The Statutory Accounting Principles Working Group (SAPWG) met during the Spring National Meeting to discuss substantive changes to SSAP No. 26, AVR/IMR items, extended deadlines for SC&A filings, and more.
Changes to SSAP No. 26R
After months of debate, the SAPWG passed Ref #2013-26, which included substantive changes to SSAP No. 26R as part of the Investment Classification Project, effective December 31, 2017.
Changes to Bond ETFs
This item has been open since 2015 and was finally approved. The NAIC originally suggested that all mutual funds be reported on a different schedule at fair value since the current method (usually original cost) was not a defensive measurement method. Bond ETF-approved providers and insurers objected to this suggestion, saying they felt moving the book-adjusted carrying value to market value would impact the marketability of the instrument. They argued that because a bond ETF is nothing more than a series of bonds, it should remain on the Schedule D – Part 1 and be reported in a manner similar to Schedule D – Part 1 bonds. ETF providers recommended an alternative to cost or fair value, which they referred to as “systematic value.” The systematic value calculation takes the aggregated cash flows of each investment owned by the fund and uses the effective yield of those cash flows compared to the actual distributions to increase or decrease the carrying value of the investment. ETF providers argued that smaller insurance companies use ETFs to access the bond market at a cheaper cost than buying instruments directly, and fair value introduces too much volatility into a small insurer’s surplus.
Some regulators and interested parties were skeptical of this method, for several reasons:
- The calculation method is new, unique, and has never been used before.
- Industry had many questions around implementation. Industry was concerned about the risk of insurance companies implementing this method inconsistently or incorrectly, defeating the Investment Classification Project’s key objective of establishing consistent reporting of investments across Industry.
- The Investment Analysis Office had concerns about how impairment would work.
While NAIC staff originally wanted a fair value approach, they recognize the merits of these investments and did not want to leave the smaller companies at a disadvantage. They developed transition and impairment guidance to address the major concerns.
This item was passed. It allows insurance companies to choose (proxy) to report each investment using either systematic value or fair value.
Effective December 31, 2017, each insurance company must make a one time, irrevocable election on how they will report each SVO-approved ETF. If an insurer chooses fair value, they will immediately report the security at market value. If an insurer elects systematic value, they will use their current method for 2017 reporting and use the systematic value calculation for 2018. This election will be made using a new Code Code on the Schedule D – Part 1.
Revisions to SSAP No. 97 – Extended Deadlines for Subsidiary, Controlled, and Affiliated (SC&A) Entities
As part of the ongoing effort to improve compliance with filing requirements for SC&As, the SAPWG exposed revisions to SSAP No. 97 to extend deadlines for submitting SC&As. The SAPWG received comments from Industry stating it was not possible to meet the current deadlines due to documentation, audit support requirements, and time delays on foreign SC&As. Staff noted that over 95% of Sub 1 filings are submitted after the required deadline.
The revisions seek to extend the deadline for Sub 1 filings to 60 days after acquisition or formation (currently 30 days) and to July 31 for the Sub 2 filing (currently June 30) so Industry can better comply with the filing deadlines. The SAPWG is open feedback on the suggested timelines from interested parties.
Ref #2017-04 – Settlement of Variation Margin
The Chicago Mercantile Exchange recently changed variation margin payments for over the counter (OTC) derivatives to be categorized as settlement payments rather than collateral. The SEC staff agreed with these changes and the SAPWG is requesting comments on what impact this would have on statutory reporting. Two areas of impact have been identified so far:
- Current SSAP No. 86 guidance dictates that the daily change in variation margin is an unrealized gain or loss until termination of the futures contract. If legal settlement is reflected for statutory accounting, the daily change in variation margin would be a realized gain or loss. However, since most clients report these items together on the income statement, this change would have no effect on the presentation. For those clients who do report unrealized and realized gross amounts for margin payments on the income statement, this change would reclassify those gains.
- There are fields in the Schedule DB and RBC reporting that reference margin as collateral, and those references may need to be changed. The SAPWG has exposed this item for comment.
Since it is uncertain if a formal position will be adopted by the SEC or if further assessments or revisions of US GAAP will be made, the SAPWG disposed of the agenda item without statutory revisions and requested further input on the impact of the changes.
Treatment of AVR/IMR in SSAP No.26
This agenda item was originally discussed in tandem with the proposed revisions to SSAP No. 26 (26R) but was instead addressed as a separate revision.
