September 2021 NAIC-Related Activity
Although NAIC accounting and reporting committee activity was minimal during September, there was a lot of activity occurring with various Interested Parties (IP) groups. Below is a summary of NAIC-related activity for September.
Statutory Accounting Interested Parties – September 8, 2021
The main purpose of this meeting was to review the latest exposures from the Statutory Accounting Principles Working Group (SAPWG) and discuss industry’s responses to those exposures. Comments were due to the NAIC by October 1. Items discussed for inclusion in the comment letter were:
Ref #2021-11 providing revisions to Statement of Statutory Accounting Principle (SSAP) No. 43R (SSAP No. 43R) regarding credit tenant loans.
Ref #2021-12EP covering various editorial changes.
Ref #2021-13 would change SSAP No. 55 to indicate that subrogation receipts should be netted against losses or loss adjustment expenses, according to the nature of the recoupment. The revisions will make the SSAP consistent with statement instructions.
Ref #2021-14 updates the Policy Statement in the Accounting Practices & Procedures Manual. At the request of the Financial Condition (E) Committee, the terms “substantive changes” and “nonsubstantive changes” will no longer be used in describing adopted accounting changes. IPs found the definitions of the suggested new terms very subjective and will be proposing an alternative approach.
Ref #2019-24 is the issue paper providing the background for recently adopted revisions to SSAP No. 71.
The SAPWG response to a referral from the Valuation of Securities Task Force regarding Working Capital Finance Investments was discussed. The group then reviewed SAPWG’s decision to create a separate project addressing nonrated residual trances under SSAP Nos. 26R and 43R. The focus of the meeting then switched to affiliated service agreements with market-based expense allocation. IPs felt that perhaps state regulators were not spending enough time looking at the agreements on the front end (Form D), i.e., before implementation. Instead, it appears that questions on the agreements are not being addressed until during the examination process, which can occur several years after the agreement implementation. At that point, it would be nearly impossible to “unwind” any part of the agreement with which the state was not comfortable. The meeting ended with a comment indicating that the adoption of a new principles-based bond definition would most likely result in significant changes to Schedule D reporting. A separate IP group will be meeting to work with NAIC staff and regulators on Schedule D revisions.
NAIC/AICPA Working Group – September 13, 2021
The meeting began with the annual review of the $500M premium threshold established for the application of the Management’s Report of Internal Control over Financial Reporting section of the Annual Financial Reporting Model Regulation (#205). The intent of the review is to determine if companies subject to that section’s requirement will represent at least approximately 90 percent of industry premium. The $500M threshold was determined to still meet the requirement. The group received an American Institute of CPAs (AICPA) update on recent audit pronouncements. NAIC staff gave a report on the results of the 2020 reserve data training, a joint project between the NAIC and AICPA. The training was a two-part webinar covering how audit firms review reserving and was attended by more than 300 regulators. As a result of that session, the Financial Examiners Handbook is being revised, adding some additional procedures to the examination process and incorporating reliance on some of the auditors’ work for regulatory purposes. It is hoped revisions will shortly be ready for public exposure and comment. The meeting ended with a reminder that beginning this year, additional information is required in the audit internal controls report regarding the lead audit partner.
Interested Parties SSAP No. 43R Group – September 16 & 30, 2021
After taking a short break from meeting, this IP group is back in action following the latest meeting of SAPWG. Beginning with a brief review of what occurred during the SAPWG meeting, several specific topics coming out of that meeting were discussed. Of particular interest was the announcement that the small regulator group working with IPs to develop a principles-based definition of bonds will be expanded beyond the core group of Iowa regulators. At this time, it appears Michigan, Texas, and Ohio also will be involved in future talks. More states could join. As a result of the proposed new bond definition, the scope of work for this group also will include revisions to Schedule D, work on residual tranches (the lowest investment level of a collateralized mortgage obligation) and explaining investment types to provide regulators with a more thorough understanding.
