SAPWG Hearing Agenda
Statutory Accounting Principles (E) Working Group
Hearing Agenda
August 15, 2015
Roll Call
Dale Bruggeman, Chair
Jim Armstrong, Vice Chair
Kim Hudson
David Lonchar
Eric Moser
Stewart Guerin
Judy Weaver
Patricia Gosselin
Stephen Wiest
Stephen Johnson
Doug Slape / Jamie Walker
Doug Stolte / David Smith
Tom Houston
Ohio
Iowa
California
Delaware
Illinois
Louisiana
Michigan
New Hampshire
New York
Pennsylvania
Texas
Virginia
Wisconsin
REVIEW AND ADOPTION of NON-CONTESTED POSITIONS
The Working Group may elect to discuss the following items even though no comments were received during
the exposure. If desired, a single motion can occur to adopt all of the following items.
1. Ref #2015-20: Placement Revisions to the AP&P Manual
2. Ref #2015-16: ASU 2015-06: Earnings per Share
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
2015-20
AP&P Manual
(Josh)
Placement Revisions to
AP&P Manual
1
No Comment
IP - 6
Summary:
On June 17, 2015, the Working Group moved this item to the nonsubstantive active listing and exposed
nonsubstantive revisions to incorporate a process to remove Issue Papers from the printed version of the
AP&P Manual, and include on the website, as detailed in the agenda item.
Interested Parties’ Comments:
Interested parties have no comment on the placement revisions; however we wish to comment on the
continued importance of the Issue Papers, especially as the bulk of the papers will no longer be part of
the printed accounting manual. Ref# 2015-20 states, “As expressed in the Statutory Hierarchy of the
Preamble, issue papers are not considered authoritative literature. The purpose of their inclusion in the
AP&P manual is to provide a historical reference of adopted issue papers and their substantive
revisions to authoritative literature.” As stated in the Statement of Concepts and the Preamble
(paragraph 50) “SAP utilizes the framework established by GAAP.” Not only are the Issue Papers to
“provide a historical reference of adopted issue papers and their substantive revisions to authoritative
literature,” but they were also developed to be consistent with the FASB Background information and
basis for conclusions included in each ASU. Per the FASB Rules of procedures:
The basis for the conclusions, which should describe the reasons (conceptual of otherwise) for
accepting certain alternatives and rejecting others and a summary of significant and relevant
points of view communicated through public forums and in written comments.
Many of us continue to refer to Issue Papers to provide additional context on issues finding them an
important tool of our accounting research.
© 2015 National Association of Insurance Commissioners
1
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Recommended Action:
Adopt revisions to the AP&P Manual as exposed.
Staff appreciates the comments made by interested parties regarding the importance of Issue Papers and is
in complete agreement. Within the last few years, staff has attempted to make issue papers more reflective
of the discussions held by the Working Group, interested regulators and interested parties.
2015-16
Appendix D
(Josh)
ASU 2015-06: Earnings
Per Share
2
No Comment
IP - 4
Summary:
On June 17, 2015, the Working Group moved this item to the nonsubstantive active listing and exposed
nonsubstantive revisions to Issue Paper No. 99 to reject ASU 2015-06 as not applicable to statutory
accounting.
Interested Parties’ Comments:
Interested parties have no comment on this item
Recommended Action:
Adopt nonsubstantive revisions to Appendix D—Nonapplicable GAAP Pronouncements to reject
ASU 2015-06 as not applicable to statutory accounting.
© 2015 National Association of Insurance Commissioners
2
SAPWG Hearing Agenda
REVIEW of COMMENTS on EXPOSED ITEMS
The Working Group will consider each of the following items separately.
1. Ref #2013-36: Investment Classification Project
2. Ref #2014-36: ASU 2013-06 – Not-For-Profit Entities – Services Received from Personnel of Affiliate
3. Ref #2015-03: Sale Leaseback with Nonadmitted Assets
4. Ref #2015-04: Prepayment Penalties and Amortization on Callable Bonds
5. Ref #2015-13: ASU 2015-04: Practical Expedient for the Measurement Date of An Employer’s
Defined Benefit Obligation and Plan Assets
6. Ref #2015-14: SSAP No. 68 – Paragraph 7 Clarification on Goodwill Limitation
7. Ref #2015-15: ASU 2015-05: Fees paid in a Cloud Computing Arrangement
8. Ref #2015-18: Policy Statement Revisions
9. Ref #2015-19: Quarterly Disclosures – Restricted Assets
10. Ref #2015-22: FAS 133 EITF’s
11. Ref #2015-27: Quarterly Reporting of Investment Schedules
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Ref #2013-36
SSAP No. 26
(Julie)
Investment Classification
Project
3
Comments
Received
IP – 12
Blackrock - 35
Summary:
This agenda item represents a comprehensive project to review the “investment SSAPs” with suggestions
to clarify definitions, scope, and the accounting method / related reporting. This project suggests the
development of new SSAPs to capture investments that are outside of specific “investment-type”
definitions and consider the elimination of “exceptions” within specific SSAPs and address specific
characteristics of those investments to ensure consistent and appropriate valuation and reporting. On
March 28, 2015, the Statutory Accounting Principles (E) Working Group exposed four discussion
documents to assist with the consideration of revisions under the Investment Classification Project:
•
•
•
•
Proposal to include a definition for “security”
Proposal to require a “contractual amount of principle due”
Analysis of exchange-traded fund (ETF) investments approved for reporting as bonds or preferred
stocks as of Dec. 31, 2013
Definitions of non-bond items. (Ref #2013-36)
Subsequent to the March exposure, an additional document detailing an analysis of ETF investments
approved for reporting as bonds or preferred stocks as of Dec. 31, 2014 was exposed in April 2015.
Interested Parties’ Comments:
Discussion – Inclusion of Security Definition in SSAP No. 26
This item proposes adopting the definition of a security found in U.S. GAAP by including it as a
footnote in SSAP 26, as well as considering at a later date if the definition should be included in the
AP&P Manual Master Glossary. Since the U.S. GAAP definition of a security is already in the AP&P
Manual (SSAP 37 and SSAP 83), we do not object to requiring it to be used for SSAP 26, or any other
SSAPs where the term “security” is referenced. As stated previously, we do believe the best approach is
to include the security definition in the Master Glossary rather than individually in each SSAP.
© 2015 National Association of Insurance Commissioners
3
SAPWG Hearing Agenda
Agreement with
Ref #
Title
Attachment #
the Exposed
Document?
Discussion – Requirement for “Contractual Amount of Principal Due”
Comment Letter
Page Number
Reference
This item proposes limiting the scope of SSAP 26 to investments that have a “contractual amount of
principal due.” The practical effect of this change would be that ETF’s and mutual funds would no
longer be in scope of SSAP 26. This item also contains a proposed new SSAP to address the accounting
for funds. As stated in our prior comment letter, we do not believe it is necessary to move funds to a
new SSAP nor review the accounting for these investments.
We understand from prior exposures related to 2013-36 and discussions with regulators, that the intent
of the Investment Classification Review is to clarify and improve the accounting for bonds and bondlike investments, and not to restrict the types of investments in which insurers are currently permitted to
invest under state investment laws and the AP&P Manual. With this understanding in mind, it is
troubling that the proposed new SSAP contains the following statement “Other types of fund
investments (e.g., closed-end funds, hedge funds, and unit investment trusts that are not ETFs) are not
specifically addressed within statutory accounting guidance and pursuant to SSAP No. 4 are considered
nonadmitted assets.” All of these investments are currently held by insurers and considered admitted
assets under SSAP 30 and SSAP 48, as well as state investment laws, and we are not aware of any
significant regulatory concerns related to them. We ask that the Working Group clarify the intent of this
statement and comment on whether the scope of the Investment Classification review has now changed.
If the Working Group decides to move forward with a new SSAP, it is important to do so carefully and
with industry input, to avoid unintended consequences. We also recommend the Working Group and
NAIC staff solicits feedback from interested parties on the different types of funds, how they are
structured and accounted for, to avoid additional issues like this from arising.
ETF-Financial Data Summary as of Year-End 2013 and 2014 (two separate items)
This item was originally exposed at the Spring NAIC meeting and provides and overview of ETF
holdings by the insurance industry as well as an analysis of the accounting for ETFs that hold bonds
and are eligible for the amortized cost measurement prescribed by SSAP 26. The original memorandum
contained data as of December 31, 2013 and was subsequently updated with 2014 data. The original
paper stated that requiring a fair value measurement for bond ETFs would have a negligible impact on
most insurers, and would result in companies consistently reporting these assets at a publically-traded
value which represents the amount available for policyholder claims. The updated paper makes a
statement that there is a strong need for separate reporting and a specific measurement for all ETF
investments, and provides several examples supporting this point, including details of inconsistencies
with how insurers are accounting for and reporting investments in bond ETFs.
As stated earlier, we do not believe a separate accounting model for funds is necessary. If insurers are
reporting or accounting for bond ETFs inconsistently, the most efficient way to address this problem is
to clarify the existing requirements in SSAP 26 and the annual statement instructions for the Schedule
D Part 1. Creating a new SSAP and potentially a new investment schedule to address all types of funds
because one particular subset requires review seems unnecessary, especially when bond ETFs represent
a very small portion of the overall fund universe invested in by insurers. Most funds owned by insurers
are reported as common stock (SSAP 30/ Schedule D Part 2) or as limited partnerships (SSAP
48/Schedule BA).
Additionally, assessing the impact that a change to fair value would have in a flat (historically low)
interest rate environment is not an accurate measure of the impact that such a change could potentially
have when rates begin to rise. We also disagree with the statement that fair value represents the amount
available for policyholder claims for bond ETFs, because that premise is inconsistent with the
© 2015 National Association of Insurance Commissioners
4
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
objectives of statutory accounting principles. Statutory accounting generally prescribes the valuation of
assets to meet both current and future policyholder claims and to avoid fluctuations in surplus, where
possible. Fair value would not be the appropriate measurement for meeting these objectives when bond
ETFs are held on a long-term basis to meet future policyholder claims. We ask the Working Group to
keep this principle in mind along with the immateriality of bond ETFs relative to all assets owned by
insurers when considering what, if any changes to make to the accounting and reporting for these
investments.
Discussion – Definitions of Non-Bond Items
This item provides definitions for debt-like investments outside of the bond definition proposed in
SSAP 26, asks for comments on the definitions, and requests feedback on whether other terms should
be defined for purposes of determining appropriate statutory accounting guidance. Interested parties
offer the following comments on each item, while noting we do not have additional investments to add
to the list at this time.
Loan Participations and Loan Syndications
There are a number of ways in which these investments can be defined. We recommend replacing the
proposed definitions with the definitions contained within the FASB Codification Master Glossary.
Loan Participation - A transaction in which a single lender makes a large loan to a borrower and
subsequently transfers undivided interests in the loan to groups of banks or other entities.
Loan Syndication - A transaction in which several lenders share in lending to a single borrower. Each
lender loans a specific amount to the borrower and has the right to repayment from the borrower. It is
common for groups of lenders to jointly fund those loans when the amount borrowed is greater than
any one lender is willing to lend.
A subset of both loan participations and syndications, are bank participations, where the underlying is a
loan that if originated directly by the insurer, would be accounted for under SSAP 26. We note that loan
participations and syndications where the underlying is a loan secured by real estate are accounted for
under SSAP 37 or SSAP 83. In speaking with several large insurers that invest in this asset class and
reviewing legal analysis of these investments, we have concluded that some structures may meet the
definition of a security, while others do not. There can be minor differences in the legal documents
unrelated to the economics of the investments that can impact this classification. We believe all loan
participations and syndications, where the underlying is a loan not secured by real estate, should
continue to be accounted for as a bond under SSAP 26.
To Be Announced (TBA Securities)
The TBA market is a mechanism to create liquidity for certain types of U.S. Government sponsored
agency securities. Therefore, we believe describing these investments as TBA Securities or
Transactions is unclear at best. We recommend the following alternative definition to clarify this point
as well as make other changes more consistent with our understanding of the TBA market.
TBA means “To-Be-Announced” and refers to a market that facilitates the enhanced liquidity in
and trading of Agency-Pass-Through Mortgage Backed Securities where the parties agree that the
seller will deliver to the buyer Agency Pass-Through Mortgage-Backed Securities of a specified
agency type, face amount, coupon and maturity on a specified date, at a specified price
representing a pool (or pools) of mortgage loans that are typically not known at the time of trade
but are “announced” 48 hours before the established trade settlement date (i.e., to be announced at
a future date). An Agency Pass-Through Mortgage-Backed Security means a mortgage backed
security issued by Ginnie Mae or a Government-Sponsored Enterprise (e.g., Freddie Mac or
Fannie Mae), for which the timely payment of principal and interest is either explicitly guaranteed
© 2015 National Association of Insurance Commissioners
5
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
by the U.S. Government (also known as Ginnie Mae Securities) or implicitly guaranteed by the
U.S. Government (also known as Conventional Securities), representing ownership interests in a
pool or pools of residential mortgage loans with the security structured to “pass through” the
principal and interest payments made by the mortgagees to the owners of the pool(s) on a pro rata
basis.
Hybrids
This section attempts to define different types of Hybrid investments that have characteristics of both
debt and equity. Currently, examples of Hybrid Securities are listed in the annual statement
instructions. We offer comments on each investment listed in the exposure:
Trust Preferred Securities – We offer no comments on the definition but note this type of investment
is commonly treated as a hybrid security for annual statement reporting.
Yankee Bonds – We offer no comments on the proposed definition. Yankee bonds, or bonds issued
by foreign entities denominated in U.S. dollars, generally meet both the current and proposed
definition of a bond in SSAP 26, and are not considered hybrid securities, unless they have equitylike features.
American Depository Receipts (ADRs) – Similar to Yankee bonds, ADRs are ordinary securities and
not considered hybrid securities. The only significant difference between an ADR and a bond is an
ADR represents an interest in a bond of a foreign corporation, where the interest is traded on a U.S.
exchange.
Zero Coupon Bond – We offer no comments on the definition, while noting that the zero coupon
feature in itself does not make this investment a hybrid security. Zero coupon bonds meet both the
current and proposed definition of a bond in SSAP 26.
Convertible Securities
The proposed definition (which was taken from U.S. GAAP) is accurate. The NAIC staff recommends
a separate project to review and define these investments. While the economics of these instruments are
very complex and they can be designed in many different forms, the amount of these investments
actually held by the insurance industry is extremely small. We do not believe a separate project to
address these investments is worth the efforts of the NAIC staff or Working Group.
Blackrock Comment’s: (This is only the summary. The details of the proposal are in the comment letter.)
We agree that industry and regulators alike would benefit from greater clarity in reporting NAIC
designated bond ETFs, and clearly there are demonstrable reporting inconsistencies (as highlighted in
Discussion Papers 3 & 5). However, we propose adhering to the current rationale of including NAIC
designated bond ETFs within SSAP 26 along with the other investments mentioned in Discussion Paper
4 that do not meet the new “Security” definition for SSAP 26 based upon the assessed risk of the
underlying securities (e.g. consideration for a “SSAP 26 – A” for bonds and “SSAP 26 – B” for bondlike investments). There are a number of reasons for this, which are broken out and described in greater
detail below.
We put forth an alternative proposal to resolve the current transparency issues & reporting
inconsistencies: similar to other fixed income investments on Schedule D Part 1, NAIC designated
bond ETFs should continue to be reported on Schedule D Part 1 but broken out into their own separate
sub-section. This would alleviate regulators’ concerns about not being able to locate each ETF within
the other reported bond holdings, help clarify important reporting differences for insurance companies
who hold ETFs, and hopefully reduce the number of reporting inconsistencies going forward.
© 2015 National Association of Insurance Commissioners
6
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
Importantly, it would continue to group NAIC designated bond ETFs, which are generally simple,
transparent pass-through portfolios of bonds, along with other fixed income investments and would
eliminate the potential for several other unintended consequences caused by inclusion within a new
“Funds” SSAP and a move to a new reporting schedule.
Recognizing that SSAP No. 26 uses an amortized cost measurement for bonds, however, and that an
“original cost” valuation method is no longer supported by ICP 14, we propose that NAIC consider an
amortized cost valuation methodology akin to that of other fixed income investments with multiple
individual positions and fluctuating cash flows. The method used to value NAIC designated bond ETFs
must be able to account for the changing composition of the ETF’s underlying bond portfolio over time
without introducing noise into the valuation process, in the form of interest rate fluctuations and market
influences, which should not be present from a statutory accounting perspective for fixed income
investments. Accordingly, BlackRock puts forth a preliminary proposal of an amortized cost valuation
methodology below. We are happy to work with regulators to assess the feasibility of this proposal.
Recommended Action:
Staff appreciates the comments received, and recommends that the Working Group take two
separate actions:
1)
Direct staff to proceed with including the definition of “security” (using the GAAP
definition), as well as definitions for specifically noted terms, into an issue paper detailing
revisions to SSAP No. 26.
2) Expose the Blackrock comment letter – specifically asking for comment on their proposed
calculation for an “amortized cost” for ETFs. This exposure is proposed to have a shortened
comment period ending Sept. 11, with a conference call scheduled to discuss on Sept. 24.
Discussion – Issue Paper Documentation:
A.
Security Definition – No comments were received objecting to the GAAP definition. Staff
recommends that the Working Group incorporate the exposed GAAP definition into SSAP
No. 26. (As part of the investment classification project, this conclusion would be detailed in the
issue paper with subsequent exposure of the guidance.)
Staff does not necessarily object to including the term “security” and definition in the master
glossary as recommended by interested parties, but this term is used in numerous times throughout
the Manual. Once included in the master glossary, the definition will apply to all manual references.
Staff has conducted a preliminary identified all of the “security” references in the AP&P
Manual and believes there would be any unintended consequences on the use of the GAAP
definition in some of the instances in which the term is used. Until a further review is completed,
staff suggests only including the definition in SSAP No. 26, and utilizing that definition for
subsequent discussion as part of the investment classification project.
B.
Non-Bond Definitions – Staff appreciates the comments received on the non-bond definitions. It
is staff’s recommendation that the Working Group direct staff to incorporate the
definitions for the following noted terms for subsequent review and discussion as part of
the issue paper revising SSAP No. 26.
•
Yankee Bonds – Include in SSAP No. 26 with Exposed Definition (removing from an
example as a hybrid security from the A/S instructions). Yankee bonds, or bonds issued by
© 2015 National Association of Insurance Commissioners
7
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
foreign entities denominated in U.S. dollars, generally meet both the current and proposed
definition of a bond in SSAP 26, and are not considered hybrid securities, unless they have
equity-like features.
•
American Depository Receipts (ADRs) – Include in SSAP No. 26 with Exposed Definition
(removing from an example as a hybrid security from the A/S instructions). Similar to
Yankee bonds, ADRs are ordinary securities and not considered hybrid securities. The only
significant difference between an ADR and a bond is an ADR represents an interest in a bond
of a foreign corporation, where the interest is traded on a U.S. exchange.
•
Zero Coupon Bond – Include in SSAP No. 26 with Exposed Definition (removing from an
example as a hybrid security from the A/S instructions).The zero coupon feature does not
make this a hybrid security. Zero coupon bonds meet both the current and proposed definition
of a bond in SSAP 26.
•
Loan Participations – Include in SSAP No. 26 with exposed definition. Although interested
parties suggested modifications to these definitions to match the GAAP glossary, the exposed
definition includes the GAAP glossary as well as information from the GAAP Codification
that further describes the components of the item. (Info from GAAP provided below).
•
Loan Syndications – Include in SSAP No. 26 with exposed definition. Although interested
parties suggested modifications to these definitions to match the GAAP glossary, the exposed
definition includes the GAAP glossary as well as information from the GAAP Codification
that further describes the components of the item. (Info from GAAP provided below).
•
Convertible Securities – Include in SSAP No. 26 with exposed definition. Although
interested parties did not agree that a separate project is needed, staff would suggest that
subsequent consideration occur due to the amount of questions received. (This project is
suggested to occur outside of the current investment discussion on SSAP No. 26.)
As part of the project to incorporate definitions, staff suggests that the following terms be included in the
issue paper with the ultimate intent to recommend revisions to the Annual Statement instructions:
•
To Be Announced (TBA): TBA means “To-Be-Announced” and refers to a market that facilitates
the enhanced liquidity in and trading of Agency-Pass-Through Mortgage Backed Securities where
the parties agree that the seller will deliver to the buyer Agency Pass-Through Mortgage-Backed
Securities of a specified agency type, face amount, coupon and maturity on a specified date, at a
specified price representing a pool (or pools) of mortgage loans that are typically not known at
the time of trade but are “announced” 48 hours before the established trade settlement date (i.e., to
be announced at a future date). An Agency Pass-Through Mortgage-Backed Security means a
mortgage backed security issued by Ginnie Mae or a Government-Sponsored Enterprise (e.g.,
Freddie Mac or Fannie Mae), for which the timely payment of principal and interest is either
explicitly guaranteed by the U.S. Government (also known as Ginnie Mae Securities) or implicitly
guaranteed by the U.S. Government (also known as Conventional Securities), representing
ownership interests in a pool or pools of residential mortgage loans with the security structured to
“pass through” the principal and interest payments made by the mortgagees to the owners of the
pool(s) on a pro rata basis.
•
Hybrids – Remove examples from the definition, except for reference to trust preferred securities.
© 2015 National Association of Insurance Commissioners
8
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
The following illustrates the information from GAAP regarding loan participants and loan syndications.
As noted above, the proposed definition for SAP includes the information from the GAAP glossary, as
well as information included in the FASB Codification that provides further details on these transactions:
Loan Participations: A transaction in which a single lender makes a large loan to a borrower and
subsequently transfers undivided interests in the loan to groups of banks or other entities.
860-10-05-22: In certain industries, a typical customer’s borrowing needs often exceed its bank’s
legal lending limits. To accommodate the customer, the bank may participate the loan to other banks
(that is, transfer under a participation agreement a portion of the customer’s loan to one or more
participating banks).
860-10-05-23: Transfers by the originating lender may take the legal form of either assignments or
participations. The transfers are usually on a nonrecourse basis, and the transferor (originating
lender) continues to service the loan. The transferee (participating entity) may or may not have the
right to sell or transfer its participation during the term of the loan, depending on the terms of the
participation agreement.
470-50-55-1: Based on the definition of a loan participation, for purposes of applying the guidance in
this Subtopic, the debt instrument would be the contract between the debtor and the lead bank.
Participating banks are not direct creditors but, rather, have an interest represented by a certificate
of participation. In the event of a modification or exchange between the debtor and lead bank, the
debtor shall apply the guidance in this Subtopic.
Loan Syndications: A transaction in which several lenders share in lending to a single borrower.
Each lender loans a specific amount to the borrower and has the right to repayment from the
borrower. It is common for groups of lenders to jointly fund those loans when the amount borrowed
is greater than any one lender is willing to lend.
310-10-25-4: Each lender in a syndication shall account for the amounts it is owed by the borrower.
Repayments by the borrower may be made to a lead lender that then distributes the collections to
the other lenders of the syndicate. In those circumstances, the lead lender is simply functioning as a
servicer and, therefore, shall not recognize the aggregate loan as an asset.
470-50-55-2: Based on the definition of a loan syndication, for purposes of applying the guidance in
this Subtopic, separate debt instruments exist between the debtor and the individual creditors
participating in the syndication. If an exchange or modification offer is made to all members of the
syndicate and only some of the creditors agree to the exchange or modification, the guidance in this
Subtopic would be applied to debt instruments held by those creditors that agree to the exchange or
modification. Debt instruments held by those creditors that do not agree would not be affected.
860-10-55-4: In addition, a loan syndication is not a transfer of financial assets. See paragraph 31010-25-4 for further guidance on a loan syndication.
Discussion – Exposure – Blackrock Comment Letter:
C. Contractual Amount of Principal Due – Staff recommends that the proposal for amortized
cost included within the Blackrock proposal be exposed for comment. In presentations
completed through the interim staff highlighted the comments received (very high-level) and
comments were received from attendees (insurers) disagreeing with the concept for a calculated
amortized cost. NAIC staff also received informal emails noting concerns. (A formal comment letter
was not deemed appropriate as the proposal was not officially exposed.) In order to allow for
proper review and consideration of the Blackrock proposal, staff suggests exposure for a
shortened comment period ending Sept. 11. A call is already scheduled to discuss on Sept. 24.
© 2015 National Association of Insurance Commissioners
9
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
2014-36
SSAP No. 25
(Julie)
ASU 2013-06 – Not-ForProfit Entities – Services
Received from Personnel
of Affiliate
4
Comments
Received
Comment Letter
Page Number
Reference
IP - 19
Summary:
This agenda item reviews ASU 2013-06, issued by FASB to address diversity in practice regarding the
recognition of services provided by the personnel of an affiliate, when those services are provided at nocharge to a not-for-profit affiliated entity. From the original review, NAIC staff recommended rejecting
the GAAP guidance as it is specific to not-for-profit entities, and guidance is detailed in Model Act #440.
However, with the proposed rejection, staff recommended revisions to SSAP No. 25 to incorporate
references and disclosures for services provided.
Although interested parties agree with the rejection of ASU 2013-06, comments were received regarding
the expanded disclosures proposed in SSAP No. 25. After considering these comments, during the 2015
Spring National Meeting, the Working Group directed staff to move the proposed disclosure into a new
subparagraph and re-expose. (The proposed revisions originally proposed as an expansion of a disclosure
that details information regarding asset transfers.) The following was the proposed disclosure (new
subparagraph 19g) exposed during the Spring National Meeting:
19g.
Information on transactions involving services received and/or transferred by the
reporting entity, including the fair value of the services received or transferred. (If
fair value is not determinable, the cost to the related party providing the services
shall be used as a proxy.)
Interested Parties’ Comments:
Because the re-exposure of this item simply moved the disclosure that was proposed in November
2014, interested parties still have the same concerns that were noted in our letter to the Working Group
dated January 16, 2015. Specifically:
•
Interested parties believe the proposed revisions to SSAP 25 paragraph 18 are not necessary, as
these revisions do not represent or clarify accounting guidance. In addition, we do not believe it is
necessary or prudent to attempt to clarify, in accounting guidance outside of Appendix A-440,
narrow aspects of a particular type of holding company transaction that would be encompassed by
Appendix A-440.
•
Regarding the proposed disclosures for new paragraph 19g of SSAP 25, we do not believe that a
new fair value disclosure is necessary or useful to statutory financial statements, especially when
such a disclosure is not even required under U.S. GAAP, which makes more use of fair value
accounting than statutory accounting. In fact, ASU 2013-06 allows the use of cost or fair value in
certain circumstances in transactions involving services between not-for-profit affiliates, but does
not require any such disclosure involving fair value.
•
Interested parties also note that material service contracts between affiliates are already disclosed
in statutory financial statements under the requirements of SSAP No. 25 paragraph 19f, are
subject to domiciliary state regulatory scrutiny and approval, and such transaction amounts are
typically recorded at cost. Furthermore, amounts pertaining to such service transactions are
disclosed in Schedule Y – Part 2, column 8 (“Management and Service Contracts”).
Interested parties again request that the proposed revisions of Ref# 2014-36 be rejected. However, if
the Working Group still believes some disclosures are necessary as a result of NAIC staff’s review of
ASU 2013-06, we recommend that such disclosure be limited to services that are in the scope of ASU
© 2015 National Association of Insurance Commissioners
10
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
2013-06. Specifically, we request that the disclosure be limited to services that are provided by the
reporting entity to a not-for-profit (NFP) affiliate that directly benefit the recipient NFP affiliate and
for which the reporting entity does not charge the recipient NFP. Charging the recipient NFP means
requiring payment from the recipient NFP at least for the approximate amount of the direct costs (for
example, compensation and any payroll-related fringe benefits) incurred by the reporting entity in
providing a service to the recipient NFP or the approximate fair value of that service.
Recommended Action:
Although comments received continue to discourage the need for disclosures on transactions
involving services, staff continues to suggest that the regulators consider disclosures for service
transactions, particularly for situations in which there is no charge for services. However, staff
defers to the regulators on whether these disclosures would be beneficial. There is no disagreement
regarding the rejection of GAAP guidance in ASU 2013-06. As such, staff requests direction from
regulators on two possible options:
1) Reject ASU 2013-06 in SSAP No. 25 with no disclosure revisions.
2) Reject ASU 2013-06 in SSAP No. 25 and expose disclosure revisions for all related-party
service contracts.
Staff agrees with rejecting the GAAP guidance (originally proposed in the agenda item), as the
GAAP guidance is specific to transactions with not-for-profit affiliates. Staff disagrees with the IP
proposal to mirror the GAAP disclosure for ASU 2013-06, as it only reflects transactions with one
type of affiliate, and if enhanced disclosures are desired, staff would suggest enhanced disclosures
for all related-party service contracts.
If the regulators do not wish to receive the fair value detail of services as previously exposed, staff
would suggest the following revisions to still clarify the guidance in paragraph 18 and expanded
disclosures for services at no charge:
18. Transactions involving services provided between related parties shall be recorded at the
amount charged. Regulatory scrutiny of related party transactions where amounts charged
for services do not meet the fair and reasonable standard established by Appendix A-440
(including services provided at no charge), may result in (a) amounts charged (or the fair
value of services received) being recharacterized as dividends or capital contributions, (b)
transactions being reversed, (c) receivable balances being nonadmitted, or (d) other
regulatory action. Expenses that result from cost allocations shall be allocated subject to the
same fair and reasonable standards, and the books and records of each party shall disclose
clearly and accurately the precise nature and details of the transaction. See SSAP No 70—
Allocation of Expenses for additional discussion regarding the allocation of expenses.
19. The financial statements shall include disclosures of all material related party transactions.
In some cases, aggregation of similar transactions may be appropriate. Sometimes, the
effect of the relationship between the parties may be so pervasive that disclosure of the
relationship alone will be sufficient. If necessary to the understanding of the relationship, the
name of the related party should be disclosed. Transactions shall not be purported to be
arm’s-length transactions unless there is demonstrable evidence to support such statement.
The disclosures shall include:
19f.
A description of material management or service contracts and cost-sharing
arrangements involving the reporting entity and any related party, including
explicit identification on whether the service was provided at no charge. Service
contracts subject to this disclosure This shall include, but is not limited to, sale
© 2015 National Association of Insurance Commissioners
11
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
lease-back arrangements, computer or fixed asset leasing arrangements, and
agency contracts, which remove assets otherwise recordable (and potentially
nonadmitted) on the reporting entity’s financial statements;
Ref #2015-03
SSAP No.22
(Julie)
Sale-Leaseback with
Nonadmitted Assets
5
Comments
Received
IP – 20
AICPA - 42
Summary:
On March 28, 2015, the Statutory Accounting Principles (E) Working Group moved this agenda item to
the substantive active listing and exposed to get initial feedback before providing staff direction. This
agenda item focuses on the following elements:
•
Incorporate guidance to clarify that the reference to “property” in the sale-leaseback section has
the same scope as the full SSAP - property, plant or equipment (land or depreciable assets). This
item also suggests clarifying the guidance specific to “real estate” versus “non-real estate.”
•
Incorporate guidance to clarify when sale-leaseback transactions involving nonadmitted assets
shall follow the deposit method of accounting. (Revisions under this item would be proposed to
either require all such transactions to follow the deposit method of accounting, or, if the Working
Group wants to allow these items, clarify that they are permitted in SSAP No. 22.)
•
Incorporate guidance and/or revisions to clearly identify and reflect the guidance adopted under
GAAP. This item proposes to incorporate the current GAAP guidance in ASC 840-40 to the
extent that the pre-codification GAAP standards were adopted by the Working Group, with the
modifications previously adopted unless items are specifically noted for reconsideration.
Interested Parties’ Comments:
Summary
• As to whether non-admitted assets should be included in the sale-leaseback guidance, interested
parties believe the present guidance in SSAP No. 22, paragraph 27(d) is very explicit that nonadmitted assets can be subject to sale-leaseback accounting. Paraphrasing that section, saleleaseback accounting shall be used if a transaction meeting certain criteria involves “(d) admitted
assets, if the lessor is a related party, or either admitted or nonadmitted assets if the buyerlessor is not a related party” (bolding added). Statutory guidance explicitly allows the inclusion
of non-admitted assets as qualifying for a sale-leaseback today. Clarification is not needed on that
point. Any confusion on the history of the statutory consideration of numerous GAAP
developments should not detract from the explicit guidance.
•
Interested parties also agree with the current guidance that a sale-leaseback transaction with
related parties involving nonadmitted assets should be excluded from sale-leaseback accounting.
Both SSAP No. 25 and SSAP No. 97 also have provisions to prevent such transactions from
enhancing surplus. We distinguish such transactions with related parties from the financing with
an unrelated third party. In financing transactions with an unrelated third party, new money has
been injected into the group and the insurance company is better off by monetizing a nonadmitted asset like software, converting it into cash that is available to pay policyholder claims or
be invested for future earnings.
© 2015 National Association of Insurance Commissioners
12
SAPWG Hearing Agenda
Ref #
•
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Regarding staff’s request to review and update SSAP No. 22, we do not believe that it is
necessary to make significant changes to the current guidance in SSAP No. 22. The FASB is
expected to issue significant revisions to lease guidance later this year which will require the
Working Group to consider the applicability of that guidance for statutory purposes. Therefore it
seems wise to wait until that guidance is issued. SSAP 22 has generally been well understood and
worked fine so the use of any resources on this point does not seem well advised. Any
inconsistencies in the various references to property can be addressed by adding basic definitions
to SSAP No. 22 to clarify that all depreciable property is eligible for sale-leaseback accounting.
Interested Parties Detailed Discussion
The remainder of the comments discusses our positions in greater detail and provides our responses to
the three questions that staff asked to solicit feedback to assist the Working Group in providing staff
direction:
1. Incorporate the guidance to clarify that the reference to “property” in the sale-leaseback
section has the same scope as the full SSAP – property plant or equipment (land or depreciable
assets). This proposal also suggests clarifying the guidance specific to “real estate” versus
“non-real estate.”
Interested parties believe that all depreciable assets are included under the sales-leaseback accounting
guidance in SSAP No. 22 today and should continue to be included. Sale-leaseback transactions are a
valid form of financing to monetize an asset. In practice there are no limitations on the types of
depreciable assets that could be included in a sale-leaseback transaction. As such, we recommend that
the term Property, Plant or Equipment be used in the sale-leaseback accounting guidance in SSAP No.
22 to describe the assets included in this guidance. Property, plant or equipment is an all-inclusive
term which encompasses all depreciable assets, while the term property could be interpreted to refer to
real estate only. We recommend adding the following clarifying language to define the assets included
under the guidance in the Sale-Leaseback Transactions section of SSAP No. 22:
21. The guidance in this section applies to all depreciable assets, including but not
limited to real-estate, leasehold improvements, furniture and fixtures, transportation
vehicles, equipment, software, etc. The term property, plant or equipment shall be
used to describe the assets covered in this section.
The numbering sequence for all paragraphs subsequent to this new paragraph should be revised
accordingly. We suggest that wherever the term property is used in SSAP No. 22, including Appendix
A, it be replaced by property, plant or equipment. We also suggest that to avoid confusion as to which
assets are included in this guidance, the references to real estate and real estate with equipment in
paragraph 26 be replaced with property, plant or equipment, as the guidance in SSAP No. 22 applies
to all depreciable assets.
2. Incorporate guidance to clarify when sale-leaseback transactions involving nonadmitted assets
shall follow the deposit accounting method. (These revisions would be proposed to either
require such transactions to follow the deposit method of accounting, or, if the working group
wants to allow these items, clarify that they are permitted within SSAP No. 22.)
Interested parties strongly object to this statement. We believe that an arms-length sale-leaseback
transaction with a non-affiliate involving nonadmitted assets should follow sale-leaseback accounting.
As stated in our response to Question 1 above, sale-leaseback transactions with a non-affiliate is a
© 2015 National Association of Insurance Commissioners
13
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
valid form of financing. In order to apply the SSAP No. 22 sale-leaseback guidance, the following
criteria in paragraph 27 of SSAP No. 22 must be met:
a. A normal leaseback as described in paragraph 28.
b. Payment terms and provisions that adequately demonstrate the buyer-lessor’s initial and
continuing investment in the property (refer to Appendix A, paragraphs 50-58).
c. Payment terms and provisions that transfer all of the other risks and rewards of ownership
as demonstrated by the absence of any other continuing involvement by the seller-lessee
described in paragraphs 31- 33 of this section and paragraphs 25 – 29 and 41- 43 of FAS 66.
d. Admitted assets, if the buyer – lessor is a related party, or either admitted or nonadmitted
assets if the buyer-lessor is not a related party. For purposes of this paragraph, related
parties include those identified in SSAP No. 25 and entities created for the purpose of
buying and leasing nonadmitted assets for the reporting entity and/or its affiliates.
If these criteria are met, the leased asset is sold and is permanently deleted from the balance sheet.
Insurance entities should not be penalized by having to follow deposit accounting rules because the
sale-leaseback transaction with a non-affiliate involved a nonadmitted asset. Some potential adverse
impacts from having to follow deposit accounting rules even though the transaction was at armslength and with a non-affiliate are:
a. Preventing an insurer from taking advantage of a viable financing alternative.
b. Having to borrow at higher rates.
c. Having to follow more complicated accounting method.
d. Taking a surplus charge where a nonadmitted asset was cleared from the books through a
legitimate arms-length transaction.
We recommend the following wording be added to SSAP No. 22:
Sale-leaseback transactions with non-affiliates involving nonadmitted assets shall follow the saleleaseback accounting guidance in SSAP No. 22, if the transaction meets the requirements of
paragraph 27 of SSAP No. 22.
3. Incorporate guidance/revisions to clearly reflect the guidance adopted under GAAP. This
proposal would incorporate current GAAP guidance in ASC 840-40 to the extent that the precodification GAAP standards were adopted by the Working Group, with the modification
previously adopted unless items are specifically noted for reconsideration.
Interested parties believe that the suggested wording changes noted in responding to questions 1&2
above provide sufficient guidance and no further GAAP revisions to the guidance are necessary at this
time. GAAP does not include the concept of nonadmitted assets and to add more GAAP guidance to
SSAP No. 22 when the salient issue involves nonadmitted assets may only cause confusion.
AICPA Comments
Paragraph 27 of SSAP 22 states the following and appears to be explicit that a sale/leaseback of a nonadmitted asset with unrelated third parties is specifically allowed. If the SAP Working Group choses
© 2015 National Association of Insurance Commissioners
14
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
the modify the accounting for these transactions, we suggest the change be considered a revision to the
current guidance, with appropriate transition, as opposed to a “clarification” as proposed in the Form A.
27. Sale-leaseback accounting shall be used by a seller-lessee only if a sale-leaseback transaction
includes all of the following:
d. Admitted assets, if the buyer-lessor is a related party, or either admitted or non-admitted assets
if the buyer-lessor is not a related party. For purposes of this paragraph, related parties include
those identified in SSAP No. 25 and entities created for the purpose of buying and leasing nonadmitted assets for the reporting entity and/or its affiliates.
Recommended Action:
Staff agrees with interested parties that a detailed project to review SSAP No. 22 at this time may not be
the best use of time as the FASB project on leases is expected to be issued shortly. However, staff
identifies that this agenda item was provided in response to regulator questions due to concerns that the
current guidance allows for the possibility to arbitrarily remove nonadmitted assets from financial
statements to temporarily improve the reported surplus position. Staff also agrees that the current guidance
in SSAP is explicit that the guidance allows sales-leaseback with nonadmitted assets with nonrelated
parties. However, staff is not certain (per the guidance in paragraph 27 of the Issue Paper) that the broad
application was fully intended. Staff does not suggest revisions to SSAP No. 25 as recommended by
interested parties. Although these revisions seems to be simple changes, these revisions would have a
significant impact on what was previously adopted GAAP guidance, and would require much more detail
within the SSAP. (Including these proposed revisions would significantly modify what was adopted under
GAAP and require documentation highlighting these GAAP modifications.)
Staff believes that the guidance was identified as concerning by regulators as the guidance does not
provide the ability for domiciliary-state regulators to require use of the deposit method when the regulator
is concerned with the merits of the sale-leaseback transaction. However, with the current GAAP
guidance pending, unless Working Group members want staff to proceed with drafting revisions at
this time, staff recommends that the Working Group defer consideration of this agenda item. Staff
anticipates that when the FASB guidance is issued, the Working Group will likely be recommended to
dispose of this agenda item and consider the new GAAP guidance in a separate agenda item. However,
staff does not object to retaining this as an agenda item for now in case there is a delay in the FASB
issuance and these issues are requested to be further discussed.
Ref #2015-04
SSAP No.26
(Josh)
Prepayment Penalties
and Amortization on
Callable Bonds
6&7
Comments
Received
IP - 23
NYL – 33
Conning – 44
Summary:
On March 28, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 26. These exposed
revisions would require prepayment penalties and acceleration fees to be reported as realized capital gains,
clarify the yield-to-worst concept for continuously callable bonds, and revise the guidance for bonds with
make-whole call provisions. Illustrations for the application of the exposed guidance are also included for
comment in the agenda item.
© 2015 National Association of Insurance Commissioners
15
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Interested Parties’ Comments:
This item proposes three changes to the accounting for bonds and mortgage loans (1) Require
prepayment penalties and acceleration fees on bonds and mortgage loans to be reported as realized
capital gains instead of net investment income, (2) Incorporate guidance to clarify the yield to worst
concept for bonds, and (3) Require make-whole provisions on bonds to be considered in applying the
yield to worst guidance. We will address each of these items separately.
Accounting for Prepayment Penalties and Acceleration Fees
The proposed changes to SSAP No. 26 and SSAP No. 37 would require that prepayment penalties and
acceleration fees be reported as realized gains, rather than the current treatment as net investment
income. We do not see a compelling reason to make this change. Below we will outline some reasons
why the current treatment is appropriate, but first we would like the Working Group to consider
whether the costs exceed the benefits of this proposal. Prepayment and make-whole fees represent an
insignificant proportion of investment income received by insurers and generally are not exercised
often by issuers. So, this change will not significantly impact the financial statements of insurers.
However, the costs of implementing this change will be significant.
Insurers will be required to reprogram their investment systems to accommodate the change.
Additionally, new processes and controls will need to identify these payments and reclassify them as a
capital gain. Also, a new difference between U.S. GAAP and statutory accounting will be created
requiring insurers to audit and explain this difference. Insurers and regulators are faced with an everincreasing number of regulatory proposals dealing with accounting, reporting, capital, reserves and
other areas. We believe it would be beneficial to all parties for regulators to consider the materiality and
costs/benefits of individual proposals when deciding whether they should be adopted. On this basis, we
believe this proposed change should be rejected. If regulators are concerned with the impact of these
payments to the financial statements of insurers, a much more cost effective solution would be to create
a new disclosure or other mechanism for identifying them in the Schedule D. If the Working Group is
concerned with the impact of these payments to the financial statements of insurers, a far more cost
effective solution would be to create a new footnote in the Exhibit of Net Investment Income or a new
disclosure identifying prepayment penalties and acceleration fees.
With respect to the nature and appropriate treatment for prepayment penalties including make-whole
provisions, these payments are generally considered compensation for lost investment income by
investors. The provisions in loan agreements generating these payments can only be invoked by the
issuer, which makes them distinct from capital gains and losses from sales, which occur at the option of
the investor. As a result, we believe treatment as net investment income is appropriate. If, however, the
Working Group decides to move forward with the proposal, the guidance would need to be made
effective on a prospective basis, to avoid requiring insurers to go back in time and adjust historical IMR
balances.
Requiring Make Whole Provisions to Be Considered In the Yield To Worst Guidance
The proposed changes to SSAP No. 26 to consider to make whole provisions when determining the
timeframe for amortizing bond premium or discount and the amount to which a bond is amortized is
non-operational. Make-whole provisions are most commonly found in private placement fixed income
transactions originated by insurance entities. Most of these investments can be called at any time by the
borrower and have some form of a make-whole provision. The make-whole provision is typically equal
to a benchmark interest rate (Treasury, LIBOR) plus a spread. These provisions are designed to
compensate the insurer for loss investment income should the bond be called when the bond’s interest
rate is higher than current market rates.
© 2015 National Association of Insurance Commissioners
16
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Make-whole provisions vary with changes in interest rates and investors cannot determine the call price
of the bond in advance. As a result, it is not practical to incorporate make-whole provisions in the
amortization or measurement guidance of SSAP No. 26, unless information is known by the insurer
indicating that the issuer is expected to invoke the provision in the near future, and the call price can be
estimated. SSAP No. 26 as written, including the clarifications adopted in 2013-21, provides adequate
and appropriate guidance for these situations.
If insurers were required to estimate call prices by forecasting make-whole provisions, this would be a
very costly and time consuming exercise. The result would be amortizing premium or discount to a
hypothetical amount that would have to be adjusted each period as interest rates and the amount of the
call price changes. If the call price couldn’t be estimated and insurers were required to immediately
expense any premium above par (as suggested in the proposal), private placement securities would
become a less attractive investment for insurers. We do not believe this result to be a desired outcome
by regulators.
Guidance Clarifying the Yield to Worst Guidance
The Working Group previously adopted 2013-21, which clarified the amortization requirements for
bonds with make whole call provisions and bonds that are continuously callable. The revisions did not
require insurers to consider make-whole call provisions in determining the timeframe for amortizing
bond premium or discount unless information is known by the reporting entity indicating that the issuer
is expected to invoke the provision. Interested parties did not object to this proposal as it clarified our
interpretation of the existing amortization guidance and was generally consistent with long-standing
industry practice. We do not believe additional clarifications to SSAP No. 26 are necessary, but if the
Working Group moves forward with this part of the proposal, then we offer the following additional
comments:
•
•
•
•
We believe the amortization guidance proposed in paragraph 7 sections a, b, and c of SSAP No.
26 is generally consistent with how our investment systems currently amortize premiums and
discounts.
We object to the proposed requirement in section b that states “For callable bonds without a
lockout period (which includes bonds with make whole call provisions) the BACV (at the time of
acquisition) of the callable bonds shall equal the lesser of the next call price (subsequent to
acquisition) or cost.” This statement would change the measurement of these bonds from
amortized cost to a “lower-of” approach. We believe this situation to be very uncommon, as the
market price would typically not exceed any potential call price. In addition, since make-whole
provisions are typically not fixed, we would not be able to apply this guidance to the acquisition
of bonds with make-whole provisions. Since this is a measurement change, the costs of reprogramming our investment system would be significant, and given this situation is unlikely to
occur, we believe the costs far outweigh any benefits of this proposed change.
We do not believe the situation described in paragraph 7 section d (a bond having scheduled call
dates and a make-whole provision) exists and recommend deleting this example from the
proposal.
Examples 1-4 in the proposal are generally consistent with how our investment systems treat
amortization today. We do not believe the situation described in Example 5 exists and recommend
it be deleted. We recommend deleting Examples 6-7 because they involve estimating make-whole
provisions as described earlier.
© 2015 National Association of Insurance Commissioners
17
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Conning Comments:
We support the NAIC staff’s goal to disclose investment activity in a clear and transparent manner.
However, we do not believe reporting Prepayment Penalties/Fees as a capital gain accomplishes this
goal. Capital gains and losses result from a market based decision made by the investor to sell
securities. Prepayment penalties/fees result from a decision made by the issuer to compensate the
investor for foregone future interest payments that will be lost. This forces the investor to take the
prepayment fees paid and reinvest those funds presumably at a lower interest rate. Therefore we believe
the current guidance to report these fees as investment income is appropriate. This can be reported in
one of two ways.
1. The prepayment fee can be reported as interest received in column in column 20 of the Schedule
D-4
2. The prepayment fee can be reported in column 12 as an “increase by adjustment” (accrual of
discount) to the basis of the bond.
When an investor purchases a bond with a prepayment penalty/make-whole provision, that information
is used by the investor to determine the cost of the investment and correspondingly is reflected in the
ultimate yield associated with the security. As a result, any ultimate realization of that event should also
be recorded as an adjustment to yield through “investment income.”
GAAP Philosophy on Prepayment fees:
Regarding the income statement, the Board believes that the measurement objective of interest income
is to reflect the rate of return implicit in a debt instrument (that is, the contractual interest rate adjusted
for any net deferred loan fees, premiums, or discounts existing upon initial recognition, which is
referred to as the effective interest rate). Importantly, that rate of return includes the compensation that
a lender receives for taking on the credit risk inherent in the debt instrument and the contractual cash
flows. (Source: Financial Instrument – Credit Losses (Sub-topic 825-15) FAQ document dated
3/25/2013
Finally the reporting of prepayment fees as investment income, is consistent with existing statutory
guidelines (SSAP 26 paragraphs 15, 18, SSAP 37 and SSAP 43R).
Amortization on Callable Bonds:
We have no opposition to the language relating to callable bonds and amortization on a yield to worst
basis. However, some of the examples highlighted by the NAIC staff include the infrequent
combination of several different call features and may require enhancements from current Vendors that
support the statutory investment schedules.
New York Life Comments:
We agree with the proposal to clarify that prepayment penalties and acceleration fees are interest rate
driven and should be reported as interest related realized capital gains subject to the IMR instead of
investment income, including the proposed revision to SSAP No. 37 on mortgage loan prepayment
penalties.
Prepayment penalties, which are usually referred to as make-whole provisions, are meant to protect
investors from the loss of future expected interest income that results from the prepayment of a bond in
a lower interest rate environment. Typical terms require the issuer to make a lump sum payment to the
bond holder, which is derived from an agreed upon formula. The formula is based on the par amount
plus the net present value (NPV) of the future coupon interest payments that will not be paid because of
© 2015 National Association of Insurance Commissioners
18
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
the call, using treasury rates plus a set spread. The make whole provision goes into effect when the
current interest rate environment is substantially lower than the bond’s prevailing coupon rate.
As you acknowledge in your proposal, there are some inconsistencies between the statutory accounting
standards and the annual statement instructions. SSAP 26 states that bond “prepayment and
acceleration fees” should be included in net investment income when received. However, SSAP 26
does not define these terms. It is not clear whether "make whole” provisions or other types of call
provisions were meant to be part of this guidance. The NAIC annual statement instructions for IMR
state that realized gains on called bonds must be reported in the IMR.
NYL’s view is that gains on calls are interest related since the make-whole formula is inherently based
on current interest rates, and these calls are triggered when the investment is called in a lower interest
rate environment than when it was issued. Therefore, all make-whole provisions should be recorded as
realized gains and deferred into the IMR. The purpose of the IMR is to minimize the effect that realized
gains and losses attributable to interest rate movements have on current year surplus by deferring and
amortizing such capital gains and losses, net of tax, over the approximate remaining life of the
investments sold. In our view, reporting these amounts in the IMR is the appropriate accounting
treatment for make-whole provisions and is in the best interests of the policyholders. The IMR
amortization would more closely “mirror” the way in which the interest payments would have been
recorded if the bond had been held to maturity and better reflects the amount that should be credited to
policyholders on whole life and universal life policies.
We also suggest that any changes that are adopted be applied prospectively as it would be operationally
ineffective to adjust previous amounts reported for IMR.
Staff Discussion
Below, staff has summarized key discussion points from interested parties’ comments and provided
analysis and recommendations in response to comments received.
Prepayment Penalties - Investment Income or Gain
A majority of the comments received focused on the exposed revision to have prepayment penalties
recognized as realized capital gains, instead of the current accounting treatment of investment income. As
detailed above, comments received both supported and opposed this revision. Staff has summarized the
comments for these positions below:
Realized Capital Gain (Subject to IMR)
• Gains on calls are interest related and the make-whole formula is inherently based on current
interest rates. Therefore, make-whole provisions should be recorded as realized gains and deferred
into the IMR (on basis of the definition of IMR).
• The purpose of the IMR is to minimize the effect that realized gains and losses attributable to
interest rate movements have on current year surplus. The IMR amortization would more closely
“mirror” the way in which the interest payments would have been recorded if the bond had been
held to maturity and reporting these amounts in the IMR is in the best interests of the
policyholders.
Investment Income (Current Accounting Treatment)
• Do not see a compelling reason to revised the accounting treatment as prepayment and makewhole fees represent an insignificant proportion of investment income received by insurers and
generally are not exercised often by issuers. As such, these fees will not significantly impact the
financial statement of insurers, but the cost to implement changes will be significant.
© 2015 National Association of Insurance Commissioners
19
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
•
Capital gains and losses result from a market based decision made by the investor to sell
securities. Prepayment penalties/fees result from a decision made by the issuer to compensate the
investor for foregone future interest payments that will be lost.
