressed within this guidance, has been repealed beginning January 1, 2021. As a result of this adoption, the existing guidance has been moved to Appendix H—Superseded SSAPs and Nullified INTs of the AP&P Manual.
Possible Extension for COVID-19-Related INTs
In April and May 2020, the Working Group adopted the following interpretations in response to COVID-19, which were effective through the second quarter of 2020:
- INT 20-02: Extension of the Ninety-Day Rule for the Impact of COVID-19
- INT 20-04: Mortgage Loan Impairment Assessment Due to COVID-19
- INT 20-05: Investment Income Due and Accrued
The Working Group voted to expose potential extensions to these interpretations to consider extensions to the third quarter of 2020. The comment period will be for a shortened two-week comment period ending August 14, 2020, and any resulting recommendations will be adopted or rejected through a virtual Working Group vote. As of the NAIC summer meeting, the proposal being exposed is for the INTs to be updated to reflect that they are applicable to the September 30, 2020, financial statements. Furthermore, the proposal is for the interpretations to be updated to note that they will expire automatically on December 30, 2020 (and not be effective for year-end).
The following INTs are effective for the 60 days following the termination of the national emergency or December 31, 2020, whichever occurs first:
- INT 20-03: Troubled Debt Restructuring Due to COVID-19
- INT 20-07: Troubled Debt Restructuring of Certain Debt Investments Due to COVID-19
The national emergency was not terminated prior to August 1, 2020. However, since the SAPWG held its meeting prior to August 1, 2020, no official action was able to be taken. However, since the national emergency was not terminated prior to August 1, these INTs are expected to be effective through the third quarter.
Items to Be Exposed
Ref #2019-34: Related Parties, Disclaimer of Affiliation and Variable Interest Entities
SSAP No. 25—Affiliates and Other Related Parties is being exposed to incorporate new disclosures to ensure regulators have the full picture of complicated business structures. The proposed SSAP revisions intend to address the following key aspects:
- Clarify the identification of related parties and ensure that any related party identified under U.S. generally accepted accounting principles (GAAP) or SEC reporting requirements would be considered a related party under statutory accounting principles (SAP)
- Clarify that noncontrolling ownership over 10 percent results in a related party classification regardless of any disclaimer of control or disclaimer of affiliation
- Clarify the impact of a disclaimer of control or disclaimer of affiliate under SAP. As detailed, such disclaimers affect holding company group allocation and reporting as a subsidiary, controlled and affiliated (SCA) under SSAP No. 97, but do not eliminate the classification as a “related party” and the disclosure of material transactions as required under SSAP No. 25
- Propose rejection of several U.S. GAAP standards addressing variable interest entities
Ref #2019-24: Levelized and Persistency Commission
During the 2019 fall national meeting, the Working Group exposed revisions to SSAP No. 71—Policy Acquisition Costs and Commissions to provide clarifications to the long-standing levelized commissions guidance and provide additional guidance regarding commission that is based on policy persistency. The revisions clarify that a levelized commission arrangement (whether linked to traditional or nontraditional elements) requires the establishment of a liability for unpaid principal and accrued interest payable, regardless of the timing of payments made to a third party. In addition, persistency commission shall be accrued proportionately over the policy period in which the commission relates to and is not deferred until fully earned.
The exposed recommendations are intended to be consistent with the original intent of SSAP No. 71, as well as the Statutory Statement of Concepts focusing on Recognition (noted in the Preamble, paragraphs 37 and 38) stating that liabilities require recognition as they are incurred and accounting treatments that tend to defer expense recognition do not generally represent acceptable SAP treatment.
The SAPWG voted to expose this matter again to consider additional proposed language. The exposure period will end on September 18, 2020.