It was noted that there are potential interpretation differences with how Other Than Temporary Impairment (OTTI) should be applied between the AVR and IMR. More specifically, the SSAPs advise that OTTI should be bifurcated between the AVR and IMR while the statement instructions advise to take the entirety of the OTTI loss and allocate through AVR in the situation that either:
- There has been more than one designation change
- The investment has an NAIC designation 6
Additionally, the SAPWG questioned the portion of SSAP No. 26 that states, “… a decline in fair value which is other-than-temporary includes situations where a reporting entity has made a decision to sell a security prior to its maturity at an amount below its carrying value” to potentially mean that all securities sold before maturity at an amount lower than the carrying value should recognize OTTI and be bifurcated between the AVR/IMR.
Staff recommended that the SAPWG move this item to the substantive active listing and expose it, requesting that regulators and Industry provide feedback on their current OTTI and AVR/IMR treatment of these securities.
The SAPWG directed staff to draft revisions to SSAP No. 26R and the AVR/IMR annual statement instructions to ensure consistency in language and treatment.
Bank Loans Issued by Reporting Entities
On a March 16, 2017, conference call the SAPWG noted that bank participations are included in the definition of SSAP No. 26 without definition. A definition was proposed that included bank loans in the scope of SSAP No. 26 and provided a definition which included language specifying that a bank loan had to be acquired through “participation, syndication or assignment.”
Industry agrees that bank loans are within the scope of SSAP No. 26, noting that bank loans possess the same characteristics of a bond or security reported on the Schedule D – Part 1. However, Industry requested revisions which ignore the manner in which bank loans are acquired, indicating that the manner in which the loan was originated is irrelevant to the definition and would cause arbitrary and unnecessary confusion.
There has been additional discussion on whether bank loan instruments should have specific accounting guidance or instructions, whether they should be considered admissible, or whether they should be reported on the Schedule BA.
The SAPWG requested input from Industry on statutory accounting guidance for bank loans, specifically focused on loans that were issued directly by the reporting entity. In addition, they sent a proposal to the Valuation of Securities Task Force (VOSTF) on whether the variations between bank loans issued by the reporting entity and those issued by outside parties would necessitate specific treatment, guidance, or classifications.
Definition of Loan-Backed and Structured Securities
On June 10, 2016, the VOSTF submitted a referral to the SAPWG that proposed changes to the definition of SSAP No. 43R – Loan-Backed and Structured Securities. The proposed changes recognize that the dynamic cash flow patterns characteristic of structured finance securities should include the following four features:
- Legal isolation and pooling of a finite number of cash generating assets
- Each cash generating assets should be derived from a different obligor
- Cash generating assets are held in a trust
- Cash flows from the cash generating assets are used to pay the security holders
On December 10, 2016, the SAPWG exposed proposed revisions to SSAP No. 43R, moved the agenda item to the substantive active listing, and requested comments from the VOSTF on the exposures’ potential impacts to financial modeling.
SAPWG staff exposed the agenda item. Originally, the SAPWG proposed a definition change for securities with the intent to dispose without incorporating the proposed definition change, and they directed notification to the VOSTF of the intent to dispose.
Non-Substantive Changes to Mortgage Loan Investments
SSAP No. 37 states, “A mortgage loan is defined as a debt obligation that is not a security, which is secured by a mortgage on real estate. (A security is a share, participation, or other interest).”
This language has led some insurers to believe that a “participant in a mortgage loan agreement” was not considered a mortgage loan.
The SAPWG exposed non-substantive revisions to the definition of mortgage loans, including examples of mortgage loan investments.
Clarification on Inflation-Indexed Securities
Questions have been received on whether INT 01-25 – Accounting for US Treasury Inflation-Indexed Securities applies only to US Treasury Inflation-Protected Securities (TIPS) or also to foreign government inflation-indexed securities. The SAPWG took up this agenda item to clarify this matter and also decide if specific guidance should be created for foreign inflation-indexed securities.
Upon review, the SAPWG determined that the guidance only applies to TIPS. Additionally, they noted that these types of securities were relatively rare in the industry, so new guidance would not be drafted.
Treatment of Certain Items on the Statement of Cash Flow
The SAPWG reviewed comments on an exposed non-substantive item which adopted ASU 2016-15 – Classification of Certain Cash Receipts and Cash Payments. The ASU was issued to eliminate the diversity in Industry’s treatment of these transactions. Industry commenters agreed with the adoption of the ASU, but asked that the effective date of transaction be clarified to ensure it is consistent with the effective date of the ASU.
The SAPWG also reviewed a pending item which relates to ASU 2016-18. The item is a FASB update which clarifies that restricted cash and cash equivalents should be included in the Statement of Cash Flow. The SAPWG moved the item to the non-substantive active listing and proposed changes which would make SSAP No. 69 – Statement of Cash Flow consistent with the new guidance.