•
A new difference between U.S. GAAP and statutory accounting will be created requiring insurers
to audit and explain this difference.
Upon further review of the accounting impact for prepayment penalties, staff notes that if the prepayment
penalty is classified as investment income, the company recognizes two accounting benefits on the
exercise date; 1) The loss recognized (BACV-Par) will decrease the IMR liability (balance sheet benefit)
and 2) The penalty recognized as investment income (Consideration-Par) would increase revenue (income
statement benefit). If the recognize it as gain, at the exercise date offset, the gains and losses with offset
with the net amount increasing/decreasing IMR.
As noted by interested parties, if the Working Group elects to recognize prepayment penalties as realized
capital gains, a new difference between GAAP and SAP will be created requiring insurers to audit and
explain this difference. Through staff’s review of GAAP and discussions with an AICPA representative, it
was identified that GAAP guidance is not specific on the presentation of prepayment penalties, but rather
focuses on when recognition shall occur. Additionally, it was identified that there are at least two views
with respect to the treatment of prepayment penalties, interest income and gain on settlement and both are
acceptable with ample footnote disclosure.
Presentation of Prepayment Penalties
Comments received from interested parties noted that if regulators are concerned with the impact of these
payments to the financial statements of insurers, a much more cost effective solution would be to create a
new disclosure or other mechanism for identifying them in the Schedule D.
During staff’s review of some entities Schedule D-Part 4, which had bonds disposed of as a result of a
make whole provision; it was identified that the amount reported in column 7 for consideration was being
manipulated so the balances reflected in column 18 (realized gain/loss) represented the appropriate
gain/loss on disposal of the bond (with the prepayment penalty reflected in investment income, column
20).
Additionally, staff reviewed a CUSIP called under a make whole call provision (21 entities impacted),
noting that 15 of them reported the difference between Consideration and BACV @ Call Date within the
Realized Gain/Loss Column (Col. 18) and no investment income recorded in column 20 (these 15 entities
all reported bond interest equal to 7.54% of Par in column 20). Therefore, these entities did not record the
prepayment penalty in investment income as directed per SSAP No. 26.
As a result of the reporting inconsistencies and based on the direction elected by the Working
Group, staff proposes drafting revisions (based on the direction elected by the Working Group) to
SSAPs, Annual Statement Blanks and Instructions (and draft a blanks proposal) and Disclosures.
Below, staff has identified the following areas to be considered by the Working Group for potential
revisions (if applicable based on WG direction). Staff welcomes comments from regulators and interested
parties on potential revisions to aid in the transparency and reporting of callable bonds, including those
with make whole call provisions.
Schedule D-Part 1:
• Revisions to instructions/blanks to identify callable bonds, including those with make
whole call provisions
© 2015 National Association of Insurance Commissioners
20
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Schedule D-Part 4:
• Revisions to instructions/blanks to identify bonds that were sold, redeemed, or otherwise
disposed of as a result of a call provision (including make whole call).
• Revisions to instructions/blanks to identify the amount of investment income recognized
as a result of a call provisions (including make whole call).
IMR:
• Revisions to clarify the accounting treatment for prepayment penalties.
SSAP Nos. 26, 37 and 43R:
• Revisions to clarify the accounting treatment for prepayment penalties.
• Revisions to SSAP No. 26 to create a disclosure pertaining to callable bonds (including
bonds with make whole call provisions).
Application of Yield-to-Worst for Make Whole Call Provisions
Comments received from interested parties objected to the exposed revision to require bonds containing
make whole call provisions to follow the Yield-to-Worst concept, as the cost to implement changes in
software would be extensive and it would be non-operational to amortize a bond to a hypothetical carrying
value that would fluctuate daily (as a result of the make whole call provision structure).
Staff’s intent behind the revision requiring bonds containing make whole call provisions to follow yieldto-worst was driven by the increasing use of this call feature in bond issuances and the fact that traditional
callable bonds (including those with call schedules) are required to follow the concept of yield-to-worst
(therefore recognizing a worse balance sheet position in comparison to bonds with make whole call
provisions). Additionally, research indicates that bonds containing make whole call provisions have
frequently been listed as “non-callable” on bond indexes.
However, in response to comments provided by interested parties and the revisions adopted by the
Working Group for agenda item 2013-21: Make Whole Call Provisions & Continuously Callable Bonds,
staff has recommended that the Working Group move forward with the current language in SSAP
No. 26 (make whole call provisions are excluded from the concept of yield-to-worst) that details that
insurers are not required to consider make-whole call provisions in determining the timeframe for
amortizing bond premium or discount unless information is known by the reporting entity indicating that
the issuer is expected to invoke the provision.
Prospective Application
If the Working Group elects to change the accounting treatment for prepayment penalties from investment
income to realized capital gain, interested parties recommended that the revisions be effective on a
prospective basis, to avoid requiring insurers to adjust historical IMR balances. Staff agrees with
interested parties and recommends to the Working Group that any revisions to the accounting
treatment of prepayment penalty being applied on a prospective basis.
Recommended Action:
Based on the comments received by interested parties, staff recommends that the Working Group
bifurcate the contents of this agenda item into two separate Form A’s. The topic of amortization on
callable bonds (including bonds with make whole call provisions) will continue to be documented in this
agenda item (2015-04); with the topics of accounting treatment for prepayment penalties and presentation
of callable bonds being documented in agenda item 2015-23.
© 2015 National Association of Insurance Commissioners
21
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
•
Agenda Item 2015-04: Staff recommends that the Working Group expose proposed changes
to SSAP No. 26 to clarify guidance for bonds with make-whole call provisions. The agenda
item includes revisions from what was previously exposed, incorporating interested parties
suggestions. Staff recommends that the exposure specifically request comments on whether
examples (1-4) should be included as an Appendix to SSAP No. 26. (The revisions are in the
agenda item and detailed below.)
•
Agenda Item 2015-23: Staff recommends that the Working Group move agenda item 201523 to the nonsubstantive active listing and expose for comment three potential options for
the accounting and presentation treatment for prepayment penalties:
1) Maintain current treatment of investment income;
2) Report as realized capital gains, subject to IMR
3) Report as realized capital gains, but excluded from the calculation of IMR.
After considering comments received, staff will request the Working Group to provide direction on
the preferred treatment. After receiving the Working Group’s direction, staff will prepare revisions (for
exposure at a future meeting of the Working Group) to SSAP Nos. 26, 37 and 43R (as applicable) and the
Annual Statement Blanks and Instructions (as applicable) to clarify the accounting treatment and reporting
presentation for prepayment penalties and acceleration fees.
Proposed Revisions to SSAP No. 26 - (Agenda Item 2015-04):
Staff Note: Highlighted text represents changes from the original March 2015 exposed language.
Additionally, staff notes have been provided to address specific comments received. Revisions related to
the treatment of prepayment penalties and presentation of callable bonds will in agenda item 2015-23.
6.
Amortization of bond premium or discount shall be calculated using the scientific
(constant yield) interest method taking into consideration specified interest and principal
provisions over the life of the bond (INT 07-01). Bonds containing call provisions (where the issue can
be called away from the reporting entity at the issuer's discretion), except "make whole" call
provisions, shall be amortized to the call or maturity value/date1 which produces the lowest asset
value (yield to worst). Although the concept for yield to worst shall be followed for all callable
bonds, make whole call provisions, which allow the bond to be callable at any time, shall not be
considered in determining the timeframe for amortizing bond premium or discount unless
information is known by the reporting entity indicating that the issuer is expected to invoke the
make whole call provision.
Staff Note: The previously proposed revisions to paragraph 6 have been removed. The paragraph above
reflects current guidance in SSAP No. 26
7.
For callable bonds1, the first call date after the lockout period, or the date of acquisition if
no lockout period exists, shall be used as the “effective date of maturity” for reporting in Schedule
D - Part 1. Depending on the characteristics of the callable bonds, the yield to worst concept in
paragraph 6 shall be applied as follows:
a. For callable bonds with a lockout period, premium in excess of the next call price2
(subsequent to acquisition3 and lockout period) shall be amortized proportionally over the
length of the lockout period. After each lockout period (if more than one), remaining
premium shall be amortized to the call or maturity value/date which produces the lowest
asset value.
b. For callable bonds without a lockout period (which includes bonds with make whole call
provisions) the BACV (at the time of acquisition) of the callable bonds shall equal the
lesser of the next call price (subsequent to acquisition) or cost. Remaining premium shall
© 2015 National Association of Insurance Commissioners
22
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
then be amortized to the call or maturity value/date which produces the lowest asset
value.
Staff Note: Interested parties objected to the language in paragraph 7.b. and indicated that it would
change the measurement of these bonds from amortized cost to a “lower-of” approach. While staff agrees
that this revision would in essence make this situation a “lower-of” approach, this “lower of” would be
the lower of amortized cost or immediate call price. This approach is consistent with the existing concept
of “yield-to-worst” and how the application of the concept should be applied.
c.
For callable bonds that do not have a stated call price or contractual elements to calculate
make whole call provisions, all premiums over par shall be immediately expensed. For
callable bonds with a call price at par in advance of the maturity date, all premiums shall
be amortized to the call date.
d. If a bond has both scheduled call dates and contains a make whole call provision, the
bond shall be accounted for under the provisions of this paragraph (7a-7c) that results in
the lowest asset value
Staff Note: Interested parties noted that they do not believe the situation described in paragraph 7d (a
bond having scheduled call dates and a make-whole provision) exists and recommended deleting from the
proposal. Upon further review of these call features; staff believes that the combinations of different call
features are currently used in callable bonds. However, as staff is unable to determine the frequency or
impact of the combination of call features, staff agrees with not proposing specific guidance for these
situations at this time.
Footnote 1: For continuously callable bonds with a lockout period, the first call date after the lockout period shall be used
in determining the amortization of any premium. If there is no lockout period, and make whole call provisions are not
included, any premium for continuously callable bonds shall be expensed completely at acquisition. (For continuously
callable bonds, the first call date after the lockout period, or the date of acquisition if no lockout period exists, shall be used
as the “effective date of maturity” for reporting in Schedule D, Part 1.)
Footnote 1: Callable bonds within scope of this paragraph excludes bonds with make-whole call
provisions unless information is known by the reporting entity indicating that the issuer is expected
to invoke the make whole call provision.
Footnote 2: Reference to the “next call price” indicates that the reporting entity shall continuously
review the call dates / prices to ensure that the amortization (and resulting BACV) follows the
yield-to-worst concept throughout the time the reporting entity holds the bond.
Footnote 3: The reporting entity shall only consider call dates / prices that occur after the reporting
entity acquires the bond. If all of the call dates had expired prior to the reporting entity acquiring
the bond, the reporting entity would consider the bond continuously callable without a lock-out
period.
© 2015 National Association of Insurance Commissioners
23
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
2015-13
SSAP Nos. 92
and 102
(Josh)
ASU 2015-04: Practical
Expedient for the
Measurement Date of An
Employer’s Defined
Benefit Obligation and
Plan Assets
8
Comments
Received
Comment Letter
Page Number
Reference
IP - 1
Summary:
On June 17, 2015, Working Group moved this item to the nonsubstantive active listing and exposed
nonsubstantive revisions to SSAP No. 92—Postretirement Benefits Other Than Pensions and SSAP No.
102—Accounting for Pensions, to reject ASU 2015-04 and maintain the current accounting treatment.
Interested Parties’ Comments:
Interested parties believe ASU 2015-04 contains guidance which is relevant and beneficial to insurers.
In addition to allowing a practical expedient related to the annual measurement of plan assets and
obligations, ASU 2015-04 also permits this same practical expedient to be applied to situations in
which a significant event requiring remeasurement occurs during an interim period. Interested parties
believe being permitted to remeasure defined benefit assets and obligations using the month-end that is
closest to the date of the significant event would alleviate the cost and burden associated with having to
adjust month-end balances to the specific date of the significant event, while still providing relevant
and timely information in interim financial statements. That is to say, if a significant event were to
occur on June 17th, it would be cost effective and beneficial if the remeasurement could occur on June
30th. However, it is unclear if existing statutory guidance explicitly allows for this (other than by
concluding the use of the month-end date is immaterial). For example, paragraph 63 of SSAP No. 92
includes the following:
“For example, if a significant event occurs, such as a plan amendment, settlement, curtailment,
that ordinarily would call for remeasurement, the assumptions used for those later measurements
shall be used to remeasure net periodic postretirement benefit cost from the date of the event to
the year—end measurement date.”
Many believe this implies that the remeasurement date for the above hypothetical curtailment would
need to be June 17th for June 30th interim reporting. Interested parties would welcome explicit statutory
guidance that the closest month-end date (e.g., June 30th in this hypothetical example) could be used as
a practical expedient when a significant event occurs other than on a month-end.
Interested parties believe such an explicit acknowledgement should be included in both SSAP No. 92 and
SSAP No. 102. We suggest the insertion of the following two new paragraphs in each applicable SSAP,
after paragraph 63 (as new paragraphs 64 and 65) in SSAP No. 92 and after paragraph 42 (as new
paragraphs 43 and 44) in SSAP No. 102:
64. / 43. If a significant event caused by the employer (such as a plan amendment, settlement, or
curtailment) that requires an employer to re-measure both plan assets and benefit obligations does
not coincide with a month-end, the employer may elect to re-measure plan assets and benefit
obligations using the month-end that is closest to the date of the significant event.
65. / 44. If an employer re-measures plan assets and benefit obligations during the fiscal year in
accordance with paragraph (64 / 43), the employer shall adjust the fair value of plan assets and the
actuarial present value of benefit obligations for any effects of the significant event that may or
may not be captured in the month-end measurement (for example, if the closest month-end is
before the date of a partial settlement, then the measurement of plan assets may include assets that
© 2015 National Association of Insurance Commissioners
24
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
are no longer part of the plan). An employer shall not adjust the fair value of plan assets and the
actuarial present value of benefit obligations for other events occurring between the month-end
date used to measure plan assets and benefit obligations and the employer’s fiscal year-end that
may be significant to the measurement of defined benefit plan assets and obligations, but are not
caused by the employer (for example, changes in market prices or interest rates).
In addition, interested parties suggest the following conforming changes to the respective SSAPs’
Relevant Literature sections (new paragraph 101 in SSAP No. 92 and new paragraph 83 in SSAP No.
102):
SSAP No. 92 – Accounting for Postretirement Benefits Other Than Pensions:
101. This statement adopts the revisions to ASC 715-60 as it relates to interim re-measurement
due to a significant event as detailed in ASU 2015-04: Practical Expedient for the Measurement
Date of An Employer’s Defined Benefit Obligation and Plan Assets. Other revisions are rejected
as statutory accounting requires the annual measurement of benefit obligations and plan assets to
be measured as of a year-end measurement date.
SSAP No. 102- Accounting for Pensions, A Replacement of SSAP No. 89:
83. This statement adopts the revisions to ASC 715-30 as it relates to interim re-measurement due
to a significant event as detailed in ASU 2015-04: Practical Expedient for the Measurement Date
of An Employer’s Defined Benefit Obligation and Plan Assets. Other revisions are rejected as
statutory accounting requires the annual measurement of benefit obligations and plan assets to be
measured as of a year-end measurement date.
Recommended Action:
Based on review of interested parties’ comments, staff agrees with adding language to include explicit
guidance in SSAP Nos. 92 and 102 regarding interim re-measurement of plan assets and benefit
obligations due to a significant event. However, to ensure continued year-end reporting consistency,
staff does not support utilizing a mid-year remeasurement as the basis for the year-end reporting
balances. A consistent year-end measurement date is already required within SSAP No. 92 and
SSAP No. 102. Staff recommends that the Working Group expose the proposed revisions to SSAP
Nos. 92 and 102, reflecting language primary suggested by interested parties, but with revisions
(highlighted in gray)
With the action, staff would like the Working Group to direct staff to proceed with making a name
change to SSAP No. 102 (no exposure). With the adoption of the SSAP titles, the “Accounting For”
was not removed from SSAP No. 102. It is preferred if this title is revised to be consistent with the
other changes, so that it would be SSAP No. 102—Pensions.
SSAP No. 92 –Postretirement Benefits Other Than Pensions:
(To be added as new paragraphs 64-65. Paragraph references will be updated to reflect these revisions)
64. If a significant event caused by the employer (such as a plan amendment, settlement, or
curtailment) that requires an employer to re-measure both plan assets and benefit obligations
does not coincide with a month-end, the employer may elect to re-measure plan assets and
benefit obligations using the month-end that is closest to the date of the significant event. This remeasurement would not eliminate the requirement for a year-end measurement of plan assets
and benefit obligations required in paragraph 62
© 2015 National Association of Insurance Commissioners
25
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
65. If an employer re-measures plan assets and benefit obligations during the fiscal year in
accordance with paragraph 64, the employer shall adjust the fair value of plan assets and the
actuarial present value of benefit obligations for any effects of the significant event that may or
may not be captured in the month-end measurement (for example, if the closest month-end is
before the date of a partial settlement, then the measurement of plan assets may include assets
that are no longer part of the plan). An employer shall not adjust the fair value of plan assets and
the actuarial present value of benefit obligations for other events occurring between the monthend date used to re-measure plan assets and benefit obligations and the employer’s fiscal yearend that may be significant to the measurement of defined benefit plan assets and obligations, but
are not caused by the employer (for example, changes in market prices or interest rates).
(To be added as new paragraph under Relevant Literature. Paragraph references will be updated to
reflect this revision)
This statement adopts the revisions to ASC 715-60 as it relates to interim re-measurement due to
a significant event as detailed in ASU 2015-04: Practical Expedient for the Measurement Date of
An Employer’s Defined Benefit Obligation and Plan Assets. Other revisions are rejected as
statutory accounting requires the annual measurement of benefit obligations and plan assets to
be measured as of a year-end measurement date.
SSAP No. 102—Pensions:
(To be added as new paragraphs 43-44. Paragraph references will be updated to reflect these revisions)
43. If a significant event caused by the employer (such as a plan amendment, settlement, or
curtailment) that requires an employer to re-measure both plan assets and benefit obligations
does not coincide with a month-end, the employer may elect to re-measure plan assets and
benefit obligations using the month-end that is closest to the date of the significant event. This remeasurement would not eliminate the requirement for a year-end measurement of plan assets
and benefit obligations required in paragraph 42.
44. If an employer re-measures plan assets and benefit obligations during the fiscal year in
accordance with paragraph 43, the employer shall adjust the fair value of plan assets and the
actuarial present value of benefit obligations for any effects of the significant event that may or
may not be captured in the month-end measurement (for example, if the closest month-end is
before the date of a partial settlement, then the measurement of plan assets may include assets
that are no longer part of the plan). An employer shall not adjust the fair value of plan assets and
the actuarial present value of benefit obligations for other events occurring between the monthend date used to re-measure plan assets and benefit obligations and the employer’s fiscal yearend that may be significant to the measurement of defined benefit plan assets and obligations, but
are not caused by the employer (for example, changes in market prices or interest rates).
(To be added as new paragraph under Relevant Literature. Paragraph references will be updated to
reflect this revision)
This statement adopts the revisions to ASC 715-30 as it relates to interim re-measurement due to
a significant event as detailed in ASU 2015-04: Practical Expedient for the Measurement Date of
An Employer’s Defined Benefit Obligation and Plan Assets. Other revisions are rejected as
statutory accounting requires the annual measurement of benefit obligations and plan assets to
be measured as of a year-end measurement date.
© 2015 National Association of Insurance Commissioners
26
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
2015-14
SSAP No. 68
(Josh)
SSAP No. 68 –
Paragraph 7
Clarification on
Goodwill Limitation
9
Comments
Received
Comment Letter
Page Number
Reference
IP - 3
NYL - 11
Summary:
On June 17, 2015, the Working Group moved this item to the nonsubstantive active listing and exposed
nonsubstantive revisions to SSAP No. 68 to provide a consistency clarification that the goodwill limitation
test is completed at the individual reporting company level.
New York Life:
We are requesting clarification of how this guidance should be applied to a downstream non-insurance
holding company that has goodwill through the holding company’s acquisition of a subsidiary. Should
the goodwill limitation test be applied at the parent insurance company level or at the downstream
holding company level? The proposed footnote references “insurance reporting entity.” We interpret this
to mean the limitation should be applied at the parent insurance company level (that is, the insurance
company that directly owns the downstream non-insurance subsidiary). This would be consistent with
SSAP No. 97 paragraph 21e that requires a downstream holding company’s assets and liabilities, other
than its investments in SCA entities, to follow statutory accounting principles.
Interested Parties’ Comments:
Interested parties do not disagree with the intent of the clarification but do not recommend using the
phrase “at the consolidated level.” Even though statutory accounting rejected the concept of
consolidated financial statements, the use of this reference may lead some companies to believe that
there may be instances where it is appropriate to evaluate items at a consolidated level. We recommend
ending the footnote at “individual reporting company level.”
Recommended Action:
Staff recommends that the Working Group adopt the exposed revisions to SSAP No. 68 with
technical edits proposed by interested parties. Based on review of interested parties’ comments, staff
agrees with the suggested edit to remove the phrase “and not at the consolidated level” from the proposed
footnote 1. In reviewing the comments from New York Life, staff recommends that the Working
Group direct staff to prepare a separate agenda item to clarify the application of guidance within
SSAP No. 97. It is anticipated that this guidance will clarify that goodwill from all sources (including all
goodwill from acquisitions through a downstream holding company) would be limited to 10% of the
capital and surplus of the parent insurance reporting entity. As changes to SSAP No. 97 may require
detailed reviews to ensure clarity, staff recommends proceeding with the current revisions a separate
agenda item so that questions on existing language in SSAP No. 68 can be addressed.
Revisions to SSAP No. 68
7. Positive goodwill recorded under the statutory purchase method of accounting shall be
admitted subject to the following limitation: Positive goodwill from all sources, including life,
accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to
10% of the acquiring1 entity’s capital and surplus as required to be shown on the statutory
balance sheet of the reporting entity for its most recently filed statement with the domiciliary
state commissioner adjusted to exclude any net positive goodwill, EDP equipment and
operating system software, and net deferred tax assets. When negative goodwill exists, it shall
be recorded as a contra-asset. Positive or negative goodwill resulting from the purchase of an
SCA, joint venture, partnership or limited liability company shall be amortized to unrealized
© 2015 National Association of Insurance Commissioners
27
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
capital gains and losses on investments over the period in which the acquiring entity benefits
economically, not to exceed 10 years. Positive or negative goodwill resulting from life,
accident and health, and deposit-type assumption reinsurance shall be amortized to
operations as a component of general insurance expenses over the period in which the
assuming entity benefits economically, not to exceed 10 years. Goodwill shall be evaluated
separately for each transaction.(INT 01-18)
Footnote 1: The “acquiring” entity is intended to reflect the insurance reporting entity that reports
the investment resulting in goodwill. The goodwill limitation test shall be completed at the
individual reporting company level.
2015-15
SSAP No. 16R
(Josh)
ASU 2015-05:
Customer’s Accounting
for Fees Paid in a Cloud
Computing Arrangement
10
Comments
Received
IP - 3
Summary:
On June 17, 2015, the Working Group moved this item to the nonsubstantive active listing and exposed
nonsubstantive revisions to SSAP No. 16R to clarify that entities that license internal-use computer
software are required to follow the lease provisions outlined in SSAP No. 22.
Interested Parties’ Comments:
Interested parties recommend that this issue be deferred until the Financial Accounting Standards
Board (FASB) completes its deliberation of lease accounting and issues final guidance and the Working
Group concludes on the FASB’s final guidance.
Recommended Action:
Staff does not have strong comments on this issue. If the Working Group would prefer to wait, staff
does not object to the interested parties’ recommendation to defer action on ASU 2015-05 until
issuance of FASB’s revised lease accounting guidance. However, the proposed reference does not
incorporate any new guidance at this time. Currently, SSAP No. 16R includes direction that entities
that license internal-use computer software to follow the operating-lease provisions of SSAP No. 22.
Staff highlights that if the Working Group prefers to move forward with the proposed revisions, the
reference would be updated, as appropriate, if the Working Group adopts different lease guidance for SAP
after reviewing the FASB guidance.
2015-18
Policy
Policy Statement
Comments
11
IP - 4
Statement
Revisions
Received
(Julie)
Summary:
On June 17, 2015, the Working Group moved this item to the nonsubstantive active listing and exposed
the proposed concept change to disband the Emerging Accounting Issues (E) Working Group, with the
SAPWG incorporating a new process to issue interpretations and to increase their membership by two.
The Working Group directed staff to work with regulators in drafting revisions to the Policy Statements to
reflect these procedures and to incorporate other components that reflect the current process of the
Working Group.
© 2015 National Association of Insurance Commissioners
28
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Interested Parties’ Comments:
Interested parties recommends that the Emerging Accounting Issues (E) Working Group be retained
and utilized for the purposes for which it was originally formed, i.e., to address interpretations of
existing guidance in instances where questions are raised by regulators, industry, or NAIC staff. The
interpretations should then be left intact for a period of time to determine if the guidance is clear and
being applied appropriately. The formation of this group was intended to free up regulatory resources
from having to re-write existing guidance when questions arise. Some recent examples of where
interpretations would have been appropriate include the discussions on make-whole provisions,
goodwill impairment, and questions regarding SSAP No. 97.
Recommended Action:
Staff recommends the following action by the Working Group:
•
Adopt the recommendation to disband the Emerging Accounting Issues (E) Working Group,
with the Statutory Accounting Principles (E) Working Group incorporating a new process
to issue interpretations and increasing membership by two. (This recommendation is
proposed to be presented to the AP&P Task Force for review and consideration.)
•
Expose nonsubstantive revisions to the Policy Statements (Appendix F) to incorporate
guidance to update procedures to include the INT process within the SAPWG and insert
clarity on the current process of the Working Group.
In reviewing the interested parties’ comments, staff agrees that there are times in which
interpretations would be beneficial to SAP in lieu of drafting SSAP revisions. However, with the
current process – and the time delay to issue referrals between the SAPWG/EAIWG for INT or
SAP revisions – the interpretation process has not recently resulted with the timely issuance of
guidance. It is staff’s expectation that combining the groups and moving the INT process within the
SAPWG would allow the SAPWG to move quickly on issuing INTS – following an approach very
similar to what was established under the EAIWG – for scenarios that warrant an INT instead of
SAP revisions. The draft guidance reflects the following revisions:
1.
Delete the references to the Emerging Accounting Issues (E) Working Group and its processes
and gives the SAPWG the ability to issue interpretations, using similar voting thresholds as the
EAIWG. These revisions also expand the SAPWG membership from 13 to 15 with the intent that
the prior members of EAIWG not already on SAPWG would become members of the SAPWG.
2.
Add detail regarding substantively revised statements and nonsubstantive changes to reflect
current practice. These revisions include deletion of the maintenance agenda flowchart.
3. Proposes minor revisions to other policy statements (e.g., deleting the form to communicate
impact to other publications as it is not historically used), as well as adds reference providing the
ability to comment on IASB exposure drafts.
© 2015 National Association of Insurance Commissioners
29
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
2015-19
SSAP No. 1
(Julie)
Quarterly Reporting of
Restricted Assets
12
Comments
Received
Comment Letter
Page Number
Reference
IP - 4
Summary:
June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 1 to require the
disclosure of restricted assets in all interim and annual financial statements, require information on
admitted and nonadmitted restricted assets, and require information on stock restrictions (which is
currently provided in the annual statement general interrogatory). It is also proposed that the Working
Group expose a proposal to possibly sponsor blanks revisions to incorporate the full investment schedules
within all interim financial statements. No changes are anticipated to the statutory accounting guidance for
this investment schedule proposal.
Staff Note – With the June 17, 2015 discussions on this item, the Working Group directed staff to divide
the issues originally reflected in this agenda item. As such, this agenda item will consider the restricted
asset interim disclosures, and a new agenda item (2015-27) will consider quarterly investment schedules.
Interested Parties’ Comments:
Note Disclosure
Interested parties understand the need for adequate information during interim reporting periods to
assess the financial condition of an insurer. Current statutory accounting guidance defines
circumstances in which current material information should be disclosed in the quarterly statements. In
summary, with certain exceptions, the guidance in paragraph 61 of the Preamble to the Accounting
Practices and Procedures Manual (AP&P Manual) stipulates that in order to avoid the duplication of the
disclosures included in the most recent annual statement,, disclosures in the notes to interim financial
statements should be made only when there are material events subsequent to the most recent fiscal
year end that are significantly different from the annual disclosure. If not significantly different from
the annual disclosure, the annual disclosure can be used in the evaluation of the financial condition of
the insurer during interim periods subsequent to the filing of the most recent annual statement. The
quarterly statement instructions for note disclosures provide similar guidance.
General Interrogatory Disclosure
Interested Parties do not support eliminating General Interrogatories 25.2 and 25.3. The General
Interrogatory is the basis for components of the C-0 and R-0 “Off-balance Sheet” RBC charge; its lineitem values are pulled directly into the RBC formulas and assigned RBC charges. If GI 25.2 and 25.3
were eliminated, the RBC formulas would need to be repointed. Use of Footnote 5H as a substitute
source, if that is contemplated, has RBC implications that should be addressed by the Capital Adequacy
Task Force before any such wholesale change is made.
The Interrogatories and Footnote 5H each have distinct and different instructions: for example,
Interrogatories 25.2 and 25.3 report assets that are “not under the exclusive control of the reporting
entity,” whereas the footnote requires disclosure of “Restricted Assets.” As regulators have observed,
the distinctions have resulted in material differences in categories and amounts reported in the General
Interrogatory versus the footnote, and also have the potential for differences in interpretation between
reporters unless the categories are clearly defined.
© 2015 National Association of Insurance Commissioners
30
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
In 2013, when the expanded Restricted Assets footnote was created, it was our understanding that the
separation between the expanded footnote and the General Interrogatory was intended and agreed as
appropriate at the least until such time as issues of category definition, accounting treatment, and RBC
treatment, as necessary, were simultaneously addressed. The separation has the beneficial effect that it
allows regulators to collect through Footnote 5H very broad, comprehensive information about every
category of assets that could be considered as “restricted” to any degree and in any fashion, without
necessarily forcing accounting treatment changes, or forcing each identified category into the existing
RBC charge structure. It also provides time to hone clearer, consistent category definitions and
reporting structures. Notably, catch-all Other categories were introduced in Footnote 5H [table lines
5H(1)m and 5H(1)n] with companies being instructed to interpret them broadly and then detail them
further in 5H(2) and 5H(3) precisely so that regulators could begin to identify and distinguish new
subcategories and determine their appropriate treatment. The separation between Footnote 5H and the
Interrogatories remains beneficial today because the work of reviewing 5H categories is not complete.
Interested parties acknowledge that important progress has been made by the Restricted Asset
Subgroup, and we encourage and support continuing that work, but without a specific review of the
RBC charges generated from GI 25.2 and 25.3 we cannot support their elimination.
Additional Disclosures
Interested parties agree that providing information on admitted and nonadmitted restricted assets in the
annual disclosure may provide useful information to a regulator. However, it is unclear what
information is being proposed to be added to the disclosure. On page 5 of Ref #2015-19 under staff
recommendations it states:
Staff recommends that the Working Group move this item to the nonsubstantive active listing and
expose revisions to SSAP No. 1 to …… require information on admitted and nonadmitted assets,
The added wording in the first sentence of paragraph 25 b of SSAP No. 1 states:
“The total amount (admitted and nonadmitted), admitted amount and………”
It is unclear from this added wording whether the nonadmitted amount should also be reported
separately or only the admitted amount is reported separately. We suggest that the opening sentence of
this paragraph be rephrased as follows:
“The amount of admitted and nonadmitted restricted assets reported separately, admitted restricted
assets by category and …”
Interested parties believe that the current guidance in the AP&P Manual and annual statement
instructions are sufficient to require that material changes to restricted assets be reported in the
quarterly financial statement’s note disclosures. We believe that for a majority of insurers, restricted
assets are not material to the companies’ financial condition and do not fluctuate significantly from
quarter to quarter. For these reasons we believe that additional mandatory quarterly reporting
requirements for restricted assets are not necessary.
Recommended Action:
Staff recommends that the Working Group provide direction to the following:
•
Whether restricted asset disclosures shall always be completed quarterly regardless of
significance of change.
© 2015 National Association of Insurance Commissioners
31
SAPWG Hearing Agenda
Ref #
•
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Whether restricted asset disclosures shall be completed quarterly when there is a significant
change from what was reported in the annual financial statements.
Staff then recommends that the Working Group direct staff to incorporate disclosure revisions
based on the regulator direction above, which considers the interested party comments on
disclosure revisions for subsequent exposure.
As a side note, staff notes that any referral to remove the general interrogatory would not occur until
disclosures were updated to separate admitted and non-admitted restricted assets so that the reference for
the RBC instructions can be updated accordingly. It is also noted that a referral to update the instructions
would not occur until the other revisions were finalized.
Staff disagrees with the interested parties regarding the preamble providing guidance that would
require quarterly disclosures at this time. For the disclosure requirement in SSAP No. 1, the guidance
is explicit that the disclosure is only required “for each year that a balance sheet is presented
(annual)…” As such, staff does not agree that the preamble would override the explicit SSAP reference
and be completed in the quarterly financial statements, even if the restricted assets in the quarter are
significantly different than what was reported in the annual financial statements. If the disclosure was
revised to remove the specific references to “year” and “annual” then it would seem that the
disclosure would be updated if the quarter information was significantly different.
Staff is uncertain with regards to the interested parties’ comments regarding differences between the
general interrogatory and the restricted asset note disclosure in SSAP No. 1. With the exception of “nonadmitted” assets not being included for RBC purposes, staff would request additional comments
regarding the differences that are reflected within the reported information.
•
The instruction for the general interrogatory is to disclose the statement value of investments that
are “not under the exclusive control of the reporting entity.”
•
The guidance in the A/S instructions for coding these items in the investment schedules is
“disclose information regarding investments that are not under the exclusive control of the
reporting entity, and also including assets loaned to others”
•
The guidance in SSAP No. 1 includes “assets pledged as collateral or otherwise restricted (e.g.,
not under the exclusive control, assets subject to a put option contract, etc.” This sentence is
footnoted with the following: The aggregate information captured within this disclosure is
intended to reflect information reported in the Annual Statement Investment Schedules in
accordance with the coding of investments that are not under the exclusive control of the
reporting entity, including assets loaned to others and the information reported in the
general interrogatories.
© 2015 National Association of Insurance Commissioners
32
SAPWG Hearing Agenda
Ref #
•
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
In reviewing the GI, the A/S investment codes, and the SSAP No. 1 disclosure, the following
categories are the same:
Description
Reporting assets subject to contractual obligation
for which liability is not shown
Collateral Under Security Lending Agreements
Subject to Repurchase Agreement
Subject to Reverse Repurchase Agreement
Subject to Dollar Repurchase Agreement
Subject to Dollar Reverse Repurchase Agreement
Placed Under Option Agreements
Letter of Stock or Securities Restricted as to Sale
– excluding FHLB
FHLB Capital Stock
On Deposit with States
On Deposit with other Regulatory Bodies
Pledged as Collateral – Excluding FHLB
Pledged as Collateral to FHLB
Other
2015-22
SSAP No. 86
(Josh)
FAS 133 EITF’s
SSAP No. 1
GI #
17.b.i
GI 21.1
17.b.ii
17.b.iii
17.b.iv
17.b.v
17.b.vi
17.b.vii
GI 24.101
GI 25.21
GI 25.22
GI 25.23
GI 25.24
GI 25.25
Code RA
Code RR
Code DR
Code DRR
Code DB
17.b.viii
GI 25.26
Code R
17.b.ix
17.b.x
17.b.xi
17.b.xii
17.b.xiii
17.b.xiv
GI 25.27
GI 25.28
GI 25.29
GI 25.30
GI 25.31
GI 25.32
Code RF
Code SD
Code SD
Code C
Code CF
Code O
13
Comments
Received
Investment Code
IP - 7
Summary:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed this agenda item requesting comment on the prior action of the
EITF’s identified in the agenda item.
Interested Parties’ Comments:
Interested parties reviewed the comment letter we submitted when SSAP 86 was exposed for comment,
where we stated:
Paragraph 55 – Although this SSAP does not specifically address the various interpretations of
FAS 133 that the FASB Derivatives Implementation Group developed (i.e., the DIG issues), we
believe that, given the complexity of FAS 133 and the uncertainty of intent with regard to much of
the guidance in FAS 133, this paragraph should be amended to apply certain DIG issues. We
believe that it will be necessary for both financial statement preparers and auditors to utilize the
interpretations in various DIG issues in order to apply SSAP 86. We are also cognizant of the
dangers of attempting to apply all DIG issues to this SSAP. Accordingly, we recommend that the
end of the first sentence be amended to read: “….for fair value and cash flow hedges, including
its technical guidance to the extent that such guidance is consistent with the statutory accounting
approach to derivatives utilized in this SSAP.”
In an effort to timely complete SSAP 86, we believe that the above phrase was incorporated: “….An
amendment of FASB Statement No. 133 (FAS 138), for fair value and cash flow hedges, including its
technical guidance to the extent such guidance is consistent with the statutory accounting approach to
derivatives utilized in this statement.” However, as the detailed EITF’s were not listed in SSAP 86,
© 2015 National Association of Insurance Commissioners
33
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
interested parties believe it would be appropriate for staff to mark the EITFs as “pending” in Appendix
D and complete a subsequent agenda item to review and provide a staff recommendation.
Recommended Action:
Staff agrees with the proposal by interested parties and recommends the Working Group direct
staff to mark these EITF’s as “pending” in Appendix D and to prepare subsequent agenda items for
the Working Group to review and discuss these GAAP items.
2015-27
SSAP No. 1
(Julie)
Quarterly Reporting of
Investment Schedules
14
Comments
Received
IP - 8
Summary:
On June 17, 2015, the Working Group moved this item to the nonsubstantive active listing and exposed
this agenda item requesting comments on the prospect to collect full investment schedule information (or
perhaps limited details of all investments) in the quarterly financial statements. It was noted that the
AP&P Manual does not prescribe guidance limiting the investment schedules to the annual financial
statements, but this change, if supported, would be implemented by Blanks (E) Working Group changes.
Although no changes to the AP&P Manual would be anticipated, soliciting comments from the members,
interested regulators and interested parties of the Statutory Accounting Principles (E) Working Group is
desired as they are responsible for the accounting guidance pertaining to the related investments.
Interested Parties’ Comments:
Before discussing our comments in detail, Interested parties note that the Preamble to the Accounting
Practices and Procedures Manual states “It may be presumed that the users of the interim financial
information have read or have access to the annual statement for the preceding period and that the
adequacy of additional disclosure needed for a fair presentation, except in regard to material
contingencies may be determined in that context.” The statutory process was developed to be consistent
with other regulatory processes such as SEC filings. Statutory follows the SEC filing process to prepare
full financial statements (10K’s) and updates to the annual financial statements (10Q’s) for material
items.
Interested parties strongly support this statement as it provides a balance between providing regulators
the tools they need to assess the solvency of insurers and subjecting insurers to regulation at costs that
are not unreasonable, so that they may continue to provide affordable insurance protection to
consumers. This proposal would represent a radical departure from this principle and we urge
regulators to carefully consider the implications.
There are a number of reasons why the interim financial statements contain limited information when
compared to the annual statement. As the filing requirements and deadlines for insurers have developed
over the years, attention was paid to the type, frequency and usefulness of information needed by
regulators to assess the solvency of insurers, as well as the costs associated with obtaining that
information. Preparing investment schedules detailing every investment holding is a colossal
undertaking, even for the largest insurers with significantly more resources available to them than
smaller companies. Smaller companies often have to rely on contractors or outsource the investment
reporting process at a significant cost, because they simply do not have the resources to complete the
full annual statement by March 1 of each year. The investment schedules represent the most time
consuming part of the Annual Statement, whether completed electronically or in print, with the full
Schedule D typically being one of the last schedules completed.
© 2015 National Association of Insurance Commissioners
34
SAPWG Hearing Agenda
Agreement with
Comment Letter
Ref #
Title
Attachment #
the Exposed
Page Number
Document?
Reference
The exposure states that “…it is not anticipated that requiring the full investment schedules will be an
overly difficult task for reporting entities. Information on investments held during the interim periods
should already be known.” This statement is not accurate. While insurers are aware of their investment
holdings on an interim basis, there is a big difference between knowing the carrying value and fair
value of our holdings and being prepared to report them in Schedules that is some cases (Schedule D)
contain thirty columns with various types of information. The Quarterly Reporting of full Investment
Schedules would require additional resources to complete within the quarterly timing, which is a
shorter period than year end. This will result in additional insurers costs, both internal and external
(investment managers, vendors, etc.)
We question the cost/benefit of providing this additional information for NAIC staff and regulators
compared to what is provided today. The exposure states the requirement to only provide full
investment schedules on an annual basis was “intended to alleviate insurers from the extensive printing
that may have been required.” While this may have been one of the reasons, another important
consideration was the limited ability of the regulators to store, manage and use the electronic data in a
cost effective and useful manner. To this point, we ask the regulators to consider the following issues:
1. Is it more helpful for regulators to receive and use a quarterly data listing of investments from
insurers or more summarized information as it currently provided? The interim financial
statements already provide all acquisitions and dispositions, as well as the aggregate carrying
value and fair value of all investments owned, by type, which when viewed together with the
annual statement provide a comprehensive view of insurers’ investment holdings.
2. Are the regulators staffed to review the additional data received on a quarterly basis? There will
be a significant amount of additional data that places responsibility on insurance departments
(financial analysts and examiners) to review.
3. While it may be desirable for NAIC staff to have the ability to analyze or data mine all investment
holdings on a quarterly basis, will this proposal materially improve the ability of regulators to
assess the solvency of insurers, particularly when insurers are already providing the information in
item 1 above?
4. Will the costs incurred by companies to provide this information and by the NAIC to process,
analyze and store the data outweigh the benefits provided by the additional data?
5. Could perhaps a better solution be to improve the NAIC’s ability to make use of the existing
information already available (quarterly acquisition and disposition schedules, financial statement
footnotes, Investment Analysis Office research etc.)?
This item also requests comments on a possible Blanks proposal to incorporate full investment
schedules in the interim financial statements. It’s unclear why this is being exposed by the Working
Group when the investments schedules are clearly within the scope of the Blanks Working Group. The
rational laid out by NAIC staff in the exposure draft indicates that since the proposed revisions are tied
to the presentation of the statutory financial statements, it is appropriate for the Working Group to
expose the proposal. All proposed changes to exhibits and schedules in the Annual Statement can
impact the presentation of the statutory financial statements. We believe in this case the discussion
should have started with the Valuation of Securities Task force and included an evaluation of
information needs before a referral was made to the Blanks Working Group. We are a bit confused
about the course this proposal has taken.
© 2015 National Association of Insurance Commissioners
35
SAPWG Hearing Agenda
Ref #
Title
Attachment #
Agreement with
the Exposed
Document?
Comment Letter
Page Number
Reference
Recommended Action:
Staff appreciates the comments received in response to this agenda item, and appreciates the identification
of issues to be considered, particularly as the intent of this agenda item is to begin discussion. It is not
necessarily envisioned that a full completion of the investment schedules would be the end result of this
discussion; however, as communicated by the NAIC staff for capital markets, an improved process
would be beneficial to allow an aggregate review of the type of investments held – particularly when
certain investments are gaining traction amongst insurance entities throughout a year. Staff is open
to suggestions and comments from regulators (and interested parties) on whether there is an easier
way for interested parties to communicate their investment holding (with the known fair value and
carrying value) rather than in the schedule detail.
For direction at the Summer National Meeting – staff is proposing that regulators and/or interested
parties that would like to propose a process or format for submitting investment information
quarterly to proceed with submitting these proposals to NAIC staff for review and subsequent
discussion. However, staff is not proposing any revisions or exposures to occur at this point in time.
As noted in the agenda item, an option to consider is whether it is possible to implement an NAIC
supplemental, electronic filing – that could be accessed by regulators, but that would not be subject to
detailed regulator analysis as part of the quarterly review process.
With regards to the Blanks Proposal – This element was only included to highlight that no revision to SAP
is necessary to require quarterly disclosure of this information. However, the SAPWG was identified as an
appropriate group to begin discussions for quarterly reporting as they determine accounting guidance for
these investments. The reporting format – and what is required – is detailed within the Blanks
requirements, so any recommendation would result with a blanks proposal.
NOTE: The 46 pages of comment letters are included as Attachment 15.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\08 2015 Hearing_Agenda - Public.doc
© 2015 National Association of Insurance Commissioners
36
Attachment 1
Ref #2015-20
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Placement Revisions to the AP&P Manual
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue: As part of the efforts to continuously make modifications to the Accounting
Practices & Procedures Manual to make the publication more user-friendly for regulators, companies and
other users of the manual; this agenda item proposes placement revisions to the AP&P Manual, which
will not impact existing authoritative literature. The placement revisions are primarily related to the
publication of issue papers within the AP&P Manual (Appendix E).
As expressed in the Statutory Hierarchy of the Preamble, issue papers are not considered authoritative
literature. The purpose of their inclusion in the AP&P manual is to provide a historical reference of
adopted issue papers and their substantive revisions to authoritative literature. As adopted issue papers are
not updated after adoption, staff is proposing that issue papers be removed from Appendix E of the AP&P
Manual (book version only) and maintained on the “Updates to the AP&P Manual” section of the
Statutory Accounting Principles (E) Working Group Webpage. Refer to Exhibits A and B for proposed
revisions.
In addition, for Issue Paper 99—Nonapplicable GAAP Pronouncements, staff is proposing a placement
revision to transfer the contents of this issue paper to Appendix D of the AP&P Manual. As expressed in
the Statement of Concepts, Statutory Accounting Principles (SAP) utilizes the framework established by
Generally Accepted Accounting Principles (GAAP). Appendix D includes GAAP pronouncements that
have been considered or are pending consideration in the development of SAP. Further, all GAAP
pronouncements outlined in Issue Paper 99 have also been addressed throughout the sections of Appendix
D. As such, staff is recommending this placement revision so GAAP pronouncements considered for SAP
are documented within Appendix D. Refer to Exhibit C for proposed revisions.
Existing Authoritative Literature: The proposed revisions to the Manual are detailed in Exhibit A-C.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation: It is recommended that the Working Group move this agenda item to the
nonsubstantive active listing and expose proposed nonsubstantive revisions to the AP&P Manual as
detailed in Exhibits A-C.
Note: Although nonsubstantive revisions are shown as tracked changes, it is proposed that the revisions in
Exhibits A-C not be shown as marked. Comments are requested on any concerns with this approach.
Staff Review Completed by:
Josh Arpin – May 2015
© 2015 National Association of Insurance Commissioners
1
Attachment 1
Ref #2015-20
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to incorporate a process to remove
Issue Papers from the printed version of the AP&P Manual, and include on the website, as detailed above.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H1 - 15-20 - Placement Revisions to the AP&P
Manual.docx
© 2015 National Association of Insurance Commissioners
2
Attachment 1
Ref #2015-20
Exhibit A – Revisions to Appendix E of the AP&P Manual (Book Version)
This exhibit contains proposed revisions to Appendix E of the AP&P Manual (book version). The table of
contents and all issue papers (with the exception of new issue papers as outlined below) will be deleted in
their entirety. Further, references throughout the manual to Appendix E will be revised as applicable.
Proposed Revision
Introduction
Appendix E includes all of the issue papers associated with SSAPs adopted through December 2015. The
issue papers are used as the first step in developing new or substantively revised SSAPs and contain a
recommended conclusion, discussion and relevant literature section. While the issue papers do not
constitute an authoritative level of statutory accounting guidance, as defined by the statutory hierarchy,
they are an important part of this Manual because they reference the history and discussion of the related
SSAP. For a comprehensive listing of all issue papers adopted as of December 2015, refer to Appendix E
in the “Updates to the AP&P Manual” section of the Statutory Accounting Principles (E) Working Group
Webpage.
If an issue paper was adopted during the defined period, the issue paper will be included in its
entirety. The following language is proposed to be added to Appendix E
During 2015, issue paper (s) 1XX— 1XX was (were) adopted for statutory accounting. Final Issue Paper
has been included within Appendix E.
If no issue papers were adopted during the defined period, the following language is proposed to be
added to Appendix E
No issue papers were adopted during 2015
© 2015 National Association of Insurance Commissioners
3
Attachment 1
Ref #2015-20
Exhibit B
As a result of the revisions outlined in Exhibit A, this exhibit proposes to add the following
comprehensive listing of issue papers to the “Updates to the AP&P Manual” section of the Statutory
Accounting Principles (E) Working Group Webpage. This table would include links to all adopted issue
papers and contain the original and current authoritative literature information as outlined on the face of
the issue paper.
Proposed Revision
IP No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
16
17
19
20
21
22
23
24
25
26
27
28
29
30
Title
Consolidation of Majority-Owned Subsidiaries
Definition of Cash
Accounting Changes
Definition of Assets and Nonadmitted Assets
Definition of Liabilities, Loss Contingencies and
Impairments of Assets
Amounts Due From Agents and Brokers
Asset Valuation Reserve and Interest Maintenance Reserve
Accounting for Pensions
Subsequent Events
Uncollected Premium Balances
Compensated Absences
Accounting for Drafts Issued and Outstanding
Employers’ Accounting for Postemployment Benefits
Employers’ Accounting for Postretirement Benefits Other
Than Pensions
Electronic Data Processing Equipment and Software
Preoperating and Research and Development Costs
Furniture, Fixtures and Equipment
Gain Contingencies
Bills Receivable For Premiums
Leases
Property Occupied by the Company
Discontinued Operations and Extraordinary Items
Accounting for and Disclosures about Transactions with
Affiliates and Other Related Parties
Bonds, Excluding Loan-Backed and Structured Securities
Disclosure of Information about Financial Instruments with
Concentration of Credit Risk
Short-Term Investments
Prepaid Expenses (excluding deferred policy acquisition
costs and other underwriting expenses, income taxes and
guaranty fund assessments)
Investments in Common Stock (excluding investments in
common stock of subsidiary, controlled, or affiliated
entities)
© 2015 National Association of Insurance Commissioners
4
Original
Current
Authoritative Authoritativ
Literature
e Literature
3
3 and 97
2
2
3
3
4
4
5
5R
6
7
8
9
6
11
2
11
6
7
102
9
6
11
2
11
14
92
16
17
19
5
6
22
40
24
16R
17
19
5R
6
22
40
24
25
25
26
26
27
27
2
2
29
29
30
30
Attachment 1
Ref #2015-20
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
59
65
66
67
68
69
71
72
73
74
75
76
Leasehold Improvements Paid by the Reporting Entity as
Lessee
Investments in Preferred Stock (excluding investments in
preferred stock of subsidiary, controlled, or affiliated
entities)
Disclosures about Fair Value of Financial Instruments
Investment Income Due and Accrued
Accounting for Guaranty Fund and Other Assessments
Troubled Debt Restructurings
Mortgage Loans
Acquisition, Development and Construction Arrangements
Reverse Mortgages
Real Estate Investments
Surplus Notes
Sale of Premium Receivables
Loan-Backed and Structured Securities
Capitalization of Interest
Repurchase Agreements, Reverse Repurchase Agreements
and Dollar Repurchase Agreements
Accounting for Investments in Subsidiary, Controlled and
Affiliated Entities
Uninsured Plans
Investments in Joint Ventures, Partnerships and Limited
Liability Companies
Policy Loans
Classifications and Definitions of Insurance or Managed
Care Contracts in Force
Life Contracts
Deposit-Type Contracts
Property Casualty Contracts–Premiums
Individual and Group Accident and Health Contracts
Unpaid Claims, Losses and Loss Adjustment Expenses
Universal Life-Type Contracts, Policyholder Dividends, and
Coupons
Title Insurance
Credit Life and Accident and Health Insurance Contracts
Property and Casualty Contracts
Accounting for Retrospectively Rated Contracts
Depreciation of Property and Amortization of Leasehold
Improvements
Business Combinations and Goodwill
Financial Guaranty Insurance
Policy Acquisition Costs and Commissions
Statutory Surplus
Nonmonetary Transactions
Life, Deposit-Type and Accident and Health Reinsurance
Property and Casualty Reinsurance
Offsetting and Netting of Assets and Liabilities
© 2015 National Association of Insurance Commissioners
5
19
19
32
32
27
34
35
36
37
38
39
40
41
42
43
44
27
34
35R
36
37
38
39
40
41
42
43R
44
45
103
46
97
47
47
48
48
49
49
50
50
51
52
53
54
55
51
52
53
54
55
51
51
57
59
65
66
57
59
65
66
19
19
68
60
71
72
28
61
62
64
68
60
71
72
95
61R
62R
64
Attachment 1
Ref #2015-20
77
78
80
81
82
83
84
85
86
87
88
89
90
92
94
95
96
97
99
100
101
103
104
105
106
107
108
109
110
111
112
113
Disclosure of Accounting Policies, Risks & Uncertainties,
1
1
and Other Disclosures
Employee Stock Ownership Plans
12
12
Debt
15
15
Foreign Currency Transactions and Translations
23
23
Stock Options and Stock Purchase Plans
13
104R
Accounting for Income Taxes
10
101
Quasi-Reorganizations
72
72
Derivative Instruments
27 and 86
27 and 86
Securitization
33
103
Other Admitted Assets
21
21
Mortgage Guaranty Insurance
58
58
Separate Accounts
56
56
Nonadmitted Assets
20
20
Statement of Cash Flow
69
69
Allocation of Expenses
70
70
Holding Company Obligations
15
15
Other Liabilities
67
67
Underwriting
Pools
and
Associations
Including
63
63
Intercompany Pools
Nonapplicable and Rejected GAAP Pronouncements
Refer to table in Appendix D
Health Care Delivery Assets—Supplies, Pharmaceuticals
73
73
and Surgical Supplies, and Durable Medical Equipment
Health Care Delivery Assets—Furniture, Medical
Equipment and Fixtures, and Leasehold Improvements in
73
73
Health Care Facilities
Accounting for the Issuance of Insurance-Linked Securities
Issued by a Property and Casualty Insurer through a
74
74
Protected Cell
Reinsurance Deposit Accounting—An Amendment to SSAP
62R
62R
No. 62—Property and Casualty Reinsurance
Reporting on the Costs of Start-Up Activities
76
76
Real Estate Sales—An Amendment to SSAP No. 40—Real
77
40
Estate Investments
Certain Health Care Receivables and Receivables Under
84
84
Government Insured Plans
Multiple Peril Crop Insurance
78
78
Depreciation of Nonoperating System Software—An
Amendment to SSAP No. 16—Electronic Data
79
16R
Processing Equipment and Software
Life Contracts, Deposit-Type Contracts and Separate
Accounts, Amendments to SSAP No. 51—Life
51, 52, and 56 51, 52, and 56
Contracts, SSAP No. 52—Deposit-Type Contracts, and
SSAP No. 56—Separate Accounts
Software Revenue Recognition
81
16R
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use and Web Site Development
82
16R
Costs
Mezzanine Real Estate Loans
83
83
© 2015 National Association of Insurance Commissioners
6
Attachment 1
Ref #2015-20
114
116
118
119
121
122
123
124
125
126
127
128
129
131
132
133
134
135
137
138
140
141
143
144
145
Accounting for Derivative Instruments and Hedging
Activities
Claim Adjustment Expenses, Amendments to SSAP No.