The September 30 meeting also covered more than just an update on the SSAP No. 43R revision project. It began with discussing a request for information received from NAIC staff on reporting of Federal Home Loan Bank funding agreements in Exhibit 7 of the Life Annual Statement. NAIC staff had noted inconsistencies in the reporting used by various companies and asked about developing clarifying instructions. The group decided to provide feedback suggesting that companies continue to report the funding agreements as they have been, but a footnote would be added to the reporting indicating in which column of Exhibit 7 the agreements were included. The discussion then moved into a recent SAPWG exposure, 2021-15, regarding residual tranches within the scope of SSAP No. 43R. The SAPWG exposure would move the reporting of these tranches from Schedule D to Schedule BA. NAIC staff also asked if a January 1, 2022, implementation date would be feasible upon adoption. The last half of the meeting was an update on the SSAP No. 43R project. As mentioned previously, IPs are now working with an expanded group of regulators on this issue and are spending a lot time trying to bring the newer regulators up to date on previous discussions. IPs again stressed that it was difficult to propose resolutions for issues if there was not a good understanding of what specific regulatory concerns existed. In the process of that discussion, regulators seemed to recognize that they may be trying to solve risk-based capital issues with accounting changes and that approach might not be appropriate. IPs are starting to get a better understanding of certain investments falling under the scope of SSAP No. 43R that make regulators uneasy.
Blanks Interested Parties – September 20 & 27, 2021
Blanks IPs met on September 20 to discuss the four items the Blanks Working Group (BWG) re-exposed for comment on July 22. All of these proposals present substantive reporting changes and/or present industry with significant data collection challenges. In addition, some of the proposed changes should lead to additional revisions in other parts of the statement, which appear to be missing from the current proposals. Comments during this meeting will be incorporated into the IP’s second draft of its comment letter and distributed for review. The comment letter is due October 22, with the next BWG meeting scheduled for November 16.
The September 27 call might not fall under the normal Blanks IP umbrella. This was the first of what will likely be many calls to address revised Schedule D reporting, and possibly other investment reporting, that will result once the new principles-based bond definition becomes effective. The high attendance number was indicative of the level of interest in this project. An NAIC conceptual document indicating possible new bond reporting categories was distributed and will be used as part of the project going forward. The decision was made to immediately form two subgroups, with one group working to list all quarterly and annual statement reporting (including supplements) that would be affected because of major reporting changes to Schedule D. The second group will begin to identify changes to Schedule D – Part 1 based on current work being done by SAPWG and closely reviewing existing provided information. A new SAPWG exposure, 2021-15, was briefly discussed with everyone being encouraged to attend the September 30 call of the IP’s SSAP No. 43R group to participate in further discussion of the issue.
Valuation of Securities Task Force (VOSTF) – September 30, 2021
The Task Force received, discussed, and exposed for comment three different proposed amendments to the Purposes and Procedures Manual of the Investment Analysis Office.
An industry request to add the U.S. International Development Finance Corporation to the U.S. Government Full Faith and Credit – Filing Exempt List. The 30-day exposure period ends October 30, 2021.
Clarification that the Securities Valuation Office (SVO) can assess and assign NAIC designations to bank loans that fall under the scope of SSAP No. 26R and that filing instructions and the SVO methodology used would follow that of other corporate obligations. The 30-day exposure period ends October 30, 2021.
Provide language that had previously been removed for the handling of zero loss legacy modeled Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities (CMBS). The language covers year-end 2021 reporting and states these legacy securities will be mapped to an NAIC Designation Category of 1A instead of the previous 1D. There is a short 15-day comment period ending October 15, 2021.
VOSTF adopted the addition of Spanish GAAP to the list of countries and associated national financial presentation standards.
The Structured Securities Group (SSG) provided an update for year-end modeling. It reported that the CMBS base case has been adjusted to reflect a much smaller impact from COVID-19 than occurred last year. Zero loss modeled RMBS and CMBS were discussed (see above for exposed P&P Manual revision for legacy securities), emphasizing that nonlegacy zero loss securities will be assigned an NAIC Designation Category of 1A by the SSG. The SSG is planning on using 19 thresholds and breakpoints based on the new RBC factors, subject to later VOSTF approval. The SSG reaffirmed it will be producing two files to companies at year-end, one for legacy and one for nonlegacy securities. And finally, the SSG announced that when reviewing re-REMICs, it will be using a look-through to determine legacy and nonlegacy status. (A re-REMIC is a resecuritization of real estate mortgage investment conduits.)
The meeting came to a close with a quick discussion on the status of filing private rating letter rational reports, due to be implemented at January 1, 2022. The SVO acknowledged it will take some time to get its VISION and AVS+ systems updated to accommodate the new requirement. Therefore, companies will most likely need to complete the filings over a period of time in 2022.
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