Update: Potential Changes to Annual Holdings Reports

The Statutory Accounting Principles Working Group (SAPWG) proposed an update that would require mid-year holdings reports for the following fields: CUSIP, par value, book/adjusted carrying value, and fair value. The SAPWG passed a motion to recommend the mid-year data collection of Schedule D investments to the Accounting Practices and Procedures (E) Task Force. The Accounting Practices and Procedures (E) Task Force sent the decision to be reviewed and ratified by the Financial Condition (E) Committee, which is the parent of both the SAPWG and the Accounting Practices and Procedures (E) Task Force.

If adopted, the mid-year holdings report would be effective June 2019. The Financial Condition (E) Committee extended the vote on this item for 30 days to receive comments and feedback from Industry and interested parties.

Meeting Discussion

During the meeting on May 12, 2017, interested parties raised concerns about the increased cost the additional disclosure would entail. They argued that in addition to possible systematic cost, there are also soft costs that require effort and time to validate.

Interested Parties asserted that since acquisition and disposition data are already provided, the NAIC should invest in programming the requested holdings data. Industry expressed the NAIC has not given specific cost/benefit considerations in their request. Industry suggested the NAIC could potentially invest in a more consolidated effort rather than asking insurance companies to provide this additional data every year.

Potential Impact

At the center of the dialog, the issue remains: regulators are requesting more timely information on investments, and the current process cannot yield the desired results. The NAIC proposed a solution Industry argues may not fully address the source of the issue.

Currently, the NAIC receives holdings annually and uses a database to combine the annual filings with Q1, Q2, and Q3 to get a new value. The values produced from the database are an estimate at best; CUSIPs and par amount data are up-to-date, while all other holdings details are predominately comprised of data from the previous year. Reasonable estimates on certain items (such as fair value) can be made using Investment Analysis Office data.

When regulators have questions, they are potentially using data that has been stale for over 12 months. For example, a regulator has a question on an investment in February 2017. Since the annual reports for 2016 have not been filed yet, the NAIC uses the 2015 annual report as a starting point, then adds the quarterly reports. The key challenges the NAIC is attempting to solve are the length of time this process takes and the limited amount of data that’s available, even with the database.

The proposed solution moves the starting point of the investment data regulators receive to mid-year instead of the previous year-end. Regulators would analyze information using six-month-old data as opposed to 12-month-old data. Some members of Industry proposed an alternative to this solution, saying they could substitute the mid-year holdings schedule with additional quarterly summary disclosures to help with the quality and accuracy of the NAIC’s data. However, the NAIC has been hesitant to act on this approach, stating that market events, which can fluctuate, determine its needs.

Next Steps

Further action on this time has been deferred to the NAIC Summer 2017 National Meeting, tentatively scheduled for Tuesday, August 8, 2017. During this meeting, the proposal with either be approved as-is, be sent back to the SAPWG for further modifications, or be rejected with no further action. Visit the committee page for details on the meeting agenda and more information on the Financial Condition (E) Committee.

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Richard has more than 15 years of insurance investment accounting experience. He is an expert in statutory accounting and investment systems and is Clearwater's liaison for the NAIC, NASVA, and the IASA. He has an MBA in finance from the University of Hartford and a bachelor's in accounting from York College of Pennsylvania.