55—Unpaid Claims, Losses and Loss Adjustment
Expenses
Investments in Subsidiary, Controlled and Affiliated
Entities, A Replacement of SSAP No. 46
Capitalization Policy, An Amendment to SSAP Nos. 4, 19,
29, 73, 79 and 82
Accounting for the Impairment or Disposal of Real Estate
Investments
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities
Accounting for Pensions, A Replacement of SSAP No. 8
Treatment of Cash Flows When Quantifying Changes in
Valuation and Impairments, an Amendment of SSAP
No. 43
Accounting for Low Income Housing Tax Credit Property
Investments
Accounting for Transferable State Tax Credits
Exchanges of Nonmonetary Assets, A Replacement of SSAP
No. 28—Nonmonetary Transactions
Settlement Requirements for Intercompany Transactions, An
Amendment to SSAP No.25—Accounting for and
Disclosures about Transactions with Affiliates and Other
Related Parties
Share-Based Payment, A Replacement of SSAP No. 13—
Stock Options and Stock Purchase Plans
Accounting for Certain Securities Subsequent to an OtherThan-Temporary Impairment
Accounting for Pensions, A Replacement of SSAP No. 89
Accounting for Postretirement Benefits Other Than
Pensions, A Replacement of SSAP No. 14
Servicing Assets/Liabilities, An Amendment of SSAP No.
91
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others
Transfer of Property and Casualty Reinsurance Agreements
in Run-Off
Fair Value Measurements
Substantive Revisions to SSAP No. 43—Loan-Backed and
Structured Securities
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities
Prospective-Based Guaranty Fund Assessments
Substantive Revisions to SSAP No. 91R: Securities Lending
Accounting for Transferable and Non-Transferable State
Tax Credits
© 2015 National Association of Insurance Commissioners
7
86
86
85
55
68 and 97
68 and 97
87
4, 19, 29 and
73
90
90
91
103
89
102
43R
43R
48 and 93
48 and 93
94
94R
90 and 95
90 and 95
96
25
104
104R
99
26, 32 and 34
102
102
92
92
91R
103
5R
5R
62R
62R
100
100
43R
43R
103
103
35R
91R
35R
103
94R
94R
Attachment 1
Ref #2015-20
146
147
148
149
150
Share-Based Payments With Non-Employees
Working Capital Finance Investments
Affordable Care Act Section 9010 Assessment
Wholly-Owned Single Real Estate Property in an LLC
Accounting for the Risk-Sharing Provisions of the
Affordable Care Act
© 2015 National Association of Insurance Commissioners
8
104R
105
35R
40R
104r
105
106
40R
107
107
Attachment 1
Ref #2015-20
Exhibit C
This exhibit illustrates proposed revisions which would transfer the contents of Issue Paper 99 to
Appendix D.
Proposed Revisions to Appendix D
Introduction
(Revision to be added as a new paragraph)
In addition to the “GAAP Cross Reference to SSAP,” Appendix D includes a “Nonapplicable GAAP
Pronouncements” supplement. This supplement contains a listing of all GAAP Pronouncements that have
been considered in the development of SAP and deemed not applicable.
Appendix D - GAAP Cross-Reference to SAP Table of Contents
(Revision to be added to Table of Contents)
Page
Nonapplicable GAAP Pronouncements .......................................................................................... D-112
Nonapplicable GAAP Pronouncements for Statutory Accounting
(Revisions to be added as a new section at end of Appendix D)
For items presented to the Statutory Accounting Principles (E) Working Group, this table addresses
Generally Accepted Accounting Principles (GAAP) pronouncements that are nonapplicable due to one of
the following reasons:
a.
The pronouncement does not relate to the insurance industry;
b.
The pronouncement is not within the objectives of statutory accounting;
c.
The pronouncement would not add a substantive amount of guidance to statutory
accounting due to the narrow scope of the topic;
d.
The pronouncement relates to transition of a previously issued GAAP pronouncement.
For items presented to the Emerging Accounting Issues (E) Working Group, this table includes references
to EITFs that have been rejected for the following reasons:
a.
Rejected as not applicable to statutory accounting;
b.
Rejected without providing additional statutory guidance;
c.
Rejected on the basis of issues rejected in a SSAP.
EITFs that were rejected on the basis of issues rejected in a SSAP (paragraph 2.c.) are denoted
with an asterisk after the EITF number. Additional information related to those rejected issues is
located in Appendix H, Interpretation 99-00—Compilation of Rejected EITFs.
© 2015 National Association of Insurance Commissioners
9
Attachment 1
Ref #2015-20
GAAP pronouncements1 not considered applicable to NAIC statutory accounting principles are
summarized as follows:
GAAP Pronouncement
FASB Accounting
Standards Updates
(ASU)
ASU 2009-02
ASU 2009-13
ASU 2009-15
ASU 2010-01
ASU 2010-03
ASU 2010-16
ASU 2010-17
ASU 2010-24
ASU 2010-25
ASU 2010-27
ASU 2011-05
ASU 2011-07
ASU 2011-12
ASU 2012-01
ASU 2012-04
ASU 2012-07
ASU 2013-02
ASU 2013-07
ASU 2013-12
ASU 2014-10
ASU 2014-13
1
Title
Omnibus Update—Amendments to Various Topics for Technical Corrections
Revenue Recognition: Multiple Deliverable Revenue Arrangements
Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance or Other Financing
Equity: Accounting for Distributions to Shareholders with Components of
Stock and Cash
Extractive Activities—Oil and Gas (Topic 932): Oil and Gas Reserve
Estimation and Disclosures
Entertainment—Casinos (Topic 924): Accruals for Casino Jackpot Liabilities
Revenue Recognition—Milestone Method (Topic 605): Milestone Method of
Revenue Recognition
Health Care Entities (Topic 954): Presentation of Insurance Claims and
Related Insurance Recoveries
Plan Accounting—Defined Contribution Pension Plans (Topic 962):
Reporting Loans to Participants by Defined Contribution Pension Plans
Other Expenses (Topic 720): Fees Paid to the Federal Government by
Pharmaceutical Manufacturers
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
Health Care Entities (Topic 954): Presentation and Disclosure of Patient
Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful
Accounts for Certain Health Care Entities
Comprehensive Income (Topic 220): Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of
Accumulated Other Comprehensive Income in ASU 2011-05
Health Care Entities (Topic 954): Continuing Care Retirement
Communities—Refundable Advance Fees
Technical Corrections and Improvements
Entertainment—Films (Topic 926): Accounting for Fair Value Information
That Arises after the Measurement Date and Its Inclusion in the Impairment
Analysis of Unamortized Film Costs
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out
of Accumulated Other Comprehensive Income
Presentation of Financial Statements (Topic 205): Liquidation Basis of
Accounting
Definition of a Public Business Entity—An Addition to the Master Glossary
Development Stage Entities (Topic 915): Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest
Entities Guidance in Topic 810, Consolidation
Measuring the Financial Assets and Financial Liabilities of a Consolidated
GAAP guidance that is rejected explicitly in an SSAP is not included within this listing.
© 2015 National Association of Insurance Commissioners
10
Attachment 1
Ref #2015-20
GAAP Pronouncement
Title
Collateralized Financing Entity
Pre-Codification FASB
Statements (FAS)
FAS 03
FAS 06
FAS 11
FAS 14
FAS 18
FAS 19
FAS 21
FAS 24
FAS 25
FAS 30
FAS 35
FAS 37
FAS 44
FAS 45
FAS 47
FAS 48
FAS 49
FAS 50
FAS 51
FAS 53
FAS 63
FAS 65
FAS 68
FAS 69
FAS 71
FAS 72
FAS 73
FAS 75
Reporting Accounting Changes in Interim Financial Statements—an
amendment of APB Opinion No. 28
Classification of Short-Term Obligations Expected to Be Refinanced—an
amendment of ARB No. 43, Chapter 3A
Accounting for Contingencies: Transition Method—an amendment of FASB
Statement No. 5
Financial Reporting for Segments of a Business Enterprise
Financial Reporting for Segments of a Business Enterprise: Interim Financial
Statements—an amendment of FASB Statement No. 14
Financial Accounting and Reporting by Oil and Gas Producing Companies
Suspension of the Reporting of Earnings per Share and Segment Information
by Nonpublic Enterprises—an amendment of APB Opinion No. 15 and
FASB Statement No. 14
Reporting Segment Information in Financial Statements That Are Presented
in Another Enterprise’s Financial Report—an amendment of FASB
Statement No. 14
Suspension of Certain Accounting Requirements for Oil and Gas Producing
Companies—an amendment of FASB Statement No. 19
Disclosure of Information about Major Customers—an amendment of FASB
Statement No. 14
Accounting and Reporting by Defined Benefit Pension Plans
Balance Sheet Classification of Deferred Income Taxes—an amendment of
APB Opinion No. 11
Accounting for Intangible Assets of Motor Carriers—an amendment of
Chapter 5 of ARB No. 43 and an Interpretation of APB Opinions 17 and 30
Accounting for Franchise Fee Revenue
Disclosure of Long-Term Obligations
Revenue Recognition When Right of Return Exists
Accounting for Product Financing Arrangements
Financial Reporting in the Record and Music Industry
Financial Reporting by Cable Television Companies
Financial Reporting by Producers and Distributors of Motion Picture Films
Financial Reporting by Broadcasters
Accounting for Certain Mortgage Banking Activities
Research and Development Arrangements
Disclosures about Oil and Gas Producing Activities—an amendment of
FASB Statements 19, 25, 33, and 39
Accounting for the Effects of Certain Types of Regulation
Accounting for Certain Acquisitions of Banking or Thrift Institutions—an
amendment of APB Opinion No. 17, an Interpretation of APB Opinions 16
and 17, and an amendment of FASB Interpretation No. 9
Reporting a Change in Accounting for Railroad Track Structures—an
amendment of APB Opinion No. 20
Deferral of the Effective Date of Certain Accounting Requirements for
© 2015 National Association of Insurance Commissioners
11
Attachment 1
Ref #2015-20
GAAP Pronouncement
FAS 78
FAS 85
FAS 89
FAS 90
FAS 92
FAS 93
FAS 99
FAS 101
FAS 110
FAS 111
FAS 117
FAS 124
FAS 128
FAS 130
FAS 131
FAS 134
FAS 135
FAS 136
FAS 139
FAS 143
FAS 147
FAS 151
FAS 160
Pre-Codification FASB
Interpretations
FIN 01
(APB 20)
FIN 08
(FASB 6)
Title
Pension Plans of State and Local Governmental Units—an amendment of
FASB Statement No. 35
Classification of Obligations That Are Callable by the Creditor—an
amendment of ARB No. 43, Chapter 3A
Yield Test for Determining whether a Convertible Security Is a Common
Stock Equivalent—an amendment of APB Opinion No. 15
Financial Reporting and Changing Prices
Regulated Enterprises—Accounting for Abandonments and Disallowances of
Plant Costs—an amendment of FASB Statement No. 71
Regulated Enterprises—Accounting for Phase-In Plans— an amendment of
FASB Statement No. 71
Recognition of Depreciation by Not-for-Profit Organizations
Deferral of the Effective Date of Recognition of Depreciation by Not-forProfit Organizations—an amendment of FASB Statement No. 93
Regulated Enterprises—Accounting for the Dis-continuation of Application
of FASB Statement No. 71
Reporting by Defined Benefit Pension Plans of Investment Contracts—an
amendment of FASB Statement No. 35
Rescission of FASB Statement No. 32 and Technical Corrections
Financial Statements of Not-for-Profit Organizations
Accounting for Certain Investments Held by Not-For-Profit Organizations
Earnings per Share
Reporting Comprehensive Income
Segment Disclosures
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of FASB Statement No. 65
Rescission of FASB Statement No. 75 and Technical Corrections
Transfers of Assets to a Not-For-Profit Organization or Charitable Trust that
Raises or Holds Contributions for Others
Rescission of FASB Statement No. 53
Accounting for Asset Retirement Obligations
Acquisitions of Certain Financial Institutions, an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9
Inventory Costs, and amendment of ARB No. 43 (FAS 151), Chapter 4
Noncontrolling Interests in
Amendment of ARB No. 51
Consolidated
Financial
Statements—an
Accounting Changes Related to the Cost of Inventory
Classification of a Short-Term Obligation Repaid Prior to Being Replaced by
a Long-Term Security
© 2015 National Association of Insurance Commissioners
12
Attachment 1
Ref #2015-20
GAAP Pronouncement
FIN 09
(APB 16 & 17)
FIN 31
(APB 15 & FASB 28)
FIN 33
(FASB 34)
FIN 36
(FASB 19)
FIN 42
(FASB 116)
FIN 47
(FASB 143)
Pre-Codification
Accounting Principles
Board Opinions (APB)
APB 13
APB 15
Pre-Codification
Accounting Research
Bulletins (ARB)
ARB 43
ARB 45
Pre-Codification FASB
Technical Bulletins
(TB)
TB 79-1
TB 79-3
TB 79-4
TB 79-5
TB 79-8
TB 82-2
TB 84-1
TB 85-1
TB 87-2
TB 87-3
TB 90-1
Pre-Codification FASB
Staff Positions (FSP)
FSP FAS 19-1
Title
Applying APB Opinions No. 16 and 17 When a Savings and Loan
Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method
Treatment of Stock Compensation Plans in EPS Computations
Applying FASB Statement No. 34 to Oil and Gas Producing Operations
Accounted for by the Full Cost Method
Accounting for Exploratory Wells in Progress at the End of a Period
Accounting for Transfers of Assets in Which a Not-for-Profit Organization is
Granted Variance Power
Accounting for Conditional Asset Retirement Obligations
Amending Paragraph 6 of APB Opinion No. 9, Application to Commercial
Banks
Earnings Per Share
Restatement and Revision of Accounting Research Bulletins, Chapter 4
Long-Term Construction-Type Contracts
Purpose and Scope of FASB Technical Bulletins and Procedures for Issuance
Subjective Acceleration Clauses in Long-Term Debt Agreements
Segment Reporting of Puerto Rican Operations
Meaning of the Term “Customer” as it Applies to Health Care Facilities
under FASB Statement No. 14
Applicability of FASB Statements 21 and 33 to Certain Brokers and Dealers
in Securities
Accounting for the Conversion of Stock Options into Incentive Stock Options
as a Result of the Economic Recovery Tax Act of 1981
Accounting for Stock Issued to Acquire the Results of a Research and
Development Arrangement
Accounting for the Receipt of Federal Home Loan Mortgage Corporation
Participating Preferred Stock
Computation of a Loss on an Abandonment
Accounting for Mortgage Servicing Fees and Rights
Accounting for Separately Priced Extended Warranty and Product
Maintenance Contracts
Accounting for Suspended Well Costs
© 2015 National Association of Insurance Commissioners
13
Attachment 1
Ref #2015-20
GAAP Pronouncement
FSP FAS 117-1
FSP FAS 126-1
FSP FAS 143-1
FSP FAS 150-3
FSP FAS 150-5
FSP FIN 46(R)-7
FSP AAGINV-1 and
SOP 94-4-1
FSP AUG AIR-1
FSP SOP 78-9-1
FSP SOP 90-7-1
FSP SOP 94-3-1 and
AAG HCO-1
FSP SOP 07-1-1
FSP EITF 85-24-1
Pre-Codification
AICPA Statement of
Positions
SOP 14040
SOP 14060
SOP 14070
SOP 74-8
SOP 75-2
SOP 76-3
SOP 78-9-1
SOP 78-10
SOP 81-1
SOP 82-1
SOP 83-1
SOP 85-3
SOP 87-2
SOP 88-1
SOP 89-2
SOP 89-3
SOP 89-5
Title
Endowments of Not-for-Profit Organizations: Net Asset Classification of
Funds Subject to an Enacted Version of the Uniform Prudent Management of
Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds
Disclosure and Interim Reporting for Obligors for Conduit Debt Securities
Accounting for Electronic Equipment Waste Obligations
Effective Date, Disclosures and Transition for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests Under FASB Statement No. 150
Issuer’s Accounting Under FASB Statement 150 for Freestanding Warrants
and Other Similar Instruments on Shares That are Redeemable
Application of FASB Interpretation No. 46(R) to Investment Companies
Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain
Investment Companies Subject to the AICPA Investment Company Guide
and Defined-Contribution Health and Welfare and Pension Plans
Accounting for Planned Major Maintenance Activities
Interaction of AICPA Statement of Position 78-9 and EITF Issue 04-5
An Amendment of AICPA Statement of Position 90-7
Omnibus Changes to Consolidate and Equity Method Guidance for Not-ForProfit Organizations
Effective Date of AICPA Statement of Position 07-1
Application of EITF Issue No. 85-24 When Cash for the Right to Future
Distribution Fees for Shares Previously Sold is Received from Third Parties
Confirmation of Insurance Policies in Force
Auditing Property and Liability Reinsurance
Auditing Life Reinsurance
Financial Accounting and Reporting by Colleges and Universities
Accounting Practices of Real Estate Investment Trusts
Accounting Practices for Certain Employee Stock Ownership Plans
Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5
Accounting Principles and Reporting Practices for Certain Nonprofit
Organizations
Accounting for Performance of Construction-Type and Certain ProductionType Contracts
Accounting and Financial Reporting for Personal Financial Statements
Reporting by Banks of Investment Securities Gains or Losses
Accounting by Agricultural Producers and Agricultural Cooperatives
Accounting for Joint Costs of Informational Materials and Activities of NotFor-Profit Organizations That Include a Fund-Raising Appeal
Accounting for Developmental and Preoperating Costs, Purchases and
Exchanges of Take-off and Landing Slots, and Airframe Modifications
Reports on Audited Financial Statements of Investment Companies
Questions Concerning Accountants’ Services on Prospective Financial
Statements
Financial Accounting and Reporting by Providers of Prepaid Health Care
© 2015 National Association of Insurance Commissioners
14
Attachment 1
Ref #2015-20
GAAP Pronouncement
SOP 89-7
SOP 90-1
SOP 90-2
SOP 90-7
SOP 90-8
SOP 91-1
SOP 92-2
SOP 92-6
SOP 92-8
SOP 92-9
SOP 93-1
SOP 93-2
SOP 93-3
SOP 93-4
SOP 93-5
SOP 93-8
SOP 94-1
SOP 94-2
SOP 94-3
SOP 94-4
SOP 95-2
SOP 95-3
SOP 95-4
SOP 95-5
SOP 98-2
SOP 98-3
SOP 98-6
Title
Services
Report on the Internal Control Structure in Audits of Investment Companies
Accountants’ Services on Prospective Financial Statements for Internal Use
Only and Partial Presentations
Report on Internal Control Structure in Audits of Futures Commission
Merchants
Financial reporting by entities in reorganization under the Bankruptcy Code
Financial Accounting and Reporting by Continuing Care Retirement
Communities
Software Revenue Recognition
Questions and Answers on the Term Reasonably Objective Basis and Other
Issues Affecting Prospective Financial Statements
Accounting and Reporting by Health and Welfare Benefit Plans
Auditing Property/Casualty Insurance Entities Statutory Financial
Statements—Applying Certain Requirements of the NAIC Annual Statement
Instructions
Audits of Not-for-Profit Organizations Receiving Federal Awards
Financial Accounting and Reporting for High-Yield Debt Securities by
Investment Companies
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies
Rescission of Accounting Principles Board Statements
Foreign Currency Accounting and Financial Statement Presentation for
Investment Companies
Reporting on Required Supplementary Information Accompanying Compiled
or Reviewed Financial Statements of Common Interest Realty Associations
The Auditor’s Consideration of Regulatory Risk-Based Capital for Life
Insurance Enterprises
Inquiries of State Insurance Regulators
The Application of the Requirements of Accounting Research Bulletins,
Opinions of the Accounting Principles Board, and Statements and
Interpretations of the Financial Accounting Standards Board to Not-for-Profit
Organizations
Reporting of Related Entities by Not-for-Profit Organizations
Reporting of Investment Contracts Held by Health and Welfare Benefit Plans
and Defined-Contribution Pension Plans
Financial Reporting by Nonpublic Investment Partnerships
Accounting for Certain Distribution Costs of Investment Companies
Letters for State Insurance Regulators to Comply with the NAIC Model
Audit Rule
Auditor’s Reporting on Statutory Financial Statements of Insurance
Enterprises
Accounting for Costs of Activities of Not-for-Profit Organizations and State
and Local Governmental Entities That Include Fund Raising
Audits of States, Local Governments, and Not-for-Profit Organizations
Receiving Federal Awards
Reporting on Management’s Assessment Pursuant to the Life Insurance
© 2015 National Association of Insurance Commissioners
15
Attachment 1
Ref #2015-20
GAAP Pronouncement
SOP 98-8
SOP 99-1
SOP 99-2
SOP 99-3
SOP 00-1
SOP 00-2
SOP 01-1
SOP 01-2
SOP 01-3
SOP 01-4
SOP 01-6
SOP 02-1
SOP 02-2
SOP 03-2
SOP 03-4
SOP 03-5
SOP 04-1
SOP 04-2
SOP 06-1
SOP 07-1
SOP 07-2
Title
Ethical Market Conduct Program of the Insurance Marketplace Standards
Association
Engagements to Perform Year 2000 Agreed-Upon Procedures Attestation
Engagements Pursuant to Rule 17a-5 of the Securities Exchange Act of 1934,
Rule 17Ad-18 of the Securities Exchange Act of 1934, and Advisories No.
17-98 and No. 42-98 of the Commodity Futures Trading Commission
Guidance To Practitioners In Conducting And Reporting On An AgreedUpon Procedures Engagement To Assist Management In Evaluating The
Effectiveness Of Its Corporate Compliance Program
Accounting for and Reporting of 401(h) Features of Defined Benefit Pension
Plans
Accounting and Reporting of Certain Defined Contribution Plan Investments
and Other Disclosure Matters
Auditing Health Care Third-Party Revenues and Related Receivables
Accounting by Producers of Films
Amendment to Scope of Statement of Position 95-2, Financial Reporting by
Nonpublic Investment Partnerships, to include Commodity Pools
Accounting and Reporting by Health and Welfare Benefit Plans
Performing Agreed-Upon Procedures Engagements That Address Internal
Control Over Derivative Transactions as Required by the New York State
Insurance Law
Reporting Pursuant to the Association for Investment Management and
Research Performance Presentation Standards
Accounting by Certain Entities (Including Entities with Trade Receivables)
That Lend to or Finance the Activities of Others
Performing Agreed Upon Procedures Engagements That Address Annual
Claims Prompt Payment Reports as Required by the New Jersey
Administrative Code
Accounting for Derivative Instruments and Hedging Activities by Not-forProfit Health Care Organizations, and Clarification of the Performance
Indicator
Attest Engagements on Greenhouse Gas Emissions Information
Reporting Financial Highlights and Schedule of Investments by
Nonregistered Investment Partnerships: An Amendment to the Audit and
Accounting Guide Audits of Investment Companies and AICPA Statement of
Position 95-2, Financial Reporting by Nonpublic Investment Partnerships
Financial Highlights of Separate Accounts: An Amendment to the Audit and
Accounting Guide “Audits of Investment Companies”
Auditing the Statement of Social Insurance
Accounting for Real Estate Time-Sharing Transactions
Reporting Pursuant to the Global Investment Performance Standards
Clarification of the Scope of the Audit and Accounting Guide Investment
Companies and Accounting by Parent Companies and Equity Method
Investors for Investments in Investment Companies
Attestation Engagements That Address Specified Compliance Control
Objectives and Related Controls at Entities That Provide Services to
Investment Companies, Investment Advisers, or Other Service Providers
© 2015 National Association of Insurance Commissioners
16
Attachment 1
Ref #2015-20
GAAP Pronouncement
SOP 09-1
Pre-Codification
FASB EITF
EITF 84-9
EITF 85-8
EITF 85-12
EITF 85-13
EITF 85-18
EITF 85-23
EITF 85-24
EITF 85-27
EITF 85-31
EITF 85-41
EITF 85-42
EITF 85-44
EITF 86-2
EITF 86-3
EITF 86-5
EITF 86-7
EITF 86-12
EITF 86-13
EITF 86-24
EITF 86-27
EITF 86-30
EITF 86-31
EITF 86-40
EITF 86-44
EITF 86-46
EITF 87-4
EITF 87-10
EITF 87-20
EITF 87-22
EITF 87-24
EITF 87-30
EITF 88-4
EITF 88-16
Title
Performing Agreed-Upon Procedures Engagements That Address the
Completeness, Accuracy or Consistency of XBRL-Tagged Data
Deposit Float of Banks
Amortization of Thrift Intangibles
Retention of Specialized Accounting for Investments in Consolidation
Sale of Mortgage Service Rights on Mortgages Owned by Others
Earnings-per-Share Effect of Equity Commitment Notes
Effect of a Redemption Agreement on Carrying Value of a Security
Distribution Fees by Distributors of Mutual Funds That Do Not Have a
Front-End Sales Charge
Recognition of Receipts from Made-Up Rental Shortfalls
Comptroller of the Currency’s Rule on Deferred Tax Debits
Accounting for Savings and Loan Associations under FSLIC Management
Consignment Program
Amortization of Goodwill Resulting from Recording Time Savings Deposits
at Fair Values
Differences between Loan Loss Allowances for GAAP and RAP
Retroactive Wage Adjustments Affecting Medicare Payments
Retroactive Regulations regarding IRC Section 338 Purchase Price
Allocations
Classifying Demand Notes with Repayment Terms
Recognition by Homebuilders of Profit from Sales of Land and Related
Construction Contracts
Accounting by Insureds for Claims-Made Insurance Policies
Recognition of Inventory Market Declines at Interim Reporting Dates
Third-Party Establishment of Collateralized Mortgage Obligations
Measurement of Excess Contributions to a Defined Contribution Plan or
Employee Stock Ownership Plan
Classification of Obligations When a Violation is Waived by the Creditor
Reporting the Tax Implications of a Pooling of a Bank and a Savings and
Loan Association
Investments in Open-End Mutual Funds That Invest in U.S. Government
Securities
Effect of a Change in Tax Law on Investments in Safe Harbor Leases
Uniform Capitalization Rules for Inventory under the Tax Reform Act of
1986
Restructuring of Operations: Implications of SEC Staff Accounting Bulletin
No. 67
Revenue Recognition by Television (Barter) Syndicators
Offsetting Certificates of Deposit against High-Coupon Debt
Prepayments to the Secondary Reserve of the FSLIC
Allocation of Interest to Discontinued Operations
Sale of a Short-Term Loan Made under a Long-Term Credit Commitment
Classification of Payment Made to IRS to Retain Fiscal Year
Basis in Leveraged Buyout Transactions
© 2015 National Association of Insurance Commissioners
17
Attachment 1
Ref #2015-20
GAAP Pronouncement
EITF 88-19
EITF 88-20
EITF 88-25
EITF 89-3
EITF 89-19
EITF 89-20
EITF 90-4
EITF 90-16
EITF 90-18
EITF 91-6
EITF 91-9
EITF 91-10
EITF 92-3
EITF 92-5
EITF 92-7
EITF 92-12
EITF 92-13
EITF 93-1
EITF 93-9
EITF 93-12
EITF 94-2
EITF 95-1
EITF 95-4
EITF 95-6
EITF 95-7
EITF 95-22
EITF 96-7
EITF 96-16 *
Title
FSLIC-Assisted Acquisitions of Thrifts
Difference between Initial Investment and Principal Amount of Loans in a
Purchased Credit Card Portfolio
Ongoing Accounting and Reporting for a Newly Created Liquidating Bank
Balance Sheet Presentation of Savings Accounts in Financial Statements of
Credit Unions
Accounting for a Change in Goodwill Amortization for Business
Combinations Initiated Prior to the Effective Date of FASB Statement No. 72
Accounting for Cross Border Tax Benefit Leases
Earnings-per-Share Treatment of Tax Benefits for Dividends on Stock Held
by an Employee Stock Ownership Plan
Accounting for Discontinued Operations Subsequently Retained
Effect of a “Removal of Accounts” Provision on the Accounting for a Credit
Card Securitization
Revenue Recognition of Long-Term Power Sales Contracts
Revenue and Expense Recognition for Freight Services in Process
Accounting for Special Assessments and Tax Increment Financing Entities
(TIFEs)
Earnings-per-Share Treatment of Tax Benefits for Dividends on Unallocated
Stock Held by an Employee Stock Ownership Plan
Amortization Period for Net Deferred Credit Card Origination Costs
Accounting by Rate-Regulated Utilities for the Effects of Certain Alternative
Revenue Programs
Accounting for OPEB Costs by Rate-Regulated Enterprises
Accounting for Estimated Payments in Connection with the Coal Industry
Retiree Health Benefit Act of 1992
Accounting for Individual Credit Card Acquisitions
Application of FASB Statement No. 109 in Foreign Financial Statements
Restated for General Price-Level Changes
Recognition and Measurement of the Tax Benefit of Excess Tax-Deductible
Goodwill Resulting from a Retroactive Change in Tax Law
Treatment of Minority Interests in Certain Real Estate Investment Trusts
Revenue Recognition on Sales with a Guaranteed Minimum Resale Value
Revenue Recognition on Equipment Sold and Subsequently Repurchased
Subject to an Operating Lease
Accounting by a Real Estate Investment Trust for an Investment in a Service
Corporation
Implementation Issues Related to the Treatment of Minority Interests in
Certain Real Estate Investment Trusts
Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements That Include both a Subjective Acceleration Clause and a
Lock-Box Arrangement
Accounting for Deferred Taxes on In-Process Research and Development
Activities Acquired in a Purchase Business Combination
Investor’s Accounting for an Investee When the Investor Has a Majority of
the Voting Interest but the Minority Shareholder or Shareholders Have
Certain Approval or Veto Rights
© 2015 National Association of Insurance Commissioners
18
Attachment 1
Ref #2015-20
GAAP Pronouncement
EITF 96-17
EITF 97-1
EITF 97-2
EITF 97-3 *
EITF 97-4
EITF 97-6
EITF 97-7
EITF 97-9
EITF 97-10 *
EITF 97-15
EITF 98-1
EITF 99-5
EITF 99-6
EITF 99-7
EITF 99-11
EITF 99-13
EITF 99-15
EITF 99-16
EITF 99-18
EITF 99-19
EITF 00-4
EITF 00-6
EITF 00-10
EITF 00-14
EITF 00-15
Title
Revenue Recognition under Long-Term Power Sales Contracts That Contain
both Fixed and Variable Pricing Terms
Implementation Issues in Accounting for Lease Transactions, Including
Those Involving Special-Purpose Entities
Application of FASB Statement No. 94 and APB Opinion No. 16 to
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Arrangements
Accounting for Fees and Costs Associated with Loan Syndications and Loan
Participations after the Issuance of FASB Statement No. 25
Deregulation of the Pricing of Electricity
Application of Issue No. 96-20 to Qualifying Special-Purpose Entities
Receiving Transferred Financial Assets Prior to the Effective Date of FASB
Statement No. 125
Accounting for Hedges of the Foreign Currency Risk Inherent in an
Available-for-Sale Marketable Equity Security
Effect on Pooling-of-Interests Accounting of Certain Contingently
Exercisable Options or Other Equity Instruments
The Effect of Lessee Involvement in Asset Construction
Accounting for Contingency Arrangements Based on Security Prices in a
Purchase Business Combinations
Valuation of Debt Assumed in a Purchase Business Combination
Accounting for Pre-Production Costs Related to Long-Term Supply
Arrangements
Impact of Acceleration Provisions in Grants Made between Initiation and
Consummation of a Pooling-of-Interests Business Combination
Accounting for an Accelerated Share Repurchase Program
Subsequent Events Caused by Year 2000
Application of Issue No. 97-10 and FASB Interpretation No. 23 to Entities
that Enter into Leases with Governmental Entities
Accounting for Decreases in Deferred Tax Asset Valuation Allowances
Established in a Purchase Business Combination as a Result of a Change in
Tax Regulations
Accounting for Transactions with Elements of Research and Development
Arrangements
Effect on Pooling-of-Interests Accounting on Contracts Indexed to a
Company’s Own Stock
Reporting Revenue Gross as a Principal versus Net as an Agent
Majority Owner’s Accounting for a Transaction in the Shares of a
Consolidated Subsidiary and a Derivative Indexed to the Minority Interest in
That Subsidiary
Accounting for Freestanding Derivative Financial Instruments Indexed to,
and Potentially Settled in, the Stock of a Consolidated Subsidiary
Accounting for Shipping and Handling Fees and Costs
Accounting for Certain Sales Incentives
Classification in the Statement of Cash Flows of the Income Tax Benefit
Received by a Company upon Exercise of a Nonqualified Employee Stock
Option
© 2015 National Association of Insurance Commissioners
19
Attachment 1
Ref #2015-20
GAAP Pronouncement
EITF 00-17
EITF 00-19
EITF 00-22
EITF 01-3
EITF 01-5 *
EITF 01-6
EITF 01-9
EITF 01-12
EITF 01-14
EITF 02-3 *
EITF 02-6
EITF 02-7 *
EITF 02-8
EITF 02-13 *
EITF 02-14 *
EITF 02-16
EITF 02-17 *
EITF 03-2
EITF 03-6 *
EITF 03-10
EITF 03-11 *
EITF 03-12
EITF 03-13
Title
Measuring the Fair Value of Energy-Related Contracts in Applying Issue No.
98-10
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, A Company’s Own Stock
Accounting for “Points” and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to be
Delivered in the Future
Accounting in a Business Combination for Deferred Revenue of an Acquiree
Application of FASB Statement No. 52 to an Investment Being Evaluated for
Impairment That Will Be Disposed Of
The Meaning of “Indexed to a Company’s Own Stock”
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)
The Impact of the Requirements of FASB Statement No. 133 on Residual
Value Guarantees in Connection with a Lease
Income Statement Characterization of Reimbursements Received for “Outof-Pocket” Expenses Incurred
Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities
Classification in the Statement of Cash Flows of Payments Made to Settle an
Asset Retirement Obligation within the Scope of FASB Statement No. 143
Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible
Assets
Accounting for Options Granted to Employees in Unrestricted, Publicly
Traded Shares of an Unrelated Entity
Deferred Income Tax Considerations in Applying the Goodwill Impairment
Test in FASB Statement No. 142
Whether the Equity Method of Accounting Applies When an Investor Does
Not Have an Investment in Voting Stock of an Investee but Exercises
Significant Influence through Other Means
Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor
Recognition of Customer Relationship Intangible Assets Acquired in a
Business Combination
Accounting for the Transfer to the Japanese Government of the Substantial
Portion of Employee Pension Fund Liabilities
Participating Securities and the Two-class Method under FASB Statement
No. 128
Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to
Consumers by Manufacturers
Reporting Realized Gains and Losses on Derivative Instruments That Are
Subject to FASB Statement No. 133 and Not “Held for Trading Purposes” as
Defined in Issue No. 02-3
The Impact of FASB Interpretation No. 45 on Issue No. 95-1
Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in
Determining Whether to Report Discontinued Operations
© 2015 National Association of Insurance Commissioners
20
Attachment 1
Ref #2015-20
GAAP Pronouncement
EITF 03-16 *
EITF 04-1
EITF 04-2
EITF 04-3
EITF 04-4
EITF 04-5
EITF 04-6
EITF 04-7
EITF 04-8
EITF 04-10
EITF 04-13
EITF 05-5
EITF 05-6
EITF 05-8
EITF 06-1
EITF 06-07
EITF 06-10
EITF 07-1
EITF 07-4
EITF 07-5
EITF 08-8
Pre-Codification
AICPA Practice
Bulletins (PB)
PB 2
PB 5
PB 11
Title
Accounting for Investments in Limited Liability Companies
Accounting for Preexisting Relationships between the Parties to a Business
Combination
Whether Mineral Rights are Tangible or Intangible Assets
Mining Assets: Impairment and Business Combinations
Allocation of Goodwill to Reporting Units for a Mining Enterprise
Determining Whether a General Partner, or the General Partners as a Group,
Controls a Limited Partnership or Similar Entity When the Limited Partners
Have Certain Rights
Accounting for Stripping Costs Incurred During Production in the Mining
Industry
Determining Whether an Interest is a Variable Interest in a Potential Variable
Interest Entity
The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share
Determining Whether to Aggregate Operating Segments That Do Not Meet
the Quantitative Thresholds
Accounting for Purchases and Sales of Inventory with the Same Counterparty
Accounting for Early Retirement or Postemployment Programs with
Specified Features (Such as Term Specified in Altersteilzeit Early Retirement
Arrangements)
Determining the Amortization Period for Leasehold Improvements Purchased
after Lease Inception or Acquired in a Business Combination
Income Tax Consequences of Issuing Convertible Debt with a Beneficial
Conversion Feature
Accounting for Consideration Given by a Specific Provider to Manufacturers
or Resellers of Equipment Necessary for an End-Customer to Receive
Service from the Service Provider
Issuer's Accounting for a Previously Bifurcated Conversion Option in a
Convertible Debt Instrument When the Conversion Option No Longer Meets
the Bifurcation Criteria in FASB Statement No. 133
Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Collateral Assignment Split-Dollar Life Insurance Arrangements
Accounting for Collaborative Arrangements
Application of the Two-Class Method under FAS 128 to Master Limited
Partnerships
Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock
Accounting for an Instrument (or an embedded feature) with a Settlement
Amount That is Based on the Stock of an Entity’s Consolidated Subsidiary
Elimination of Profits Resulting From Intercompany Transfers of LIFO
Inventories
Income Recognition on Loans to Financially Troubled Countries
Accounting for Preconfirmation Contingencies in Fresh-Start Reporting
© 2015 National Association of Insurance Commissioners
21
Attachment 1
Ref #2015-20
GAAP Pronouncement
PB 12
PB 14
Pre-Codification
AICPA Accounting
Interpretations (AIN)
AIN-APB15
Title
Reporting Separate Investment Fund Option Information of DefinedContribution Pension Plans
Accounting and Reporting by Limiting Liability Companies and Limited
Liability Partnerships
Computing Earnings per Share: Accounting Interpretations of APB Opinion
No. 15
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H1 - 15-20 - Placement Revisions to the AP&P
Manual.docx
© 2015 National Association of Insurance Commissioners
22
Attachment 2
Ref #2015-16
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2015-06: Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown
Transactions
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
ASU 2015-06: Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown
Transactions (ASU 2015-06) was issued in April 2015 to address master limited partnerships that
originated from Emerging Issues Task Force (EITF) Issue No. 07-4, “Application of the Two-Class
Method under FASB Statement No. 128 to Master Limited Partnerships.” Under Topic 260, master
limited partnerships apply the two-class method of calculating earnings per unit because the general
partner, limited partners, and incentive distribution rights holders each participate differently in the
distribution of available cash in accordance with the contractual rights contained in the partnership
agreement. When a general partner transfers (or “drops down”) net assets to a master limited partnership
and that transaction is accounted for as a transaction between entities under common control, the
statements of operations of the master limited partnership are adjusted retrospectively to reflect the
dropdown transaction as if it occurred on the earliest date during which the entities were under common
control. However, Topic 260 did not address how to present historical earnings per unit for periods before
the date of a dropdown transaction that occurs after formation of a master limited partnership. This
Update was issued to help resolve diversity in practice.
Existing Authoritative Literature:
FAS 128, Earnings per Share (FAS 128) (reflected in Topic 260 of the FASB Codification) was rejected
as not applicable to statutory accounting.
EITF No. 07-04: Application of the Two-Class Method under FASB Statement No. 128 to Master Limited
Partnerships was rejected as not applicable to statutory accounting
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation: ASU 2015-06 pertains to the presentation of “earnings per share” in GAAP
financial statements. The concept of “earnings per share” has previously been addressed in FAS 128 and
EITF 07-04, which were rejected for statutory accounting. As such, staff recommends moving this item
to the nonsubstantive active listing, and exposing nonsubstantive revisions to Issue Paper No. 99—
Nonapplicable GAAP Pronouncements to reject ASU 2015-06 as not applicable to statutory
accounting.
Staff Review Completed by:
Josh Arpin - May 2015
© 2015 National Association of Insurance Commissioners
1
Attachment 2
Ref #2015-15
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to Issue Paper No. 99 to reject ASU
2015-06 as not applicable to statutory accounting. (Note – Per agenda item 2015-20, there is a current
proposal to incorporate Issue Paper No. 99 into Appendix D. As such, if that agenda item is adopted, the
reference to reject ASU 2015-06 as not applicable will be included in that new location.)
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H2 - 15-16 ASU 2015-06-Earnings Per
Share.docx
© 2015 National Association of Insurance Commissioners
2
Attachment 3
Exposure – Security Definition
To:
Statutory Accounting Principles (E) Working Group
From: Julie Gann (NAIC Staff)
Re:
Discussion – Inclusion of Security Definition in SSAP No. 26
Date: December 17, 2014 - (Exposed for Comment on March 28, 2015)
This memorandum details proposed revisions to include a definition to the term “security” within the
definition of a bond in SSAP No. 26—Bonds, Excluding Loan-Backed and Structured Securities.
Proposal: Incorporate the GAAP definition of a security, as it is used in FASB Codification Topic 320:
Investments – Debt and Equity Securities, and Topic 860: Transfers and Servicing:
Security: A share, participation, or other interest in property or in an entity of the issuer or an
obligation of the issuer that has all of the following characteristics:
a. It is either represented by an instrument issued in bearer or registered form or, if not
represented by an instrument, is registered in books maintained to record transfers by or on
behalf of the issuer.
b. It is of a type commonly dealt in on securities exchanges or markets or, when represented by
an instrument, is commonly recognized in any area in which it is issued or dealt in as a
medium for investment.
c.
It either is one of a class or series or by its terms is divisible into a class or series of shares,
participations, interests, or obligations.
This definition is already included in SSAP No. 37—Mortgage Loans, paragraph 2.
2. 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 in property or
in an enterprise of the issuer or an obligation of the issuer that (a) either is represented by
an instrument issued in bearer or registered form, or if not represented by an instrument,
is registered in books maintained to record transfers by or on behalf of the issuer, (b) is of
a type commonly dealt in on securities exchanges or markets or, when represented by an
instrument, is commonly recognized in any area in which it is issued or dealt in as a
medium for investment, and (c) either is one of a class or series or by its terms is divisible
into a class or series of shares, participations, interests, or obligations).
Rationale – Staff does not see a regulatory reason to define “security” differently between GAAP & SAP.
Impact: By incorporating the definition of a security in SSAP No. 26, it will be clear that some
investments within scope of SSAP No. 26 do not meet the definition of a bond. Although the inclusion of
these investments will be subsequently considered under the investment project, for this discussion topic,
it is proposed that the guidance in SSAP No. 26 be divided between those items that meet the explicit
definition of a bond, and investments that have been previously decided to be reported as bonds.
Consideration should subsequently occur on whether the GAAP security definition should be included in the
AP&P Manual master glossary for all references within the Manual. If this definition is supported for SSAP
No. 26, staff will identify all of the SSAPs and references that would be impacted and present this info for
subsequent Working Group discussion.
© 2015 National Association of Insurance Commissioners
1
Attachment 3
Exposure – Security Definition
Proposed Revisions to SSAP No. 26 – Include Security Definition
Bonds, Excluding Loan-Backed and Structured Securities
SCOPE OF STATEMENT
1.
This statement establishes statutory accounting principles for bonds and fixed-income
investments specifically identified to be within the scope of this statement.
2.
This statement excludes:
a.
, excluding lLoan-backed and structured securities. These investments are
addressed in SSAP No. 43R—Loan-Backed and Structured Securities.
b.
Bonds that meet the definition in paragraph 3, but have a maturity date of one
year or less from the date of acquisition. These investments are addressed in
SSAP No. 2—Cash, Drafts and Short-Term Investments.
a.c.
Mortgage loans and other real estate lending activities made in the ordinary
course of business. These investments are addressed in SSAP No. 37—
Mortgage Loans and SSAP No. 39—Reverse Mortgages.
SUMMARY CONCLUSION
1.3.
Bonds shall be defined as any securities1 representing a creditor relationship, whereby
there is a fixed schedule for one or more future payments. This definition includes:
a.
U.S. Treasury securities,(INT 01-25)
b.
U.S. government agency securities,
c.
Municipal securities, and
d.
Corporate bonds,
d.
Convertible debtbonds, including mandatory convertible debtbonds as defined in
paragraph 9,
NOTE: Other items currently included in SSAP No. 26 will be subsequently discussed. The intent
of this memo is simply to consider including the definition for a “security”.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H3a - 13-36-1 - Investment Security
Defintion.docx
1
This SSAP adopts the GAAP definition of a security as it is used in FASB Codification Topic 320 and 860:
Security: A share, participation, or other interest in property or in an entity of the issuer or an obligation of the
issuer that has all of the following characteristics:
a.
It is either represented by an instrument issued in bearer or registered form or, if not represented by an
instrument, is registered in books maintained to record transfers by or on behalf of the issuer.
b.
It is of a type commonly dealt in on securities exchanges or markets or, when represented by an
instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for
investment.
c.
It either is one of a class or series or by its terms is divisible into a class or series of shares,
participations, interests, or obligations.
© 2015 National Association of Insurance Commissioners
2
Attachment 3
Exposure Document – Principal Due
To:
From:
Re:
Date:
Statutory Accounting Principles (E) Working Group
Julie Gann (NAIC Staff)
Discussion – Requirement for “Contractual Amount of Principal Due”
January 5, 2015 - (Exposed for Comment on March 28, 2015)
This memo discusses the proposal for a “contractual amount of principal due” for SSAP No. 26
investments for Working Group consideration under the investment classification project.
Proposal: This item proposes to incorporate guidance to require all SSAP No. 26 investments to have a
“contractual amount of principal due,” with concurrent consideration of new guidance for “funds”.
Although a preliminary draft SSAP for “funds” has been proposed based on existing guidance, it is
recommended that the Working Group complete a full assessment of “funds” to review the variety of
items that can be captured within this definition and consider statutory accounting guidance for all types.
Rationale: The following elements support the consideration of revised accounting treatment:
•
Existing statutory accounting guidance has resulted in “funds” being captured throughout various
investment schedules. This process has resulted in a lack of transparency and makes it difficult to
assess the amount of “funds” held as investments. (Existing guidance allows some mutual funds
and ETFs to be classified as bonds, common stock or preferred stock based on SVO assessment.)
•
SSAP No. 26 uses an amortized cost measurement. The bond investment schedule (D - Part 1) is
not conducive to the reporting of “funds” or other items that do not have an amortized cost.
Without a contractual amount of principal due, there is no actual “amortized cost” for fund
investments. As such, the “amortized cost” reported is a calculated amount determined by the
reporting entity and is not consistently determined.
•
The rationale for the current process of including “funds” in different schedules was based on the
assessed risk of the funds. (For example, allocating funds based on credit quality, market risk,
redemption process, underlying investments, etc.) This process was supported as a lower-risk
investment was deemed to warrant a lower RBC charge. (This proposal suggests that lower RBC
charges – if appropriate – are feasible with a collective reporting process as different types of
investments would be coded separately. Furthermore, having similar investments reported
together, but bifurcated by type, will assist regulators in understanding the extent of investments.
•
Some concerns with moving “funds” into a single SSAP/schedule are based on the expectation
that funds previously in scope of SSAP No. 26 will no longer be considered “bonds” for state
investment purposes. Per info from some states, mutual funds or ETFs classified as bonds for
reporting do not result in those items being considered bonds under state investment guidelines. If
some states do allow such funds to be considered “bonds” within their guidelines, this is still
possible with the proposed coding of investments within a new schedule. In short, recognition in
accounting and reporting does not impact state investment law limitation requirements.
Impact: By requiring all SSAP No. 26 investments to have a “contractual amount of principle due”,
ETF’s and mutual funds would be eliminated from the scope of SSAP No. 26. Additionally, this
requirement would prevent future inclusion of other “fund” investments from being classified as bonds.
This memo also proposes consideration of new accounting and reporting guidance for “funds”.
© 2015 National Association of Insurance Commissioners
1
Attachment 3
Exposure Document – Principal Due
Proposed Revisions to SSAP No. 26 – Contractual Amount of Principal Due
(Note – The Proposed Revisions from the Security Definition memo are shown as Accepted Changes.)
Bonds
SCOPE OF STATEMENT
1.
This statement establishes statutory accounting principles for bonds and fixed-income
investments specifically identified to be within the scope of this statement.
2.
This statement excludes:
a.
Loan-backed and structured securities. These investments are addressed in
SSAP No. 43R—Loan-Backed and Structured Securities.
b.
Bonds that meet the definition in paragraph 3, but have a maturity date of one
year or less from the date of acquisition. These investments are addressed in
SSAP No. 2—Cash, Drafts and Short-Term Investments.
c.
Mortgage loans and other real estate lending activities made in the ordinary
course of business. These investments are addressed in SSAP No. 37—
Mortgage Loans and SSAP No. 39—Reverse Mortgages.
SUMMARY CONCLUSION
3.
Bonds shall be defined as any securities1 representing a creditor relationship, whereby
there is a contractual amount of principal due with a there is fixed schedule for one or
more future payments. This definition includes:
a.
U.S. Treasury securities,(INT 01-25)
b.
U.S. government agency securities,
c.
Municipal securities, and
d.
Corporate bonds
e.
Convertible bonds, including mandatory convertible bonds as defined in
paragraph 9,
i.
Exchange Traded Funds, which qualify for bond treatment, as identified in the
Purposes and Procedures Manual of the NAIC Investment Analysis Office, and
1
This SSAP adopts the GAAP definition of a security as it is used in FASB Codification Topic 320 and 860:
Security: A share, participation, or other interest in property or in an entity of the issuer or an obligation of the
issuer that has all of the following characteristics:
a.
It is either represented by an instrument issued in bearer or registered form or, if not represented by an
instrument, is registered in books maintained to record transfers by or on behalf of the issuer.
b.
It is of a type commonly dealt in on securities exchanges or markets or, when represented by an
instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for
investment.
c.
It either is one of a class or series or by its terms is divisible into a class or series of shares,
participations, interests, or obligations.
© 2015 National Association of Insurance Commissioners
2
Attachment 3
Exposure Document – Principal Due
j.
Class 1 Bond Mutual Funds, as identified in the Purposes and Procedures
Manual of the NAIC Investment Analysis Office.
NOTE: Other items currently included in SSAP No. 26 will be subsequently discussed. The intent
of this memo is simply to consider the requirement for a “contractual amount of principal due”
resulting in the exclusion of ETFs and Mutual Funds from the scope of SSAP No. 26.
Proposed New SSAP – Accounting for Funds
Investments in Funds
SCOPE OF STATEMENT
1.
This statement establishes statutory accounting principles for investments in Mutual Funds2 and
Exchange Traded Funds3. Other types of fund investments (e.g., closed-end funds, hedge funds, and unit
investment trusts that are not ETFs) are not specifically addressed within statutory accounting guidance
and pursuant to SSAP No. 4 are considered nonadmitted assets.
NOTE: The scope of this SSAP has been limited to funds currently addressed within statutory
accounting principles. It is proposed that subsequent consideration occur on other types of funds
not currently addressed. This proposal should not imply that all other funds should be admitted;
however, staff suggests that clear guidance and direction for the different types of funds would
eliminate confusion and improve consistency. Other types of funds for future discussion include:
closed-end investment companies, unit investment trusts, hedge funds, and investments in “trust
funds” that do not currently fit within the confines of SSAP No. 48.
SUMMARY CONCLUSION
2.
A mutual fund is a type of investment company that pools money from many investors and
invests the money in stocks, bonds, money-market instruments, other securities, or even cash. Per the
SEC, some characteristics of mutual funds include:
2
a.
Investors purchase shares in the mutual fund from the fund itself, or through a broker for
the fund, and cannot purchase the shares from other investors on a secondary market,
such as the New York Stock Exchange or Nasdaq Stock Market. The price that investors
pay for mutual fund shares is the fund’s approximate net asset value (NAV) per share
plus any fees that the fund may charge at purchase, such as sales charges, also known as
sales loads.
b.
Mutual fund shares are "redeemable." This means that when mutual fund investors want
to sell their fund shares, they sell them back to the fund, or to a broker acting for the fund,
at their current NAV per share, minus any fees the fund may charge, such as deferred
sales loads or redemption fees.
A mutual fund is legally known as an open-end company.
3 Exchange traded funds (ETFs) are investment companies that are legally classified as open-end companies or Unit
Investment Trusts (UITs). For the scope of this statement, UITs that are not ETFs are currently excluded.
Additionally, although potentially formed as an open-end company, because of the limited redeemability of ETF
shares, ETFs are not considered to be - and may not call themselves - mutual funds.
© 2015 National Association of Insurance Commissioners
3
Attachment 3
Exposure Document – Principal Due
c.
Mutual funds generally sell their shares on a continuous basis, although some funds will
stop selling when, for example, they reach a certain level of assets under management.
d.
The investment portfolios of mutual funds typically are managed by separate entities
known as "investment advisers" that are registered with the SEC. In addition, mutual
funds themselves are registered with the SEC and subject to SEC regulation.
e.
There are many varieties of mutual funds, including index funds, stock funds, bond
funds, and money market funds. Each may have a different investment objective and
strategy and a different investment portfolio. Different mutual funds may also be subject
to different risks, volatility, and fees and expenses. (Fees reduce returns on fund
investments.)
3.
Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end
companies or Unit Investment Trusts (UITs), but that differ from traditional open-end companies and
UITs in the following respects:
a.
ETFs do not sell individual shares directly to investors and only issue their shares in large
blocks that are known as "Creation Units."
b.
Investors generally do not purchase Creation Units with cash. Instead, they buy Creation
Units with a basket of securities that generally mirrors the ETF’s portfolio. Those who
purchase Creation Units are frequently institutions.
c.
After purchasing a Creation Unit, an investor often splits it up and sells the individual
shares on a secondary market. This permits other investors to purchase individual shares
(instead of Creation Units).
d.
Investors who want to sell their ETF shares have two options: (1) they can sell individual
shares to other investors on the secondary market, or (2) they can sell the Creation Units
back to the ETF. In addition, ETFs generally redeem Creation Units by giving investors
the securities that comprise the portfolio instead of cash.
e.
An ETF will have annual operating expenses and may also impose certain shareholders
fees.
4.
Investments in mutual funds and ETFs meet the definition of assets as defined in SSAP No. 4—
Assets and Nonadmitted Assets and are admitted assets to the extent they conform to the requirements of
this statement.
Acquisitions and Sales
5.
At acquisition, mutual funds and exchange traded funds shall be reported at their cost, including
brokerage and other related fees. Acquisitions and dispositions shall be recorded on the trade date.
Balance Sheet Amount
6.
Investments in mutual funds shall be valued at fair value. Exchange traded funds shall be valued
at… (Valuation is currently subject to Working Group discussion. No proposed language at this time.)
7.
For reporting entities required to maintain an Asset Valuation Reserve (AVR), the accounting for
unrealized capital gains and losses shall be in accordance with SSAP No. 7—Asset Valuation Reserve and
© 2015 National Association of Insurance Commissioners
4
Attachment 3
Exposure Document – Principal Due
Interest Maintenance Reserve (SSAP No. 7). For reporting entities not required to maintain an AVR,
unrealized capital gains and losses shall be recorded as a direct credit or charge to surplus.
Impairment
8.
For any decline which is determined to be other than temporary (INT 06-07) the mutual fund shall be
written down to fair value as the new cost basis and the amount of the write down shall be accounted for
as a realized loss. For those reporting entities required to maintain an AVR, realized losses shall be
accounted for in accordance with SSAP No. 7. Subsequent fluctuations in fair value shall be recorded as
unrealized gains or losses. Future declines in fair value which are determined to be other than temporary
shall be recorded as realized losses. A decline in fair value which is other than temporary includes
situations where a reporting entity has made a decision to sell a security at an amount below its carrying
value. (This guidance will be subsequently considered for ETFs based on the valuation approach.)
Income
9.
Dividends shall be recorded as investment income on the ex-dividend date with a corresponding
receivable to be extinguished upon receipt of the dividend. Dividends received as additional shares of the
mutual fund or ETF (e.g., ETF coupons used to acquire additional shares of the ETF) shall be reported at
the fair value / NAV of the mutual fund or ETF as of the date of receipt.
10.
For reporting entities required to maintain an AVR, the accounting for realized capital gains and
losses on sales of mutual funds or ETFs shall be in accordance with SSAP No. 7. For reporting entities
not required to maintain an AVR, realized gains and losses on sales of mutual funds or ETFs shall be
reported as realized gains/losses in the statement of operations.
11.
If fees and expenses of mutual funds and ETFs are not netted with the return of investment (e.g.,
ETF shareholder fees), such costs shall be expensed when incurred.
Reporting
12.
Mutual funds shall be reported separately from ETFs on the investment schedule (Schedule D –
Part 7) and by type of mutual fund:
a.
Index Fund
b.
Stock Fund
c.
Bond Fund
d.
Bond Fund on the NAIC SVO Bond List
e.
Money Market Fund
f.
Money Market Fund on the NAIC SVO Class 1 List
g.
Money Market Fund on the NAIC SVO U.S. Direct Obligations / Full Faith and Credit
Exempt List
13.
ETFs shall be reported separately from mutual funds on the investment schedule (Schedule D –
Part 7) and by type of ETF:
a.
Index Fund
© 2015 National Association of Insurance Commissioners
5
Attachment 3
Exposure Document – Principal Due
b.
Index Fund - on the NAIC SVO Bond List
c.
Index Fund – on the NAIC SVO Preferred Stock List
d.
Leveraged or Inverse ETF4
e.
Actively Managed ETF5
Disclosures
14.
The following disclosures regarding mutual funds and ETFs shall be made in the financial
statements:
a.
A description, as well as the amount, of mutual funds and ETFs not under the exclusive
control of the reporting entity (e.g., restricted) and the nature of the restriction.
b.
For each balance sheet presented, all mutual funds and ETFs (separately) in an unrealized
loss position for which other-than-temporary declines in value have not been recognized:
i.
The aggregate amount of unrealized losses (that is, the amount by which cost or
exceeds fair value / NAV), and
ii.
The aggregate fair value / NAV of mutual funds or ETFs with unrealized losses.
c.
The disclosures in (i) and (ii) above should be segregated by mutual funds and ETFs that
have been in a continuous unrealized loss position for less than 12 months and those that
have been in a continuous unrealized loss position for 12 months or longer.
d.
As of the most recent balance sheet presented, additional information should be included
describing the general categories of information that the investor considered in reaching
the conclusion that the impairments are not other-than-temporary.
Effective Date and Transition
15.
This statement is effective for __________. A change resulting from the adoption of this
statement shall be accounted for as a change in accounting principle in accordance with SSAP No. 3—
Accounting Changes and Corrections of Errors.
REFERENCES
Other
•
Purposes and Procedures Manual of the NAIC Investment Analysis Office
Relevant Issue Papers
•
Issue Paper No._____ —Investment Classification Project
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H3b - 13-36-2 - Contractual Principle.docx
4
Leveraged or inverse ETFs seek to achieve a daily return that is a multiple or an inverse multiple of the daily return of a
securities index. An important characteristic of these ETFs is that they seek to achieve their stated objectives on a daily basis, and
their performance over longer periods of time can differ significantly from the multiple or inverse multiple of the index
performance over those longer periods of time.
5
ETFs that pursue active management strategies and publish their portfolio holdings on a daily basis.
© 2015 National Association of Insurance Commissioners
6
Attachment 3
Exposure Document - Definitions
To:
Statutory Accounting Principles (E) Working Group
From: Julie Gann (NAIC Staff)
Re:
Discussion – Definitions of Non-Bond Items
Date:
February 3, 2015 - (Exposed for Comment on March 28, 2015)
This memo provides definitions for debt-like investments that are outside of the bond definition proposed
in SSAP No. 26. This memorandum seeks first to clarify definitions of these investments, and request
whether other terms should be defined, so that discussion on the appropriate statutory accounting
guidance can subsequently occur.
1. Loan Participations – Based on U.S. GAAP
A loan participation is defined as a transaction in which a single lender makes a large loan to a
borrower and subsequently transfers (sells) undivided interests in the loan to other entities. Transfers
by the originating lender may take the legal form of either assignments or participations. The transfers
are usually on a nonrecourse basis, and the originating lender continues to service the loan. The
participating entity may or may not have the right to sell or transfer its participation during the term
of the loan, depending on the terms of the participation agreement. Reporting entities shall account
for loan participations within the guidelines of this statement if the participation agreement provides
the reporting entity with the right to sell or transfer its participation during the term of the loan. Loan
Participations can be made on a parri-passu basis (where each participant shares equally) or a senior
subordinated basis (senior lenders get paid first and the subordinated participant gets paid if there are
sufficient funds left to make a payment).
(Note – The term “Bank Participations” is intended to be replaced by “Loan Participations”.)
2. Loan Syndication – Based on U.S. GAAP
A loan syndication is defined as a transaction in which several lenders share in lending to a single
borrower. Each lender loans a specific amount to the borrower and has the right to repayment from
the borrower. Separate debt instruments exist between the debtor and the individual creditors
participating in the syndication. Each lender in a syndication shall account for the amounts it is owed
by the borrower. Repayments by the borrower may be made to a lead lender that then distributes the
collections to the other lenders of the syndicate. In those circumstances, the lead lender is simply
functioning as a servicer and shall not recognize the aggregate loan as an asset. A loan syndication
arrangement may result in multiple loans to the same borrower by different lenders. Each of those
loans is considered a separate instrument.
3. To Be Announced (TBA) Securities – TBA means “to be announced” and refers to a transaction in
an Agency-Pass-Through Mortgage Backed Security where the parties agree that the seller will
deliver to the buyer an Agency Pass-Through Mortgage-Backed Security of a specified face amount
and coupon from a specified Agency or Government-Sponsored Enterprise program representing a
pool (or pools) of mortgages that are not specified by a unique pool number. (An Agency PassThrough Mortgage-Backed Security means a mortgage-backed security issued by an Agency or a
Government-Sponsored Enterprise, for which the timely payment of principal and interest is
© 2015 National Association of Insurance Commissioners
1
Attachment 3
Exposure Document - Definitions
guaranteed by an Agency or a Government-Sponsored Enterprise, representing ownership interests in
a pool or pools of residential mortgage loans with the security structured to “pass through” the
principal and interest payments made by the mortgagees to the owners of the pool(s) on a pro rata
basis.) (Source – SEC / FINRA)
4. Hybrids – The term “hybrid” - as it is used by the SEC - is not intended to reference particular
securities, but instead is a generic term to reference broad groups of securities that have debt
and equity-like features. In addition to depository shares and trust-preferred securities, the
term “hybrid” security also includes convertibles.
Pursuant to SSAP No. 4—Assets and Nonadmitted Assets, nonadmitted assets include assets
specifically identified in the AP&P Manual as a nonadmitted asset, or not specifically identified in the
AP&P Manual as an admitted asset. This guidance was originally included for statutory accounting to
allow for review and assessment of assets before they were afforded value in statutory accounting
statements. To be consistent with this premise, it is recommended that the different types of
securities within this broad “hybrid” category be explicitly defined. After a specific review of
the investments, the Working Group may conclude on the appropriate SSAP placement.
(Additionally, U.S. GAAP does not define “hybrid security”. The only related definition under U.S.
GAAP is “hybrid instrument” and that represents a contract that embodies both an embedded
derivative and a host contract.)
The following definition for Hybrid Securities is currently included within the A/S Instructions:
Securities whose proceeds are accorded some degree of equity treatment by one or more of the
nationally recognized statistical rating organizations and/or which are recognized as regulatory
capital by the issuer’s primary regulatory authority. Hybrid securities are designed with
characteristics of debt and equity and are intended to provide protection to the issuer’s senior
note holders. Hybrid securities products are sometimes referred to as coupon securities.
Examples of hybrid securities include Trust Preferreds, Yankee Tier 1s (with and without
coupon step-ups) and debt-equity hybrids (with and without mandatory triggers). This
specifically excludes surplus notes, which are reported in Schedule BA, subordinated debt issues,
which have no coupon deferral features; and “traditional” preferred stocks, which are reported in
Schedule D Part 2, Section 1. With respect to preferred stock, traditional preferred stocks include,
but are not limited to a) U.S. issuers that do not allow tax deductibility for dividends; and b) those
issued as preferred stock of the entity or an operating subsidiary, not through a trust or a special
purpose vehicle.
Per the recommendation above, the following securities are proposed to be defined:
A.
Trust-Preferred Securities: Trust-preferred securities have been issued by banks for a
number of years due to favorable regulatory capital treatment. Various trust-preferred structures
have been developed involving minor differences in terms. Under the typical structure, a bank
holding company first organizes a business trust or other special-purpose entity. This trust issues
two classes of securities: common securities, all of which are purchased and held by the
bank holding company, and trust-preferred securities, which are sold to investors. The
trust's only assets are deeply subordinated debentures of the corporate issuer, which the trust
purchases with the proceeds from the sale of its common and preferred securities. The bank
holding company makes periodic interest payments on the subordinated debentures to the
business trust, which uses these payments to pay periodic dividends on the trust-preferred
securities to the investors. The subordinated debentures have a stated maturity and may include
an embedded call option. Most trust-preferred securities are subject to a mandatory
redemption upon the repayment of the debentures. Under the provisions of Topic 810, a bank
© 2015 National Association of Insurance Commissioners
2
Attachment 3
Exposure Document - Definitions
or holding company that sponsored a structure described in the preceding paragraph shall not
consolidate the trust because the trust is a variable interest entity (VIE) and the bank or holding
company is not the primary beneficiary of that VIE. (Source – U.S. GAAP – 942-810-55-1 & 2)
B.
Yankee Bond: No explicit definition of a “Yankee” bond was found on the SEC or U.S.
GAAP website. However, from other sources, this was routinely defined as a bond denominated
in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporations. According to
the Securities Act of 1933, these bonds must first be registered with the Securities and Exchange
Commission (SEC) before they can be sold. Yankee bonds are often issued in tranches.
C.
American Depository Receipts: The stocks of most foreign companies that trade in the
U.S. markets are traded as American Depositary Receipts (ADRs) issued by U.S. depositary
banks. Sometimes the terms “ADR” and “ADS” (American Depositary Share) are used
interchangeably. An ADR is actually the negotiable physical certificate that evidences ADSs (in
much the same way a stock certificate evidences shares of stock), and an ADS is the security that
represents an ownership interest in deposited securities (in much the same way a share of stock
represents an ownership interest in the corporation). ADRs are the instruments actually traded in
the market. Each ADR represents one or more shares of a foreign stock or a fraction of a share. If
you own an ADR you have the right to obtain the foreign stock it represents, but U.S. investors
usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of
the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.
(Source – SEC)
D.
Zero Coupon Bond: Zero coupon bonds are bonds that do not pay interest during the
life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face
value, which is the amount a bond will be worth when it "matures" or comes due. When a zero
coupon bond matures, the investor will receive one lump sum equal to the initial investment plus
the imputed interest, which is discussed below. The maturity dates on zero coupon bonds are
usually long-term—many don’t mature for ten, fifteen, or more years. These long-term maturity
dates allow an investor to plan for a long-range goal, such as paying for a child’s college
education. With the deep discount, an investor can put up a small amount of money that can grow
over many years. Investors can purchase different kinds of zero coupon bonds in the secondary
markets that have been issued from a variety of sources, including the U.S. Treasury,
corporations, and state and local government entities. Because zero coupon bonds pay no interest
until maturity, their prices fluctuate more than other types of bonds in the secondary market. In
addition, although no payments are made on zero coupon bonds until they mature, investors may
still have to pay federal, state, and local income tax on the imputed or "phantom" interest that
accrues each year. Some investors avoid paying tax on the imputed interest by buying municipal
zero coupon bonds (if they live in the state where the bond was issued) or purchasing the few
corporate zero coupon bonds that have tax-exempt status. (Source – SEC)
5. Convertible Securities – A security that is convertible into another security based on a conversion
rate. For example, convertible preferred stock that is convertible into common stock on a two-for-one
basis (two shares of common for each share of preferred). (Source – US GAAP)
A "convertible security" is a security—usually a bond or a preferred stock—that can be converted
into a different security—typically shares of the company's common stock. In most cases, the
holder of the convertible determines whether and when to convert. In other cases, the company
has the right to determine when the conversion occurs. In a conventional convertible security
financing, the conversion formula is generally fixed - meaning that the convertible security
converts into common stock based on a fixed price. The convertible security financing
© 2015 National Association of Insurance Commissioners
3
Attachment 3
Exposure Document - Definitions
arrangements might also include caps or other provisions to limit dilution (the reduction in
earnings per share and proportional ownership that occurs when, for example, holders of
convertible securities convert those securities into common stock). By contrast, in less
conventional convertible security financings, the conversion ratio may be based on fluctuating
market prices to determine the number of shares of common stock to be issued on conversion. A
market price based conversion formula protects the holders of the convertibles against price
declines, while subjecting both the company and the holders of its common stock to certain risks.
Because a market price based conversion formula can lead to dramatic stock price reductions and
corresponding negative effects on both the company and its shareholders, convertible security
financings with market price based conversion ratios have colloquially been called "floorless",
"toxic," "death spiral," and "ratchet" convertibles. (Source – SEC)
Staff Note – Staff is aware that there are different structures of “convertible securities.” A separate
project to review and define the different convertible structures is proposed.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H3c - 13-36-3 - Definitions.docx
© 2015 National Association of Insurance Commissioners
4
Attachment 3
Exposure Document – ETF 2013 Data
To:
Statutory Accounting Principles (E) Working Group
From: Julie Gann (NAIC Staff)
Re:
ETF – Financial Data Summary as of Year-End 2013 – No Company Specific Data
Date: February 2, 2015 - (Exposed for Comment on March 28, 2015)
Staff Overview: This memorandum details the accounting for ETFs approved for “bond” or “preferred
stock” reporting by the SVO as of Dec. 31, 2013. Per the analysis within, this memo highlights the
inconsistencies that currently exist with the reporting of ETFs.
Staff Observations:
By requiring a fair value measurement method (or Net Asset Value - NAV - as a practical expedient) for
all ETFs at this time, in most instances, the individual company impact would be negligible to the
reporting company and would result with companies consistently reporting these assets at a publiclytraded value which represents the amount available for policyholder claims. (Although there are a limited
number of companies that would have a significant surplus impact, such situations would likely be best
individually addressed by the respective domiciliary regulator. The assessment of the appropriate
accounting should likely be determined without considering the impact to those limited companies.)
Additionally, it is noted that the benefits from acquiring an approved ETF may be driven more by the
RBC impact (lower RBC charge) then in the valuation approach. (It is recognized that if ETFs are
reported at fair value (or NAV), there could be fluctuation changes based on market factors.)
ETFs Creation Units trade at the intraday value of the portfolio and shares trade at a negotiated price on
an exchange trade – but the fact that an institution can do either means there is a possibility of arbitrage –
i.e., buy and sell whichever is higher in price – the Creation Unit or the equivalent number of shares. This
mechanism means the price of ETFs usually trade at or near the NAV per share of the ETF. This stable
relationship between the ETF price and NAV per share of the ETF minimizes any arbitrage opportunity
that might exist between holding the ETF shares versus the Creation Unit basket of securities.
Characteristics of ETFs:
• These assets are bought and sold at net asset value (NAV)
• There is no maturity date, but there is a ready market whenever the insurer wants to sell
• There is no contractual amount of principal due
As an additional note, by incorporating statutory accounting guidance to require fair value for ETFs (or
NAV as a practical expedient), the guidance would comply with the IAIS Insurance Core Principle for
valuation (ICP 14). This ICP specifically identifies that historical cost is not consistent with a “current
economic valuation approach”. (Amortized cost is as an acceptable measurement if adjusted to reflect
future cash flows and with an adequacy or impairment test, however, without a maturity date or a
contractual amount of principle due, an “amortized cost” does not exist for ETFs.)
Staff also notes that the information on the ETFs reported on Schedule D (either as bonds or preferred
stock) was often difficult to locate using the current regulatory tools, and having all of these ETF
collectively reporting on a single schedule, with appropriate codes and categories, would improve the
regulator’s ability to review and analyze the information.
© 2015 National Association of Insurance Commissioners
1
Attachment 3
Exposure Document – ETF 2013 Data
BOND ETFs – Overview:
•
468 ETF Investments at 142 Companies
•
116 Companies consistently reported Actual Cost as the BACV (384 ETFs).
•
21 Companies consistently reported Fair Value as the BACV (76 ETFs).
•
3 Companies did not report either Actual Cost or Fair Value as the BACV (3 ETFs).
•
2 Companies both Actual Cost and Fair Value matched the BACV (5 ETFs).
Financial Impact – 116 Companies that Use Actual Cost as BACV:
•
From reviewing the list of investments, at least two ETFs were reported at Actual Cost when the
guidelines in SSAP No. 26 would have required a Fair Value measurement pursuant to the NAIC
designation. (P/C entity with ETF that has an NAIC 4 designation in which fair value was less
than the reported amount.)
•
For most (87) companies that use Actual Cost as the BACV, moving to Fair Value would have a
negligible impact on Surplus. (Surplus impact of 0.00% to 0.43%. Only 23 of these 87 companies
had a surplus impact of 0.10% or greater.) Additionally, moving to Fair Value would result in a
surplus benefit for 18 of these 87 companies.
•
For 11 companies that use Actual Cost as the BACV, moving to Fair Value would have a surplus
impact of approximately 0.50% to less than 1%. For three of these companies, moving to Fair
Value would result in a surplus benefit.
•
For 18 companies that use Actual Cost as the BACV, moving to Fair Value would have over a
1.00% impact to surplus. (Two of these companies would have a positive impact.) In reviewing
the reasons for this impact the cause varies by company. In some situations it is due to a wide
variation between actual cost and fair value, but in others, it is because the ETFs reported at
BACV comprise a large portion of the total invested assets and/or the company’s overall surplus.
The following 18 companies utilize Actual Cost as the BACV, and a movement to Fair Value would
equal or exceed 1% of Surplus. (For two, the impact would improve surplus.) These companies are
domiciled in 10 states and are included in 10 groups. These companies are divided between different lines
of business: 6 property/casualty, 8 life, accident and health, and 4 health. From the detail below, the
difference to reflect Fair Value varies significantly by company. However, in comparison to the each
respective company’s surplus, the percentage impact may reflect 1% or more of surplus:
Difference to
Reflect FV
Surplus
Surplus
Impact %
LOB
845,868
827,856
2,783,599
4,652,781
30.39%
17.79%
P/C
P/C
2,492,545
15,675,410
15.90%
Health
559,694
801,616
263,970
4,659,392
8,224,554
3,428,979
12.01%
9.75%
7.70%
LAH
LAH
LAH
© 2015 National Association of Insurance Commissioners
2
Attachment 3
Exposure Document – ETF 2013 Data
315,066
27,921,158
1.13%
LAH
(153,390)
1,710,796
378,862
2,011,302
8,536,189
28,386,180
10,450,483
81,704,541
-1.80%
6.03%
3.63%
2.46%
LAH
P/C
P/C
Health
380,673
11,119,662
3.42%
Health
196,500
290,279
19,624,544
8,448,528
1.00%
3.44%
LAH
LAH
97,520
803,938
6,140,744
60,545,990
1.59%
1.33%
P/C
P/C
(921,536)
122,448
34,897,819
7,864,266
-2.64%
1.56%
LAH
Health
The following 11 companies utilize Actual Cost as the BACV, and a movement to Fair Value would have
a 0.50% to less-than 1.0% impact to surplus. Similar to the information above, the difference to reflect
Fair Value varies significantly by company.
Difference to
Reflect FV
75,498
14,362
7,813
(17,036)
(826,775)
(35,242)
1,911,655
985,889
8,059,990
483,649
227,324
Surplus
Impact %
0.90%
0.68%
0.56%
-0.49%
-0.67%
-0.47%
0.66%
0.45%
0.49%
0.94%
0.48%
Surplus
8,369,217
2,103,404
1,399,059
3,464,501
124,022,621
7,563,237
290,682,523
217,993,912
1,644,001,743
51,320,514
47,394,667
LOB
Health
P/C
P/C
P/C
Fraternal
Health
LAH
LAH
LAH
LAH
Health
Financial Impact – 21 Companies that Use Fair Value as BACV:
•
For 9 of the companies that use Fair Value as BACV, the percentage of the ETFs represent a
significant portion of their Total Bonds, Total Invested Assets or Total Surplus. However, the
impact of the fluctuation changes in fair value are already reflected in surplus.
•
For 10 of the 21 companies, all of the ETFs were required to be held at lower of cost or Fair
Value based on the NAIC designation and the type of insurer.
•
For 11 of the 21 companies that consistently use Fair Value as BACV, the NAIC designation
would allow an amortized cost measurement under SSAP No. 26.
Financial Impact – 3 Companies Did Not Report Either Fair Value or Actual Cost:
• For the 3 companies whose BACV did not agree to either Fair Value or Actual Cost, these
companies reported amortization in column 13. For 2 of the companies, a rate of interest and
© 2015 National Association of Insurance Commissioners
3
Attachment 3
Exposure Document – ETF 2013 Data
maturity date were included in Schedule D. (Although these are two separate companies they are
in the same group, and the ETFs were purchased in September 2003, with the same maturity date
of 7/15/2049.) The other company (ETF purchased August 2004) did not include any information
regarding the rate of interest or a maturity date in the Schedule D.
•
For these 3 companies, reporting at Fair Value would have a negligible impact of surplus.
(Surplus impact of 0.05%, 0.04% and 0.01%.)
Financial Impact – 2 Companies Whose BACV Equaled Both Fair Value and Actual Cost:
•
For 1 of the companies whose BACV equaled both the reported Fair Value and Actual Cost, the
company reported an unrealized valuation decrease in column 12. Staff is uncertain how an
unrealized valuation decrease would be reported if there has been no change to Fair Value from
Actual Cost. (This ETF was purchased September 2013 and has an NAIC designation of 1.)
•
For 1 of the companies whose BACV equaled both the reported Fair Value and Actual Cost, no
adjustments to BACV was reported. The ETF was purchased September 2013.
PREFERRED STOCK ETFs – Overview:
•
33 Investments at 26 Companies
•
9 Companies reported Actual Cost as BACV (10 ETFs).
•
16 Companies reported Fair Value as BACV (22 ETFs).
•
1 Company did not report either Actual Cost or Fair Value as BACV (1 ETF).
•
For all of the Companies noted, the percentage of the Preferred Stock ETF represents a notable
amount (if not 100%) of their preferred stock portfolio.
Financial Impact – 9 Companies that Use Actual Cost as BACV:
•
From reviewing the list of investments, all of the preferred stock investments reported at Actual
Cost had an NAIC 2 designation.
•
For 8 companies that use Actual Cost as the BACV, moving to Fair Value would have a
negligible impact on Surplus. (Surplus impact between 0.00% to 0.09%.)
•
For 1 company that uses Actual Cost as the BACV, moving to Fair Value would have a surplus
impact of 0.85%.
Since only 9 companies use Actual Cost for their Preferred Stock ETFs, all are listed below:
Difference to
Reflect FV
24,870
639,124
29,452
1,708
25,833
130,233
26,111
194,701
9,165
Surplus
Impact %
0.85%
0.02%
0.00%
0.01%
0.09%
0.06%
0.00%
0.01%
0.00%
Surplus
2,939,877
24,414,082,083
598,382,993
28,910,294
30,264,889
217,993,912
1,102,396,535
1,550,069,872
347,851,794
© 2015 National Association of Insurance Commissioners
4
LOB
Life
Life
Life
Life
Life
Life
Life
Life
Health
Attachment 3
Exposure Document – ETF 2013 Data
Financial Impact – 16 Companies that Use Fair Value as BACV:
•
For 14 companies, the ETF had NAIC designations of 1 or 2.
•
For 2 companies, the ETF had an NAIC 3 designation. (These were property/casualty companies;
in compliance with the provisions of SSAP No. 32 that require a lower of cost, amortized cost or
fair value measurement method.)
Financial Impact – 1 Company Did Not Report Either Fair Value or Actual Cost:
•
For the 1 company whose BACV did not agree to either Fair Value or Actual Cost, this company
reported an unrealized valuation change decrease of 7,154. (No amortization was recorded.) This
ETF was acquired on Dec. 6, 2013 (25 days prior to year-end). The actual cost for this ETF was
noted as 99,047, with a fair value of 204,555 and a BACV of 212,713. Staff is uncertain how the
reported value for this ETF increased 215% from actual cost, with a resulting BACV that exceeds
fair value 25 days after acquisition.
Actual Cost
99,047
Fair Value
204,555
BACV
212,713
Unrealized
(7,154)
Total Change in BACV
(7,154)
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H3d - 13-36-4 - 2013 ETF Data.docx
© 2015 National Association of Insurance Commissioners
5
This page intentionally left blank.
Attachment 3
Exposure Document – ETF 2014 Data
To:
Statutory Accounting Principles (E) Working Group
From: Julie Gann (NAIC Staff)
Re:
ETF – Financial Data Summary as of Year-End 2014
Date: March 23, 2015
Staff Overview: This memorandum details the accounting for ETFs approved for “bond” or “preferred
stock” reporting by the SVO as of Dec. 31, 2014. Per the analysis within, this memo highlights the
inconsistencies that currently exist with the reporting of ETFs.
Staff Recommendation:
The following elements strongly support the need for separate reporting and a specific
measurement method for ETF investments:
1. Inconsistencies in the Overall Measurement Method for Bond & Preferred Stock ETFs
A. Some companies appear to have elected a reporting method (and reporting schedule)
inconsistent with the guidance in SSAP No. 26 and/or SSAP No. 32.
B. Elections for these companies have resulted with overstated asset valuations, increasing
overall surplus, as well as general inconsistencies in reporting investments:

Companies reported at actual cost, which was greater than fair value, when NAIC
designation required the lower of amortized cost or fair value.

Companies reported at fair value, which was greater than amortized cost, when the
NAIC designation specified use of amortized cost.

A minimum of 74 companies have elected to report approved ETFs on D-2-2.
2. Inconsistencies in the Reporting of NAIC Designations
A. Some companies currently appear to use an NAIC designation that allows a preferred
measurement method without verifying the designation.

Companies are not filing with the NAIC.
•

As noted within, 110 of the ETF bond investments were reported with an NAIC
designation, when no NAIC designation exists. An additional 38 of the bond ETF
investments were reported with an incorrect NAIC designation.
By including ETFs on the Bond and Preferred Stock schedules, it is difficult to
review and verify reporting designations, resulting with overstated assets under SAP.
3. There appears to be inconsistencies when and how amortization is reported, and for those
reporting at fair value, there appear to be inconsistencies when unrealized valuation
fluctuations are reported. (Often the amortization / unrealized fluctuations are nonexistent.)
4. Concerns regarding the potential impact to small companies may be overstated due to the
limited number of Bond ETFs held by most companies. (75% of companies with Bond ETFs
own 3 or less, 83% own 4 or fewer, and 89% own 5 or less).
© 2015 National Association of Insurance Commissioners
1
Attachment 3
Exposure Document – ETF 2014 Data
BOND ETFs – Overview:
•
122 ETFs are listed on the SVO Approved Bond Listing for 2014.
•
In completing a search of the 2014 YE financials with ETFs included on the 2013 and 2014 SVO
approved bond lists:
o
58 ETFs (from the 2013 and 2014 listing) were identified as reported on Schedule D-1
o
54 of these ETFs were on the 2014 Approved Bond Listing.
o
3 of these ETFs were on the 2013 Approved Bond Listing and NOT on the 2014 listing.
The 58 ETFs were reported by 142 Insurers for 411 ETFs reported as bonds on Schedule D-1 for 2014.
(The 3 ETFs incorrectly included were reported by 16 insurers.)
NOTE – This search was only completed for the CUSIPS on the 2013 and 2014 SVO listings. There
could be more ETFs incorrectly reported on D-1 that have not been identified. With the current reporting
process it is not possible to separately identify ETFs without searching for specific CUSIP numbers.
Few ETFs Comprise Most of D-1 ETF Investments:
As noted below, the top 15 ETFs represent a large percentage 281 (68%) of the bond-reported ETFs.
Number of ETFs
Number of Companies
Total Investments
2 ETFs
Held by more than 30 Companies
66 ETF Investments
5 ETFs
Held by 20-29 Companies
115 ETF Investments
8 ETFs
Held by 10-19 Companies
100 ETF Investments
9 ETFs
Held by 5-9 Companies
64 ETF Investments
20 ETFs
Held by 2-4 Companies
52 ETF Investments
14 ETFS
Held by Only 1 Company
14 ETF Investments
58 ETFs Total
411 ETF Investments
4 ETFs
1 Not Held
Not Approved for
2014
2 Held by 3 Companies (6)
16 ETF Investments
1 Held by 10 Companies
55 ETFs
395 ETF Investments
Approved for 2014
•
Of the 54 approved 2014 ETFs reported on D-1 as bonds by some insurers, 29 of these ETFs
were held by 74 other insurers, but those insurers reported them on D-2-2 as common stock using
a fair value measurement with unrealized gains and losses for fluctuations.
•
Of the 3 ETFs incorrectly reported on D-1 as bonds (not approved in 2014) by 16 insurers, the
ETFs were held by 3 other insurers. Those insurers reported them on D-2-2 as common stock.
•
Of the 3 ETFs incorrectly reported on D-1 as bonds (not approved in 2014) all but one insurer
reported the ETF at amortized cost. If the ETFs had been reported correctly, they would have
been on D-2-2 and reported at fair value.
© 2015 National Association of Insurance Commissioners
2
Attachment 3
Exposure Document – ETF 2014 Data
NAIC Designations of ETF Investments:
•
37% of the 2014 approved ETFs reported on D-1 were reported with incorrect designations:
NAIC
Designation
NR*
None*
Insurers Incorrectly Reporting
Total ETFs
45 Insurers Incorrectly Reporting
6 ETFs
65 Insurers Incorrectly Reporting
19 ETFs
7 of 64 Insurers Incorrectly Reporting
4
6 ETFs
Reported as 1 = 5 Insurers
Reported as 4FE = 2 Insurers
10 of 70 Insurers Incorrectly Reporting
2
1
Reported as 1 = 8
Reported as 2FE = 2
21 of 151 Insurers Incorrectly Reporting
5 ETFs
19 ETFs
Reported as 1FE = 19
Reported as 2FE = 2
148 ETF Investments Incorrectly Reported
37% of 395 ETF Investments
55 ETFs
* An “NR” NAIC designation indicates that the investment had previously been filed (prior year) with the
NAIC and obtained a designation, but it was not filed, and did not receive a designation for the 2014
reporting year. A “None” designation indicates that the investment has never been filed with the NAIC.
Analysis of Bond-Reported ETF Investments by Company:
•
411 Reported ETF Investments at 142 Companies (2013 and 2014 Listing)
o
Same Number of Companies from 2013 with 58 fewer ETFs (468 ETFs in 2013)
o
48% of Companies Reported Only ETF. 75% of Companies Reported 3 Or Less.
Number of Companies
Number of ETFs Owned
67
28
11
12
9
4
2
2
1
1
1
1
1
2
3
4
5
6
7
9
10
11
12
13
© 2015 National Association of Insurance Commissioners
3
Attachment 3
Exposure Document – ETF 2014 Data
2
1
16
28
•
324 ETFs (79%) Reported Are Within 16 States. (All other states had less than 10.)
•
183 ETFs (45%) Reported Are Within 5 States.
•
State
Number of ETFs
Owned
State
Number of ETFs
Owned
TX
AL
IL
OH
NV
NY
AR
PA
74
45
23
21
20
17
16
15
FL
IN
ME
LA
MT
MO
IA
HI
15
14
13
11
10
10
10
10
166 ETFs (40%) Reported Are Within 6 Groups.
Analysis of Bond-Reported ETFs - Measurement Method:
•
92 Companies Always Reported Actual Cost as the BACV (240 ETFs).
o
•
4 P/C companies (4 ETFs) reported at Actual Cost when NAIC designation requires FV.
31 Companies consistently reported Fair Value as the BACV (65 ETFs).
o
47 should have been reported at Amortized Cost under SSAP No. 26.
•
12 Companies With More Than One ETF Reported Based on ETF Designation (92 ETFs).
•
5 Companies did not report either Actual Cost or Fair Value as the BACV (11 ETFs).
(One company with 28 ETFs mostly reported based on ETF designation, but had 7 ETFs that did
not match either Actual Cost or FV.)
•
1 Company both Actual Cost and Fair Value matched the BACV (3 ETFs).
Financial Impact – Companies that Reported ETFs at Actual Cost:
•
•
10 ETFs were reported at Actual Cost when the guidelines in SSAP No. 26 requires a Fair Value
measurement pursuant to the NAIC designation.
o
5 companies (P/C or Health), reported the ETF with a NAIC 4 designation, but still reported
the ETF at amortized cost and not the lower of amortized cost or fair value:
o
5 companies reported ETFs with an NAIC 1 designation, but the correct SVO assigned
designation was a 4. As such, the ETF should have been reported at fair value:
16 ETFs were reported on D-1 at Actual Cost when they were not included on the approved SVO
bond listing. These ETFs should have been reported on D-2-2 as common stock at fair value.
© 2015 National Association of Insurance Commissioners
4
Attachment 3
Exposure Document – ETF 2014 Data
•
For the 110 ETFs that were not submitted to the NAIC for a designation (noted as “NR” or
without a designation in SVO database), it is not possible to identify at this time whether the
company incorrectly reported the security at amortized cost.
Financial Impact – If All ETF’s Were Reported at Fair Value:
(This analysis does not exclude the above-noted ETFs that should already be reported at fair value. If
those had been excluded, the surplus impact would be even less.)
Out of 110 Companies with an ETF that Could Move to Fair Value:
•
For 92 companies, moving to Fair Value would have a negligible impact on Surplus.
(Negligible is defined as a Surplus impact of 0.00% to 0.43%.)
o
Only 30 of these 92 companies would have a surplus impact of 0.10% or greater.
o
Most (65) would have a surplus impact of less than 0.10%.
o
Moving to Fair Value would result in a surplus benefit for 22 of these 92 companies.
•
For 10 companies, moving to Fair Value would have a surplus impact of approximately 0.47% to
less than 0.85%. For four of these companies, moving to FV would result in a surplus benefit.
•
For 8 companies, moving to Fair Value would have over a 0.98% impact to surplus. (Three with a
positive surplus impact.)
Financial Impact – 87 ETF’s Already Reported at Fair Value:
•
For 47 of the ETF investments reported at fair value, under the requirements in SSAP No. 26, the
ETF should have been reported at amortized cost. For 15 of these investments, by reporting at fair
value, the company reported an improved surplus position.
•
For 41 of the ETF investments reported at fair value, the NAIC designation required a fair value
measurement under SSAP No. 26 (Non-AVR filer with NAIC designation below 2.)
Financial Impact – 5 Companies Did Not Report Either Fair Value or Actual Cost:
•
For two insurers, there was no unrealized valuation or amortization recorded for these ETFs.
These investments were purchased at various times beginning in 2010 through June 2014.
•
For three insurers, the ETF was amortized to reflect an Amortized Cost. (This is the expected
treatment under SSAP No. 26.) However, it is uncertain how the company calculated the
amortization value.
Financial Impact – 1 Company had 3 ETFs Whose BACV Equaled Both FV and Actual Cost:
• For 2 of the investments, an unrealized valuation adjustment was recorded. These ETFs were
acquired in 2010 and 2013. Staff is uncertain how this valuation adjustment was determined. For
the third ETF, the investment was acquired in February 2014, without any valuation adjustment
or amortization recorded.
Actual Cost
Fair Value
© 2015 National Association of Insurance Commissioners
BACV
5
Designation
Attachment 3
Exposure Document – ETF 2014 Data
$752,515
$595,503
$2,025,158
$752,515
$595,503
$2,025,158
$752,515
$595,503
$2,025,158
1
1
1
Bond Reporting Inconsistencies – NAIC Designation
Under the guidelines of the Purposes and Procedures Manual of the NAIC Investment Analysis Office, the
concept for an “FE” designation does not apply to ETFs. The ETF bond-like determination requires an
assessment by the SVO of the composition of the fund’s portfolio both for the purposes of ascertaining
that bond flows would be produced (bond-like determination) and the quality level of the cash flow that
would be produced (designation of the bond like instrument). CRPs have unique rating processes for
ETFs concerned only with the credit risk component.
•
71 ETF investments (by 23 companies) were incorrectly reported with an “FE” designation.
(55 reported as 1FE, 13 reported as 2FE, and 3 reported as 4FE.)
•
In comparing company reported NAIC designations for the same ETFs, 11 ETFs were identified
with different designations. In reviewing the detail for these 11 ETFs, concerns on the compliance
with NAIC filing requirements has been noted. Detail of those 11 ETFs is provided below.
However, as a result of these findings, NAIC staff reviewed all of the 2014 SVO approved ETFs
and found a multitude of errors in which it appears that several companies are not verifying NAIC
designations for ETFs – and it is uncertain how companies support their reported designations.
464287242
464288513
464288620
464288638
18383M654
46431W507
72201R775
78464A375
78464A417
78468R408
Companies
Reporting
NAIC 1
1
4
2
4
1
1
2
5
1
2
Companies
Reporting
NAIC 2
36
0
1 (as FE)
20
2
8
1
1
0
-
Companies
Reporting
NAIC 4
23
15
5
Notes
Actual NAIC
Designation
A
B
C
D
E
F
G
H
I
J
2
4
Not Filed
2
2
2
Not Approved
Not Filed
4
Not Filed
A – 464287242 – With an NAIC 1, instead of an NAIC 2, the ETF would have still been reported at
amortized cost. However, by reporting as an NAIC 1, the entity received a lower RBC charge.
B – 464288513 – All companies designating as “1” are health filers who reported the ETF at actual cost.
If they had reported the correct NAIC 4 designation, the ETF would have been required to be reported
at FV. In reviewing the financial detail, FV was less than actual cost in all instances, and if reported
correctly, the company would have reported the lesser amount (and decreased surplus). Additionally,
these securities would have incurred a higher RBC charge. (All are in the same group.)
C – 464288620 – This ETF was not filed with the SVO. All companies that hold this ETF are not in
compliance with the NAIC filing requirements.
D – 464288638 – Although the designation change from 1 to 2 would not result with a change in
measurement method, by reporting the 1 designation, the companies received a lower RBC charge.
© 2015 National Association of Insurance Commissioners
6
Attachment 3
Exposure Document – ETF 2014 Data
E – 18383M654 – In 2014 the actual designation was an NAIC 2. This ETF was on the approved listing
for 2014, but has been removed for 2015. As such, if still held in the first quarter of 2015, the security
should be reported as common stock with a fair value measurement.
F – 46431W507 – Although the designation change from 1 to 2 would not result with a change in
measurement method, by reporting the 1 designation, the company received a lower RBC charge.
G – 72201R775 – This ETF is not approved for bond reporting in 2014. For 2013 reporting, it was noted
as an NAIC 2. For 2014, this ETF should have been reported as common stock at fair value.
H – 78464A375 – This ETF was not filed with the SVO. All companies that hold this ETF are not in
compliance with NAIC filing requirements. (2 companies reported the security as an “FE”.)
I – 78464A417 – The company that designated as NAIC 1, instead of NAIC 4, is a life company. Under
the provisions of SSAP No. 26, companies subject to AVR are not required to report at lower of cost
or fair value until designated as NAIC 6. However, this company still received a lower RBC charge.
J – 78468R408 – One company designating as 1 was a property filer, the other was a health filer. Despite
the NAIC 1 designation (which is to be reported at amortized cost under SSAP No. 26), the health
filer reported the ETF at fair value. The property filer reported the ETF at actual cost. With the proper
designation, the ETF would have been required to be reported at FV, and would have resulted with a
decrease to surplus. For both companies that reported at NAIC 1, instead of NAIC 4, they received a
lower RBC charge.
PREFERRED STOCK ETFs – Overview:
•
In completing a search of the 2014 YE financials with ETFs included on the 2013 and 2014 SVO
approved preferred stock lists:
o
2 ETFs approved by the SVO were identified as reported on Schedule D-2-1
o
1 ETF – approved for bond reporting – was included on Schedule D-2-1.
NOTE – This search was only completed for the CUSIPS on the 2013 and 2014 SVO listings. There
could be more ETFs incorrectly reported on D-2-1 that have not been identified. With the current
reporting process it is not possible to identify ETFs without searching for specific CUSIP numbers.
The 3 ETFs were reported by 43 Insurers:
•
3 SVO Approved ETFs Reported by 43 Companies on the Preferred Stock Schedule:
o
o
o
•
1 ETF Owned by 32 Companies – 464288687
1 ETF Owned by 1 Company – 464289479
1 ETF Owned by 10 Companies – 73936T565
ETF 464288687 – 20 Companies Reported at FV; 12 Companies Reported at Actual Cost
o
5 Companies noted an NAIC 1 designation (4 reported at FV, 1 at Actual Cost)
o
27 Companies noted an NAIC 2 designation (16 reported at FV, 11 at Actual Cost)
Per the SVO, the correct NAIC designation for this ETF is P2.
© 2015 National Association of Insurance Commissioners
7
Attachment 3
Exposure Document – ETF 2014 Data
•
ETF 73936T565 – 9 Companies Reported at FV; 1 Company Reported at Actual Cost
o
7 Companies noted an NAIC 1 Designation (all reported at Actual Cost – P/C companies)
o
3 Companies noted and NAIC 3 Designation (2 reported at FV, 1 at Actual Cost)
Per the SVO, this security has never been filed by the SVO. As such, all of the companies
reporting this security are not in compliance with the SVO filing requirements.
•
ETF 464289479 – Company Reported at Actual Cost (Noted as an NAIC 1)
Per the SVO, this ETF is approved for Bond Reporting. The Company incorrectly classified
this ETF on the Preferred Stock schedule.
Financial Impact – Companies that Use Actual Cost as BACV:
In ALL instances, moving to Fair Value would have a negligible impact to surplus.
•
The greatest surplus impact would have been 0.14%, followed by 0.05%, 0.03%, 0.02% and
0.01%.
•
In only 3 companies, moving to fair value would have decreased surplus. The other 10
companies would have a surplus benefit if they had reported at fair value.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H3e - 13-36-5 - 2014 ETF Data.docx
© 2015 National Association of Insurance Commissioners
8
Attachment 4
Ref #2014-36
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2013-06 – Not-For-Profit Entities – Services Received from Personnel of Affiliate
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue: ASU 2013-06, Not-for-Profit Entities, Services Received from an Affiliate (ASU 201306) was issued in April 2013 as a consensus position of the FASB Emerging Issues Task Force. This ASU
was issued to address diversity in practice regarding the recognition of services provided by the personnel of
an affiliate, when those services are provided at no-charge to a not-for-profit affiliated entity.
The amendments in this ASU apply to not-for-profit entities, including not-for-profit, business-oriented health
care entities, which receive services from personnel of an affiliate that directly benefit the recipient not-forprofit entity and for which the affiliate does not charge the recipient not-for-profit. This ASU defines
“charging” as requiring payment from the recipient not-for-profit entity at least for the approximate amount of
the direct personnel costs (e.g., compensation and payroll-related fringe benefits) incurred by the affiliate in
providing a service to the recipient not-for-profit entity or the approximate fair value of that service.
The amendments in this ASU require the recipient not-for-profit entity to recognize all services received from
personnel of an affiliate that directly benefit the recipient not-for-profit entity. These services should be
measured at the cost recognized by the affiliate for the personnel providing those services. However, if
measuring a service received at cost will significantly overstate or understate the value of the services
received, then the not-for-profit may elect to record the services received at the affiliate cost in providing that
service, or the fair value of that service.
The amendments in this ASU are effective prospectively for fiscal years beginning after June 15, 2014, and
for interim and annual periods thereafter. Early adoption is permitted.
Existing Authoritative Literature:
SSAP No. 25—Accounting for and Disclosures About Transactions with Affiliates and Other Related Parties
identifies that related party transactions are subject to abuse because reporting entities may be induced to
enter transactions that may not reflect economic realities or may not be fair and reasonable to the reporting
entity or its policyholders. As such, related party transactions require specialized accounting rules and
increased regulatory scrutiny. Guidance is currently included in SSAP No. 25, paragraphs 17-18 specifically
for related party transactions involving services:
17.
Transactions involving services between related parties can take a variety of different forms.
One of the significant factors as to whether these transactions will be deemed to be
arm’s length is the amount charged for such services. In general, amounts charged for
services are based either on current market rates or on allocations of costs.
Determining market rates for services is difficult because the circumstances surrounding
each transaction are unique. Unlike transactions involving the exchange of assets and
liabilities between related parties, transactions for services create income on one party’s
books and expense on the second party’s books, and therefore, do not lend themselves to
the mere inflation of surplus. These arrangements are generally subject to regulatory
approval.
© 2015 National Association of Insurance Commissioners
1
18.
Attachment 4
Ref #2014-36
Transactions involving services provided between related parties shall be recorded at
the amount charged. Regulatory scrutiny of related party transactions where amounts
charged for services do not meet the fair and reasonable standard established by
Appendix A-440, may result in (a) amounts charged being recharacterized as dividends
or capital contributions, (b) transactions being reversed, (c) receivable balances being
nonadmitted, or (d) other regulatory action. Expenses that result from cost allocations
shall be allocated subject to the same fair and reasonable standards, and the books and
records of each party shall disclose clearly and accurately the precise nature and details of
the transaction. See SSAP No 70—Allocation of Expenses for additional discussion regarding
the allocation of expenses.
NAIC Model Act #440 – Insurance Holding Company System Regulatory Act Section 5.A.(1)(c)
stipulates that charges or fees for services performed shall be reasonable.
A.
Transactions Within an Insurance Holding Company System
(1)
Transactions within an insurance holding company system to which an insurer
subject to registration is a party shall be subject to the following standards:
(a)
The terms shall be fair and reasonable;
(b)
Agreements for cost sharing services and management shall include such
provisions as required by rule and regulation issued by the commissioner;
(c)
Charges or fees for services performed shall be reasonable;
(d)
Expenses incurred and payment received shall be allocated to the insurer in
conformity with customary insurance accounting practices consistently
applied;
(e)
The books, accounts and records of each party to all such transactions shall
be so maintained as to clearly and accurately disclose the nature and details
of the transactions including such accounting information as is necessary to
support the reasonableness of the charges or fees to the respective parties;
and
(f)
The insurer’s surplus as regards policyholders following any dividends or
distributions to shareholder affiliates shall be reasonable in relation to the
insurer’s outstanding liabilities and adequate to meet its financial needs.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
None
Staff Recommendation:
Staff has proposed that the Working Group move this item to the nonsubstantive active listing and
expose nonsubstantive revisions to SSAP No. 25 to reject ASU 2013-06 for statutory accounting as
guidance requiring reasonable charges is detailed in Model Act #440. Revisions are proposed to SSAP
No. 25 to incorporate references and disclosures for services provided.
Proposed Revisions to SSAP No. 25 – Disclosures for Services:
17.
Transactions involving services between related parties can take a variety of different forms.
One of the significant factors as to whether these transactions will be deemed to be arm’s
length is the amount charged for such services. In general, amounts charged for services are
based either on current market rates or on allocations of costs. Determining market rates for
© 2015 National Association of Insurance Commissioners
2
Attachment 4
Ref #2014-36
services is difficult because the circumstances surrounding each transaction are unique.
Unlike transactions involving the exchange of assets and liabilities between related parties,
transactions for services create income on one party’s books and expense on the second
party’s books, and therefore, do not lend themselves to the mere inflation of surplus. These
arrangements are generally subject to regulatory approval.
18.
Transactions involving services provided between related parties shall be recorded at the
amount charged. Regulatory scrutiny of related party transactions where amounts charged
for services do not meet the fair and reasonable standard established by Appendix A-440
(including services provided at no charge), may result in (a) amounts charged (or the fair
value of services received) being recharacterized as dividends or capital contributions, (b)
transactions being reversed, (c) receivable balances being nonadmitted, or (d) other
regulatory action. Expenses that result from cost allocations shall be allocated subject to the
same fair and reasonable standards, and the books and records of each party shall disclose
clearly and accurately the precise nature and details of the transaction. See SSAP No 70—
Allocation of Expenses for additional discussion regarding the allocation of expenses.
Disclosures
19.
The financial statements shall include disclosures of all material related party transactions. In
some cases, aggregation of similar transactions may be appropriate. Sometimes, the effect of
the relationship between the parties may be so pervasive that disclosure of the relationship
alone will be sufficient. If necessary to the understanding of the relationship, the name of the
related party should be disclosed. Transactions shall not be purported to be arm’s-length
transactions unless there is demonstrable evidence to support such statement. The
disclosures shall include:
a.
The nature of the relationships involved;
b.
A description of the transactions for each of the periods for which financial
statements are presented, and such other information considered necessary to
obtain an understanding of the effects of the transactions on the financial statements.
Exclude reinsurance transactions, any non-insurance transactions which involve less
than ½ of 1% of the total admitted assets of the reporting entity, and cost allocation
transactions. The following information shall be provided if applicable:
i.
Date of transaction;
ii.
Explanation of transaction;
iii.
Name of reporting entity;
iv.
Name of affiliate;
v.
Description of assets received by reporting entity;
vi.
Statement value of assets received by reporting entity;
vii.
Description of assets transferred by reporting entity; and
viii.
Statement value of assets transferred by reporting entity.
viii.ix. Information on transactions involving services received and/or transferred by
the reporting entity, including the fair value of the services received or
transferred. (If fair value is not determinable, the cost to the related party
providing the services shall be used as a proxy.)
c.
The dollar amounts of transactions for each of the periods for which financial
statements are presented and the effects of any change in the method of establishing
the terms from that used in the preceding period;
© 2015 National Association of Insurance Commissioners
3
d.
20.
Attachment 4
Ref #2014-36
Amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement;
e.
Any guarantees or undertakings, written or otherwise, shall be disclosed in
accordance with the requirements of SSAP No. 5R. In addition, the nature of the
relationship to the beneficiary of the guarantee or undertaking (affiliated or
unaffiliated) shall also be disclosed;
f.
A description of material management or service contracts and cost-sharing
arrangements involving the reporting entity and any related party. This shall include,
but is not limited to, sale lease-back arrangements, computer or fixed asset leasing
arrangements, and agency contracts, which remove assets otherwise recordable
(and potentially nonadmitted) on the reporting entity’s financial statements;
g.
The nature of the control relationship whereby the reporting entity and one or more
other enterprises are under common ownership or control and the existence of that
control could result in operating results or financial position of the reporting entity
significantly different from those that would have been obtained if the enterprises
were autonomous. The relationship shall be disclosed even though there are no
transactions between the enterprises; and
h.
The amount deducted from the value of an upstream intermediate entity or ultimate
parent owned, either directly or indirectly, via a downstream subsidiary, controlled, or
affiliated entity, in accordance with the Purposes and Procedure Manual of the NAIC
Securities Valuation Office, “Procedures for Valuing Common Stocks and Stock
Warrants.”
Refer to the preamble for further discussion regarding disclosure requirements.
Relevant Literature
21.
This statement adopts FASB Statement No. 57, Related Party Disclosures with a modification
to paragraph 3 to require disclosure of compensation arrangements, expense allowances,
and other similar items in the ordinary course of business.
22.
This statement rejects ASU 2013-06, Not-For-Profit Entities, Services Received from
Personnel of an Affiliate and AICPA Accounting Interpretations, Business Combinations:
Accounting Interpretations of APB Opinion No. 16, #39, “Transfers and Exchanges Between
Companies Under Common Control.”
23.
Guidance in paragraph 7 was incorporated from SSAP No. 96 as discussed in Issue Paper
No. 128—Settlement Requirements for Intercompany Transactions, An Amendment to SSAP
No. 25—Accounting for and Disclosures about Transactions with Affiliates and Other Related
Parties. SSAP No. 96 was nullified in 2011 with the guidance from that SSAP retained within
this SSAP.
Staff Review Completed by:
Julie Gann – NAIC – October 10, 2014
Status:
On November 16, 2014, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 25 to reject ASU 2013-06 as
guidance requiring reasonable charges is detailed in Model Act #440. Exposed revisions, as illustrated above,
also propose to incorporate references and disclosures for services provided.
On March 28, 2015, the Statutory Accounting Principles (E) Working Group directed NAIC staff to move the
proposed disclosure (originally exposed as a subparagraph 19b.iv) into a new subparagraph directly under
© 2015 National Association of Insurance Commissioners
4
Attachment 4
Ref #2014-36
paragraph 19 (for example, paragraph 19g), with re-exposure of this agenda item. The March 2015 exposed
revisions are shown below:
March 2015 Exposed Revisions to SSAP No. 25 – Disclosures for Services:
17.
Transactions involving services between related parties can take a variety of different forms.
One of the significant factors as to whether these transactions will be deemed to be arm’s
length is the amount charged for such services. In general, amounts charged for services are
based either on current market rates or on allocations of costs. Determining market rates for
services is difficult because the circumstances surrounding each transaction are unique.
Unlike transactions involving the exchange of assets and liabilities between related parties,
transactions for services create income on one party’s books and expense on the second
party’s books, and therefore, do not lend themselves to the mere inflation of surplus. These
arrangements are generally subject to regulatory approval.
18.
Transactions involving services provided between related parties shall be recorded at the
amount charged. Regulatory scrutiny of related party transactions where amounts charged
for services do not meet the fair and reasonable standard established by Appendix A-440
(including services provided at no charge), may result in (a) amounts charged (or the fair
value of services received) being recharacterized as dividends or capital contributions, (b)
transactions being reversed, (c) receivable balances being nonadmitted, or (d) other
regulatory action. Expenses that result from cost allocations shall be allocated subject to the
same fair and reasonable standards, and the books and records of each party shall disclose
clearly and accurately the precise nature and details of the transaction. See SSAP No 70—
Allocation of Expenses for additional discussion regarding the allocation of expenses.
Disclosures
19.
The financial statements shall include disclosures of all material related party transactions. In
some cases, aggregation of similar transactions may be appropriate. Sometimes, the effect of
the relationship between the parties may be so pervasive that disclosure of the relationship
alone will be sufficient. If necessary to the understanding of the relationship, the name of the
related party should be disclosed. Transactions shall not be purported to be arm’s-length
transactions unless there is demonstrable evidence to support such statement. The
disclosures shall include:
a.
The nature of the relationships involved;
b.
A description of the transactions for each of the periods for which financial
statements are presented, and such other information considered necessary to
obtain an understanding of the effects of the transactions on the financial statements.
Exclude reinsurance transactions, any non-insurance transactions which involve less
than ½ of 1% of the total admitted assets of the reporting entity, and cost allocation
transactions. The following information shall be provided if applicable:
i.
Date of transaction;
ii.
Explanation of transaction;
iii.
Name of reporting entity;
iv.
Name of affiliate;
v.
Description of assets received by reporting entity;
vi.
Statement value of assets received by reporting entity;
vii.
Description of assets transferred by reporting entity; and
© 2015 National Association of Insurance Commissioners
5
Attachment 4
Ref #2014-36
viii.
20.
Statement value of assets transferred by reporting entity.
c.
The dollar amounts of transactions for each of the periods for which financial
statements are presented and the effects of any change in the method of establishing
the terms from that used in the preceding period;
d.
Amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement;
e.
Any guarantees or undertakings, written or otherwise, shall be disclosed in
accordance with the requirements of SSAP No. 5R. In addition, the nature of the
relationship to the beneficiary of the guarantee or undertaking (affiliated or
unaffiliated) shall also be disclosed;
f.
A description of material management or service contracts and cost-sharing
arrangements involving the reporting entity and any related party. This shall include,
but is not limited to, sale lease-back arrangements, computer or fixed asset leasing
arrangements, and agency contracts, which remove assets otherwise recordable
(and potentially nonadmitted) on the reporting entity’s financial statements;
g.
Information on transactions involving services received and/or transferred by the
reporting entity, including the fair value of the services received or transferred. (If fair
value is not determinable, the cost to the related party providing the services shall be
used as a proxy.)
h.
The nature of the control relationship whereby the reporting entity and one or more
other enterprises are under common ownership or control and the existence of that
control could result in operating results or financial position of the reporting entity
significantly different from those that would have been obtained if the enterprises
were autonomous. The relationship shall be disclosed even though there are no
transactions between the enterprises; and
i.
The amount deducted from the value of an upstream intermediate entity or ultimate
parent owned, either directly or indirectly, via a downstream subsidiary, controlled, or
affiliated entity, in accordance with the Purposes and Procedure Manual of the NAIC
Securities Valuation Office, “Procedures for Valuing Common Stocks and Stock
Warrants.”
Refer to the preamble for further discussion regarding disclosure requirements.
Relevant Literature
21.
This statement adopts FASB Statement No. 57, Related Party Disclosures with a modification
to paragraph 3 to require disclosure of compensation arrangements, expense allowances,
and other similar items in the ordinary course of business.
22.
This statement rejects ASU 2013-06, Not-For-Profit Entities, Services Received from
Personnel of an Affiliate and AICPA Accounting Interpretations, Business Combinations:
Accounting Interpretations of APB Opinion No. 16, #39, “Transfers and Exchanges Between
Companies Under Common Control.”
23.
Guidance in paragraph 7 was incorporated from SSAP No. 96 as discussed in Issue Paper
No. 128—Settlement Requirements for Intercompany Transactions, An Amendment to SSAP
No. 25—Accounting for and Disclosures about Transactions with Affiliates and Other Related
Parties. SSAP No. 96 was nullified in 2011 with the guidance from that SSAP retained within
this SSAP.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H4 - 14-36 ASU 2013-06 - NFP Services Received
from Affiliate.docx
© 2015 National Association of Insurance Commissioners
6
Attachment 5
Ref# 2015-03
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Sale-Leasebacks with Nonadmitted Assets
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
Several questions have recently been presented to NAIC staff regarding sale-leaseback transactions
involving nonadmitted assets with unrelated parties. Although these transactions may include real estate,
the questions received have specifically identified non-real estate depreciating assets (e.g., software) as
the nonadmitted assets being sold and leased-back. With the existing guidance in SSAP No. 22—Leases,
and references to “property” in the sale-leaseback section, questions have been received on whether these
assets were intended to be excluded from the sale-leaseback guidance. In addition to the types of assets
captured within the guidance, clarification is requested on the statutory accounting guidance for saleleaseback transactions involving nonadmitted assets.
Based on the feedback from inquiring states, it appears that explicit guidance disallowing all saleleaseback transactions with nonadmitted assets may be supported. This agenda item has been developed
to clarify the history / scope intent of the existing guidance, and to request Working Group consideration
on whether nonadmitted, non-real estate assets should be permitted for sale-leaseback accounting. In
researching this item, staff has identified that there are some inconsistencies with the scope of adopted
GAAP guidance (e.g., real estate). This agenda item also requests consideration to review and update
SSAP No. 22 accordingly.
Existing Authoritative Literature:
SSAP No. 22—Leases: This SSAP adopts / rejects a variety of GAAP guidance. In reviewing the
historical guidance supporting SSAP No. 22, there may be some confusion on the guidance adopted from
GAAP with regards to the sale-leasebacks:
•
As noted in paragraph 18 of Issue Paper No. 22 and paragraph 40 of SSAP No. 22, the guidance
from FAS 13, Accounting for Leases, was rejected “except for certain of the guidance on
operating leases, sale-leaseback transactions and leveraged leases.” The adopted FAS 13
paragraphs are noted as 15, 16 (b, c, d), 19 (a, b), 23 (b, c), 36, 37, 39c and 42-47, with all other
paragraphs rejected. In reviewing FAS 13 to see what was adopted for sale-leaseback
transactions, none of the adopted FAS 13 paragraphs pertain to sale-leaseback transactions.
Guidance for sale-leaseback transactions were included in paragraphs 32-34 of FAS 13. Original
sale-leaseback guidance in FAS 13, paragraph 32 states: “Sale-leaseback transactions involve the
sale of property by the owner and a lease of the property back to the seller.” This is not the
original guidance adopted in SSAP No. 22 (and Issue Paper No. 22). The original
SSAP/Issue Paper guidance stated “Sale-leaseback transactions involve the sale of property,
plant or equipment by the owner and a lease of the asset back to the seller.”
•
Per paragraph 40f of SSAP No. 22, FAS 28, Accounting for Sales with Leasebacks (an
amendment of FAS 13) is adopted in its entirety, except guidance on capital leases is not
applicable other than those leases that qualify as leveraged leases and modifications for sale-
© 2015 National Association of Insurance Commissioners
1
Attachment 5
Ref# 2015-03
leaseback transactions involving real estate settled entirely in cash. The focus of FAS 28 was to
identify the accounting for when only portions of an asset were sold and/or leased-back. FAS 28
superseded paragraphs 32 and 33 of FAS 13. As a result of this guidance, the GAAP definition
for sale-leasebacks was revised as follows: “Sale-leaseback transactions involve the sale of
property by the owner and a lease of the property back to the seller. A sale of property that is
accompanied by a leaseback of all or any part of the property for all or part of its remaining
economic life shall be accounted for by the seller-lessee in accordance with the provisions of
paragraph 33 [of Statement No. 13] and shall be accounted for by the purchaser-lessor in
accordance with the provisions of paragraph 34 [of Statement No. 13].” At the time of adoption,
this FAS 28 guidance was also not reflected in SSAP No. 22 or Issue Paper No. 22. (Although
this guidance was noted as adopted at original issuance of SSAP No. 22, this guidance was not
reflected in SSAP No. 22 until after the adoption of agenda item 2004-06. With the adoption of
that agenda item, this guidance was originally included in Appendix A of SSAP No. 22
paragraphs 33-35 within a section entitled “Sale-Leaseback Accounting for Non-Real Estate
Transactions.” This guidance is currently included within Appendix A under the section entitled
“Sale Leaseback Transactions” in paragraphs 47-49.)
•
Per paragraph 40h of SSAP No. 22, the following paragraphs from FAS 98, Accounting for
Leases (an amendment of FAS 13, 66 and 91 and a recission of FAS 26 and TB 79-11) were
adopted: paragraphs 1-13, 17-22.a., b., d., and e.; adopted with modification paragraph j.to
exclude references to sales-type lease classification criterion; adopted with modification
paragraphs 27, 30, 31 to reference applicable statements of statutory accounting principles and to
reject guidance associated with capital leases; with all other paragraphs rejected. This GAAP
standard was issued to specifically address sales-leaseback transactions involving real estate.
(Although paragraphs of FAS 98 were adopted at original issuance of SSAP No. 22, changes to
those paragraphs, and explicit inclusion in SSAP No. 22 did not occur until after adoption of
agenda item 2002-07. The guidance was originally included in a section for “real estate” in SSAP
No. 22, but is now included for all sale-leaseback transactions in paragraphs 27-33. Per GAAP
guidance in ASC 840-40, this guidance is specific to real-estate transactions.)
•
Current GAAP guidance for sale-leaseback transactions is included in ASC 840-40. This
guidance has specific sections for real estate. However, the other aspects of the guidance are
applicable to non-real estate sale-leaseback transactions. The following chart shows the prior
statutory accounting consideration of the underlying GAAP guidance within ASC 840-40:
840-40
Pre-Codification Standard
FAS 13 – Accounting for Leases
SAP Status
Reject except certain
paragraphs on operating
leases, leveraged leases and
sale leaseback transactions.
(Adopt paragraphs 15, 16 (b,
c, d), 19 (a, b), 23 (b, c), 36,
37, 39c and 42-47. Reject all
others.)
FAS 28 – Accounting for Sales with Leasebacks Adopt with Modification
– An Amendment of FAS 13
Adopted in its entirety, except
guidance on capital leases is
not applicable other than those
leases that qualify as
© 2015 National Association of Insurance Commissioners
2
Attachment 5
Ref# 2015-03
FAS 98 – Accounting for Leases
• Sale-Leaseback Transactions
Real Estate
leveraged leases and
modifications for saleleaseback transactions
involving real estate settled in
cash.
Adopt paragraphs 1-13, 17Involving 22.a., b., d., and e.,
• Sales-Type Leases of Real Estate
• Definition of the Lease Term
paragraph j. adopted with
modification to exclude
references to sales-type lease
classification criterion,
• Initial Direct Costs of Direct Financing paragraphs 27, 30, 31, adopted
with modification to reference
Leases
applicable statements of
(an amendment of FASB Statements No. 13, statutory accounting
66 and 91 and a rescission of FASB principles and reject guidance
Statement No. 26 and Technical Bulletin associated with capital leases;
No. 79-11)
All other paragraphs rejected;
FAS 143 – Accounting for Asset Retirement
Obligations
Technical Bulletin 88-01 – Issues Relating to
the Accounting for Leases: Time Pattern of the
Physical Use of the Property in an Operating
Lease, Lease Incentives in an Operating Lease,
Applicability of Leveraged Lease Accounting to
Existing Assets of the Lessor, Money-OverMoney Lease Transactions and Wrap Lease
Transactions.
Not Applicable
Adopt paragraphs 1-12
Staff Note:
The GAAP guidance in TB
88-01, paragraph 22 is the
only section that pertained to
sale-leaseback
transactions,
and that guidance was not
adopted.
EITF 84-37 – Sale-Leaseback Transactions with No EITF Consensus
Repurchase Option
Staff Note: The guidance from
this EITF included in ASC
840-40 only relates to SEC
comments.
EITF 86-17 – Deferred Profit on Sale- Reject in SSAP No. 22
Leaseback Transactions with Lessee Guarantee
on Residual Value
EITF 88-21 – Accounting for the Sale of Reject in SSAP No. 22
Property Subject to the Seller’s Preexisting
Lease
EITF 89-16 – Consideration of Executory Costs Reject in SSAP No. 22
in Sale-Leaseback Transactions
EITF 89-20 – Accounting for Cross-Border Not Applicable
Benefit Leases
EITF 90-14 – Unsecured Guarantee by Parent Adopted in SSAP No. 22
of Subsidiary’s Lease Payments in a Sale-
© 2015 National Association of Insurance Commissioners
3
Attachment 5
Ref# 2015-03
Staff Note: The ASC 840-40
guidance from this EITF is
limited to the recognition of
prepaid rent in a salesleaseback transaction.
EITF 90-20 – Impact of an Uncollateralized Adopted in SSAP No. 22
Irrevocable Letter of Credit on a Real Estate
Staff Note: The ASC 840-40
Sale Leaseback Transaction
guidance from this EITF is
limited to deferring profit
through a construction period.
Leaseback Transaction
History of Statutory Guidance on Nonadmitted Assets:
The guidance prescribing deposit-method accounting for sale-leaseback transactions involving
nonadmitted assets with related parties was originally detailed in Issue Paper No. 22 (which at that
time referenced “property, plant and equipment” for sale-leaseback transactions). In adopting the
guidance, it was noted as conservative as it eliminated the possibility of surplus enhancement:
22. In addition, the statutory accounting principles established in this issue paper provide for the
deferral of any gains on sales of property with a leaseback, except if certain strict criteria are
met. Such accounting meets the conservatism objective in the Statement of Concepts.
Furthermore, the statutory accounting principles established for sale-leaseback
transactions of nonadmitted assets with related parties meet the conservatism
objective by eliminating the possibility of surplus enhancement through saleleaseback transactions involving nonadmitted assets.
Issue Paper No. 22 also included in paragraph 27 (discussion) minutes from a September 11, 1989
meeting of the Emerging Accounting Issues Working Group regarding the sale and leaseback of furniture
and equipment: (This question focused on operating / capital lease treatment and not the impact to surplus
from the removal of nonadmitted assets, but it highlights that these items were discussed.)
Accounting for Sale and Leaseback of Furniture and Equipment
Mr. Robert Solitro, Director of Examinations for the State of New Hampshire Insurance
Department, had requested that this item be placed on the agenda of the working group.
His request included an issue summary (Attachment A).
In the situation described, an insurance company would enter into a sale and leaseback agreement with a third party, non-affiliate, in which nonadmitted furniture is
sold and then leased-back. As described, the terms of the agreement would provide
that future payments to be made by the insurance company would be equal to or greater
than the proceeds to be received from the original sale. The issue identified and
addressed by the working group at this meeting was as follows:
Should the transaction be accounted for as an operating lease or a capital lease?
The working group reached the consensus that for sale and leaseback transactions
involving furniture and non-EDP equipment guidance should be obtained from FASB
No. 13 and related amendments. In a case where it is determined that the
transaction results in a capital lease, no surplus enhancement should be recorded.
© 2015 National Association of Insurance Commissioners
4
Attachment 5
Ref# 2015-03
SSAP No. 22 – Revisions History:
•
Agenda Item 2001-39, Gain Recognition Related to Sale Leaseback Transactions With More Than A
Minor Leaseback (adopted Dec. 10, 2001): This agenda item identified that several insurers have
either entered into or contemplated a sale-leaseback of fixed assets, including real estate, furniture,
and fixtures, EDP equipment or software. It noted the advantages of sale leaseback transactions to the
insurer include ready access to cash, improved risk-based capital from the conversion of a fixed or
real estate asset into cash, and perhaps, increasing statutory surplus. The revisions from this agenda
item noted that for sale-leaseback transactions with other than a minor leaseback, the profit on sale
shall be deferred and amortized in proportion to the amortization of the leased asset in accordance
with paragraph 3 of FAS 28. This agenda item specifically stated: “Additionally, the inclusion of
this clarification would not affect an entity’s ability to remove nonadmitted assets from their
books and recognizing the resulting increase in surplus provided the other conditions of SSAP
No. 22 are met.”
•
Agenda item 2002-07, Application of FAS 28 and FAS 98 to Sale-Leaseback Transactions Under
SSAP No. 22 (adopted June 10, 2002): Revisions were incorporated to SSAP No. 22 to address the
inadvertent combination of GAAP provisions for sale-leaseback transactions not involving real
estate with the GAAP provisions for sale-leaseback transactions involving real estate. These
revisions, reflected in the 2003 Manual, revised the sale-leaseback guidance to no longer
reference “property, plant and equipment” but to only reference “property.” The agenda item
noted that the criteria for immediate sales recognition are quite different for non-real estate and real
estate under GAAP. It noted that the current SSAP applies the GAAP criteria for real estate to all
asset classes, and this was inconsistent with GAAP. This resulted in separate sections in the 2003
Manual for “Sale-Leaseback Transactions” and “Sale-Leaseback Transactions Involving Real Estate.”
In making this change, the following statement was included in agenda item 2002-07:
o
SSAP 22 adopts FAS 98 paragraph 6 which includes a scope limitation that states, “…
this Statement does not address sale-leaseback or other leasing transactions involving
only equipment.”
•
Agenda item 2004-06, Accounting for Sale-Leaseback Transactions Involving Real Estate Under
SSAP No. 22 (adopted June 15, 2004): Revisions to remove certain GAAP references on the
basis that “NAIC staff believes the original intent of the Working Group was to treat the
gains and losses associated with non-real estate and real estate sales-leaseback transactions
differently as it is set forth in the Statement.” (It also identifies that FAS 28 was equally
applicable to sale-leaseback transactions involving real estate and non-real estate.) This agenda
item noted that the guidance was conflicting as paragraph 22 of SSAP No. 22 suggested that a
profit or loss could be recognized immediately (as it references FAS 66), whereas paragraph 26e
(as it adopts FAS 28) suggested that profit or loss on the sale portion of the transaction, under
certain circumstances, be deferred and amortized over the lease-back period. In addition to
removing some references to GAAP guidance, it also incorporated Appendix A for sale-leaseback
accounting.
•
Agenda item 2006-09, Accounting for the Gain or Loss on Sale on Real Estate Included in a SaleLeaseback Transaction (adopted Dec. 2, 2007): Revisions were incorporated to combine the
guidance for “sale-leaseback transactions” and the “sale-leaseback transactions for non-real
estate transactions.” The agenda item identified that the differentiation between non-real
estate and real estate was causing confusion, and identifies that the sale-leaseback
accounting outlined in FAS 28 was to be applied to both real estate and non-real estate
© 2015 National Association of Insurance Commissioners
5
Attachment 5
Ref# 2015-03
transactions. Additionally, revisions were incorporated to allow for immediate gain recognition
for real-estate sale-leaseback transactions settled entirely in cash.
Current SSAP No. 22 Excerpts:
As detailed in the excerpts below, guidance is included in SSAP No. 22 to identify “depreciating assets”
within the scope of leases. Then, when sale-leaseback transactions are specifically discussed (paragraph
21), the guidance only refers to “property.” Although the agenda item revisions shown above detail how
this guidance has been transformed over time, without knowing the history, it does result in confusion on
what is intended to be included within the scope of sale-leaseback transactions.
The following excerpts from SSAP No. 22 are specifically noted (bolded for emphasis):
2. A lease is defined as an agreement conveying the right to use property, plant, or
equipment (land and/or depreciable assets) usually for a stated period of time. This definition
does not include agreements that are contracts for services that do not transfer the right to use
property, plant, or equipment from one contracting party to the other (i.e., employee lease
contracts) or service concession arrangements. On the other hand, agreements that do transfer
the right to use property, plant, or equipment meet the definition of a lease even though
substantial services by the contractor (lessor) may be called for in connection with the operation
or maintenance of the assets.
5. Property, plant or equipment, as used in this SSAP, includes only land and/or depreciable
assets. Therefore, inventory (including equipment parts inventory) and minerals, precious metals
or other natural resources cannot be the subject of a lease for accounting purposes because
those assets are not depreciable. Additionally, intangibles (for example, motion picture film
licensing rights or workforce) and rights to explore for minerals, precious metals or other natural
resources are not depreciable assets (they are amortized or depleted) so they may not be the
subject of a lease.
21. Sale-leaseback transactions involve the sale of property by the owner and a lease of the
property back to the seller. Sale-leaseback accounting is a method of accounting in which
the seller-lessee records the sale, removes all property and related liabilities from its
balance sheet.
22. A sale of property that is accompanied by a leaseback of all or any part of the property for all or
part of its remaining economic life shall be accounted for by the buyer-lessor and seller-lessee as
a purchase and operating lease and a sale and an operating lease, respectively, unless the
sale-leaseback includes sale of nonadmitted assets to a related party.
25. If the transaction involves a sale of nonadmitted assets to a related party, the transaction
shall be accounted for by the deposit method (refer to Appendix A, paragraphs 42 and 43).
26. Paragraphs 26-33 present the additional standards of statutory accounting by a seller-lessee for
sale-leaseback transactions regarding the lease term and sale-leaseback transactions
involving real estate, including real estate with equipment, such as office buildings with
furniture and fixtures. A sale-leaseback transaction involving real estate with equipment
includes any sale-leaseback transaction in which the equipment and the real estate are sold and
leased back as a package, irrespective of the relative value of the equipment and the real estate.
Those paragraphs also address sale-leaseback transactions in which the seller-lessee sells
© 2015 National Association of Insurance Commissioners
6
Attachment 5
Ref# 2015-03
property improvements or integral equipment1 to a buyer-lessor and leases them back while
retaining the underlying land.2
27. Sale-leaseback accounting shall be used by a seller-lessee only if a sale-leaseback transaction
includes all of the following:
a.
A normal leaseback as described in paragraph 28.
b.
Payment terms and provisions that adequately demonstrate the buyer-lessor's initial and
continuing investment in the property (refer to Appendix A, paragraphs 50-58).
c.
Payment terms and provisions that transfer all of the other risks and rewards of
ownership as demonstrated by the absence of any other continuing involvement by the
seller-lessee described in paragraphs 31-33 of this section and paragraphs 25-39 and
41-43 of FAS 66.
d.
Admitted assets, if the buyer-lessor is a related party, or either admitted or
nonadmitted assets if the buyer-lessor is not a related party. For purposes of this
paragraph, related parties include those identified in SSAP No. 25 and entities
created for the purpose of buying and leasing nonadmitted assets for the reporting
entity and/or its affiliates.
Deposit Method
42. Paragraphs 25 and 30 of this statement describe certain circumstances in which it is appropriate
to account for a transaction using the deposit method. If a sale-leaseback transaction is
accounted for by the deposit method, lease payments decrease and collections on the
buyer-lessor's note, if any, increase the seller-lessee's deposit account. The property and
any related debt continue to be included in the seller-lessee's balance sheet, and the
seller-lessee continues to depreciate the property. Under the provisions of paragraph 21 of
FAS 66, a seller-lessee that is accounting for any transaction by the deposit method shall
recognize a loss if at any time the net carrying amount of the property exceeds the sum of the
balance in the deposit account, the fair value of the unrecorded note receivable, and any debt
assumed by the buyer.
43. If a sale-leaseback transaction accounted for by the deposit method subsequently qualifies for
sales recognition under this statement and SSAP No. 40R, the transaction is accounted for using
sale-leaseback accounting, and the gain or loss is recognized in accordance with the provisions
of paragraph 46 of this statement. In addition, the leaseback is classified and accounted for in
accordance with this statement as if the sale had been recognized at the inception of the lease.
The change in the related lease accounts that would have been recorded from the inception of
the lease had the transaction initially qualified for sale-leaseback accounting is included in
computing the gain or loss recognized in accordance with paragraph 46 of this statement.
1
The terms property improvements or integral equipment as used in paragraphs 26-33 of this section refer to any physical
structure or equipment attached to the real estate, or other parts thereof, that cannot be removed and used separately without
incurring significant cost.
2
Paragraphs 38 and 39 of FAS 66 address transactions in which the seller sells property improvements to a buyer and leases the
underlying land to the buyer of the improvements. Under certain circumstances, paragraph 38 of FAS 66 precludes sales
recognition for such transactions and requires that they be accounted for as leases of both the land and improvements. Paragraphs
26-33 of this section are not intended to modify paragraph 38 of FAS 66; thus, they do not address a sale-leaseback transaction
that does not qualify for sales recognition under the provisions of paragraph 38 of FAS 66. However, those paragraphs do address
a sale-leaseback transaction that qualifies for sales recognition under the provisions of paragraph 39 of FAS 66.
© 2015 National Association of Insurance Commissioners
7
Attachment 5
Ref# 2015-03
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): See discussion of the prior
agenda items above.
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
Staff recommends that the Working Group expose the agenda item to get initial feedback before
providing direction on the following items and before classifying this agenda item as substantive or
nonsubstantive. After receiving initial information, whichever direction the Working Group prefers
for sale-leasebacks, staff recommends revisions in SSAP No. 22 to eliminate future questions.
Staff has received several questions regarding sale-leaseback transactions involving nonadmitted assets
with unrelated parties. These questions have noted that these transactions are seemingly being completed
only to remove nonadmitted assets from the financial statements, resulting in an increase in surplus.
Several questions have been received regarding why sale-leaseback transactions with nonadmitted assets
with related parties are excluded from sale-leaseback accounting, and other transactions with nonadmitted
assets and unrelated parties are permitted. These questions have speculated that the use of “property” in
the sale-leaseback section were intended to reflect “real estate” and not other depreciating assets (e.g.,
software).
As detailed in the history section, it appears that sale-leaseback transactions involving nonadmitted assets
with unrelated parties were considered and permitted sale-leaseback accounting from the original
adoption of SSAP No. 22. However, the discussion section of the Issue Paper noted that the exclusion of
nonadmitted asset sale-leaseback transactions with related parties was intended to eliminate the possibility
of surplus enhancement through sale-leasebacks with nonadmitted assets. It is staff’s assessment that
unless the deposit method of accounting is used, sale-leaseback with nonadmitted assets, regardless if it is
with a related party, results with surplus enhancement.
Sale-Leaseback Accounting: Removes the “sold” property from the insurer’s financial statements,
with recognition of an operating lease. (This allows for elimination of previously nonadmitted
assets, resulting in an increase to surplus.)
Deposit Method of Accounting: The property and any related debt continue to be included in the
balance sheet, with continued depreciation of the property.
In addition to the specific questions on sale-leaseback transactions involving nonadmitted assets, the
guidance in SSAP No. 22 does not match GAAP – particularly as SSAP No. 22 combines guidance for
sales-leasebacks for real estate with the accounting guidance for non-real estate sale-leasebacks.
Staff requests that the exposure solicit guideline on the following three items to assist the Working
Group in providing staff direction:
1) Incorporate guidance to clarify that the reference to “property” in the sale-leaseback section has
the same scope as the full SSAP - property, plant or equipment (land or depreciable assets). This
proposal also suggests clarifying the guidance specific to “real estate” versus “non-real estate.”
2)
Incorporate guidance to clarify when sale-leaseback transactions involving nonadmitted assets
shall follow the deposit method of accounting. (These revisions would be proposed to either
© 2015 National Association of Insurance Commissioners
8
Attachment 5
Ref# 2015-03
require all such transactions to follow the deposit method of accounting, or, if the Working Group
wants to allow these items, clarify that they are permitted within SSAP No. 22.)
3) Incorporate guidance / revisions to clearly identify and reflect the guidance adopted under GAAP.
This proposal would incorporate the current GAAP guidance in ASC 840-40 to the extent that the
pre-codification GAAP standards were adopted by the Working Group, with the modifications
previously adopted unless items are specifically noted for reconsideration.
Staff Note: The FASB and IASB have a joint project to reconsider the accounting for leases. Current the
FASB is redeliberating decisions based on comments from their exposure draft. Although staff suggests
that the elements of the exposure draft move forward, a comprehensive project to review the GAAP
guidance (including possible re-consideration of capital leases) is expected once the FASB issues their
revised standard. (There is no expected release date on the FASB website.)
Staff Review Completed by:
Julie Gann - Dec. 19, 2014
Status:
On March 28, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
substantive active listing and exposed this agenda item to get initial feedback on sale-leaseback
transactions, with a specific request for responses on the three items identified in the staff
recommendation.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H5 - 15-03 - Leaseback with Nonadmitted
Assets - SSAP 22.doc
© 2015 National Association of Insurance Commissioners
9
This page intentionally left blank.
Attachment 6
Ref #2015-04
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Prepayment Penalties and Amortization on Callable Bonds
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue: SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities currently
has guidance requiring bonds containing call provisions (where the issue can be called away from the
reporting entity at the issuer’s discretion), except “make whole” call provisions, to amortize the premium
or discount to the call or maturity value/date which produces the lowest asset value (yield to worst).
Questions have been received on this accounting guidance for make whole call provision bonds and
continuous callable bonds. This agenda item proposes revisions to SSAP No. 26 to clarify the accounting
treatment of these bonds.
Additionally, SSAP No. 26 has guidance requiring prepayment penalties and acceleration fees received
upon liquidation of a bond prior to its scheduled termination date to be reported as investment income
upon receipt. Questions have been received on this accounting guidance and whether the prepayment
penalties and acceleration fees should be treated as investment income or capital gain. This agenda item
proposes revisions to SSAP No. 26 to clarify the treatment of prepayment penalty and acceleration fees
when received.
Item 1: Prepayment Penalties and Acceleration Fees
Often, callable bonds provide a prepayment penalty (or acceleration fee) in the event the bond is
liquidated prior to its scheduled termination date. Questions have been received on the accounting
treatment of these penalties and whether they should be recorded as investment income or as a capital
gain and how they should be reported within the financial statements and supporting schedules. Current
guidance in SSAP No. 26, paragraph 14 indicates these penalties and fees should be classified as
investment income. However, this guidance is conflicting with existing annual statement instructions, as
well as how information currently flows on Schedule D-Part 4. Furthermore, with the differences in types
of calls (e.g., make-whole call provisions), the “penalty” may not be as easily identifiable (e.g., a standard
call price of 105 indicates a penalty of 5). This agenda item proposes that the Working Group consider
reporting all prepayment penalties and acceleration fees as realized gains, which would result with the
total difference between the consideration (amount received – including penalties and fees) and BACV
being subject to authoritative literature (if applicable) within SSAP No. 7—Asset Valuation Reserve and
Interest Maintenance Reserve.
Item 2: Continuously Callable Bonds
Bonds that are considered “continuously callable” without specific “make whole” call provisions are
intended to capture bonds that have a lock-out period before the first call date, and bonds (if any) that are
callable immediately after acquisition. These bonds are proposed to be captured within the existing
guidance of SSAP No. 26 (yield to worst – amortized to the lowest asset value). Questions have been
received regarding the amortization on continuously callable bonds and the concept of “Yield to Worst” –
more specifically, the instances in which the premium needs to be immediately expensed. This agenda
item provides illustrations and proposes revisions to clarify the existing accounting guidance.
© 2015 National Association of Insurance Commissioners
1
Attachment 6
Ref #2015-04
Item 3: Make Whole Call Provisions
Make whole call provisions allow the borrower to pay off the remaining debt at any time by making a
lump-sum payment to the holder derived from a contractual agreement, usually based on the net present
value of future cash flows not paid because of the call. This agenda item provides illustrations and
proposes revisions to revise the measurement method for make whole call provisions. Make whole call
provisions are intended to be infrequently exercised. However, in 2014, numerous bonds with these
provisions were called, resulting in proposed revisions to the guidance.
Existing Authoritative Literature:
SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities:
Amortized Cost
6.
Amortization of bond premium or discount shall be calculated using the scientific
(constant yield) interest method taking into consideration specified interest and principal
provisions over the life of the bond. Bonds containing call provisions (where the issue can be
called away from the reporting entity at the issuer’s discretion), except “make whole” call
provisions, shall be amortized to the call or maturity value/date1 which produces the lowest asset
value (yield to worst). Although the concept for yield to worst shall be followed for all callable
bonds, make whole call provisions, which allow the bond to be callable at any time, shall not be
considered in determining the timeframe for amortizing bond premium or discount unless
information is known by the reporting entity indicating that the issuer is expected to invoke the
make whole call provision.
Footnote 1 – For continuously callable bonds with a lockout period, the first call date after
the lockout period shall be used in determining the amortization of any premium. If there
is no lockout period, and make whole call provisions are not included, any premium for
continuously callable bonds shall be expensed completely at acquisition. (For
continuously callable bonds, the first call date after the lockout period, or the date of
acquisition if no lockout period exists, shall be used as the “effective date of maturity” for
reporting in Schedule D, Part 1.)
Income
14.
A bond may provide for a prepayment penalty or acceleration fee in the event the bond is
liquidated prior to its scheduled termination date. Such fees shall be reported as
investment income when received.
SSAP No. 37—Mortgage Loans:
(Staff Note: Similar language is also included in SSAP No. 37 for investment income.)
Prepayments
11.
A mortgage loan may provide for a prepayment penalty or acceleration fee in the event
the loan is liquidated prior to its scheduled termination date. Such fees shall be reported as
investment income when received.
Additional Information – Superseded SSAP Guidance:
As detailed in the INT 99-04 excerpt below, prior to codification some insurers were recording
prepayment penalties and acceleration fees as realized gains and amortizing through IMR. While the
intent of INT 99-04 was to no longer have prepayment penalties or acceleration fees recognized as
realized gains upon adoption of the Codification (and release all unamortized amounts within IMR); it
was noted, through discussions with regulators and interested parties, that some insurers would still
record these fees as realized gains and amortize through IMR.
© 2015 National Association of Insurance Commissioners
2
Attachment 6
Ref #2015-04
If the Working Group chooses to recognize prepayment penalties and acceleration fees as realized capital
gains, staff also recommends revisions to SSAP No. 37—Mortgage Loans to clarify this accounting
treatment.
INT 99-04: Recognition of Prepayment Penalties Upon Adoption of Codification:
1.
SSAP No. 37 requires insurers to report a prepayment penalty or acceleration fee as
investment income when received. Currently, some insurers record these fees as realized gains
and thus amortize them through IMR. SSAP No. 37 also stipulates a change resulting from the
adoption of the statement be accounted for as a change in accounting principle. Upon adoption of
Codification, it is probable that some insurers might continue to amortize the existing gain
included in IMR and recognize subsequent fees as investment income.
2.
Should an insurer release all unamortized amounts included in IMR and related to
prepayment penalties upon adoption of Codification and recognize such change in accordance
with SSAP No. 3— Accounting Changes and Corrections of Errors (SSAP No. 3)?
INT 99-04 Discussion
3.
The working group reached a consensus to instruct insurer’s to release all unamortized
amounts included in IMR related to prepayment penalties upon adoption of Codification and
recognize such change in accordance with SSAP No. 3.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG:
None
March 2015 Staff Recommendation:
Summary Recommendation: It is recommended that the Working Group move this agenda item to
the nonsubstantive active listing and expose nonsubstantive revisions to SSAP No. 26:
1) Require prepayment penalties and acceleration fees to be reported as realized capital gains
instead of investment income. (A similar revision is also suggested for SSAP No. 37.) This
agenda item proposes that the Working Group consider reporting all prepayment penalties
and acceleration fees as realized gains, which would result with the total difference between
the consideration (amount received – including penalties and fees) and BACV being subject
to authoritative literature (if applicable) within SSAP No. 7—Asset Valuation Reserve and
Interest Maintenance Reserve.
2) Incorporate guidance to clarify the “yield to worst” concept (including when to expense
premium) for continuously callable bonds.
3) Revise the measurement method for bonds with make whole call provisions to follow the
yield-to-worst concept without exception.
March 2015 - Proposed Revisions to SSAP No. 26 for Exposure:
6.
Amortization of bond premium or discount shall be calculated using the scientific
(constant yield) interest method taking into consideration specified interest and principal
provisions over the life of the bond (INT 07-01). Bonds containing call provisions (where the issue can
be called away from the reporting entity at the issuer's discretion), except "make whole" call
© 2015 National Association of Insurance Commissioners
3
Attachment 6
Ref #2015-04
provisions, shall be amortized to the call or maturity value/date1 which produces the lowest asset
value (yield to worst). Although the concept for yield to worst shall be followed for all callable
bonds, make whole call provisions, which allow the bond to be callable at any time, shall not be
considered in determining the timeframe for amortizing bond premium or discount unless
information is known by the reporting entity indicating that the issuer is expected to invoke the
make whole call provision.
7.
For callable bonds, the first call date after the lockout period, or the date of acquisition if
no lockout period exists, shall be used as the “effective date of maturity” for reporting in Schedule
D - Part 1. Depending on the characteristics of the callable bonds, the yield to worst concept in
paragraph 6 shall be applied as follows:
a. For callable bonds with a lockout period, premium in excess of the next call price1
(subsequent to acquisition2 and lockout period) shall be amortized proportionally over the
length of the lockout period. After each lockout period (if more than one), remaining
premium shall be amortized to the call or maturity value/date which produces the lowest
asset value.
b. For callable bonds without a lockout period (which includes bonds with make whole call
provisions) the BACV (at the time of acquisition) of the callable bonds shall equal the
lesser of the next call price (subsequent to acquisition) or cost. Remaining premium shall
then be amortized to the call or maturity value/date which produces the lowest asset
value.
c.
For callable bonds that do not have a stated call price or contractual elements to
calculate make whole call provisions, all premiums over par shall be immediately
expensed. For callable bonds with a call price at par in advance of the maturity date, all
premiums shall be amortized to the call date.
d. If a bond has both scheduled call dates and contains a make whole call provision, the
bond shall be accounted for under the provisions of this paragraph (7a-7c) that results in
the lowest asset value.
Income
14.
A bond may provide for a prepayment penalty or acceleration fee in the event the bond is
liquidated prior to its scheduled termination date. Such fees shall be reported as investment
incomea realized capital gain when received.
Proposed Revisions to SSAP No. 37 for Exposure:
Prepayments
1
Reference to the “next call price” indicates that the reporting entity shall continuously review the call dates / prices to ensure
that the amortization (and resulting BACV) follows the yield-to-worst concept throughout the time the reporting entity holds the
bond.
2
The reporting entity shall only consider call dates / prices that occur after the reporting entity acquires the bond. If all of the call
dates had expired prior to the reporting entity acquiring the bond, the reporting entity would consider the bond continuously
callable without a lock-out period.
1
For continuously callable bonds with a lockout period, the first call date after the lockout period shall be used in determining the
amortization of any premium. If there is no lockout period, and make whole call provisions are not included, any premium for
continuously callable bonds shall be expensed completely at acquisition. (For continuously callable bonds, the first call date after
the lockout period, or the date of acquisition if no lockout period exists, shall be used as the “effective date of maturity” for
reporting in Schedule D, Part 1.)
© 2015 National Association of Insurance Commissioners
4
Attachment 6
Ref #2015-04
11.
A mortgage loan may provide for a prepayment penalty or acceleration fee in the event
the loan is liquidated prior to its scheduled termination date. Such fees shall be reported as
investment incomea realized capital gain when received.
Additional Discussion and Illustrations Supporting Summary Recommendation and Proposed
Revisions:
Item 1: Prepayment Penalty and Acceleration Fees
As illustrated within the Description of Issue and Summary Recommendation above, staff is
recommending revisions to reflect prepayment penalties and acceleration fees as gains. However, the
following discussion provides information if the Working Group would like to consider continued
reporting as investment income.
Based on the current guidance within SSAP No. 26, paragraph 14, these prepayment and acceleration fees
are classified as investment income. The following would be recognized at the call date (when called
prior to scheduled termination date).
• Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Investment Income
• BACV in excess of Par (Premium) = Loss
• Par in excess of BACV (Discount) = Gain
Gains and losses incurred at the call date are recognized and documented on Schedule D Part 4, column
18 and are subject to authoritative literature (if applicable) within SSAP No. 7—Asset Valuation Reserve
and Interest Maintenance Reserve. Currently, Schedule D-Part 4 does not include a column specific for
investment income. However, per the Annual Statement instructions, the proportionate share of
investment income directly related to the securities reported shall be included within column 20 (Bond
Interest/Stock Dividends Received during the Year). If these fees continue to be reported as investment
income, staff would recommend adding a column to Schedule D-Part 4, to account for the
investment income generated upon disposal of callable bonds. Additionally, the annual statement
instructions for Schedule D-Part 4, Column 18 specifies that the realized gain (loss) on disposal should be
the difference between the Consideration received (Column 7) and the Book Adjusted Carrying Value at
Disposal Date (Column 16). If a portion of the Consideration (for the penalty/fee) is deemed to be
investment income (Column 20), then revisions to the annual statement instructions for Column 18
would be needed to clarify the presentation of disposals of callable bonds on Schedule D-Part 4.
If prepayment penalties and acceleration fees were recognized as a gain upon liquidation (which is
reflected in the staff recommendation), the following accounting would be recognized when the bond is
called prior to scheduled termination date:
• Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Gain
• BACV in excess of Par (Premium) = Loss
• Par in excess of BACV (Discount) = Gain
With the staff recommendation, the prepayment penalty would be included with other gains and losses
(BACV in excess of Par) and would be recognized and documented on Schedule D-Part 4, Column 18
and be subject to authoritative literature (if applicable) within SSAP No. 7—Asset Valuation Reserve and
Interest Maintenance Reserve. With this change, the “Consideration” (amount received) received in
disposal of a bond would flow through existing columns in Schedule D-Part 4. However, staff would
still suggest clarification revisions to annual statement instructions.
Item 2: Continuously Callable Bonds
As illustrated within the Description of Issue and Summary Recommendation above, staff is
recommending revisions to SSAP No. 26 to incorporate guidance to clarify the “yield to worst” concept
(including when to expense premium) for continuously callable bonds. As detailed in the illustrations, the
© 2015 National Association of Insurance Commissioners
5
Attachment 6
Ref #2015-04
amortization based on the call schedules (dates/price) should be compared to the standard amortization
(cost to par) to determine the lowest asset value. As noted in the examples, depending on the lockout
periods and set call prices, it is possible for the lowest asset value to alternate between the call price/date
and the standard amortization.
Item 3: Make Whole Call Provisions
As illustrated within the Description of Issue and Summary Recommendation above, staff is
recommending revisions to SSAP No. 26 to revise the measurement method for bonds with make whole
call provisions. These revisions propose to eliminate the exception for make whole call provisions so that
they also follow the yield-to-worst concept, with the bond reflecting the lowest asset value. With the
number of make whole call provisions invoked in 2014, and the extent of questions received, staff is
recommending that the Working Group incorporate a consistent basis of accounting for all callable bonds
that utilizes the lowest asset value consistent with other callable bonds.
Staff Note: In reviewing bonds that have been recently called with make whole call provisions, there have
been instances in which the holder only received an amount equal to the fair value of the bond.
Apparently, the contract contained provisions that allowed a fair value redemption price. Staff has
internally discussed including an element to require a lower of cost or fair value measurement for bonds
with these provisions (similar to mandatorily convertible bonds). However, without knowing more
information on how prevalent these provisions are reflected in the contractual terms of make whole
bonds, staff currently anticipates that the proposed revisions to paragraph 7 of SSAP No. 26 will provide
suitable guidance, and will be consistent with other callable bonds. However, comments are welcome on
whether a lower of cost or fair value threshold should be reflected.
Staff Review Completed by:
Josh Arpin / Julie Gann – February 2015
Status:
On March 28, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 26. These exposed
revisions will require prepayment penalties and acceleration fees to be reported as realized capital gains,
clarify the yield-to-worst concept for continuously callable bonds, and revise the guidance for bonds with
make-whole call provisions. Illustrations for the application of the exposed guidance are also included for
comment.
July 2015 Summary Recommendation
Based on the comments received by interested parties, staff recommends that the Working Group
bifurcate the contents of this agenda item into two separate Form A’s. The topic of amortization on
callable bonds (including bonds with make whole call provisions) will continue to be documented in this
agenda item (2015-04); with the topics of accounting for prepayment penalties and presentation of
callable bonds being documented in agenda item 2015-23.
In their May 26, 2015 comment letter, interested parties noted the following pertaining to the amortization
of callable bonds (including make whole call provisions):
“We do not believe additional clarifications to SSAP No. 26 are necessary, but if the Working Group
moves forward with this part of the proposal, then we offer the following additional comments:
© 2015 National Association of Insurance Commissioners
6
Attachment 6
Ref #2015-04
•
We believe the amortization guidance proposed in paragraph 7 sections a, b, and c of SSAP
No. 26 is generally consistent with how our investment systems currently amortize premiums
and discounts.
•
We object to the proposed requirement in section b that states “For callable bonds without a
lockout period (which includes bonds with make whole call provisions) the BACV (at the time
of acquisition) of the callable bonds shall equal the lesser of the next call price (subsequent to
acquisition) or cost.” This statement would change the measurement of these bonds from
amortized cost to a “lower-of” approach. We believe this situation to be very uncommon, as
the market price would typically not exceed any potential call price. In addition, since makewhole provisions are typically not fixed, we would not be able to apply this guidance to the
acquisition of bonds with make-whole provisions. Since this is a measurement change, the
costs of re-programming our investment system would be significant, and given this situation
is unlikely to occur, we believe the costs far outweigh any benefits of this proposed change.
•
We do not believe the situation described in paragraph 7 section d (a bond having scheduled
call dates and a make-whole provision) exists and recommend deleting this example from the
proposal.
•
Examples 1-4 in the proposal are generally consistent with how our investment systems treat
amortization today. We do not believe the situation described in Example 5 exists and
recommend it be deleted. We recommend deleting Examples 6-7 because they involve
estimating make-whole provisions as described earlier.”
In considering the above comments from interested parties regarding the amortization treatment for
callable bonds (including bonds with make whole call provisions) and the concept of Yield to Worst
(YTW) staff has proposed edits to the proposed revisions to SSAP No. 26 as follows:
•
Revisions to maintain the existing language in paragraph 6 regarding how yield-to-worst applies
to make whole call provisions.
•
Revisions to remove the language requiring make whole call provisions to follow yield-to-worst
in the new paragraph 7.
•
Revisions to remove language in the new paragraph 7 regarding how yield-to-worst applies when
a combination of call features are present.
Additionally, staff has proposed language on examples 5-7 below, noting they should not be used as a
reference for the application of the concept yield-to-worse. As detailed in the recommendation, Staff
requests comments on whether the examples (1-4) should be included as an appendix to SSAP No.
26.
Staff Recommendation: Staff recommends that the Working Group expose proposed changes to
SSAP No. 26 to clarify guidance for bonds with make-whole call provisions, with the discussed
revisions, (illustrated below)which incorporate interested parties suggestions. Staff recommends
that the exposure specifically request comments on whether the examples (1-4) should be included
as an Appendix to SSAP No. 26.
© 2015 National Association of Insurance Commissioners
7
Attachment 6
Ref #2015-04
Updated July 2015 Proposed Revisions to SSAP No. 26:
Staff Note: Highlighted text represents changes from the original March 2015 exposed language.
Additionally, staff notes have been provided to address specific comments received. Revisions related to
the treatment of prepayment penalties and presentation of callable bonds will be addressed in agenda
item 2015-23. Also, footnote number references will be updated (as applicable) upon revisions being
adopted.
6.
Amortization of bond premium or discount shall be calculated using the scientific
(constant yield) interest method taking into consideration specified interest and principal
provisions over the life of the bond (INT 07-01). Bonds containing call provisions (where the issue can
be called away from the reporting entity at the issuer's discretion), except "make whole" call
provisions, shall be amortized to the call or maturity value/date1 which produces the lowest asset
value (yield to worst). Although the concept for yield to worst shall be followed for all callable
bonds, make whole call provisions, which allow the bond to be callable at any time, shall not be
considered in determining the timeframe for amortizing bond premium or discount unless
information is known by the reporting entity indicating that the issuer is expected to invoke the
make whole call provision.
Staff Note: The previously proposed revisions to paragraph 6 have been removed. The paragraph above
reflects current guidance in SSAP No. 26.
7.
For callable bonds3, the first call date after the lockout period, or the date of acquisition if
no lockout period exists, shall be used as the “effective date of maturity” for reporting in Schedule
D - Part 1. Depending on the characteristics of the callable bonds, the yield to worst concept in
paragraph 6 shall be applied as follows:
a. For callable bonds with a lockout period, premium in excess of the next call price4
(subsequent to acquisition5 and lockout period) shall be amortized proportionally over the
length of the lockout period. After each lockout period (if more than one), remaining
premium shall be amortized to the call or maturity value/date which produces the lowest
asset value.
b. For callable bonds without a lockout period (which includes bonds with make whole call
provisions) the BACV (at the time of acquisition) of the callable bonds shall equal the
lesser of the next call price (subsequent to acquisition) or cost. Remaining premium shall
then be amortized to the call or maturity value/date which produces the lowest asset
value.
3
Callable bonds within scope of this paragraph excludes bonds with make-whole call provisions unless information
is known by the reporting entity indicating that the issuer is expected to invoke the make whole call provision
4
Reference to the “next call price” indicates that the reporting entity shall continuously review the call dates / prices to ensure
that the amortization (and resulting BACV) follows the yield-to-worst concept throughout the time the reporting entity holds the
bond.
5
The reporting entity shall only consider call dates / prices that occur after the reporting entity acquires the bond. If all of the call
dates had expired prior to the reporting entity acquiring the bond, the reporting entity would consider the bond continuously
callable without a lock-out period.
1
For continuously callable bonds with a lockout period, the first call date after the lockout period shall be used in determining the
amortization of any premium. If there is no lockout period, and make whole call provisions are not included, any premium for
continuously callable bonds shall be expensed completely at acquisition. (For continuously callable bonds, the first call date after
the lockout period, or the date of acquisition if no lockout period exists, shall be used as the “effective date of maturity” for
reporting in Schedule D, Part 1.)
© 2015 National Association of Insurance Commissioners
8
Attachment 6
Ref #2015-04
Staff Note: Interested parties objected to the language in paragraph 7.b. and indicated that it would
change the measurement of these bonds from amortized cost to a “lower-of” approach. While staff agrees
that this revision would in essence make this situation a “lower-of” approach, this “lower of” would be
the lower of amortized cost or immediate call price. This approach is consistent with the existing concept
of “yield-to-worst” and how the application of the concept should be applied.
c.
For callable bonds that do not have a stated call price or contractual elements to
calculate make whole call provisions, all premiums over par shall be immediately
expensed. For callable bonds with a call price at par in advance of the maturity date, all
premiums shall be amortized to the call date.
a.d. If a bond has both scheduled call dates and contains a make whole call provision, the
bond shall be accounted for under the provisions of this paragraph (7a-7c) that results in
the lowest asset value.
Staff Note: Interested parties noted that they do not believe the situation described in paragraph 7d (a
bond having scheduled call dates and a make-whole provision) exists and recommended deleting from the
proposal. Upon further review of these call features; staff believes that the combinations of different call
features are currently used in callable bonds. However, as staff is unable to determine the frequency or
impact of the combination of call features, staff agrees with not proposing specific guidance for these
situations at this time.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H6 - 15-04 - Prepayment Penalties and
Amortization on Callable Bonds.docx
© 2015 National Association of Insurance Commissioners
9
Attachment 6
Ref #2015-04
Example 1 - Call Price Less Than BACV Throughout the Life of the Bond
12/31/2008 – Issuance of Bond. Par = 100 / 10 Year Bond (Matures 12/31/2018)
1/1/2009 – Call Date / Call Price 107
12/15/2010 – Reporting Entity Acquires Bond. Cost = 106
1/1/2012 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 104
1/1/2014 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 103
1/1/2016 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 102
General Note for Examples: The reporting entity purchased the bond at a premium (cost was greater than
par). The 1/1/2009 call date and price is ignored as it occurred prior to the reporting entity acquiring the
bond. The bolded numbers represent the lowest asset value at each reporting period. The bond is
amortized to the lowest asset value, which in this scenario, is amortizing to the call dates and prices. (The
standard amortization to the maturity date is shown as it should be compared to the amortization to the
call date/price to verify that the BACV at any given reporting date reflects the lowest asset value.)
Action
Cost
12/15/2010
Acquired
106
12/31/2011
Lock Out
Period
1/1/2012
Call Date
12/31/2012
Year-End
Reporting
12/31/2013
Year-End
Reporting
Date
1/1/2014
12/31/2014
12/31/2015
1/1/2016
Call Date
Year-End
Reporting
Year-End
Reporting
Call Date
Exercised
Call Price
BACV
(Under Call
Date / Price)
Amortization
to the Lowest
Value
106
2
105.25
103.5
0.5
104.50
103
0.5
103.75
102.5
0.5
103
102
0.5
102.25
104
104
BACV
Under
Standard
Amortization
106
104
103
103
102
102
Standard Amortization
This table shows the amortization with a purchase date of 12/15/2010 at $106 through the maturity date of 12/31/2018.
12/31/2011 12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/15/2010
.75
.75
.75
.75
.75
.75
.75
.75
Amortization
105.25
104.50
103.75
103
102.25
101.50
100.75
100
BACV
Consideration
Par Value
BACV at Disposal Date
Realized Gain/Loss*
1/1/2016
102
100
102
0
Call Exercised
* As detailed in item 1, staff is recommending revisions to reflect all penalties/fees received from an issuer calling a
bond to be included with gains/losses. Since the BACV equaled the consideration received (which includes the
prepayment penalty), there is no gain or loss recognized on this transaction. If the existing guidance in SSAP No. 26
had been followed, the entity would have recognized a $(2) loss (BACV less Par), and investment income of $2
(Consideration less Par).
© 2015 National Association of Insurance Commissioners
10
Attachment 6
Ref #2015-04
Example 2 - Call Price Could be Greater Than BACV
12/31/2008 – Issuance of Bond. Par = 100 / 10 Year Bond (Matures 12/31/2018)
1/1/2009 – Call Date / Call Price 107
12/15/2010 – Reporting Entity Acquires Bond. Cost = 104
1/1/2012 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 106
1/1/2014 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 103
1/1/2016 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 102
The bolded numbers represent the lowest asset value:
Date
Action
Cost
12/15/2010
Acquired
104
12/31/2011
Lock Out
Period
106
104
1/1/2012
Call Date
106
104
12/31/2012
Year-End
Reporting
103.5
12/31/2013
Year-End
Reporting
103
1/1/2014
Call Date
12/31/2014
12/31/2015
1/1/2016
Year-End
Reporting
Year-End
Reporting
Call Date
Exercised
Call Price
BACV
(Under Call
Date / Price)
Amortization
To the
Lowest Asset
Value
BACV
Under
Standard
Amortization
104
0.5
103.50
104
103
103.50
0.5
0.5
103
102
103
102.50
102.50
102.5
0.5
102
102
0.5
101.50
102
101.50
Standard Amortization
This table shows the amortization with a purchase date of 12/15/2010 at $104 through the maturity date of 12/31/2018.
12/31/2011 12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/15/2010
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
Amortization
103.50
103
102.50
102
101.50
101
100.50
100
BACV
Consideration
Par Value
BACV at Disposal Date
Net Realized
Gain/Loss*
1/1/2016
102
100
101.50
0.50
Call Exercised
* As detailed in item 1, staff is recommending revisions to reflect all penalties/fees received from an issuer calling a
bond to be included with gains/losses. With the proposed revisions, the difference from par and the prepayment
penalty are netted to reflect $0.50 as the total gain. If the existing guidance in SSAP No. 26 had been followed, the
entity would have recognized a $(1.50) loss (BACV less Par), and investment income of $2 (Consideration less Par).
With the proposed revisions, these are netted to reflect 0.50 as the total gain.
© 2015 National Association of Insurance Commissioners
11
Attachment 6
Ref #2015-04
Example 3 - Call Price Could be Greater Than BACV
12/31/2008 – Issuance of Bond. Par = 100 / 10 Year Bond (Matures 12/31/2018)
1/1/2009 – Call Date / Call Price 107
12/15/2010 – Reporting Entity Acquires Bond. Cost = 104
1/1/2012 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 106
1/1/2014 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 102
1/1/2016 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 101
Note – This illustration shows that the evaluation of whether standard amortization (to the maturity
date) or the call date / price may change over the time. The bolded numbers represent the lowest
asset value:
Date
Action
Cost
12/15/2010
Acquired
104
12/31/2011
Lock Out
Period
106
104
1/1/2012
Call Date
106
104
12/31/2012
Year-End
Reporting
103
12/31/2013
Year-End
Reporting
102
1/1/2014
Call Date
12/31/2014
12/31/2015
1/1/2016
Year-End
Reporting
Year-End
Reporting
Call Date
Exercised
Call Price
BACV
(Under Call
Date / Price)
Amortization
To the
Lowest Asset
Value
BACV
Under
Standard
Amortization
0.5
103.50
104
102
103.50
0.5
1
102.50
102.50
102
101
103
101.5
0.5
102
101
0.5
101.50
101
101.50
Standard Amortization
This table shows the amortization with a purchase date of 12/15/2010 at $104 through the maturity date of 12/31/2018.
12/31/2011 12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/15/2010
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
Amortization
103.50
103
102.50
102
101.50
101
100.50
100
BACV
Consideration
Par Value
BACV at Disposal Date
Net Realized
Gain/Loss*
1/1/2016
101
100
101
0
Call Exercised
* As detailed in item 1, staff is recommending revisions to reflect all penalties/fees received from an issuer calling a
bond to be included with gains/losses. Since the BACV equaled the consideration received (which includes the
prepayment penalty), there is no gain or loss recognized on this transaction. If the existing guidance in SSAP No. 26
had been followed, the entity would have recognized a $(1) loss (BACV less Par), and investment income of $1
(Consideration less Par).
© 2015 National Association of Insurance Commissioners
12
Attachment 6
Ref #2015-04
Example 4 – Continuously Callable Bond - Callable at Par After Initial Lock-Out Period
12/31/2008 – Issuance of Bond. Par = 100 / 10 Year Bond (Matures 12/31/2018)
1/1/2009 – Call Date / Call Price 107 – Continuously Callable Thereafter at Par
12/15/2010 – Reporting Entity Acquires Bond. Cost = 104
The bolded numbers represent the lowest asset value:
Date
Amortization
To the
Lowest Asset
Value
4
BACV
Under
Standard
Amortization
Action
Cost
12/15/2010
Acquired
104
12/31/2010
Year-End
Reporting
100
100
12/31/2011
Year-End
Reporting
100
100
12/31/2012
Year-End
Reporting
100
100
12/31/2013
Year-End
Reporting
100
100
100
100
100
100
101.50
100
100
101.50
12/31/2014
12/31/2015
1/1/2016
Year-End
Reporting
Year-End
Reporting
Year-End
Reporting
Call Price
BACV
(Under Call
Date / Price)
100
104
103.50
There is no
subsequent
amortization
as the
premium was
fully
expensed at
acquisition.
103
102.50
102
Standard Amortization
This table shows the amortization with a purchase date of 12/15/2010 at $104 through the maturity date of 12/31/2018.
12/31/2011 12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/15/2010
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
Amortization
103.50
103
102.50
102
101.50
101
100.50
100
BACV
Consideration
Par Value
BACV at Disposal Date
Net Realized
Gain/Loss*
1/1/2016
100
100
100
0
Call Exercised
* As detailed in item 1, staff is recommending revisions to reflect all penalties/fees received from an issuer calling a
bond to be included with gains/losses. Since the call price is par, and could occur immediately after acquisition, the
premium is immediately expensed. When the bond is called, there is no gain or loss as the consideration received
equals the BACV.
© 2015 National Association of Insurance Commissioners
13
Attachment 6
Ref #2015-04
Example 5 – Continuously Callable Bond - Callable at Set Price After Initial Lock-Out Period, then
with Make Whole call Provision
June 2015 Update: As noted above, this example should not be considered in the application of the
concept Yield to Worst
12/31/2008 – Issuance of Bond. Par = 100 / 10 Year Bond (Matures 12/31/2018)
1/1/2009 – Call Date / Call Price 107
12/15/2010 – Reporting Entity Acquires Bond. Cost = 106
1/1/2010 – Continuously Callable at 104 through 12/31/2014
1/1/2015 – Subsequently Callable At Make Whole Provision Price. Price is calculated by contractual
terms and will fluctuate throughout the life of the bond. For purposes of this example:
•
12/31/2015 – Calculated Make Whole Price is 102
•
12/31/2016 – Calculated Make Whole Price is 100.50
The bolded numbers represent the lowest asset value:
Action
Cost
Call Price
12/15/2010
Acquired
106
104
104
12/31/2010
Year-End
Reporting
104
104
12/31/2011
Year-End
Reporting
104
103.5
0.50
103.50
12/31/2012
Year-End
Reporting
104
103
0.50
103
104
102.50
0.50
102.50
104
102
0.50
102
102
101.50
0.50
101.50
100.50
100.50
1.00
101
12/31/2013
12/31/2014
12/31/2015
12/31/2016
Year-End
Reporting
Year-End
Reporting
Year-End
Reporting
Year-End
Reporting
Make
Whole
Make
Whole
Amortization
to Lowest
Asset Value
2
BACV
Under
Standard
Amortization
BACV
(Under Call
Date / Price)
Date
104
Standard Amortization
This table shows the amortization with a purchase date of 12/15/2010 at $104 through the maturity date of 12/31/2018.
12/31/2011 12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/15/2010
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
Amortization
103.50
103
102.50
102
101.50
101
100.50
100
BACV
Consideration
Par Value
BACV at Disposal Date
Net Realized
Gain/Loss*
1/1/2017
100.50
100
100.50
0
Call Exercised
* As detailed in item 1, staff is recommending revisions to reflect all penalties/fees received from an issuer calling a
bond to be included with gains/losses. Since the BACV equaled the consideration received (which includes the
prepayment penalty), there is no gain or loss recognized on this transaction. If the existing guidance in SSAP No. 26
had been followed, the entity would have recognized a $(.5) loss (BACV less Par), and investment income of $.5
(Consideration less Par). For Bonds containing Make Whole Call Provisions, unless specifically identified in the
contract terms, companies are often unable to determine the portion that is considered a prepayment penalty and the
portion that reflects the net expected cash flows.
© 2015 National Association of Insurance Commissioners
14
Attachment 6
Ref #2015-04
Example 6 – Make Whole Call Provision Bond - No Other Call Provisions
June 2015 Update: As noted above, this example should not be considered in the application of the
concept Yield to Worst
12/31/2008 – Issuance of Bond. Par = 100 / 10 Year Bond (Matures 12/31/2018)
1/1/2009 – Call Date / Call Price = 107
12/15/2010 – Reporting Entity Acquires Bond. Cost = 108
12/15/2010– Make Whole Call Provision Price = 106
Make Whole Provision effective throughout life of bond. Price is calculated by contractual terms and will
fluctuate throughout the life of the bond. The Make Whole Price shown in the table below is presumed to
be calculated as of the noted date. As noted in this example, the amortization shall be the minimum of the
standard amortization based on the original terms of the bond, however, a review of the make whole call
provisions must occur at each reporting date to ensure the bond is reported at the lowest asset value under
the yield-to-worst concept. The bolded numbers represent the lowest asset value:
Action
Cost
Make Whole
Call Price
12/15/2010
Acquired
108
106
BACV
(Under
Make
Whole)
106
12/31/2010
Year-End
Reporting
106
106
12/31/2011
Year-End
Reporting
105.5
105.5
0.75
105.25
12/31/2012
Year-End
Reporting
105
105
0.75
104.50
103.5
103.5
1.0
103.75
103
103
0.50
103
102.5
102.5
0.75
102.25
104
102
0.75
101.50
Date
12/31/2013
12/31/2014
12/31/2015
12/31/2016
Year-End
Reporting
Year-End
Reporting
Year-End
Reporting
Year-End
Reporting
Amortization
to Lowest
Asset Value
BACV Under
Standard
Amortization
2
106
Standard Amortization
This table shows the amortization with a purchase date of 12/15/2010 at $104 through the maturity date of 12/31/2018.
12/31/2011 12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/15/2010
0.75
0.75
0.75
0.75
0.75
0.75
0.75
0.75
Amortization
105.25
104.50
103.75
103
102.25
101.50
100.75
100
BACV
Consideration
Par Value
BACV at Disposal Date
Net Realized
Gain/Loss*
1/1/2017
104
100
101.5
2.5
Call Exercised
* As detailed in item 1, staff is recommending revisions to reflect all penalties/fees received from an issuer calling a
bond to be included with gains/losses. With the proposed revisions, the difference from par and the prepayment
penalty are netted to reflect $2.5 as the total gain. If the existing guidance in SSAP No. 26 had been followed, the
entity would have recognized a $(1.5) loss (BACV less Par), and investment income of $4 (Consideration less Par).
For Bonds containing Make Whole Call Provisions, unless specifically identified in the contract terms, companies
are often unable to determine the portion that is considered a prepayment penalty and the portion that reflects the net
expected cash flows.
© 2015 National Association of Insurance Commissioners
15
Attachment 6
Ref #2015-04
Example 7 – Bond is Continuously Callable and Contains Make Whole Call Provisions
June 2015 Update: As noted above, this example should not be considered in the application of the
concept Yield to Worst
(Staff Note – Staff is under the impression that if a bond includes both scheduled and make whole
call provisions, the holder would receive the greater amount. In other words, the company would
not be able to call a bond under a make whole provision for less than what they would have to pay
under the next scheduled call date. However, comments on whether this is consistent with market
practices are welcome.)
12/31/2008 – Issuance of Bond. Par = 100 / 10 Year Bond (Matures 12/31/2018)
1/1/2009 – Call Date / Call Price = 107
12/15/2010 – Reporting Entity Acquires Bond. Cost = 108
12/15/2010 – First Make Whole Call Provision Price = 108
1/1/2012 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 106
1/1/2014 – Scheduled Call Date Subsequent to Reporting Entity Acquisition. Call Price 103
Subsequent to 1/1/2014 – Make Whole Call Provisions Calculated as Follows:
• 12/31/2014 – Make Whole 105
• 12/31/2015 – Make Whole 104
• 12/31/2016 – Make Whole 103
As it is presumed (see staff note) that the entity would always receive the greater of the make
whole call provision or the next scheduled call price, the make whole call provisions would not
result in the lowest asset value until after the last scheduled call date. As such the make whole
call provisions are not a factor in the yield to worst assessment until after the last scheduled call
date.
Amortization
to the Lowest
Value
BACV
Under
Standard
Amortization
108
Action
Cost
12/15/2010
Acquired
108
12/31/2011
Lock Out
Period
1/1/2012
Call Date
12/31/2012
Year-End
Reporting
104.5
1.5
106
12/31/2013
Year-End
Reporting
103
1.5
105
1/1/2014
Call Date
Date
12/31/2014
12/31/2015
12/31/2016
Year-End
Reporting
Year-End
Reporting
Year-End
Call Price
BACV
(Under Call
Date / Price)
108
106
106
Make
Whole
Make
Whole
Make
2
107
107
106
103
103
105
102.4
.6
104
104
101.8
.6
103
103
101.2
.6
102
© 2015 National Association of Insurance Commissioners
16
105
Attachment 6
Ref #2015-04
1/1/2017
Reporting
Whole
Call
Exercised
Make
Whole
103
101.2
102
Standard Amortization
This table shows the amortization with a purchase date of 12/15/2010 at $108 through the maturity date of 12/31/2018.
12/31/2011 12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/15/2010
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
Amortization
107
106
105
104
103
102
101
100
BACV
Consideration
Par Value
BACV at Disposal Date
Realized Gain/Loss*
1/1/2017
103
100
101.2
1.8
Call Exercised
* As detailed in item 1, staff is recommending revisions to reflect all penalties/fees received from an issuer calling a
bond to be included with gains/losses. With the proposed revisions, the difference from par and the prepayment
penalty are netted to reflect $1.0 as the total gain. If the existing guidance in SSAP No. 26 had been followed, the
entity would have recognized a $(1.2) loss (BACV less Par), and investment income of $3 (Consideration less Par).
For bonds containing make whole call provisions, unless specifically identified in the contract terms, companies are
often unable to determine the portion that is considered a prepayment penalty and the portion that reflects the net
expected cash flows.
© 2015 National Association of Insurance Commissioners
17
This page intentionally left blank.
Attachment 7
Ref #2015-23
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Prepayment Penalties and Presentation of Callable Bonds – Bifurcation of Agenda Item 2015-04
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
Based on comments received from interested parties, staff recommended that the Working Group
bifurcate the contents of agenda item 2015-04: Prepayment Penalties and Amortization of Callable Bonds
into two separate Form A’s. The topic of amortization on callable bonds (including bonds with make
whole call provisions) will continue to be documented in agenda item 2015-04; with the topics of
accounting for prepayment penalties and presentation of callable bonds (including make whole call
provisions) being documented in this agenda item (2015-23).
SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities currently has guidance requiring
prepayment penalties and acceleration fees received upon liquidation of a bond prior to its scheduled
termination date to be reported as investment income upon receipt. However, this guidance is conflicting
with existing annual statement instructions, as well as how information currently flows on Schedule DPart 4. Furthermore, with the differences in types of calls (e.g., make-whole call provisions), the
“penalty” may not be as easily identifiable (e.g., a standard call price of 105 indicates a penalty of 5).
This agenda item requests Working Group direction on how they would like to proceed with the
accounting treatment of prepayment penalties and acceleration fees, either as investment income (current
SSAP No. 26 guidance) or as realized capital gains (subject to authoritative literature within SSAP No.
7—Asset Valuation Reserve and Interest Maintenance Reserve). A key issue discussed throughout this
document and posed to the Working Group, is whether they believe that prepayment penalties should be
reflected within IMR, or if the current accounting treatment is appropriate. To illustrate the impact to IMR
under the current accounting treatment (investment income) and the proposed option of realized capital
gains, staff has documented examples below.
Investment Income
1/1/2016
Call
Exercised
Consideration
Par
Value
BACV
at
Disposal
Date
Gain
(Loss)
BACV-Par
Penalty
Investment
Income
Consideration-Par
Decrease to
IMR**
104
100
102
(2)
4
2
** As illustrated, the holder of the bond recognizes two accounting benefits at the exercise date; 1)
The loss recognized (BACV less Par) will decrease the IMR liability (balance sheet benefit) and 2)
The penalty recognized as investment income (Consideration less Par) would increase revenue
(income statement benefit).
© 2015 National Association of Insurance Commissioners
1
Attachment 7
Ref #2015-23
Realized Capital Gains
1/1/2016
Call
Exercised
Consideration
Par
Value
BACV
at
Disposal
Date
Gain
(Loss)
BACV-Par
Penalty
Gain (Loss)
Consideration-Par
Net
Increase to
IMR*
104
100
102
(2)
4
2
* As detailed above, if this scenario was accounted for under the current accounting treatment of
investment income, the holder of the bond would recognize two accounting benefits at exercise date.
As shown in this table, the gains/losses at the exercise date offset, leaving an increase to the IMR
liability of 2.
To determine the consistency of reporting (on Schedule D-Part 4) across entities for a bond called under a
make whole call provision, staff reviewed a CUSIP, which impacted 21 reporting entities, noting that 15
of the entities reported the difference between Consideration and BACV (at the call date) within the
Realized Gain/Loss Column (Col. 18) and with no investment income recorded in column 20 (therefore
differing from SSAP No. 26 and Schedule D-Part 4 instructions). Additionally, these 15 entities all
reported bond interest equal to the same percentage of Par in column 20. Therefore, it appears that (at
least for purposes of Schedule D-Part 4) some entities are electing to record the prepayment penalties
as realized gains and not within investment income. For those entities using this reporting, staff
welcomes comments on whether these balances are included or excluded from the IMR calculation.
Existing Authoritative Literature:
SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities:
14.
A bond may provide for a prepayment penalty or acceleration fee in the event the bond is
liquidated prior to its scheduled termination date. Such fees shall be reported as
investment income when received.
SSAP No. 37—Mortgage Loans:
(Staff Note: Similar language is also included in SSAP No. 37 for investment income.)
11.
A mortgage loan may provide for a prepayment penalty or acceleration fee in the event
the loan is liquidated prior to its scheduled termination date. Such fees shall be reported as
investment income when received.
SSAP No. 43R—Loan-Backed and Structured Securities:
(Staff Note: Similar language is also included in SSAP No. 43R for investment income.)
11.
A loan-backed or structured security may provide for a prepayment penalty or
acceleration fee in the event the investment is liquidated prior to its scheduled termination date.
These fees shall be reported as investment income when received.
Additional Information – Superseded SSAP Guidance:
INT 99-04: Recognition of Prepayment Penalties Upon Adoption of Codification:
1.
SSAP No. 37 requires insurers to report a prepayment penalty or acceleration fee as
investment income when received. Currently, some insurers record these fees as realized gains
and thus amortize them through IMR. SSAP No. 37 also stipulates a change resulting from the
© 2015 National Association of Insurance Commissioners
2
Attachment 7
Ref #2015-23
adoption of the statement be accounted for as a change in accounting principle. Upon adoption of
Codification, it is probable that some insurers might continue to amortize the existing gain
included in IMR and recognize subsequent fees as investment income.
2.
Should an insurer release all unamortized amounts included in IMR and related to
prepayment penalties upon adoption of Codification and recognize such change in accordance
with SSAP No. 3— Accounting Changes and Corrections of Errors (SSAP No. 3)?
INT 99-04 Discussion
3.
The working group reached a consensus to instruct insurer’s to release all unamortized
amounts included in IMR related to prepayment penalties upon adoption of Codification and
recognize such change in accordance with SSAP No. 3.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): The topic addressed in this
agenda item was previously discussed and exposed for comment at the Spring 2015 National Meeting, as
outlined in agenda item 2015-04. Comment Letters addressing agenda item 2015-04 are included as
an attachment to the Summer 2015 National Meeting Materials.
As detailed in the INT 99-04 excerpt above, prior to codification, some insurers were recording
prepayment penalties and acceleration fees on mortgage loans as realized gains and amortizing through
IMR. While the intent of INT 99-04 was to no longer have prepayment penalties or acceleration fees
recognized as realized gains upon adoption of Codification (and release all unamortized amounts within
IMR); it was noted, through discussions with regulators and interested parties, that some insurers would
still record these fees as realized gains and amortize through IMR. If the Working Group chooses to
recognize prepayment penalties and acceleration fees as realized capital gains for bonds, staff also
recommends revisions to SSAP No. 37—Mortgage Loans to clarify this accounting treatment.
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
Summary: It is recommended that the Working Group move agenda item 2015-23 to the
nonsubstantive active listing and expose for comment three potential options for the accounting and
presentation treatment for prepayment penalties. The three options include: 1) maintaining current
treatment of investment income, 2) reported as realized capital gains, subject to the authoritative
literature within SSAP No. 7—Asset Valuation Reserve and Interest Maintenance Reserve and 3)
reported as realized capital gains, but excluded from the calculation of IMR. Based on comments
received, it is requested that the Working Group direct staff on the accounting and presentation
treatment they prefer. Based on the Working Group’s direction, staff will prepare revisions (for
exposure at a future meeting of the Working Group) to SSAP Nos. 26, 37 and 43R (as applicable) and the
Annual Statement Blanks and Instructions (as applicable) to clarify the accounting treatment and
reporting presentation for prepayment penalties and acceleration fees.
As further detailed in the “Additional Discussion” section, staff request comments from the Working
Group and interested regulators on the following:
•
Do the current instructions/schedules for IMR provide the appropriate level of detail for
review and analysis, or would additional schedules and/or instructions be beneficial?
•
Would a disclosure pertaining to callable bonds (including make whole call provisions)
would be beneficial?
© 2015 National Association of Insurance Commissioners
3
Attachment 7
Ref #2015-23
Additional Discussion Supporting the Proposed Accounting Treatments of Prepayment Penalties:
As noted throughout the agenda item and comments received from interesting parties, the key issue
surrounding prepayment penalties is whether the penalties should be subject to IMR and the authoritative
literature in SSAP No. 7. Based on review of interested parties’ comments and discussion with NAIC
staff, there appears to be diversity in the reporting of prepayment penalties, both on Schedule D and the
calculation of IMR. In addition, based on review of the Annual Statement Blanks and Instructions for
IMR, it appears that there is not a clear way for regulators to identify which individual securities were
included or excluded from the calculation of IMR.
While the intent of a make whole call provision is to make the bond holder “whole” if the issuer elects to
call the bond prior to maturity, it has been identified that an increasing number of bonds being called
under this provision are leading to negative total returns for the bond holder. (A negative total return
is a LOSS to an insurer.) This occurs when the loss recognized (BACV less Par) exceeds the prepayment
penalty received (Consideration less Par). Additionally, research indicates that bonds containing make
whole call provisions have frequently been listed as “non-callable” on bond indexes. Therefore, there is
concern that an insurer could potentially be holding a callable bond as a result of the make whole call
provision and not be aware it is callable. Also, while there are instructions for Schedule D to identify
callable bonds, it appears that the reporting of this information is inconsistent across entities.
Based on the comments received, staff has documented three proposed options for the accounting
treatment of prepayment penalties. The purpose of these options is to provide greater transparency
regarding the reporting of callable bonds (including those with make whole call provisions) and
prepayment penalties. Staff recommends that the Working Group review these options and direct staff
to proceed with drafting revisions for the accounting treatment that they prefer.
Based on the direction elected by the Working Group, staff will proceed with drafting proposed revisions
to SSAPs, Annual Statement Blanks and Instructions (and draft a blanks proposal) and Disclosures.
Below, staff has identified the following areas to be considered by the Working Group for potential
revisions (if applicable based on WG direction). Staff welcomes comments from regulators and interested
parties on potential revisions to aid in the transparency and reporting of callable bonds, including those
with make whole call provisions.
Staff Note: The Investment Reporting (E) Subgroup is currently discussing revisions to the presentation of
Schedule D. The actions taken by this subgroup and the Blanks (E) Working Group will be considered
when drafting proposed revisions to Annual Statement Blanks and Instructions.
Schedule D-Part 1:
• Revisions to instructions/blanks to identify callable bonds, including those with make whole
call provisions
Schedule D-Part 4:
• Revisions to instructions/blanks to identify bonds that were sold, redeemed, or otherwise
disposed of as a result of a call provision (including make whole call).
• Revisions to instructions/blanks to identify the amount of investment income recognized as a
result of a call provisions (including make whole call).
IMR:
• Revisions to clarify the accounting treatment for prepayment penalties.
© 2015 National Association of Insurance Commissioners
4
Attachment 7
Ref #2015-23
SSAP Nos. 26, 37 and 43R:
• Revisions to clarify the accounting treatment for prepayment penalties.
• Revisions to SSAP No. 26 to create a disclosure pertaining to callable bonds (including bonds
with make whole call provisions).
Option One: Continued treatment as investment income (Penalties do not impact IMR)
Based on the current guidance within SSAP No. 26, paragraph 14, these prepayment and acceleration fees
are classified as investment income. The following would be recognized at the call date (when called
prior to scheduled termination date).
• Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Investment Income
• BACV in excess of Par (Premium) = Loss
• Par in excess of BACV (Discount) = Gain
Currently, Schedule D-Part 4 does not include a column specific for investment income. However, per the
Annual Statement instructions, the proportionate share of investment income directly related to the
securities reported shall be included within column 20 (Bond Interest/Stock Dividends Received during
the Year). If these fees continue to be reported as investment income, staff would recommend
revisions to Schedule D-Part 4, which would show the investment income generated upon disposal
of callable bonds (i.e. the prepayment penalty) as the current reporting comingles the penalty with
bond interest. Additionally, the annual statement instructions for Schedule D-Part 4, Column 18
specifies that the realized gain (loss) on disposal should be the difference between the Consideration
received (Column 7) and the Book Adjusted Carrying Value at Disposal Date (Column 16). If a portion
of the Consideration (for the penalty/fee) is deemed to be investment income (Column 20), then
revisions to the annual statement instructions for Column 18 would be needed to clarify the
presentation of disposals of callable bonds on Schedule D-Part 4.
During review of some entities Schedule D-Part 4, which had bonds disposed of as a result of a make
whole provision; balances reported were being manipulated (i.e. consideration, column 7), so the
appropriate gain/loss was shown in column 18 (i.e. the balance that would impact IMR), and the
remainder of the schedule balances flowed (with the prepayment penalty reflected in column 20). If the
Working Group elects to continue to have these fees reported as investment income, staff would
recommend that the Working Group consider whether they are concerned with the manipulation of
this schedule and whether revisions to the Annual Statement Instructions are necessary to eliminate
this manipulation.
Gains and losses incurred at the call date are recognized and documented on Schedule D Part 4, column
18 and are subject to authoritative literature (if applicable) within SSAP No. 7—Asset Valuation Reserve
and Interest Maintenance Reserve. Per the current accounting guidance in SSAP No. 26, the gain/loss
incurred at the call date is the difference between the BACV and Par.
Option Two: Reported as realized capital gains (Penalties subject to the IMR)
If prepayment penalties and acceleration fees were recognized as a gain upon liquidation the following
accounting would be recognized when the bond is called prior to scheduled termination date:
• Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Gain
• BACV in excess of Par (Premium) = Loss
• Par in excess of BACV (Discount) = Gain
© 2015 National Association of Insurance Commissioners
5
Attachment 7
Ref #2015-23
Under this option, the prepayment penalty would be included with other gains and losses (BACV in
excess of Par) and would be recognized and documented on Schedule D-Part 4, Column 18. With this
change, the “Consideration” (amount received) received in disposal of a bond would flow through
existing columns in Schedule D-Part 4. However, staff would still suggest clarification revisions to
annual statement instructions.
Gains and losses incurred at the call date will be subject to the authoritative literature (if applicable)
within SSAP No. 7—Asset Valuation Reserve and Interest Maintenance Reserve. SSAP No. 7, paragraphs
2-3 state the following (only applicable text included)
2.
The IMR defers recognition of the realized capital gains and losses resulting from
changes in the general level of interest rate. These gains and losses shall be amortized into
investment income over the expected remaining life of the investments sold.
3.
The IMR and AVR shall be calculated and reported as determined per guidance in the
SSAP for the specific type of investment (e.g. SSAP No. 43R for loan-backed and structured
securities), or if not specifically stated in the respective SSAP, in accordance with the NAIC
Annual Statement Instructions for Life and Accident and Health Insurance Companies.
In general, prepayment penalties on callable bonds (including bonds with make whole call provisions) are
structured to compensate the holder of the bond as a result of unfavorable interest rate fluctuations.
Therefore, as these penalties are derived to account for interest rate fluctuations, it appears that the
penalties fall under the concept of IMR, as stated in SSAP No. 7, paragraph 2 (see above).
As noted by interested parties in their comment letter (dated 5/26/15), if the Working Group elects to
recognize prepayment penalties as realized capital gains, a new difference between GAAP and SAP will
be created requiring insurers to audit and explain this difference. Through review of GAAP and
discussions with an AICPA representative, it was identified that GAAP guidance is not specific on the
presentation of prepayment penalties, but rather focuses on when recognition shall occur. Additionally, it
was identified that there are at least two views with respect to the treatment of prepayment penalties,
interest income and gain on settlement and both are acceptable with ample footnote disclosure.
Option Three: Reported as Realized Capital Gains (Penalties Excluded from IMR Calculation)
As noted above, it appears that (at least for purposes of Schedule D-Part 4) some entities are electing to
record the prepayment penalties as realized gains and not within investment income. Under this option,
the prepayment penalty would be included with other gains and losses (BACV in excess of Par) and
would be recognized and documented on Schedule D-Part 4, Column 18. With this change, the
“Consideration” (amount received) received in disposal of a bond would flow through existing columns in
Schedule D-Part 4. However, staff would still suggest clarification revisions to annual statement
instructions.
While the reporting of prepayment penalties on Schedule D-Part 4 is consistent between Options Two and
Three, the differentiating factor under Option Three is that these penalties would be reported on Schedule
D-Part 4 as realized gains/losses, but would not be subject the IMR calculation.
Staff Review Completed by:
Josh Arpin – July 2015
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H7 - 15-23 - Prepayment Penalties and
Presentation of Callable Bonds - Bifurication of Agenda Item 2015-04.docx
© 2015 National Association of Insurance Commissioners
6
Attachment 8
Ref #2015-13
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2015-04: Practical Expedient for the Measurement Date of An Employer’s Defined Benefit
Obligation and Plan Assets
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
ASU 2015-04: Practical Expedient for the Measurement Date of An Employer’s Defined Benefit
Obligation and Plan Assets (ASU 2015-04) was issued in April 2015 to address situations when reporting
entities are incurring more costs than other entities when measuring the fair value of plan assets of a
defined benefit pension or other postretirement benefit plan as a result of having a fiscal year-end that
does not coincide with a month-end. For these reporting entities, the amendments in ASU 2015-04
provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations
using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient
consistently from year to year. Also, the practical expedient should be applied consistently to all plans if
an entity has more than one plan.
Pursuant to SSAP No. 92—Accounting for Postretirements Benefits Other Than Pensions, paragraphs
106-108 and SSAP No. 102—Accounting for Pensions, paragraphs 88-91, companies are required to use a
year-end measurement date for benefit obligations and plan assets. As such, pursuant to existing statutory
accounting guidance, all reporting entities shall already be using a year-end measurement date and not a
fiscal date that differs from a year-end / month-end (Dec. 31) date.
Existing Authoritative Literature:
SSAP No. 92— Accounting for Postretirement Benefits Other Than Pensions (underlining and bolding
added for emphasis):
Effective Date and Transition
106.
The requirement to measure plan assets and benefit obligations as of the date of
the reporting entity’s financial statement year-end is effective for financial statement years
beginning January 1, 2014. (The measurement date change will be initially reflected in the
December 31, 2014, financial statements.)
SSAP No. 102— Accounting for Pensions (underlining and bolding added for emphasis):
Effective Date and Transition
88.
The requirement to measure plan assets and benefit obligations as of the date of
the reporting entity’s financial statement year-end is effective for financial statement years
beginning January 1, 2014. (The measurement date change will be initially reflected in the
December 31, 2014 financial statements.)
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
© 2015 National Association of Insurance Commissioners
1
Attachment 8
Ref #2015-13
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
With the existing statutory guidance requiring a year-end (Dec. 31) measurement date, staff recommends
that the Working Group move this item to the nonsubstantive active listing and expose
nonsubstantive revisions to SSAP Nos. 92 and 102 to reject ASU 2015-04 and maintain the current
statutory accounting treatment guidance.
Proposed Revisions to SSAP Nos. 92 and 102:
SSAP No. 92— Accounting for Postretirement Benefits Other Than Pensions
(New paragraph under Relevant Literature all remaining paragraphs & references will be updated)
101.
This statement rejects ASU 2015-04: Practical Expedient for the Measurement Date of
An Employer’s Defined Benefit Obligation and Plan Assets as statutory accounting requires
benefit obligations and plan assets to be measured as of a year-end measurement date.
SSAP No. 102— Accounting for Pensions
(New paragraph under Relevant Literature all remaining paragraphs & references will be updated)
83.
This statement rejects ASU 2015-04: Practical Expedient for the Measurement Date of
An Employer’s Defined Benefit Obligation and Plan Assets as statutory accounting requires
benefit obligations and plan assets to be measured as of a year-end measurement date.
Staff Review Completed by:
Josh Arpin - April 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 92 and SSAP No. 102, as
illustrated above, to reject ASU 2015-04 and maintain the current accounting treatment.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H8 - 15-13 ASU 2015-04 Practical Expedient
for the Measurement Date of An Employer’s Defined Benefit Obligation and Plan Assets.docx
© 2015 National Association of Insurance Commissioners
2
Attachment 9
Ref #2015-14
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Agenda Item 2015-14: SSAP No. 68 – Paragraph 7 Clarification on Goodwill Limitation
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
Questions have been presented to staff regarding the goodwill limitation test in paragraph 7 of SSAP No.
68—Business Combinations and Goodwill. Based on the information received, it appears, some
companies are broadly interpreting the phrase “acquiring entity’s capital and surplus” to complete
acquisitions at a holding company or “ultimate” parent level, and then using the capital and surplus from
the “acquiring” entity to determine the amount of goodwill admitted at each reporting entity. Staff
believes this is contrary to the original intent, and the approach to calculate the goodwill limitation test at
the reporting-entity’s capital and surplus.
Example:
•
Insurance Company A (which has a $15 million in capital and surplus) “acquires” SCA for $3
million. This purchase price reflects $500K in GAAP book value and $2.5 million in Goodwill. If
Insurance Company A retained the investment they would be permitted under SSAP No. 68 to
reflect a goodwill admitted asset on their books of $1.5 million.
•
However, Insurance Company A allocates 50% of the SCA to their 100% owned Insurance Entity
B, which has capital and surplus of $300K. Insurance Entity B reports an “Investment in SCA”
and uses the “acquiring” entities capital and surplus of $15 million to admit $1.25 of goodwill. If
Insurance Entity B had completed the goodwill limitation test on their own capital and surplus,
they would have only been able to admit $30K in goodwill.
The issue of companies using the consolidated position for the goodwill limitation test was previously
considered by the Statutory Accounting Principles (E) Working Group, and the Working Group revised
SSAP No. 68 pursuant to agenda item 2001-03. As noted in those revisions, the Working Group removed
the phrase “parent reporting entity’s capital and surplus” and replaced with “acquiring entity’s capital and
surplus” with the intent to clarify that the goodwill limitation test is done at the individual reporting
company level and not the consolidated level.
Existing Authoritative Literature:
SSAP No. 68 – Business Combinations and Goodwill
1.
Positive goodwill recorded under the statutory purchase method of accounting shall be
admitted subject to the following limitation: Positive goodwill from all sources, including life,
accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to 10%
of the acquiring entity’s capital and surplus as required to be shown on the statutory balance
sheet of the reporting entity for its most recently filed statement with the domiciliary state
commissioner adjusted to exclude any net positive goodwill, EDP equipment and operating
system software, and net deferred tax assets. When negative goodwill exists, it shall be recorded
© 2015 National Association of Insurance Commissioners
1
Attachment 9
Ref #2015-14
as a contra-asset. Positive or negative goodwill resulting from the purchase of an SCA, joint
venture, partnership or limited liability company shall be amortized to unrealized capital gains and
losses on investments over the period in which the acquiring entity benefits economically, not to
exceed 10 years. Positive or negative goodwill resulting from life, accident and health, and
deposit-type assumption reinsurance shall be amortized to operations as a component of general
insurance expenses over the period in which the assuming entity benefits economically, not to
exceed 10 years. Goodwill shall be evaluated separately for each transaction.(INT 01-18)
INT 01-18: Consolidated or Legal Entity Level – Limitations on EDP Equipment, Goodwill and
Deferred Tax Assets Admissibility
INT 01-18 Issue
1.
Case Number 1: The reporting entity has several wholly-owned insurance company
subsidiaries. The reporting entity will account for its investment in these subsidiaries at their
underlying statutory equity in accordance with SSAP No. 97—Investments in Subsidiary,
Controlled and Affiliated Entities, A Replacement of SSAP No. 88 (SSAP No. 97).
2.
Case Number 2: A reporting entity has deferred tax assets (DTAs) in excess of those that
are allowed to be admitted in accordance with the guidance in SSAP No. 101, paragraph 11. The
reporting entity files a consolidated tax return with one or more affiliates. Those affiliates have
deferred tax liabilities (DTLs) that exceed the remaining DTAs available for admission after
application of paragraphs 11.a. and 11.b. of SSAP No. 101 at the affiliates’ legal entity level.
3.
The accounting issues are:
Case Number 1:
When applying the limitations described in paragraph 11.b.ii of SSAP No. 101, paragraph
4 of SSAP No. 16R, and paragraph 7 of SSAP No. 68 to the parent reporting entity's
adjusted capital and surplus, is the reporting entity required to exclude any net deferred
tax assets, EDP equipment and operating system software, and net positive goodwill
included in its insurance subsidiaries’ valuation? Or, is the limitation calculated solely
based on the legal entity's adjusted capital and surplus?
The effect of looking solely at the legal entity is to allow for the "stacking" of intangibles,
so that the parent reporting entity may effectively have more than the defined limitations
“invested” in deferred tax assets, EDP equipment and operating system software and
goodwill. These assets are limited at each subsidiary legal entity level.
Case Number 2:
Can the reporting entity offset its DTAs against existing gross DTLs of an affiliated entity?
This offset would be pursuant to the allowance of an offset against existing DTLs under
SSAP No. 101 paragraph 11.c. This offset would occur only after application of
paragraphs 11.a. and 11.b. for both the reporting entity and the affiliate. The premise for
the offset is that both entities file a consolidated federal income tax return and that future
deductible items of the reporting entity are, by current tax law, able to offset future
income items of the affiliate. The affiliates for this purpose would have to have a tax
sharing agreement that required payment from one affiliate to another for loss usage.
INT 01-18 Discussion
4.
The Working Group reached a consensus as follows:
Case Number 1:
The Working Group reached a consensus that in applying the limitations described in
paragraph 11.b.ii. of SSAP No. 101, paragraph 4 of SSAP No. 16R, and paragraph 7 of
SSAP No. 68 to the parent reporting entity's adjusted capital and surplus, the reporting
© 2015 National Association of Insurance Commissioners
2
Attachment 9
Ref #2015-14
entity shall not exclude any net deferred tax assets, EDP equipment, and operating
system software, and net positive goodwill included in its insurance subsidiaries
valuation.
Case Number 2:
The Working Group reached a consensus that the reporting entity shall not offset it's
DTAs against existing gross DTLs of an affiliated entity.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): Agenda Item 2001-03: SSAP
No. 68 – Paragraph 7 Clarification of Goodwill Limitation.
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
Staff recommends that the Working Group move this item to the nonsubstantive active listing and
expose nonsubstantive revisions to SSAP No. 68 to further clarify that the goodwill limitation test is
done at the individual reporting company level and not at the consolidated level. This is also
consistent with INT 01-18: Consolidated or Legal Entity Level – Limitations on EDP Equipment,
Goodwill and Deferred Tax Assets Admissibility.
Proposed Revisions to SSAP No. 68
7.
Positive goodwill recorded under the statutory purchase method of accounting shall be
admitted subject to the following limitation: Positive goodwill from all sources, including life,
accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to 10%
of the acquiring1 entity’s capital and surplus as required to be shown on the statutory balance
sheet of the reporting entity for its most recently filed statement with the domiciliary state
commissioner adjusted to exclude any net positive goodwill, EDP equipment and operating
system software, and net deferred tax assets. When negative goodwill exists, it shall be recorded
as a contra-asset. Positive or negative goodwill resulting from the purchase of an SCA, joint
venture, partnership or limited liability company shall be amortized to unrealized capital gains and
losses on investments over the period in which the acquiring entity benefits economically, not to
exceed 10 years. Positive or negative goodwill resulting from life, accident and health, and
deposit-type assumption reinsurance shall be amortized to operations as a component of general
insurance expenses over the period in which the assuming entity benefits economically, not to
exceed 10 years. Goodwill shall be evaluated separately for each transaction.(INT 01-18)
Footnote 1: The “acquiring” entity is intended to reflect the insurance reporting entity that reports
the investment resulting in goodwill. The goodwill limitation test shall be completed at the
individual reporting company level and not at the consolidated level.
Staff Review Completed by:
Josh Arpin - April 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 68, as illustrated above,
to provide a consistency clarification that the goodwill limitation test is completed at the individual
reporting company level.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H9 - 15-14 SSAP 68 Clarification on Goodwill
Limitation Test.docx
© 2015 National Association of Insurance Commissioners
3
This page intentionally left blank.
Attachment 10
Ref #2015-15
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2015-05: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
ASU 2015-05: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05)
was issued in April 2015 to provide explicit GAAP guidance regarding a customer’s accounting for fees
paid in a cloud computing arrangement. The lack of such guidance has resulted in diversity in practice
and unnecessary costs and complexity. Examples of cloud computing arrangements include software as a
service, platform as a service, infrastructure as a service and other similar hosting arrangements.
The Financial Accounting Standards Board decided to add guidance to Subtopic 350-40, Intangibles—
Goodwill and Other—Internal-Use Software, which will help entities evaluate the accounting for fees
paid by a customer in a cloud computing arrangement. The guidance already exists in ASC paragraphs
985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to
determine whether an arrangement includes the sale or license of software.
The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing
arrangement includes a software license. If a cloud computing arrangement includes a software license,
then the customer should account for the software license element of the arrangement consistent with the
acquisition of other software licenses. If a cloud computing arrangement does not include a software
license, the customer should account for the arrangement as a service contract. Further, the amendments
in ASU 2015-05 will be effective beginning after December 15, 2015 for annual periods and December
15, 2016 for interim periods. Additionally, early adoption is permitted and can be applied prospectively or
retrospectively. For statutory accounting, these amendments are proposed to be adopted in advance of
GAAP and all amendments shall be applied prospectively.
The codification sections being revised by ASU 2015-05 were previously adopted (with modification,
paragraphs 11-42 and 93) for statutory accounting under AICPA Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use. As documented in SSAP
No. 16, paragraphs 10-11, which adopts FASB Codification 350-40, Internal Use Software (ASC 350-40)
with modification for statutory accounting terms and concepts.
Existing Authoritative Literature:
SSAP No. 16R— Electronic Data Processing Equipment and Software
Costs of Computer Software Developed or Obtained for Internal Use and Web Site
Development Costs
10.
This Statement adopts with modification FASB Codification 350-40, Internal Use
Software (ASC 350-40) for statutory accounting terms and concepts. This Statement also adopts
FASB Codification 350-50, Website Development Costs (ASC 350-50) in its entirety.
© 2015 National Association of Insurance Commissioners
1
Attachment 10
Ref #2015-15
11.
The modifications to ASC 350-40 are as follows:
a.
ASC 350-40-15-4 states that the accounting for costs of reengineering activities,
which often are associated with new or upgraded software applications, is not
included within scope. This guidance is expanded to require that such costs be
expensed as incurred.
b.
ASC 350-40-25-16 is amended to require that entities that license internal-use
computer software follow the operating lease provisions outlined in SSAP No.
22—Leases.
Relevant Literature
20.
This Statement references GAAP guidance in accordance with the current FASB
Codification. The references to the FASB Codification are intended to reflect the previously
adopted pre-codification GAAP guidance as communicated within SSAP No. 17, SSAP No. 81
and SSAP No. 82:
c.
The pre-codification GAAP guidance reflected within SSAP No. 82 and incorporated
within paragraphs 10 and 11 through reference to the FASB ASC 350-40 includes:
i.
AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use paragraphs 11-42 and
paragraph 93 were adopted with modification.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
Staff recommends that the Working Group move this item to the nonsubstantive active listing and
expose nonsubstantive revisions to SSAP No. 16R. As detailed above, SSAP No. 16R, paragraph 11.b,
detailed a modification to GAAP to require that entities that license internal-use computer software follow
the operating lease provisions outlined in SSAP No. 22—Leases. As clarification on the use of the SSAP
No. 22 guidance for software leases is still deemed appropriate based on existing statutory accounting
guidance, although there is no longer a direct GAAP modification as a result of ASU 2015-05, staff
recommends that the Working Group expose revisions SSAP No. 16R as proposed below.
SSAP No. 16R— Electronic Data Processing Equipment and Software
11.
The modifications to ASC 350-40 are as follows:
b. ASC 350-40-25-16 is amended to require that entities that license internal-use
computer software follow the operating lease provisions outlined in SSAP No. 22—
Leases.
(New paragraph under Costs of Computer Software Developed or Obtained for Internal Use and Web
Site Development Costs. All remaining paragraphs & references will be updated)
12. Entities that license internal-use computer software are required to follow the statutory
accounting guidance in SSAP No. 22—Leases.
© 2015 National Association of Insurance Commissioners
2
Attachment 10
Ref #2015-15
With this exposure, specific information is requested on whether guidance on cloud computing
arrangements is necessary for statutory accounting. Based on the information received, the
Working Group will subsequently consider adoption or rejection of the ASU.
Staff Review Completed by:
Josh Arpin - April 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 16R, as illustrated above,
to clarify that entities that license internal-use computer software are required to follow the lease
provisions outlined in SSAP No. 22.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H10 - 15-15 ASU 2015-05-Fees Paid in a
Cloud Computing Arrangement.docx
© 2015 National Association of Insurance Commissioners
3
This page intentionally left blank.
Attachment 11
Ref #2015-18
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Policy Statement Revisions – Membership and Roles of SAPWG
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
The formation of the Statutory Accounting Principles (E) Working Group and the Emerging Accounting Issues
(E) Working Group were originally based on the structure of the U.S. FASB and the related FASB Emerging
Issues Task Force (EITF). With the U.S. GAAP movement in 2009 that mandated the FASB Codification as the
only source of authoritative GAAP, and the related revisions that required all changes to the FASB Codification
to be reflected in a FASB Accounting Standards Update (ASU), all newly issued FASB standards, regardless if
they reflect a consensus opinion of the EITF or the Private Company Council, are considered by the SAPWG.
This change has effectively resulted with only statutory-specific interpretations being considered by the EAIWG,
and has resulted in some confusion over which group should consider specific topics, which has caused some
delays in discussion. (For example, when discussing the risk-adjustment programs of the ACA, identification of
the need for related SSAP revisions halted the discussion at the EAIWG, and required a referral to the SAPWG.
This hindered further progress until a subsequent meeting of the SAPWG.)
This agenda item proposes to revise the NAIC Policy Statements reflected in Appendix F of the NAIC Accounting
Practices and Procedures Manual (AP&P Manual) to effectively disband the EAIWG and revise the SAPWG
procedures to incorporate an interpretation process. As detailed within this proposal, although the EAWIG would
officially be disbanded, the SAPWG membership is requested to be increased to 15 members with the additional
two positions assumed by the two members of the EAIWG that are not currently also on the SAPWG. The
following chart illustrates the states currently on the SAPWG and EAIWG, and the proposed resulting SAPWG
membership:
SAPWG - 13
Ohio – Chair
Iowa – Vice Chair
California
Delaware
Illinois
Louisiana
Michigan
New Hampshire
New York
Pennsylvania
Texas
Virginia
Wisconsin
EAIWG - 13
Iowa – Chair
Ohio – Vice Chair
Alabama
California
Connecticut
Illinois
Louisiana
Michigan
New York
Pennsylvania
Texas
Virginia
Wisconsin
New SAPWG - 15
Ohio – Chair
Iowa – Vice Chair
Alabama
California
Connecticut
Delaware
Illinois
Louisiana
Michigan
New Hampshire
New York
Pennsylvania
Texas
Virginia
Wisconsin
This proposal is intended to allow the same functionality at the SAPWG that has been present within the two
separate groups, but to consolidate the groups to prevent confusion in the development of AP&P Manual
revisions.
© 2015 National Association of Insurance Commissioners
1
Attachment 11
Ref #2015-18
Existing Authoritative Literature:
Policy Statements in Appendix F of the AP&P Manual are not included in the statutory hierarchy and are not
considered accounting guidance. These are included as policy procedures and included in the Manual as
informational purposes only.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC, FASB,
other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None
Staff Recommendation:
Staff recommends that the Working Group expose for comments the concept of disbanding the Emerging
Accounting Issues (E) Working Group, with the Statutory Accounting Principles (E) Working Group
incorporating a new process to issue interpretations and increasing membership by two. It is also
recommended that the Working Group direct staff to work with regulators in drafting proposed revisions
to the Policy Statements (Appendix F) to incorporate guidance to reflect procedures and/or insert clarity on
the current process of the Working Group. These revisions will be discussed at a subsequent meeting of the
Working Group.
Staff Review Completed by:
Julie Gann – May 6, 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the nonsubstantive
active listing and exposed the proposed concept change to disband the Emerging Accounting Issues (E) Working
Group, with the SAPWG incorporating a new process to issue interpretations and to increase their membership by
two. The Working Group directed staff to work with regulators in drafting revisions to the Policy Statements to
reflect these procedures and to incorporate other components that reflect the current process of the Working
Group.
July 2, 2015 – Staff drafted recommended revisions include the following:
1. Deletes the references to the Emerging Accounting Issues (E) Working Group and its processes and gives
the SAPWG the ability to issue interpretations, using similar voting thresholds as the EAIWG. These
revisions also expand the SAPWG membership from 13 to 15 with the intent that the prior members of
EAIWG not already on SAPWG would become members of the SAPWG.
2. Adds detail regarding substantively revised statements and nonsubstantive changes to reflect current
practice. These revisions include deletion of the maintenance agenda flowchart.
3. Proposes minor revisions to other policy statements (e.g., deleting the form to communicate impact to
other publications as it is not historically used), as well as adds reference providing the ability to comment
on IASB exposure drafts.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H11 - 15-18 Policy Statement Revisions - 7-1-2015 Tracked.docx
© 2015 National Association of Insurance Commissioners
2
Attachment 11
Ref #2015-18
Appendix F
Policy Statements
Introduction
The Policy Statements contained within Appendix F are not included within the Statutory Hierarchy and
thus should not be considered accounting guidance. As such, the Policy Statements are included for
informational purposes only.
Table of Contents
Title
Page
NAIC Policy Statement on Maintenance of Statutory Accounting Principles .................................
F-1
NAIC Policy Statement on Comments to GAAP & IFRS Exposure Drafts ....................................
F-3
NAIC Policy Statement on Statutory Accounting Principles Maintenance Agenda
Process .......................................................................................................................................
F-5
NAIC Policy Statement on Emerging Accounting Issues Agenda Process .....................................
F-9
NAIC Policy Statement on the Impact of Statements of Statutory Accounting Principles
on NAIC Publications ................................................................................................................
F-11
NAIC Policy Statement on Coordination of the Accounting Practices and Procedures
Manual and the Annual Statement Blank ..................................................................................
F-13
© 2015 National Association of Insurance Commissioners
3
Attachment 11
Ref #2015-18
NAIC Policy Statement on
Maintenance of Statutory Accounting Principles
Statutory accounting principles (SAPs) provide the basis for insurers to prepare financial statements to be
filed with and utilized by state insurance departments for financial regulation purposes. Accuracy and
completeness of such filings are critical to meaningful solvency monitoring. Accordingly, maintenance of
SAP guidance for changes in the industry and changes in regulatory concerns is vital to preserving the
usefulness of SAP financial statements.
The promulgation of new or revised SAP guidance by the NAIC ultimately requires action of the entire
membership. Responsibility for proposing new or revised SAP will be delegated through the NAIC
committee structure to the Accounting Practices and Procedures (E) Task Force (Task Force). The Task
Force will employcharge two working groups with distinctly different functions to carry out the charge of
maintaining SAP. Tthe Statutory Accounting Principles (E) Working Group (SAPWG) with the exclusive
responsibility of to developing and proposeing new Statements of Statutory Accounting Principles
(SSAPs), to revise existing SSAPs, . The Emerging Accounting Issues (E) Working Group (EAIWG)
willand to issue interpretationsthat are generally much narrower in scope than development of a new
SSAP.
Composition of the Working GroupsStatutory Accounting Principles (E) Working Group
The chair of the Task Force shall determine membership on both working groupsof the Statutory
Accounting Principles (E) Working Group subject to approval by the Financial Condition (E) Committee.
The groups Statutory Accounting Principles (E) Working Group shall be limited in size to no more than
135 members and will include representation from the four zones of the NAIC. Membership shall be
vested in the state (until such time as the membership may be changed) but continuity of individuals, to
the extent possible, is extremely desirable.
Development of New or Substantively-Revised SSAPs
New or substantively revised SSAPs will be developed from time-to-time that: 1) address issues not
covered by existing SAP guidance; 2) amend existing SSAPs; or, 3) supersede existing SSAPs. The
decision to undertake development of a new or substantively revised SSAP will rest with the SAPWG
subject to approval of the Task Force. The SAPWG will report to the Task Force on its actionsagenda and
progress, if any, at each national meeting of the NAIC. New SSAPs or substantively-revised SSAPs have
a specified effective date.
As new Statements of Statutory Accounting Principles (SSAPs) are developed, it is essential to review
and, if necessary, update the status of Interpretations of the Emerging Accounting Issues (E) Working
Group related to the SSAPs that are being replaced and/or the new SSAP being developed.
The following list of options is available to the SAPWG when a SSAP with existing interpretations is
replaced:
a.
Interpretation of the new SSAP - If the SAPWG would like to maintain the
Interpretation, the new SSAP can be added to the list of statements interpreted by the
Interpretation. In addition, the status section of the new SSAP will list the Interpretation
number next to the heading “Interpreted by.”
b.
Nullification - When an Interpretation is nullified by a subsequent SSAP or superseded
by another Interpretation, the Interpretation is deemed no longer technically helpful, is
© 2015 National Association of Insurance Commissioners
4
Attachment 11
Ref #2015-18
shaded and moved to Appendix H (Superseded SSAPs and Nullified Interpretations), and
the reason for the change is noted beneath the title of the Interpretation. The status section
of the SSAP describes the impact of the new guidance and the effect on the Interpretation
(for example, nullifies, incorporated in the new SSAP with paragraph reference, etc.).
c.
Incorporation - When an Interpretation is incorporated into a new SSAP, the SAPWG
can choose from the following two options:
i.
If the Interpretation only interprets one SSAP, then the Interpretation is listed as
being nullified under the “affects” section of the SSAP and the Interpretation is
not referenced under the “interpreted by” section of the status page of the SSAP.
ii.
If the Interpretation references additional SSAPs, and the SAPWG intends to
maintain the guidance, the Interpretation is unchanged (no nullification). The
new SSAP (Summary of Issue section) reflects that the Interpretation issue has
been incorporated into the new statement.
Research and drafting on new or substantively revised SSAPs will be performed by the NAIC staff under
the direction and supervision of the SAPWG which may enlist the assistance of interested parties with
requisite technical expertise as needed or desired. The first step in developing new and substantively
revised SSAPs will usually be the drafting of an Issue Paper (IP), which will contain summary
conclusion, discussion and relevant literature sections. Public comment will be solicited on the IPs, and at
least one public hearing will be held on an IP before it is converted to a SSAP. Upon approval by the
SAPWG, all proposed SSAPs will be exposed for public comment for a period commensurate with the
length of the draft and the complexities of the issue. Adoption of the new or substantively revised SSAPs
by the SAPWG, after hearing and any further amendments, may be by simple majority. If comments are
not received during the public comment period, the SAPWG may adopt the proposal collectively (one
motion/vote) with other “non-contested” positions after opportunity is given during the hearing to
separately discuss the proposal.
The Working Group may, by majority vote, elect to combine the IP and SSAP process, resulting in
concurrent exposure of the two documents. Additionally, the Working Group may, by simple majority
vote, agree to forego completion of an IP and only proceed with a new or substantively revised SSAP.
With these elections, substantive revisions can be adopted after one hearing.
If accounting guidance, reserving standards, asset valuation standards, or any other standards or rules
affecting accounting practices and procedures are first developed by other NAIC working groups, task
forces, subcommittees, or committees, such guidance, standards or rules must be reviewed by the
SAPWG and converted to an SSAP or a revised appendix. In cases where such guidance has already been
subjected to substantial due process (e.g., public comment periods or public hearings), the SAPWG may
recommend to the Task Force that either the IP or SSAP comment periods may be shortened or
eliminated or the hearings may be eliminated.
The Executive (EX) Committee and Plenary may adopt all substantive revisions through their “Technical
Change” process. Adoption by the Task Force, its parent and the NAIC membership shall be governed by
the NAIC bylaws.
Development of Nonsubstantive Revisions to SSAPs
Nonsubstantive revisions to the Accounting Practices and Procedures Manual will be developed to revise
SSAP guidance to clarify the intent or application of existing guidance, modify disclosures or update
references to model laws. Research and drafting of nonsubstantive revisions will be performed by the
NAIC staff under the direction and supervision of the SAPWG. Public comment will be solicited on
© 2015 National Association of Insurance Commissioners
5
Attachment 11
Ref #2015-18
nonsubstantive revisions, and the item will be included on the agenda for at least one public hearing
before the SAPWG adopts nonsubstantive revisions. Nonsubstantive revisions are considered effective
immediately after adoption by the SAPWG, unless the SAPWG incorporates a specific effective date. If
comments are not received during the public comment period, the SAPWG may adopt the proposal
collectively (one motion/vote) with other “non-contested” positions after opportunity is given during the
hearing to separately discuss the proposal.
The Executive (EX) Committee and Plenary may adopt nonsubstantive revisions through their “Technical
Change” process. Adoption by the Task Force, its parent and the NAIC membership shall be governed by
the NAIC bylaws.
Development of Interpretations to SSAPs & Referencing INTs Within SSAPs
An interpretation to existing SSAP may be developed to provide timely application or clarification
guidance. SAPWG issues classified as an “interpretation” shall not amend, supersede, or conflict with
existing, effective SSAPs. Issues being considered as an Interpretation must be discussed at no less than
two open meetings. (Original introduction of the issue when the SAPWG identifies the intent to address
the issue as an “Interpretation” during a public discussion is considered the first open meeting discussion.)
The process must allow opportunity for interested parties to provide comment, but as Interpretations are
intended to provide timely responses to questions of application or interpretation and clarification of
guidance, no minimum exposure timeframe is required.
In order to adopt an Interpretation, the SAPWG must have 67% of their members voting (10 out of the 15
members). The voting requirement to adopt an Interpretation is 7 out of 10 members, 8 out of 11 or 12
members, 9 out of 13 members, 10 out of 14, and 11 out of 15 members. As Interpretations do not amend,
supersede or conflict with existing SSAP, the Interpretation is effective upon SAPWG adoption unless
specifically stated otherwise. The SAPWG shall report the adopted Interpretation to the Task Force as
part of their public report during the next National Meeting (or earlier if applicable). Interpretations can
be overturned, amended or deferred only by a two-thirds majority of the Task Force membership .
As new Statements of Statutory Accounting Principles (SSAPs) are developed, it is essential to review
and, if necessary, update the status of Interpretations of the Emerging Accounting Issues (E) Working
Group related to the SSAPs that are being replaced and/or the new SSAP being developed. The following
list of options is available to the SAPWG when a SSAP with existing interpretations is replaced:
d.
Interpretation of the new SSAP - If the SAPWG would like to maintain the
Interpretation, the new SSAP can be added to the list of statements interpreted by the
Interpretation. In addition, the status section of the new SSAP will list the Interpretation
number next to the heading “Interpreted by.”
e.
Nullification - When an Interpretation is nullified by a subsequent SSAP or superseded
by another Interpretation, the Interpretation is deemed no longer technically helpful, is
shaded and moved to Appendix H (Superseded SSAPs and Nullified Interpretations), and
the reason for the change is noted beneath the title of the Interpretation. The status section
of the SSAP describes the impact of the new guidance and the effect on the Interpretation
(for example, nullifies, incorporated in the new SSAP with paragraph reference, etc.).
f.
Incorporation - When an Interpretation is incorporated into a new SSAP, the SAPWG
can choose from the following two options:
i.
If the Interpretation only interprets one SSAP, then the Interpretation is listed as
being nullified under the “affects” section of the SSAP and the Interpretation is
not referenced under the “interpreted by” section of the status page of the SSAP.
© 2015 National Association of Insurance Commissioners
6
Attachment 11
Ref #2015-18
ii.
If the Interpretation references additional SSAPs, and the SAPWG intends to
maintain the guidance, the Interpretation is unchanged (no nullification). The
new SSAP (Summary of Issue section) reflects that the Interpretation issue has
been incorporated into the new statement.
The EAIWG will be responsible for responding to SAP questions that generally relate to application,
interpretation and clarification. In no event shall a consensus opinion of the EAIWG amend, supersede or
otherwise conflict with existing, effective SSAPs. In no event will a consensus be less than six out of a
quorum of nine members of the EAIWG; a consensus will also be determined by a vote of seven of 10
members, eight of 11 or 12 members, and nine of 13 members. In the rare event that an opinion of the
EAIWG would create SAP not addressed by SSAPs, concurrence of SAPWG (as determined by a
majority vote) will be necessary before the guidance becomes effective.
The EAIWG’s agenda will be established at the discretion of the chair, subject to approval of the Task
Force. Every issue taken up by the EAIWG must be discussed at no less than two open meetings with
opportunity for interested parties to present comments. The guidance contained in the consensus opinions
of the group will become effective upon publication unless otherwise stated in the opinion. Consensus
opinions can be overturned, amended or deferred only by a two-thirds majority of the Task Force.
© 2015 National Association of Insurance Commissioners
7
Attachment 11
Ref #2015-18
NAIC Policy Statement on
Comments to GAAP & IFRS Exposure Drafts
As expressed in the Statement of Concepts, Statutory Accounting Principles (SAP) utilizes the framework
established by U.S. Generally Accepted Accounting Principles (GAAP). The NAIC’s guidance on SAP
(defined in the Accounting Practices and Procedures Manual) is comprehensive for those principles that
differ from GAAP based on the concepts of statutory accounting. Those GAAP Pronouncements that are
not applicable to insurance companies will not be adopted by the NAIC. For GAAP Pronouncements that
do not differ from SAP, the NAIC may specifically adopt those GAAP Pronouncements to be included in
statutory accounting. GAAP Pronouncements do not become part of SAP until and unless adopted by the
NAIC. Future SAP Pronouncements will specifically identify any GAAP Pronouncements that are to be
included in SAP whether in whole, in part, or with modification as well as any GAAP Pronouncements
that are rejected. Future GAAP Pronouncements, which SAP has not yet addressed, shall not be
considered as providing authoritative statutory guidance.
As illustrated by the previous paragraph, the NAIC believes it is important to comment on GAAP
exposure drafts that will affect SAP before such guidance is finalized. Exposing potentially contentious
issues to the applicable GAAP bodies before completion will create a more efficient and effective
maintenance process for the Statutory Accounting Principles (E) Working Group (SAPWG). In addition,
this also allows the NAIC to be proactive to GAAP rather than reactive under the current system. The
NAIC also believes that there may be instances in which it is important to comment on exposure drafts of
the International Financial Reporting Standards (IFRS). This particularly is important on projects in
which U.S. FASB and the International Accounting Standards Board (IASB) are attempting to converge,
or to limit differences between U.S. GAAP and IFRS.
Comments on exposed GAAP Pronouncements or IFRS exposure drafts affecting financial accounting
and reporting will be developed at the discretion of the SAPWG chair. After the a comment letter has
been agreed to by the SAPWG, the chair of the Accounting Practices and Procedures (E) Task Force and
the Financial Condition (E) Committee must review and approve the comment letter before it is sent to
the applicable body applicable standard board. Every reasonable attempt will be made to provide an
adequate comment period to interested parties; however, FASB and IFRS /American Institute of Certified
Public Accountants (AICPA) deadlines may inhibit exposure in every instance. The chair will consider
factors such as comment deadline and level of controversy surrounding the issue. The chair of the parent
Ttask Fforce and Committee may override such decision at any time.
Comments on exposed Pronouncements promulgated by the AICPA will be developed at the discretion of
the NAIC/AICPA Working Group chair. The chair may defer comment to the SAPWG if the
pronouncement affects financial accounting guidance. After the comment letter has been agreed to by the
NAIC/AICPA Working Group, the chair of the Financial Condition (E) Committee must review and
approve the letter before it is sent to the applicable GAAP body. Every reasonable attempt will be made
to provide an adequate comment period to interested parties, however FASB/AICPA deadlines may
inhibit exposure in every instance. The chair will consider factors such as comment deadline and level of
controversy surrounding the issue. The chair of the parent Committee may override such decision at any
time.
These cComment letters submitted to the FASB on GAAP exposure drafts may be considered during the
maintenance ofwhen the SAPWG is reviewing finalized GAAP Pronouncements by the SAPWG (as
defined in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles). Nevertheless,
these letters will not bind the SAPWG to its tentative position during its deliberation to adopt, modify or
reject the final GAAP guidance.
© 2015 National Association of Insurance Commissioners
8
Attachment 11
Ref #2015-18
NAIC Policy Statement On Statutory Accounting Principles
Maintenance Agenda Process
The purpose of the following Policy Statement is to document the Statutory Accounting Principles (E)
Working Group (SAPWG) maintenance agenda process.
As acknowledged in the NAIC Policy Statement on Maintenance of Statutory Accounting
Principles, the promulgation of SAP guidance will be delegated through the NAIC committee structure
to the Accounting Practices and Procedures (E) Task Force (Task Force). The Task Force will charge the
Statutory Accounting Principles (E) Working Group (SAPWG) with the responsibility to develop and
propose new Statements of Statutory Accounting Principles (SSAPs), to propose revisions to existing
SSAPs, and to issue interpretations in response to questions of application and clarification on existing
SSAPs.
promulgation of new SAP guidance by the NAIC ultimately requires action of the entire membership.
Responsibility for proposing new SAP will be delegated through the NAIC committee structure to the
Accounting Practices and Procedures (E) Task Force (Task Force). The Task Force will employ two
working groups with distinctly different functions to carry out the charge of maintaining SAP. The
SAPWG shall have the exclusive responsibility of developing and proposing new Statements of Statutory
Accounting Principles (SSAPs). The Emerging Accounting Issues (E) Working Group will respond to
questions of application, interpretation, and clarification that are generally much narrower in scope than
development of a new SSAP.
Information and issues can be presented to the SAPWG in a variety of ways. Issues can be recommended
or forwarded from other NAIC working groups or task forces, or from interested parties. Also, if any
guidance within the Generally Accepted Accounting Principles (GAAP) Hierarchy (see § IV of the
Preamble to the Accounting Practices and Procedures Manual) is added or revised, those changes must
be considered by the SAPWG. In order for an issue to be placed on the Pending List, the recommending
party must complete a Statutory Accounting Principles Maintenance Agenda Submission Form (Form A)
and submit it to the NAIC SAPWG support staff no later than 20 business days prior to the next
scheduled SAPWG meeting. The NAIC staff will prepare a submission form for all GAAP
pronouncements that have not been previously addressed by the SAPWG. NAIC staff will update the
Pending List before each National Meeting and will notify the recommending party of such action. If the
SAPWG does not wish to address the issue (e.g.; issue deemed not applicable to statutory accounting) or
rejects the position presented, then the SAPWG may move the item to the is moved to the Rejected
Report. Should the SAPWG choose to address an issue, it is moved to either the Substantive, or
Nonsubstantive or Interpretation Listings for consideration:.
•
The Substantive Listing are includes items that introduce new, original or modified accounting
principles. These items generally require a new issue paper and a new or substantively-revised
SSAP to address the issueto detail the revised accounting guidance. Once items are placed on this
listing, they are prioritized and the formal maintenance policy is followed (see NAIC Policy
Statement on Maintenance of Statutory Accounting Principles). The SAPWG will utilize the
NAIC website for exposure of substantive items.
•
The Nonsubstantive Listing contains includes items that do not require a new or substantivelyrevised SSAP. Generally, these items are considered editorial or technical in nature and therefore
a new SSAP will not be developed. Even if new guidance is proposed, revisions can still be
considered nonsubstantive depending on the nature and context of the revisions. As just one
example, proposals that focus on disclosure revisions, even if incorporating new disclosures, In
© 2015 National Association of Insurance Commissioners
9
Attachment 11
Ref #2015-18
other words, a revision to a SSAP for these items will not be deemed to modify its conclusion or
original intent.are considered nonsubstantive.
•
The Interpretation Listing includes items for which the SAPWG will be issuing an
interpretation in response to questions that relate to application, interpretation or clarification of
existing statutory accounting guidance. Items included on the Interpretation Listing will not result
in revisions to SSAPs. If SSAP revisions are subsequently deemed necessary, the SAPWG will
need to move the item to either the substantive or non-substantive listing, as applicable, and
follow the appropriate process to consider and adopt revisions.
•
The Rejected Report identifies all the items that were proposed to the SAPWG and rejected
without consideration. The Active Report identifies items that are in the process of completion.
The Active Report is prioritized and shows the status of issue papers and SSAPsagenda items not
finalized by the Working Group. The Disposition Report captures the conclusions of the
SAPWG.
It should be noted that this Policy Statement addresses the process and the flow of information. The
timing is left to the discretion of the SAPWG. For instance, once public discussion requirements have
been met, the SAPWG can take action on an item at their discretion. In determining whether it is
appropriate to adopt items that were not exposed immediately-preceding the adoption consideration, the
Working Group must consider when the last exposure occurred and the extent of any prior comments and
discussions. Additionally, there is no timeframe in which items must be addressed, and items will remain
on the Active Report until the SAPWG formally disposes of the item. An item can move from the
pending list to the substantive disposition report in one, two, or three National Meetings.
The NAIC staff will maintain a current Maintenance Agenda on the NAIC website at www.naic.org.
Attachment A to this Policy Statement includes a flowchart depicting the flow of information. Attachment
AB includes a blank Form A. Attachment CB is an example of the document that will be attached to all
exposed osed documents with proposed substantive revisions and will serve as the notice of public
hearing and request for written comments.
© 2015 National Association of Insurance Commissioners
10
© 2015 National Association of Insurance Commissioners
All Other Sources
Pending List
GAAP Status Report
LEVEL 1
11
Nonsubstantive List
Rejected Report
Substantive List
LEVEL 2
Statutory Accounting Principles Maintenance Process
Illustration of Flow of Information
Disposition Report
Active Report
Active Report
Disposition Report
LEVEL 3
Attachment A
Attachment 11
Ref #2015-18
Attachment 11
Ref #2015-18
Attachment B
Statutory Accounting Principles (E) Working Group
Maintenance Agenda Submission Form
Form A
Issue:
____________________________________________________________________________________
Check (applicable entity):
P/C
Life
Health
Correction of existing SSAP
New Issue or SSAP
Interpretation
*Description of Issue:
____________________________________________________________________________________
*Existing Authoritative Literature:
____________________________________________________________________________________
*Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups):
____________________________________________________________________________________
*Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
____________________________________________________________________________________
Recommended Conclusion or Future Action on Issue:
____________________________________________________________________________________
Recommending Party:
____________________________________________________________________________________
(Organization) & (Person Submitting, Title)
____________________________________________________________________________________
(Person Submitting, Title)
____________________________________________________________________________________
(Address, City, State, ZIP)
____________________________________________________________________________________
(Phone and E-mail Address)
(Date Submitted)
* Indicates required information before NAIC staff will accept form as a final document.
© 2015 National Association of Insurance Commissioners
12
Attachment 11
Ref #2015-18
Attachment CB
EXPOSURE DRAFT NUMBER - TITLE
Notice of Public Hearing and Request for Written Comments
Hearing Date: __________________
Deadline for Written Notice of Intent to speak:
Location: _________________
Deadline for Receipt of Written Comments:
Basis for hearings. The Statutory Accounting Principles (E) Working Group (SAPWG) will hold a
public hearing to obtain information from and views of interested individuals and organizations about the
standards proposed in this Exposure Draft. The SAPWG will conduct the hearing in accordance with the
National Association of Insurance Commissioners (NAIC) policy statement on open meetings. An
individual or organization desiring to speak must notify the NAIC in writing by . Speakers will be
notified as to the date, location, and other details of the hearings.
Oral presentation requirements. The intended speaker must submit a position paper, a detailed outline
of a proposed presentation or comment letter addressing the standards proposed in the Exposure Draft by
__________. Individuals or organizations whose submission is not received by that date will only be
granted permission to present at the discretion of the SAPWG chair. All submissions should be addressed
to the NAIC staff at the address listed below. Comments can also be submitted by electronic mail to
___________@naic.org.
Format of the hearings. Speakers will be allotted up to 10 minutes for their presentations to be followed
by a period for answering questions from the SAPWG. Speakers should use their allotted time to provide
information in addition to their already submitted written comments as those comments will have been
read and analyzed by the SAPWG. Those submissions will be included in the public record and will be
available at the hearings for inspection.
Copies. Exposure Drafts can be obtained on the Internet at the NAIC Home Page (http://www.naic.org).
The documents can be downloaded using Microsoft Word or WordPerfect.
Written comments. Participation at a public hearing is not a prerequisite to submitting written comments
on this Exposure Draft. Written comments are given the same consideration as public hearing testimony.
The Statutory Accounting Principles Statement of Concepts was adopted by the Accounting Practices &
Procedures (EX4) Task Force on September 20, 1994, in order to provide a foundation for the evaluation
of alternative accounting treatments. All issues considered by the SAPWG will be evaluated in
conjunction with the objectives of statutory reporting and the concepts set forth in the Statutory
Accounting Principles Statement of Concepts. Whenever possible, establish a relationship between your
comments and the principles defining statutory accounting.
The exposure period is not meant to only measure support for, or opposition to, a particular accounting
treatment but rather to accumulate an analysis of the issues from other perspectives and persuasive
comments supporting them. Therefore, form letters and objections without valid support for their
conclusions are not helpful in the deliberations of the working group. Comments should not simply
register your agreement or disagreement without a detailed explanation, a description of the impact of the
proposed guidelines, and/or possible alternative recommendations for accomplishing the regulatory
objective.
Any individual or organization may send written comments to ____________ at the address listed below,
no later than _________. Comments can also be submitted by electronic mail in Microsoft Word format
© 2015 National Association of Insurance Commissioners
13
Attachment 11
Ref #2015-18
to _______@naic.org. Electronic submission followed by signed hardcopy is preferred. After they have
been reviewed by the SAPWG, these letters will be posted publicly on the NAIC webpage. available for
public inspection and may be obtained by contacting the NAIC Insurance Products and Services Division
(816) 783-8300.
National Association of Insurance Commissioners
1100 Walnut Street, Suite 1500
Kansas City, MO 64106-2197
© 2015 National Association of Insurance Commissioners
14
(816) 842-3600
Attachment 11
Ref #2015-18
NAIC Policy Statement on Emerging Accounting
Issues Agenda Process
The purpose of the following Policy Statement is to document the Emerging Accounting Issues (E)
Working Group (EAIWG) agenda process.
As acknowledged in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles, the
promulgation of new SAP guidance by the NAIC ultimately requires action of the entire membership.
Responsibility for proposing new SAP will be delegated through the NAIC committee structure to the
Accounting Practices and Procedures (E) Task Force (Task Force). The Task Force will employ two
working groups with distinctly different functions to carry out the charge of maintaining SAP. The
Statutory Accounting Principles (E) Working Group shall have the exclusive responsibility of developing
and proposing new Statements of Statutory Accounting Principles (SSAPs). The EAIWG will respond to
questions of application, interpretation and clarification that are generally much narrower in scope than
development of a new SSAP.
Information and issues can be presented to the EAIWG in a variety of ways. Issues can be recommended
or forwarded from other NAIC working groups or task forces, from interested parties or from the NAIC
staff. In order for an issue to be placed on the Agenda, the recommending party must complete an
Emerging Accounting Issues (E) Working Group Agenda Submission Form (Form B) and submit it to the
NAIC staff no later than 20 business days prior to the next scheduled EAIWG meeting. NAIC staff will
update the Agenda before each National Meeting and will notify the recommending party of such action.
Every issue taken up by the EAIWG must be discussed at no less than two open meetings with
opportunity for interested parties to present comments. The NAIC website will be utilized for such
exposures. The website will maintain the applicable Form B and the tentative consensus opinions. Final
consensus opinions will be published annually in Appendix B to the Accounting Practices and
Procedures Manual. The guidance contained in the consensus opinions of the EAIWG will become
effective upon publication unless otherwise stated in the opinion.
Exhibit A includes a blank Form B.
© 2015 National Association of Insurance Commissioners
15
Attachment 11
Ref #2015-18
Exhibit A
Emerging Accounting Issues (E) Working Group
Agenda Submission Form
Form B
Issue:
____________________________________________________________________________________
*Description of Transaction/Event/Issue:
____________________________________________________________________________________
*Accounting Issues:
____________________________________________________________________________________
*Authoritative Literature (excerpt applicable references):
____________________________________________________________________________________
*Activity to Date (issues previously addressed by Statutory Accounting Principles WG, Emerging
Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups):
____________________________________________________________________________________
*Recommended Conclusion or Future Action on Issue:
____________________________________________________________________________________
+NAIC Staff Recommendation:
____________________________________________________________________________________
Recommending Party:
____________________________________________________________________________________
(Organization)
____________________________________________________________________________________
(Person Submitting, Title)
____________________________________________________________________________________
(Address, City, State, Zip)
____________________________________________________________________________________
(Phone and E-mail Address)
+NAIC Staff Review Completed by:
____________________________________________________________________________________
_________________
(Date Submitted)
* Indicates required information before NAIC staff will accept form as a final document
+ NAIC Staff will complete before presentation to the EAIWG
© 2015 National Association of Insurance Commissioners
16
Attachment 11
Ref #2015-18
NAIC Policy Statement on the Impact of Statements of Statutory
Accounting Principles on NAIC Publications
The purpose of the following Policy Statement is to document the process and procedure for identifying
the impact of Statements of Statutory Accounting Principles (SSAP) on NAIC publications.
As referenced in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles, the
promulgation of new SAP guidance by the NAIC ultimately requires action of the entire membership.
Responsibility for proposing new SAP will be delegated through the NAIC committee structure to the
Accounting Practices and Procedures (E) Task Force (Task Force). The Task Force will employ two
working groups with distinctly different functions to carry out the charge of maintaining SAP. The
Statutory Accounting Principles (E) Working Group (SAPWG) shall have the exclusive responsibility of
developing and proposing new SSAPs. The Emerging Accounting Issues (E) Working Group will
respond to questions of application, interpretation, and clarification that are generally much narrower in
scope than development of a new SSAP.
AnNew and revised SSAPs can affect the various NAIC publications in many different ways. New
accounting practices or procedures may result in new disclosures and reporting requirements (affecting
Annual Statement Blank and Instructions), modified analysis techniques (affecting RBC formula or IRIS
ratios), or new examination procedures (affecting Examiners Handbook).
The SAPWG shall evaluate the impact that newly adopted SSAPs will have on other NAIC publications.
To that end, the SAPWG shall submit a referral to any group in response to new or revised SSAPs
expected to impact other NAIC groups or publications. (Instead of a referral, a blanks proposal may be
sponsored by the SAPWG to the Blanks (E) Working Group). These referrals and blanks proposals are
only required to be approved by the chair of the SAPWG prior to submission to the other groups, but may
be shared and approved by the full SAPWG. will complete a SSAP Impact on NAIC Publications form
after adoption of every SSAP. This form will be used to evaluate the impact of the SSAP, and to
recommend a modification as the SAPWG deems appropriate. The SAPWG may seek the assistance of
NAIC staff or interested parties in drafting specific language for the affected publication.
After completion of the form, it will be forwarded with a recommendation to the affected working group
or task force. The NAIC staff will update the SAPWG as to the progress of the recommendation.
Exhibit A includes a blank SSAP Impact on NAIC Publications form.
© 2015 National Association of Insurance Commissioners
17
Attachment 11
Ref #2015-18
Exhibit A
SSAP Impact on NAIC Publications Form
SSAP No. and Title:
____________________________________________________________________________________
Affected NAIC Publication(s) (check):
Accreditation Standards
Actuarial Opinion
Guidelines
Annual Statement Blank
Annual Statement Instructions
Financial Analysis Handbook
Financial Condition Examiners Handbook
IRIS Ratio Results
Model
Laws,
Regulations
and
RBC Formula
SVO Purposes & Procedures Manual
Other: ___________________
Background and Description of SSAP:
____________________________________________________________________________________
Issues Affecting NAIC Publication(s)
____________________________________________________________________________________
Specific Recommendation or Future Action on Issue (attached separate sheet if necessary):
____________________________________________________________________________________
Recommending Party:
Statutory Accounting Principles (E) Working Group
_________________________
(Chair)
_________________________
(Date Adopted by SAPWG)
© 2015 National Association of Insurance Commissioners
18
Attachment 11
Ref #2015-18
NAIC Policy Statement on Coordination of the Accounting
Practices and Procedures Manual and the Annual Statement Blank
The purpose of the codification of statutory accounting principles (SAP) project was to produce a
comprehensive guide to SAP for use by insurance departments, insurers, and auditors. Statutory
accounting principles, as they existed prior to codification did not always provide a consistent and
comprehensive basis of accounting and reporting. Insurance companies were sometimes uncertain
about what rules to follow and regulators were sometimes unfamiliar with the accounting rules
followed by insurers in other states. This was due in part to the fact that prior to codification,
accounting guidance could be found in the NAIC Accounting Manual, Annual Statement
Instructions, Examiners Handbook, and various states’ laws and regulations. As a result, insurers’
financial statements were not prepared on a comparable basis. Now that accounting requirements
have been more rigidly stipulated by the NAIC, it is imperative that the accounting requirements
and the reporting and disclosure requirements remain synchronized. This is an excellent
opportunity to create a system of parallel requirements. This effort has already been recognized
by the NAIC/AICPA Working Group. In 1999, the working group modified the Model
Regulation Requiring Annual Audited Financial Reports to require the following for audited
financial statements:
Notes to financial statements. These notes shall be those required by the appropriate
NAIC Annual Statement Instructions and the NAIC Accounting Practices and
Procedures Manual. The notes shall include a reconciliation of differences, if any,
between the audited statutory financial statements and the annual statement filed pursuant
to Section [insert applicable section] of the [insert state] insurance law with a written
description of the nature of these differences.
As stated in the model regulation, the NAIC/AICPA Working Group has an expectation
that the requirements of the Annual Statement Instructions and the Accounting Practices
and Procedures Manual will be identical in all pertinent parts that are subject to audit.
There is no reason to create a different set of audit requirements in the Annual Statement
Instructions when a complete and comprehensive guide to statutory accounting exists.
However, it must be noted that the Statements of Statutory Accounting Principles (SSAPs)
are not intended to prescribe the specific format of the detailed financial statements.
The scope of this Policy Statement is defined as follows:
Any change to the annual statement core financials (balance sheet, income statement,
cash flow and notes to the financial statements) must be reviewed by the Statutory
Accounting Principles (E) Working Group to determine whether it conflicts with the
disclosure requirements of the SSAPs.
The scope is defined in broad terms because it is very difficult to specify what constitutes a
conflict with the SSAPs. For example, the renumbering of the assets page does not conflict
because there is not a SSAP that prescribes the order of asset presentation. Contrast this with a
seemingly innocuous proposal to modify column 23 of Schedule P - Part 1 (salvage and
subrogation anticipated) that would create a disclosure conflict with SSAP No. 55, paragraph
14the related SSAP.
© 2015 National Association of Insurance Commissioners
19
Attachment 11
Ref #2015-18
In order to ascertain that the requirements of the Annual Statement Instructions and Blank are in
harmony with the SSAPs (as they relate solely to the core financial statements), the following
procedures shall be followed:
1.
The Blanks Agenda Item Submission Form will include an interrogatory that will indicate
to the Blanks (E) Working Group whether the proposal:
a.
b.
c.
d.
Affects the core financial statements
Conflicts with an existing SSAP
Is not currently required by a SSAP
Has been reviewed by the Statutory Accounting Principles (E) Working Group
2.
One staff member from the Statutory Accounting Principles (E) Working Group and the
Blanks (E) Working Group is charged with verifying the accuracy of the interrogatory proposed
in (1) above. After the staff member reviews the proposals, they will report their findings back to
the applicable groups before each national meeting of the Blanks (E) Working Group. If the staff
member identifies issues that need further exploration or consultation, the chairs of the two
groups or certain members from each group will hold a joint meeting before the national meeting.
3.
The Blanks (E) Working Group will reject proposals that will delete/modify information
contained within the core financial statements that are required by an existing SSAP.
4.
The Blanks (E) Working Group will either reject proposals that would require additional
audited disclosure or audited information within the core financial statements if that same item is
not required by an existing SSAP; or move it outside the core financial statements. The
sponsoring party will still have the option of placing this information outside the core financial
statements (e.g., general interrogatories or interrogatories to schedules) until the disclosure is
included in a SSAP. If the disclosure were added to a SSAP in the future, it could be moved to the
Notes to the Financial Statements and subject to audit at that time.
5.
The NAIC will maintain a SSAP to Annual Statement cross-reference. This crossreference will contain two significant features. First, it will list all of the SSAP disclosures and
reference them to where in the Annual Statement the disclosure requirement is met. Second, the
cross-reference will identify the Annual Statement components that are required by a SSAP. The
cross-reference can be used by the Blanks (E) Working Group and interested parties in
completing the new Blanks Agenda Item Submission Form Interrogatory.
The procedures included in this Policy Statement represent a significant change in the current
process, but can only result in increased coordination between the Accounting Practices and
Procedures (E) Task Force and the Blanks (E) Working Group. This coordination can only give
rise to more consistent, meaningful guidance to the regulators, companies and auditors.
© 2015 National Association of Insurance Commissioners
20
Attachment 12
Ref #2015-19
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Quarterly Reporting of Restricted Assets
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
NAIC staff has received regulator comments regarding the limited quarterly reporting of restricted assets.
This regulator noted concerns that the quarterly general interrogatory is not as robust as the annual
general interrogatory and the disclosure requirement in SSAP No. 1 is currently only required for annual
statements. As a result of this correspondence, this agenda item has been drafted to propose revisions to
incorporate information regarding restricted assets into the quarterly financial statements. Additionally,
this agenda item suggests that the Working Group expose a proposal to possibly sponsor blanks revisions
to incorporate the full investment schedules within all interim financial statements.
(Although reporting restricted assets should not be determined by inclusion of full quarterly investment
schedules, with the coding of restricted assets in the investment schedules, the process to include the
investments schedules in the interim financial statements should reduce questions on implementation.)
1) Restricted Asset Detail:
Information regarding restricted assets is significantly limited in the quarterly financial statements,
which hinders the regulator’s ability to systematically review the impact of restricted assets when
reviewing an insurer’s financial condition. Additionally, the annual statement interrogatories are
duplicative to the information reported in the Notes to the Financial Statements required under SSAP
No. 1—Disclosure of Accounting Policy, Risks & Uncertainties, and Other Disclosures (SSAP No.
1). In order to improve the quarterly reporting of restricted assets, reduce the duplication of
information, as well as eliminate questions from inconsistently reported restricted asset data, this
agenda item proposes to:
a. Modify SSAP No. 1 to require the restricted asset disclosure in all interim and annual financials
and incorporate minor revisions to encompass additional information from the GI.
b. Delete the annual general interrogatories for restricted assets (GI 25.2 and 25.3).
In addition to requiring the disclosure in quarterly financials, the revisions to SSAP No. 1 will require
that the amount reported includes total restricted assets (admitted and nonadmitted), and admitted
restricted assets per category. (The amount of admitted assets per category is necessary as the RBC
instructions would then utilize the information included in the disclosure rather than the GI.)
Additionally, the revisions proposed to SSAP No. 1 will request information on the sale restrictions
for stock or securities (excluding FHLB) as that information is already captured within the GI.
(In order to incorporate more robust information regarding restricted assets in the quarterly financials,
the Blanks (E) Working Group may proceed with considering revisions to incorporate the annual
statement general interrogatories for restricted assets into the quarterly financial statements. If this
occurs, and if this proposal is subsequently adopted, the SAPWG referral to Blanks would suggest
deleting both the annual and quarterly general interrogatories for restricted assets.)
© 2015 National Association of Insurance Commissioners
1
Attachment 12
Ref #2015-19
2) Quarterly Financial Statements – Investment Detail:
It has been communicated that not having full investment schedules in the quarterly statutory
financials makes it difficult for regulators to fully review and assess an insurer’s financial condition
over interim periods. By not including the full investment schedules in the quarterly financial
statements it is impossible for regulators to complete reviews of quarterly investment holdings. From
information received from key regulators, there is a desire to propose inclusion of the full investment
schedules in all interim financial statements for all NAIC filers.
In exploring why the investment schedules were previously not included in the quarterly financials, it
is believed that the full investment schedules were not included as the financial statements were
required to be printed with hard-copies provided to the various states and the NAIC. As the
investment schedules can be quite lengthy, it seems this provision was intended to alleviate insurers
from the extensive printing that may have been required. The guidance in the NAIC Accounting
Practices and Procedures Manual (AP&P Manual) Preamble that references relying on the annual
statement and identifying only key or significant changes in the interim financials seems to have been
based on the premise that the regulators would have a hard-copy annual version readily available for
comparison purposes. With the electronic submission of financial statements, moving to include the
full investment schedules in the quarterly financials should no longer generate a printing concern /
burden to reporting entities.
In further considering the impact of this reporting change, it is not anticipated that requiring the full
investment schedules will be an overly difficult task for reporting entities. Information on investments
held during the interim periods should already be known. This is demonstrated as reporting entities
must already report the investment additions and deletions that occur throughout the interim reporting
period and they report the total investment valuation (by line item) in the interim balance sheet.
In reviewing the guidance in the AP&P Manual, it does not seem that statutory accounting guidance
specifically indicates whether the investment schedules should / should not be included in the
quarterly financial statements. As such, no actual SSAP revisions are necessary to effect this Blanks
(E) Working Group change. However, as this revision is tied to the presentation of statutory
accounting statements, and specifically focuses on improving the regulator’s ability to complete full
reviews of the investment holdings (which are reported under the concepts of SSAP), this agenda
item proposes that the Statutory Accounting Principles (E) Working Group expose a proposal to
consider this change.
Existing Authoritative Literature:
Preamble – NAIC Accounting Practices and Procedures Manual
X.
Financial Statements
A.
Annual Financial Statement
58.
Each state requires all insurance companies doing business in that state to file an annual
financial statement. All states use the annual statement blank promulgated by the NAIC, but each
state retains the authority to make changes in those statements. Changes made by states
generally require only supplemental information and do not change the basic financial
information.
59.
To the extent that disclosures required by a SSAP are made within specific notes,
schedules, or exhibits to the annual statement, those disclosures are not required to be
© 2015 National Association of Insurance Commissioners
2
Attachment 12
Ref #2015-19
duplicated in a separate note. Annual statutory financial statements which are not accompanied
by annual statement exhibits and schedules (e.g., annual audit report) shall include all
disclosures required by the SSAPs based on the applicability, materiality and significance of the
item to the insurer. Certain disclosures, as noted in individual SSAPs, are required in the annual
audited statutory financial statements only.
B.
Interim Financial Statements
60.
Interim financial statements, including quarterly statements, shall follow the form and
content of presentation prescribed by the domiciliary state for the quarterly financial statements.
The NAIC quarterly statement form has been adopted by each state with minor variations as
required by certain states.
61.
The interim financial information shall include disclosures sufficient to make the
information presented not misleading. It may be presumed that the users of the interim financial
information have read or have access to the annual statement for the preceding period and that
the adequacy of additional disclosure needed for a fair presentation, except in regard to material
contingencies may be determined in that context. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the most recent annual statement or audited
financial statements, such as a statement of significant accounting policies and practices, details
of accounts which have not changed significantly in amount or composition since the end of the
most recently completed fiscal year, may be omitted. However disclosure shall be provided where
events subsequent to the end of the most recent fiscal year have occurred which have a material
impact on the insurer. Disclosures shall encompass, for example, significant changes since the
end of the period reported on the last annual statement in such items as: statutory accounting
principles and practices, estimates inherent in the preparation of financial statements, status of
long term contracts, capitalization including significant new borrowings or modifications of existing
financial arrangements, and the reporting entity resulting from business combinations or
dispositions. Notwithstanding the above, where material noninsurance contingencies exist,
disclosure of such matters shall be provided even though a significant change since year end
may not have occurred.
SSAP No. 1—Disclosure of Accounting Policies, Risks & Uncertainties, and Other Disclosures
Other Disclosures
23. For each year that a balance sheet is presented (annual), reporting entities shall disclose
the following information in the financial statements:
a.
Amounts not recorded in the financial statements that represent segregated
funds held for others, the nature of the assets and the related fiduciary
responsibilities associated with such assets. One example of such an item is
escrow accounts held by title insurance companies; and
b.
The amount and nature of any assets pledged to others as collateral or otherwise
restricted (e.g., not under the exclusive control, assets subject to a put option
contract, etc.)1 in the general and separate accounts2 by the reporting entity in
comparison to total assets and total admitted assets. (Pursuant to SSAP No. 4,
paragraph 6, all assets pledged as collateral or otherwise restricted shall be
1
The aggregate information captured within this disclosure is intended to reflect the information reported in the Annual
Statement Investment Schedules in accordance with the coding of investments that are not under the exclusive control
of the reporting entity, including assets loaned to others and the information reported in the General Interrogatories.
2
Restricted assets in the separate account are not intended to reflect amounts “restricted” only because they are
insulated from the general account or because they are attributed to specific policyholders. Separate account assets shall
be captured in this disclosure only if they are restricted outside of these characteristics.
© 2015 National Association of Insurance Commissioners
3
Attachment 12
Ref #2015-19
reported in this disclosure regardless if the asset is considered an admitted
asset.) This disclosure shall include the following items:
i.
Reported assets subject to contractual obligation for which liability is not
shown;
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
Collateral held under security lending agreements;
Assets subject to repurchase agreements;
Assets subject to reverse repurchase agreements;
Assets subject to dollar repurchase agreements;
Assets subject to dollar reverse repurchase agreements;
Assets placed under option contracts;
Letter stock or securities restricted as to sale – excluding FHLB stock;
FHLB capital stock;
Assets on deposit with states;
Assets on deposit with other regulatory bodies;
Pledged as collateral to the FHLB (including assets backing funding
agreements);
xiii. Assets pledged as collateral not captured in other categories; and
xiv. Other restricted assets.
24.
The financial statements shall disclose forward commitments which are not derivative
instruments (e.g., the commitment to purchase a GNMA security two months after the
commitment date, or a private placement six months after the commitment date).
SSAP No. 4—Assets and Nonadmitted Assets
Assets Pledged as Collateral or Otherwise Restricted
6.
Assets that are pledged to others as collateral or otherwise restricted (not under the
exclusive control of the insurer, subject to a put option contract, etc.) shall be identified in the
investment schedules pursuant to the codes in the annual statement instructions, disclosed in
accordance with SSAP No. 1—Disclosure of Accounting Policies, Risks & Uncertainties, and
Other Disclosures (SSAP No. 1), reported in the general interrogatories, and included in any
other statutory schedules or disclosure requirements requesting information for assets pledged as
collateral or otherwise restricted. Restricted assets should be reviewed to determine admitted or
nonadmitted assets status in the statutory financial statements per the terms of their respective
SSAPs. Asset restrictions may be a factor in determining the admissibility of an asset under a
respective SSAP3. However, determining that a restricted asset is an admitted asset does not
eliminate the statutory requirements to document and identify the asset as one that is pledged as
collateral or otherwise restricted.
7.
Assets pledged as collateral are one example of assets that are not under the exclusive
control of the insurer, and are therefore restricted, even if the assets are admitted under statutory
accounting guidelines (e.g., the asset is substitutable and/or other related SSAP conditions are
met). As such, the asset shall be coded as pledged in the investment schedules pursuant to the
annual statement instructions, disclosed in accordance with SSAP No. 1, reported in the general
3
An example of such a situation is detailed in footnote 2 pertaining to assets restricted by the action of a related party.
This is only a single example and each restricted asset would need to be reviewed to ensure it qualifies as an admitted
asset.
© 2015 National Association of Insurance Commissioners
4
Attachment 12
Ref #2015-19
interrogatories, and included in any other statutory schedules or disclosure requirements
requesting information for assets pledged as collateral or otherwise restricted.
Annual Statement General Interrogatories – Restricted Assets:
25.1
25.2
25.3
Were any of the stocks, bonds or other assets of the reporting entity owned at December 31 of the current year not exclusively under
the control of the reporting entity or has the reporting entity sold or transferred any assets subject to a put option contract that is
currently in force? (Exclude securities subject to Interrogatory 21.1 and 24.03).
If yes, state the amount thereof at December 31 of the current year:
25.21
Subject to repurchase agreements
25.22
Subject to reverse repurchase agreements
25.23
Subject to dollar repurchase agreements
25.24
Subject to reverse dollar repurchase agreements
25.25
Placed under option agreements
25.26
Letter stock or securities restricted as to sale – excluding FHLB
Capital Stock
25.27
FHLB Capital Stock
25.28
On deposit with states
25.29
On deposit with other regulatory bodies
25.30
Pledged as collateral – excluding collateral pledged to an FHLB
25.31
Pledged as collateral to FHLB – including assets backing funding
agreements
25.32
Other
For category (25.26) provide the following:
1
Nature of Restriction
2
Description
Yes [ ] No [ ]
$
$
$
$
$
$
$
$
$
$
$
$
__________________
__________________
__________________
__________________
__________________
__________________
__________________
__________________
__________________
__________________
__________________
__________________
3
Amount
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
Staff recommends that the Working Group move this item to the nonsubtantive active listing and
expose revisions to SSAP No. 1 to require the disclosure of restricted assets in all interim and
annual financial statements, require information on admitted and nonadmitted restricted assets,
and require information on stock restrictions (which is currently provided in the annual statement
general interrogatory).
It is also proposed that the Working Group expose a proposal to possibly sponsor blanks revisions
to incorporate the full investment schedules within all interim financial statements. No changes are
anticipated to the statutory accounting guidance for this investment schedule proposal.
(Upon adoption of the proposed SSAP No. 1 revisions to require restricted assets in the quarterly
financials, the corresponding proposal to the Blanks (E) Working Group would also include a proposal to
delete the annual general interrogatories for restricted assets (GI 25.2 and 25.3). Additionally, a referral
would be sent to the Capital Adequacy (E) Task Force to update the RBC calculation to incorporate the
restricted asset information from the restricted asset disclosure instead of the interrogatories.)
© 2015 National Association of Insurance Commissioners
5
Attachment 12
Ref #2015-19
Proposed Revisions to SSAP No. 1
Other Disclosures
25. For each all interim and annual financial statements, year that a balance sheet is
presented (annual), reporting entities shall disclose the following information in the
financial statements:
a.
Amounts not recorded in the financial statements that represent segregated
funds held for others, the nature of the assets and the related fiduciary
responsibilities associated with such assets. One example of such an item is
escrow accounts held by title insurance companies; and
b.
The total amount (admitted and nonadmitted), admitted amount and nature of
any assets pledged to others as collateral or otherwise restricted (e.g., not under
the exclusive control, assets subject to a put option contract, etc.)4 in the general
and separate accounts5 by the reporting entity in comparison to total assets and
total admitted assets. (Pursuant to SSAP No. 4, paragraph 6, all assets pledged
as collateral or otherwise restricted shall be reported in this disclosure regardless
if the asset is considered an admitted asset.) This disclosure shall include the
following items:
i.
Reported assets subject to contractual obligation for which liability is not
shown;
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
Collateral held under security lending agreements;
Assets subject to repurchase agreements;
Assets subject to reverse repurchase agreements;
Assets subject to dollar repurchase agreements;
Assets subject to dollar reverse repurchase agreements;
Assets placed under option contracts;
Letter stock or securities restricted as to sale6 – excluding FHLB stock;
FHLB capital stock;
Assets on deposit with states;
Assets on deposit with other regulatory bodies;
Pledged as collateral to the FHLB (including assets backing funding
agreements);
xiii. Assets pledged as collateral not captured in other categories; and
xiv. Other restricted assets.
4
The aggregate information captured within this disclosure is intended to reflect the information that would be reported
in the Annual Statement Investment Schedules in accordance with the coding of investments that are not under the
exclusive control of the reporting entity, including assets loaned to others and the information reported in the General
Interrogatories.
5
Restricted assets in the separate account are not intended to reflect amounts “restricted” only because they are
insulated from the general account or because they are attributed to specific policyholders. Separate account assets shall
be captured in this disclosure only if they are restricted outside of these characteristics.
6
The nature, description and amount of the restriction are required in the disclosure.
© 2015 National Association of Insurance Commissioners
6
Attachment 12
Ref #2015-19
26.
The financial statements shall disclose forward commitments which are not derivative
instruments (e.g., the commitment to purchase a GNMA security two months after the
commitment date, or a private placement six months after the commitment date).
Staff Review Completed by:
Julie Gann – May 8, 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 1, as illustrated above.
Staff Note – With the June 17, 2015 discussions on this item, the Working Group directed staff to divide
the issues originally reflected in this agenda item. As such, this agenda item will continue to consider the
restricted asset interim disclosures, and a new agenda item (2015-27) will be used to consider quarterly
investment schedules.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H12 - 15-19 Quarterly Disclosures - Restricted
Assets.docx
© 2015 National Association of Insurance Commissioners
7
This page intentionally left blank.
Attachment 13
Ref #2015-22
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: FAS 133 EITFs
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
At the 2015 Spring National Meeting, the Valuation of Securities (E) Task Force referred to the Working
Group a proposal pertaining to the treatment of Catastrophe Linked bonds. This referral is subject to the
understanding that work on the referral shall wait until the Working Group is provided ACLI’s report and
discussion is held among the affected group chairs (related to whether interest in cat bonds by life insurers
merits NAIC consideration of the proposal). (This referral will be addressed in a separate agenda item.)
Although consideration of accounting is pending the ACLI report, staff has reviewed whether guidance
exists in statutory accounting. In reviewing the history, there is reference to EITF 99-2 – Accounting
for Weather Derivatives as adopted with modification in SSAP No. 86. However, in reviewing SSAP
No. 86, there is no reference to the adoption of EITF 99-2. The same treatment was identified for a
variety of EITFs related to FAS 133:
EITF
98-10
98-12
99-01
99-02
99-03
99-8
99-9
00-07
00-09
Name
Accounting for Contracts Involved in Energy Trading and Risk
Management Activities
Application of Issue 00-19 to Forward Equity Sales Transactions
Accounting for Debt Convertible into the Stock of a Consolidated
Subsidiary
Accounting for Weather Derivatives
Application of Issue No. 96-13 to Derivative Instruments with
Multiple Settlement Alternatives
Accounting for Transfers of Assets that are Derivative Instruments
but that are not Financial Assets
Effect of Derivative Gains and Losses on the Capitalization of
Interest
Application of Issue No. 96-13 to Equity Derivative Instruments
That Contain Certain Provisions that Require Net Cash Settlement if
Certain Events Outside the Control of the Issuer Occur
Classification of a Gain or Loss from a Hedge of Debt that is
Extinguished
ASC
Superseded –
Not in ASC
Superseded –
Not in ASC
Superseded –
Not in ASC
815-45
Superseded –
Not in ASC
860-10
815-10
815-25
Superseded –
Not in ASC
815-30
Although the ACLI response for CAT bonds is still pending, staff believes that clarification is needed for
the EITFs identified in Appendix D, but not referenced in SSAP No. 86. In review, staff suspects that
these EITFs were intended to be included in the “framework” adoption of FAS 133 detail in SSAP No.
86. However, staff is unable to find specific reference in historical documents regarding this intent.
(These have been identified as adopted in Appendix D since 2003.)
© 2015 National Association of Insurance Commissioners
1
Attachment 13
Ref #2015-22
Existing Authoritative Literature:
•
SSAP No. 86—Accounting for Derivative Instruments and Hedging, Income Generation, and
Replication (Synthetic Asset) Transactions:
56.
This statement adopts the framework established by FAS 133, FASB Statement No.
137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the
Effective Date of FASB Statement No. 133, An amendment of FASB Statement No.
133 (FAS 137) and FASB Statement No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, An amendment of FASB Statement No.
133 (FAS 138), for fair value and cash flow hedges, including its technical guidance
to the extent such guidance is consistent with the statutory accounting approach
to derivatives utilized in this statement. This statement adopts the provisions of FAS
133 and 138 related to foreign currency hedges. With the exception of guidance specific
to foreign currency hedges and amendments specific to refining the hedging of interest
rate risk (under FAS 138, the risk of changes in the benchmark interest rate would be a
hedged risk), this statement rejects FAS No. 137 and 138 as well as the various
related Emerging Issues Task Force interpretations. This statement adopts
paragraphs 4 and 25 of FASB Statement No. 149: Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (FAS 149) regarding the definition of an
underlying and guidance for assessing hedge effectiveness. All other paragraphs in FAS
149 are rejected as not applicable for statutory accounting. This statement adopts FSP
FAS 133-1 and FIN 45-5: Disclosures about Credit Derivatives and Certain Guarantees,
An Amendment of FASB Statement No. 133 and FASB Interpretation No.45 and
Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN
45-4) and requires disclosures by sellers of credit derivatives. This statement rejects FSP
FIN 39-1, Amendments of FASB Interpretation No. 39, and ASU 2014-03, Derivatives
and Hedging – Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps
– Simplified Hedge Accounting Approach.
Appendix D –
98-10
Accounting for Contracts Involved in Energy
Trading and Risk Management Activities
98-12
Application of Issue No. 00-19 to Forward Equity
Sales Transactions
99-2
Accounting for Weather Derivatives
99-3
Application of Issue No. 96-13 to Derivative
Instruments with Multiple Settlement Alternatives
99-8
99-9
Accounting for Transfers of Assets that are
Derivative Instruments but that are not Financial
Assets
Effect of Derivative Gains and Losses on the
Capitalization of Interest
© 2015 National Association of Insurance Commissioners
2
Superseded
by EITF
02-3
Complete
Nullified
by FAS
150
Adopt/M
86
Complete
Complete
Adopt/M
Adopt/M
86
86
Complete
Adopt/M
86
Complete
Adopt/M
86
815-10
860-10
Complete
Adopt/M
86
815-25
815-30
460-10
815-45
Codified in
EITF 00-19
Attachment 13
Ref #2015-22
00-7
00-9
Application of Issue No. 96-13 to Equity
Derivative Instruments That Contain Certain
Provisions That Require Net Cash Settlement If
Certain Events outside the Control of the Issuer
Occur
Classification of a Gain or Loss from a Hedge of
Debt That Is Extinguished
Codified in
EITF 00-19
Complete
Adopt/M
86
Complete
Adopt/M
86
815-30
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
Staff Recommendation:
It is recommended that the Working Group move this agenda item to the nonsubstantive active
listing and expose this agenda item requesting comments on the intent of these EITFs. If these were
intended to be adopted in SSAP No. 86, staff will plan to include appropriate references in the
SSAP. If these have not been suitably considered previously, staff will mark them as “pending” in
Appendix D and complete a subsequent agenda item to review and provide a staff recommendation.
Staff Review Completed by:
Josh Arpin – June 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed this agenda item requesting comment on the prior action of the
EITF’s listed above.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H13 - 15-22 - FAS 133 EITFs.docx
© 2015 National Association of Insurance Commissioners
3
This page intentionally left blank.
Attachment 14
Ref #2015-27
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Quarterly Reporting of Investment Schedules
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
This agenda item requests comments on a possible blanks proposal to incorporate full investment
schedules within all interim financial statements. This aspect was previously included within agenda item
2015-19, coupled with a proposal to have the restricted asset disclosures quarterly. Based on Working
Group request, the solicitation of comments for full investment schedules was removed from that agenda
item and included in a separate Form A. Information from the original Agenda Item is included below:
Quarterly Financial Statements – Investment Detail:
It has been communicated that not having full investment schedules in the quarterly statutory
financials makes it difficult for regulators to fully review and assess an insurer’s financial condition
over interim periods. By not including the full investment schedules in the quarterly financial
statements it is impossible for regulators to complete reviews of quarterly investment holdings. From
information received from key regulators, there is a desire to propose inclusion of the full investment
schedules in all interim financial statements for all NAIC filers.
In exploring why the investment schedules were previously not included in the quarterly financials, it
is believed that the full investment schedules were not included as the financial statements were
required to be printed with hard-copies provided to the various states and the NAIC. As the
investment schedules can be quite lengthy, it seems this provision was intended to alleviate insurers
from the extensive printing that may have been required. The guidance in the NAIC Accounting
Practices and Procedures Manual (AP&P Manual) Preamble that references relying on the annual
statement and identifying only key or significant changes in the interim financials seems to have been
based on the premise that the regulators would have a hard-copy annual version readily available for
comparison purposes. With the electronic submission of financial statements, moving to include the
full investment schedules in the quarterly financials should no longer generate a printing concern /
burden to reporting entities.
In further considering the impact of this reporting change, it is not anticipated that requiring the full
investment schedules will be an overly difficult task for reporting entities. Information on investments
held during the interim periods should already be known. This is demonstrated as reporting entities
must already report the investment additions and deletions that occur throughout the interim reporting
period and they report the total investment valuation (by line item) in the interim balance sheet.
In reviewing the guidance in the AP&P Manual, it does not seem that statutory accounting guidance
specifically indicates whether the investment schedules should / should not be included in the
quarterly financial statements. As such, no actual SSAP revisions are necessary to effect this Blanks
(E) Working Group change. However, as this revision is tied to the presentation of statutory
accounting statements, and specifically focuses on improving the regulator’s ability to complete full
reviews of the investment holdings (which are reported under the concepts of SSAP), this agenda
© 2015 National Association of Insurance Commissioners
1
Attachment 14
Ref #2015-27
item proposes that the Statutory Accounting Principles (E) Working Group expose a proposal to
consider this change.
Existing Authoritative Literature:
Preamble – NAIC Accounting Practices and Procedures Manual
X.
Financial Statements
A.
Annual Financial Statement
58.
Each state requires all insurance companies doing business in that state to file an annual
financial statement. All states use the annual statement blank promulgated by the NAIC, but each
state retains the authority to make changes in those statements. Changes made by states
generally require only supplemental information and do not change the basic financial
information.
59.
To the extent that disclosures required by a SSAP are made within specific notes,
schedules, or exhibits to the annual statement, those disclosures are not required to be
duplicated in a separate note. Annual statutory financial statements which are not accompanied
by annual statement exhibits and schedules (e.g., annual audit report) shall include all
disclosures required by the SSAPs based on the applicability, materiality and significance of the
item to the insurer. Certain disclosures, as noted in individual SSAPs, are required in the annual
audited statutory financial statements only.
B.
Interim Financial Statements
60.
Interim financial statements, including quarterly statements, shall follow the form and
content of presentation prescribed by the domiciliary state for the quarterly financial statements.
The NAIC quarterly statement form has been adopted by each state with minor variations as
required by certain states.
61.
The interim financial information shall include disclosures sufficient to make the
information presented not misleading. It may be presumed that the users of the interim financial
information have read or have access to the annual statement for the preceding period and that
the adequacy of additional disclosure needed for a fair presentation, except in regard to material
contingencies may be determined in that context. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the most recent annual statement or audited
financial statements, such as a statement of significant accounting policies and practices, details
of accounts which have not changed significantly in amount or composition since the end of the
most recently completed fiscal year, may be omitted. However disclosure shall be provided where
events subsequent to the end of the most recent fiscal year have occurred which have a material
impact on the insurer. Disclosures shall encompass, for example, significant changes since the
end of the period reported on the last annual statement in such items as: statutory accounting
principles and practices, estimates inherent in the preparation of financial statements, status of
long term contracts, capitalization including significant new borrowings or modifications of existing
financial arrangements, and the reporting entity resulting from business combinations or
dispositions. Notwithstanding the above, where material noninsurance contingencies exist,
disclosure of such matters shall be provided even though a significant change since year end
may not have occurred.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the
SAPWG: None
© 2015 National Association of Insurance Commissioners
2
Attachment 14
Ref #2015-27
Staff Recommendation:
Staff recommends that the Working Group expose a proposal to possibly sponsor blanks revisions
to incorporate the full investment schedules within all interim financial statements. No changes are
anticipated to the statutory accounting guidance for this investment schedule proposal.
During the June 17, 2015 conference call, the Working Group reviewed agenda item 2015-19, which
included a recommendation to include restricted asset disclosures in interim and annual financial
statements, as well as to consider sponsoring a blanks proposal for full investment schedules. Per the
direction of the Working Group, the agenda item was split, with agenda item 2015-19 retaining the
restricted asset proposal, and this agenda item (2015-27) including the inquiry for the investment
schedules. During the call, it was noted that requiring a full pdf of the investment detail may not be
necessary for regulators, however, it was identified receiving electronic data that can be used for
aggregate reviews of investments would provide valuable information for the capital market assessments.
Staff Review Completed by:
Julie Gann – May 8, 2015
Status:
On June 17, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed this agenda item requesting comments on the prospect to collect
full investment schedule information (or perhaps limited details of all investments) in the quarterly
financial statements. It was noted that the AP&P Manual does not prescribe guidance limiting the
investment schedules to the annual financial statements, but this change, if supported, would be
implemented by Blanks (E) Working Group changes. Although no changes to the AP&P Manual would
be anticipated, soliciting comments from the members, interested regulators and interested parties of the
Statutory Accounting Principles (E) Working Group is desired as they are responsible for the accounting
guidance pertaining to the related investments.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2015\Summer\Hearing\H14 - 15-27 Quarterly Disclosures Investment Schedules.docx
© 2015 National Association of Insurance Commissioners
3
This page intentionally left blank.
Attachment 15
D. Keith Bell, CPA
Senior Vice President
Accounting Policy
Corporate Finance
The Travelers Companies, Inc.
860-277-0537; FAX 860-954-3708
Email: d.keith.bell@travelers.com
Rose Albrizio, CPA
Vice President
Accounting Practices
AXA Equitable
201-743-7221
Email: rosemarie.albrizio@axa-equitable.com
July 10, 2015
Mr. Dale Bruggeman, Chairman
Statutory Accounting Principles Working Group
National Association of Insurance Commissioners
1100 Walnut Street, Suite 1500
Kansas City, MO 64106-2197
RE:
Interested Parties Comments on Items Exposed for Comment during the June 17th
Conference Call of the NAIC Statutory Accounting Principles Working Group
Dear Mr. Bruggeman:
Interested parties appreciate the opportunity to provide comments on the items that were
exposed for comment during the June 17 conference call of the NAIC Statutory Accounting
Principles Working Group (the Working Group). We offer the following comments for your
consideration.
Ref #2015-13: ASU 2015-04: Practical Expedient for the Measurement Date of An
Employer’s Defined Benefit Obligation and Plan Assets
The Working Group exposed revisions to SSAP No. 92 - Accounting for Postretirement
Benefits Other than Pensions (SSAP No. 92) and SSAP No. 102 – Accounting for Pensions
(SSAP No. 102) to reject ASU 2015-04 and maintain current statutory accounting treatment as
statutory accounting requires benefit obligations and plan assets to be measured as of a year-end
measurement date. ASU 2015-04: Practical Expedient for the Measurement Date of An
Employer’s Defined Benefit Obligations and Plan Assets (ASU 2014-04) was issued in April
2015 to address situations when reporting entities are incurring more costs than other entities
when measuring the fair value of plan assets of a defined benefit pension or other postretirement
benefit plan as a result of having a fiscal year-end that does not coincide with a month-end. For
these reporting entities, the amendments in ASU 2015-04 provide a practical expedient that
permits the entity to measure defined benefit plan assets and obligations using the month-end
that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from
year to year. Also, the practical expedient should be applied consistently to all plans if an entity
has more than one plan.
Page 1 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 2
Attachment 15
Pursuant to SSAP No. 92 and SSAP No. 102, companies are required to use a year-end
measurement date for benefit obligation and plan assets. As such, pursuant to existing statutory
accounting guidance, all reporting entities shall already be using a year-end measurement date
and not a fiscal date that differs from a year-end / month-end (Dec.31) date.
Interested parties believe ASU 2015-04 contains guidance which is relevant and beneficial to
insurers. In addition to allowing a practical expedient related to the annual measurement of
plan assets and obligations, ASU 2015-04 also permits this same practical expedient to be
applied to situations in which a significant event requiring remeasurement occurs during an
interim period. Interested parties believe being permitted to remeasure defined benefit assets
and obligations using the month-end that is closest to the date of the significant event would
alleviate the cost and burden associated with having to adjust month-end balances to the
specific date of the significant event, while still providing relevant and timely information in
interim financial statements. That is to say, if a significant event were to occur on June 17th, it
would be cost effective and beneficial if the remeasurement could occur on June 30th.
However, it is unclear if existing statutory guidance explicitly allows for this (other than by
concluding the use of the month-end date is immaterial). For example, paragraph 63 of SSAP
No. 92 includes the following:
“For example, if a significant event occurs, such as a plan amendment, settlement,
curtailment, that ordinarily would call for remeasurement, the assumptions used for
those later measurements shall be used to remeasure net periodic postretirement benefit
cost from the date of the event to the year—end measurement date.”
Many believe this implies that the remeasurement date for the above hypothetical curtailment
would need to be June 17th for June 30th interim reporting. Interested parties would welcome
explicit statutory guidance that the closest month-end date (e.g., June 30th in this hypothetical
example) could be used as a practical expedient when a significant event occurs other than on a
month-end.
Interested parties believe such an explicit acknowledgement should be included in both SSAP
No. 92 and SSAP No. 102. We suggest the insertion of the following two new paragraphs in
each applicable SSAP, after paragraph 63 (as new paragraphs 64 and 65) in SSAP No. 92 and
after paragraph 42 (as new paragraphs 43 and 44) in SSAP No. 102:
64. / 43. If a significant event caused by the employer (such as a plan amendment,
settlement, or curtailment) that requires an employer to re-measure both plan assets and
benefit obligations does not coincide with a month-end, the employer may elect to remeasure plan assets and benefit obligations using the month-end that is closest to the
date of the significant event.
65. / 44. If an employer re-measures plan assets and benefit obligations during the fiscal
year in accordance with paragraph (64 / 43), the employer shall adjust the fair value of
plan assets and the actuarial present value of benefit obligations for any effects of the
significant event that may or may not be captured in the month-end measurement (for
example, if the closest month-end is before the date of a partial settlement, then the
Page 2 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 3
Attachment 15
measurement of plan assets may include assets that are no longer part of the plan). An
employer shall not adjust the fair value of plan assets and the actuarial present value of
benefit obligations for other events occurring between the month-end date used to
measure plan assets and benefit obligations and the employer’s fiscal year-end that may
be significant to the measurement of defined benefit plan assets and obligations, but are
not caused by the employer (for example, changes in market prices or interest rates).
In addition, interested parties suggest the following conforming changes to the respective
SSAPs’ Relevant Literature sections (new paragraph 101 in SSAP No. 92 and new paragraph
83 in SSAP No. 102):
SSAP No. 92 – Accounting for Postretirement Benefits Other Than Pensions:
101. This statement adopts the revisions to ASC 715-60 as it relates to interim remeasurement due to a significant event as detailed in ASU 2015-04: Practical
Expedient for the Measurement Date of An Employer’s Defined Benefit Obligation and
Plan Assets. Other revisions are rejected as statutory accounting requires the annual
measurement of benefit obligations and plan assets to be measured as of a year-end
measurement date.
SSAP No. 102- Accounting for Pensions, A Replacement of SSAP No. 89:
83. This statement adopts the revisions to ASC 715-30 as it relates to interim remeasurement due to a significant event as detailed in ASU 2015-04: Practical
Expedient for the Measurement Date of An Employer’s Defined Benefit Obligation and
Plan Assets. Other revisions are rejected as statutory accounting requires the annual
measurement of benefit obligations and plan assets to be measured as of a year-end
measurement date.
Ref #2014-14: SSAP No. 68 – Paragraph 7 Clarification on Goodwill Limitation
The Working Group exposed revisions to SSAP No. 68 to provide a clarification that the
goodwill limitation test is completed at the individual reporting company level. The proposal
would add the following footnote to paragraph 7 of the SSAP No. 68:
Footnote 1: The “acquiring” entity is intended to reflect the insurance reporting entity
that reports the investment resulting in goodwill. The goodwill limitation test shall be
completed at the individual reporting company level and not at the consolidated level.
Interested parties do not disagree with the intent of the clarification but do not recommend using
the phrase “at the consolidated level”. Even though statutory accounting rejected the concept of
consolidated financial statements, the use of this reference may lead some companies to believe
that there may be instances where it is appropriate to evaluate items at a consolidated level. We
recommend ending the footnote at “individual reporting company level”.
Ref #2014-15: ASU 2015-05: Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement
The Working Group exposed revisions to SSAP No. 16R to clarify that entities that license
Page 3 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 4
Attachment 15
internal-use computer software are required to follow the lease provisions outlined in SSAP No.
22.
Interested parties recommend that this issue be deferred until the Financial Accounting
Standards Board (FASB) completes its deliberation of lease accounting and issues final
guidance and the Working Group concludes on the FASB’s final guidance.
Ref #2015-16: ASU 2015-06: Effects on Historical Earnings per Unit of Master Limited
Partnership Dropdown Transactions
The Working Group exposed revisions to Issue Paper No. 99 to reject ASU 2015-06 as not
applicable to statutory accounting. (Also in agenda item 2015-20, there is a proposal to
incorporate Issue Paper No. 99 into Appendix D. If that agenda item is adopted, the reference
to reject ASU 2015-06 as not applicable will be included in that new location.)
Interested parties have no comment on this item.
Ref #2015-18: Policy Statement Revisions – Membership and Roles of SAPWG
The Working Group exposed the proposed concept change to disband the Emerging Accounting
Issues (E) Working Group, with the Statutory Accounting Principles Working Group
incorporating a new process to issue interpretations and to increase their membership by two.
The Working Group directed staff to work with regulators in drafting revisions to the Policy
Statements to reflect these procedures and to incorporate other components that reflect the
current process of the Working Group.
Interested parties recommends that the Emerging Accounting Issues (E) Working Group be
retained and utilized for the purposes for which it was originally formed, i.e., to address
interpretations of existing guidance in instances where questions are raised by regulators,
industry, or NAIC staff. The interpretations should then be left intact for a period of time to
determine if the guidance is clear and being applied appropriately. The formation of this group
was intended to free up regulatory resources from having to re-write existing guidance when
questions arise. Some recent examples of where interpretations would have been appropriate
include the discussions on make-whole provisions, goodwill impairment, and questions
regarding SSAP No. 97.
Ref #2015-19: Quarterly Reporting of Restricted Assets
The Working Group exposed revisions to SSAP No. 1 to require disclosure of restricted assets
in interim financial statements in addition to the current requirement for annual financial
statements. NAIC staff proposes to incorporate the annual reporting requirements for restricted
assets into the quarterly disclosures. This proposal stems from a regulator’s comment that the
current quarterly disclosures for restricted assets does not provide sufficient information for
evaluating the impact of restricted assets on an insurer’s financial condition during interim
periods. NAIC staff also proposes to delete the annual general interrogatory for restricted assets
and add additional disclosures on restricted assets to the annual and quarterly notes.
Page 4 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 5
Attachment 15
Note Disclosure
Interested parties understand the need for adequate information during interim reporting periods
to assess the financial condition of an insurer. Current statutory accounting guidance defines
circumstances in which current material information should be disclosed in the quarterly
statements. In summary, with certain exceptions, the guidance in paragraph 61 of the Preamble
to the Accounting Practices and Procedures Manual (AP&P Manual) stipulates that in order to
avoid the duplication of the disclosures included in the most recent annual statement,,
disclosures in the notes to interim financial statements should be made only when there are
material events subsequent to the most recent fiscal year end that are significantly different
from the annual disclosure. If not significantly different from the annual disclosure, the annual
disclosure can be used in the evaluation of the financial condition of the insurer during interim
periods subsequent to the filing of the most recent annual statement. The quarterly statement
instructions for note disclosures provide similar guidance.
General Interrogatory Disclosure
Interested Parties do not support eliminating General Interrogatories 25.2 and 25.3. The General
Interrogatory is the basis for components of the C-0 and R-0 “Off-balance Sheet” RBC charge;
its line-item values are pulled directly into the RBC formulas and assigned RBC charges. If GI
25.2 and 25.3 were eliminated, the RBC formulas would need to be repointed. Use of Footnote
5H as a substitute source, if that is contemplated, has RBC implications that should be
addressed by the Capital Adequacy Task Force before any such wholesale change is made.
The Interrogatories and Footnote 5H each have distinct and different instructions: for example,
Interrogatories 25.2 and 25.3 report assets that are “not under the exclusive control of the
reporting entity”, whereas the footnote requires disclosure of “Restricted Assets”. As regulators
have observed, the distinctions have resulted in material differences in categories and amounts
reported in the General Interrogatory versus the footnote, and also have the potential for
differences in interpretation between reporters unless the categories are clearly defined.
In 2013, when the expanded Restricted Assets footnote was created, it was our understanding
that the separation between the expanded footnote and the General Interrogatory was intended
and agreed as appropriate at the least until such time as issues of category definition,
accounting treatment, and RBC treatment, as necessary, were simultaneously addressed. The
separation has the beneficial effect that it allows regulators to collect through Footnote 5H very
broad, comprehensive information about every category of assets that could be considered as
“restricted” to any degree and in any fashion, without necessarily forcing accounting treatment
changes, or forcing each identified category into the existing RBC charge structure. It also
provides time to hone clearer, consistent category definitions and reporting structures. Notably,
catch-all Other categories were introduced in Footnote 5H [table lines 5H(1)m and 5H(1)n]
with companies being instructed to interpret them broadly and then detail them further in 5H(2)
and 5H(3) precisely so that regulators could begin to identify and distinguish new subcategories
and determine their appropriate treatment. The separation between Footnote 5H and the
Page 5 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 6
Attachment 15
Interrogatories remains beneficial today because the work of reviewing 5H categories is not
complete.
Interested parties acknowledge that important progress has been made by the Restricted Asset
Subgroup, and we encourage and support continuing that work, but without a specific review of
the RBC charges generated from GI 25.2 and 25.3 we cannot support their elimination.
Additional Disclosures
Interested parties agree that providing information on admitted and nonadmitted restricted
assets in the annual disclosure may provide useful information to a regulator. However, it is
unclear what information is being proposed to be added to the disclosure. On page 5 of Ref
#2015-19 under staff recommendations it states:
Staff recommends that the Working Group move this item to the nonsubstantive active
listing and expose revisions to SSAP No. 1 to …… require information on admitted and
nonadmitted assets, ……..
The added wording in the first sentence of paragraph 25 b of SSAP No. 1 states:
“The total amount (admitted and nonadmitted), admitted amount and………”
It is unclear from this added wording whether the nonadmitted amount should also be reported
separately or only the admitted amount is reported separately. We suggest that the opening
sentence of this paragraph be rephrased as follows:
“The amount of admitted and nonadmitted restricted assets reported separately, admitted
restricted assets by category and …”
Interested parties believe that the current guidance in the AP&P Manual and annual statement
instructions are sufficient to require that material changes to restricted assets be reported in the
quarterly financial statement’s note disclosures. We believe that for a majority of insurers,
restricted assets are not material to the companies’ financial condition and do not fluctuate
significantly from quarter to quarter. For these reasons we believe that additional mandatory
quarterly reporting requirements for restricted assets are not necessary.
Ref #2015-20: Placement Revisions to the AP&P Manual
The Working Group exposed revisions to remove Issues Papers from Appendix E of the AP&P
Manual (book version only) and to instead maintain the papers on the “Updates to the AP&P
Manual” section of the Statutory Accounting Principles (E) Working Group Webpage. This
proposal would include newly adopted Issue Papers in the printed manual for the publication in
which the SSAP that was new/substantively revised is initially included. Subsequently, they
would be retained on the NAIC website. (They would also be retained in the electronic version
of the manual.) In addition, for Issue Paper 99— Nonapplicable GAAP Pronouncements, staff
is proposing a placement revision to transfer the contents of this issue paper to Appendix D of
the AP&P Manual, as the contents of this issue paper is duplicative of the information found in
Appendix D.
Page 6 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 7
Attachment 15
Interested parties have no comment on the placement revisions; however we wish to comment
on the continued importance of the Issue Papers, especially as the bulk of the papers will no
longer be part of the printed accounting manual. Ref# 2015-20 states, “As expressed in the
Statutory Hierarchy of the Preamble, issue papers are not considered authoritative literature.
The purpose of their inclusion in the AP&P manual is to provide a historical reference of
adopted issue papers and their substantive revisions to authoritative literature.” As stated in the
Statement of Concepts and the Preamble (paragraph 50) “SAP utilizes the framework
established by GAAP”. Not only are the Issue Papers to “provide a historical reference of
adopted issue papers and their substantive revisions to authoritative literature”, but they were
also developed to be consistent with the FASB Background information and basis for
conclusions included in each ASU. Per the FASB Rules of procedures:
The basis for the conclusions, which should describe the reasons (conceptual of
otherwise) for accepting certain alternatives and rejecting others and a summary of
significant and relevant points of view communicated through public forums and in
written comments.
Many of us continue to refer to Issue Papers to provide additional context on issues finding
them an important tool of our accounting research.
Ref #2015-22: FAS 133 EITFs
The Working Group exposed this agenda item requesting comment on EITF 99-2 as well as a
variety of EITF’s related to FAS 133 in SSAP 86.
As part of a referral from the Valuation of Securities Task Force (VOS) on the treatment of
Catastrophe Linked bonds, staff reviewed the history and found there is reference to EITF 99-2
– Accounting for Weather Derivatives as adopted with modification in SSAP No. 86—
Accounting for Derivative Instruments and Hedging, Income Generation, and Replication
(Synthetic Asset) Transactions. However, in reviewing SSAP No. 86, there is no reference to
the adoption of EITF 99-2. The same treatment was identified for a variety of EITFs related to
FAS 133. Although the American Council of Life Insurers (ACLI) response for CAT bonds is
still pending, staff believes that clarification is needed for the EITFs identified in Appendix D,
but not referenced in SSAP No. 86. In review, staff suspects that these EITFs were intended to
be included in the “framework” adoption of FAS 133 detail in SSAP No. 86. However, staff is
unable to find specific reference in historical documents regarding this intent. (These have been
identified as adopted in Appendix D since 2003.)
Comments on the intent of these EITFs have been requested. If these EITFs were intended to
be adopted in SSAP No. 86, staff will plan to include appropriate references in the SSAP. If
these have not been suitably considered previously, staff will mark them as “pending” in
Appendix D and complete a subsequent agenda item to review and provide a staff
recommendation.
Page 7 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 8
Attachment 15
Interested parties reviewed the comment letter we submitted when SSAP 86 was exposed for
comment, where we stated:
Paragraph 55 – Although this SSAP does not specifically address the various
interpretations of FAS 133 that the FASB Derivatives Implementation Group developed
(i.e., the DIG issues), we believe that, given the complexity of FAS 133 and the
uncertainty of intent with regard to much of the guidance in FAS 133, this paragraph
should be amended to apply certain DIG issues. We believe that it will be necessary for
both financial statement preparers and auditors to utilize the interpretations in various
DIG issues in order to apply SSAP 86. We are also cognizant of the dangers of
attempting to apply all DIG issues to this SSAP. Accordingly, we recommend that the
end of the first sentence be amended to read: “….for fair value and cash flow hedges,
including its technical guidance to the extent that such guidance is consistent with the
statutory accounting approach to derivatives utilized in this SSAP.”
In an effort to timely complete SSAP 86, we believe that the above phrase was incorporated:
“….An amendment of FASB Statement No. 133 (FAS 138), for fair value and cash flow
hedges, including its technical guidance to the extent such guidance is consistent with the
statutory accounting approach to derivatives utilized in this statement.” However, as the
detailed EITF’s were not listed in SSAP 86, interested parties believe it would be appropriate
for staff to mark the EITFs as “pending” in Appendix D and complete a subsequent agenda item
to review and provide a staff recommendation.
Ref #2015-27: Quarterly Reporting of Investment Schedules
The Working Group exposed this agenda item requesting comments on the proposal to report
full investment schedule information (or limited details of all investments) in the quarterly
financial statements. It was noted that the Accounting Practices &Procedures Manual (AP&P
Manual) does not prescribe guidance limiting the investment schedules to the annual financial
statements, but this change, if supported, would be implemented by Blanks (E) Working Group
changes. Although no changes to the AP&P Manual would be anticipated, soliciting comments
from the members, interested regulators and interested parties of the Working Group is desired
as they are responsible for the accounting guidance pertaining to the related investments.
Before discussing our comments in detail, Interested parties note that the Preamble to the
Accounting Practices and Procedures Manual states “It may be presumed that the users of the
interim financial information have read or have access to the annual statement for the preceding
period and that the adequacy of additional disclosure needed for a fair presentation, except in
regard to material contingencies may be determined in that context.” The statutory process was
developed to be consistent with other regulatory processes such as SEC filings. Statutory
follows the SEC filing process to prepare full financial statements (10K’s) and updates to the
annual financial statements (10Q’s) for material items.
Interested parties strongly support this statement as it provides a balance between providing
regulators the tools they need to assess the solvency of insurers and subjecting insurers to
regulation at costs that are not unreasonable, so that they may continue to provide affordable
Page 8 of 46
Statutory Accounting Principles Working Group
July 10, 2015
Page 9
Attachment 15
insurance protection to consumers. This proposal would represent a radical departure from this
principle and we urge regulators to carefully consider the implications.
There are a number of reasons why the interim financial statements contain limited information
when compared to the annual statement. As the filing requirements and deadlines for insurers
have developed over the years, attention was paid to the type, frequency and usefulness of
information needed by regulators to assess the solvency of insurers, as well as the costs
associated with obtaining that information. Preparing investment schedules detailing every
investment holding is a colossal undertaking, even for the largest insurers with significantly
more resources available to them than smaller companies. Smaller companies often have to rely
on contractors or outsource the investment reporting process at a significant cost, because they
simply do not have the resources to complete the full annual statement by March 1 of each year.
The investment schedules represent the most time consuming part of the Annual Statement,
whether completed electronically or in print, with the full Schedule D typically being one of the
last schedules completed.
The exposure states that “…it is not anticipated that requiring the full investment schedules will
be an overly difficult task for reporting entities. Information on investments held during the
interim periods should already be known”. This statement is not accurate. While insurers are
aware of their investment holdings on an interim basis, there is a big difference between
knowing the carrying value and fair value of our holdings and being prepared to report them in
Schedules that is some cases (Schedule D) contain thirty columns with various types of
information. The Quarterly Reporting of full Investment Schedules would require additional
resources to complete within the quarterly timing, which is a shorter period than year end. This
will result in additional insurers costs, both internal and external (investment managers,
vendors, etc.)
We question the cost/benefit of providing this additional information for NAIC staff and
regulators compared to what is provided today. The exposure states the requirement to only
provide full investment schedules on an annual basis was “intended to alleviate insurers from
the extensive printing that may have been required”. While this may have been one of the
reasons, another important consideration was the limited ability of the regulators to store,
manage and use the electronic data in a cost effective and useful manner. To this point, we ask
the regulators to consider the following issues:
1. Is it more helpful for regulators to receive and use a quarterly data listing of investments
from insurers or more summarized information as it currently provided? The interim
financial statements already provide all acquisitions and dispositions, as well as the
aggregate carrying value and fair value of all investments owned, by type, which when
viewed together with the annual statement provide a comprehensive view of insurers’
investment holdings.
2. Are the regulators staffed to review the additional data received on a quarterly basis?
There will be a significant amount of additional data that places responsibility on
insurance departments (financial analysts and examiners) to review.
Page 9 of 46
Attachment 15
Statutory Accounting Principles Working Group
July 10, 2015
Page 10
3. While it may be desirable for NAIC staff to have the ability to analyze or data mine all
investment holdings on a quarterly basis, will this proposal materially improve the
ability of regulators to assess the solvency of insurers, particularly when insurers are
already providing the information in item 1 above?
4. Will the costs incurred by companies to provide this information and by the NAIC to
process, analyze and store the data outweigh the benefits provided by the additional
data?
5. Could perhaps a better solution be to improve the NAIC’s ability to make use of the
existing information already available (quarterly acquisition and disposition schedules,
financial statement footnotes, Investment Analysis Office research etc.)?
This item also requests comments on a possible Blanks proposal to incorporate full investment
schedules in the interim financial statements. It’s unclear why this is being exposed by the
Working Group when the investments schedules are clearly within the scope of the Blanks
Working Group. The rational laid out by NAIC staff in the exposure draft indicates that since
the proposed revisions are tied to the presentation of the statutory financial statements, it is
appropriate for the Working Group to expose the proposal. All proposed changes to exhibits
and schedules in the Annual Statement can impact the presentation of the statutory financial
statements. We believe in this case the discussion should have started with the Valuation of
Securities Task force and included an evaluation of information needs before a referral was
made to the Blanks Working Group. We are a bit confused about the course this proposal has
taken.
*
*
*
*
Thank you for considering interested parties’ comments. We look forward to working with you
and the Working Group at the Summer National Meeting in Chicago, IL. If you have any
questions in the interim, please do not hesitate to contact either one of us.
Sincerely,
D. Keith Bell
cc:
Rose Albrizio
Julie Gann, NAIC staff
Robin Marcotte, NAIC staff
Interested parties
Page 10 of 46
Attachment 15
Page 11 of 46
Attachment 15
D. Keith Bell, CPA
Senior Vice President
Accounting Policy
Corporate Finance
The Travelers Companies, Inc.
860-277-0537; FAX 860-954-3708
Email: d.keith.bell@travelers.com
Rose Albrizio, CPA
Vice President
Accounting Practices
AXA Equitable.
201-743-7221
Email: rosemarie.albrizio@axa-equitable.com
May 26, 2015
Mr. Dale Bruggeman, Chairman
Statutory Accounting Principles Working Group
National Association of Insurance Commissioners
1100 Walnut Street, Suite 1500
Kansas City, MO 64106-2197
RE:
Interested Parties Comments on Items Exposed for Comment during NAIC Spring
National Meeting in Phoenix, AZ
Dear Mr. Bruggeman:
Interested parties appreciate the opportunity to provide comments on the items that were
exposed for comment during the NAIC Spring National Meeting in Phoenix, AZ. We offer the
following comments for your consideration.
Ref #2013-36: Investment Classification Review
NAIC staff has received questions regarding the definition and scope of the bond and equity SSAPs. The
issues, not all-inclusive, that have been identified include the following:
a) Lack of definitions for types of investments and when definitions are included, variations between
statutory accounting definitions and capital-market usage, FASB or SEC definitions.
b) Allowing “look-through” accounting for certain types of investments of insurers, with specific
inclusion of items in the bond or equity SSAPs (e.g., certain Mutual Funds and ETFs) that do not
meet the SSAP definition, and the reporting of such items in the investment schedules.
c) Inconsistencies regarding the reporting of items within Schedule D and Schedule BA (e.g., bonds,
ETFs, loans, debt obligations of partnerships/joint ventures and different forms of mutual funds).
d) Different treatment for some investments by type of insurer (e.g., life and fraternal insurers have
specific instructions for BA investments with underlying characteristics of bonds or preferred
stock).
The Working Group exposed for comment four discussion documents related to the SSAP No. 26
investment discussions:
1) proposal to include a definition for “security”,
2) proposal to require a “contractual amount of principal due”,
Page 12 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 2
Attachment 15
3) analysis of exchange-traded fund (ETF) investments approved for reporting as bonds or
preferred stocks as of Dec. 31, 2013, and
4) definitions of non-bond items.
Discussion – Inclusion of Security Definition in SSAP No. 26
This item proposes adopting the definition of a security found in U.S. GAAP by including it as a
footnote in SSAP 26, as well as considering at a later date if the definition should be included in the
AP&P Manual Master Glossary. Since the U.S. GAAP definition of a security is already in the AP&P
Manual (SSAP 37 and SSAP 83), we do not object to requiring it to be used for SSAP 26, or any other
SSAPs where the term “security” is referenced. As stated previously, we do believe the best approach is
to include the security definition in the Master Glossary rather than individually in each SSAP.
Discussion – Requirement for “Contractual Amount of Principal Due”
This item proposes limiting the scope of SSAP 26 to investments that have a “contractual amount of
principal due”. The practical effect of this change would be that ETF’s and mutual funds would no
longer be in scope of SSAP 26. This item also contains a proposed new SSAP to address the accounting
for funds. As stated in our prior comment letter, we do not believe it is necessary to move funds to a new
SSAP nor review the accounting for these investments.
We understand from prior exposures related to 2013-36 and discussions with regulators, that the intent
of the Investment Classification Review is to clarify and improve the accounting for bonds and bond-like
investments, and not to restrict the types of investments in which insurers are currently permitted to
invest under state investment laws and the AP&P Manual. With this understanding in mind, it is
troubling that the proposed new SSAP contains the following statement “Other types of fund
investments (e.g., closed-end funds, hedge funds, and unit investment trusts that are not ETFs) are not
specifically addressed within statutory accounting guidance and pursuant to SSAP No. 4 are considered
nonadmitted assets.” All of these investments are currently held by insurers and considered admitted
assets under SSAP 30 and SSAP 48, as well as state investment laws, and we are not aware of any
significant regulatory concerns related to them. We ask that the Working Group clarify the intent of this
statement and comment on whether the scope of the Investment Classification review has now changed.
If the Working Group decides to move forward with a new SSAP, it is important to do so carefully and
with industry input, to avoid unintended consequences. We also recommend the Working Group and
NAIC staff solicit feedback from interested parties on the different types of funds, how they are
structured and accounted for, to avoid additional issues like this from arising.
ETF-Financial Data Summary as of Year-End 2013 and 2014 (two separate items)
This item was originally exposed at the Spring NAIC meeting and provides and overview of ETF
holdings by the insurance industry as well as an analysis of the accounting for ETFs that hold bonds and
are eligible for the amortized cost measurement prescribed by SSAP 26. The original memorandum
contained data as of December 31, 2013 and was subsequently updated with 2014 data. The original
paper stated that requiring a fair value measurement for bond ETFs would have a negligible impact on
most insurers, and would result in companies consistently reporting these assets at a publically-traded
value which represents the amount available for policyholder claims. The updated paper makes a
statement that there is a strong need for separate reporting and a specific measurement for all ETF
investments, and provides several examples supporting this point, including details of inconsistencies
with how insurers are accounting for and reporting investments in bond ETFs.
Page 13 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 3
Attachment 15
As stated earlier, we do not believe a separate accounting model for funds is necessary. If insurers are
reporting or accounting for bond ETFs inconsistently, the most efficient way to address this problem is
to clarify the existing requirements in SSAP 26 and the annual statement instructions for the Schedule D
Part 1. Creating a new SSAP and potentially a new investment schedule to address all types of funds
because one particular subset requires review seems unnecessary, especially when bond ETFs represent
a very small portion of the overall fund universe invested in by insurers. Most funds owned by insurers
are reported as common stock (SSAP 30/ Schedule D Part 2) or as limited partnerships (SSAP
48/Schedule BA).
Additionally, assessing the impact that a change to fair value would have in a flat (historically
low) interest rate environment is not an accurate measure of the impact that such a change could
potentially have when rates begin to rise. We also disagree with the statement that fair value
represents the amount available for policyholder claims for bond ETFs, because that premise is
inconsistent with the objectives of statutory accounting principles. Statutory accounting generally
prescribes the valuation of assets to meet both current and future policyholder claims and to avoid
fluctuations in surplus, where possible. Fair value would not be the appropriate measurement for
meeting these objectives when bond ETFs are held on a long-term basis to meet future policyholder
claims. We ask the Working Group to keep this principle in mind along with the immateriality of bond
ETFs relative to all assets owned by insurers when considering what, if any changes to make to the
accounting and reporting for these investments.
Discussion – Definitions of Non-Bond Items
This item provides definitions for debt-like investments outside of the bond definition proposed in SSAP
26, asks for comments on the definitions, and requests feedback on whether other terms should be
defined for purposes of determining appropriate statutory accounting guidance. Interested parties offer
the following comments on each item, while noting we do not have additional investments to add to the
list at this time.
Loan Participations and Loan Syndications
There are a number of ways in which these investments can be defined. We recommend replacing the
proposed definitions with the definitions contained within the FASB Codification Master Glossary.
Loan Participation - A transaction in which a single lender makes a large loan to a borrower and
subsequently transfers undivided interests in the loan to groups of banks or other entities.
Loan Syndication - A transaction in which several lenders share in lending to a single borrower. Each
lender loans a specific amount to the borrower and has the right to repayment from the borrower. It is
common for groups of lenders to jointly fund those loans when the amount borrowed is greater than any
one lender is willing to lend.
A subset of both loan participations and syndications, are bank participations, where the underlying is a
loan that if originated directly by the insurer, would be accounted for under SSAP 26. We note that loan
participations and syndications where the underlying is a loan secured by real estate are accounted for
under SSAP 37 or SSAP 83. In speaking with several large insurers that invest in this asset class and
reviewing legal analysis of these investments, we have concluded that some structures may meet the
definition of a security, while others do not. There can be minor differences in the legal documents
unrelated to the economics of the investments that can impact this classification. We believe all loan
participations and syndications, where the underlying is a loan not secured by real estate, should
continue to be accounted for as a bond under SSAP 26.
Page 14 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 4
Attachment 15
To Be Announced (TBA Securities)
The TBA market is a mechanism to create liquidity for certain types of U.S. Government sponsored
agency securities. Therefore, we believe describing these investments as TBA Securities or Transactions
is unclear at best. We recommend the following alternative definition to clarify this point as well as
make other changes more consistent with our understanding of the TBA market.
TBA means “To-Be-Announced” and refers to a market that facilitates the enhanced liquidity in
and trading of Agency-Pass-Through Mortgage Backed Securities where the parties agree that
the seller will deliver to the buyer Agency Pass-Through Mortgage-Backed Securities of a
specified agency type, face amount, coupon and maturity on a specified date, at a specified price
representing a pool (or pools) of mortgage loans that are typically not known at the time of trade
but are “announced” 48 hours before the established trade settlement date (i.e., to be announced
at a future date). An Agency Pass-Through Mortgage-Backed Security means a mortgage
backed security issued by Ginnie Mae or a Government-Sponsored Enterprise (e.g., Freddie Mac
or Fannie Mae), for which the timely payment of principal and interest is either explicitly
guaranteed by the U.S. Government (also known as Ginnie Mae Securities) or implicitly
guaranteed by the U.S. Government (also known as Conventional Securities), representing
ownership interests in a pool or pools of residential mortgage loans with the security structured
to “pass through” the principal and interest payments made by the mortgagees to the owners of
the pool(s) on a pro rata basis.
Hybrids
This section attempts to define different types of Hybrid investments that have characteristics of both
debt and equity. Currently, examples of Hybrid Securities are listed in the annual statement instructions.
We offer comments on each investment listed in the exposure:
Trust Preferred Securities – We offer no comments on the definition but note this type of investment
is commonly treated as a hybrid security for annual statement reporting.
Yankee Bonds – We offer no comments on the proposed definition. Yankee bonds, or bonds issued
by foreign entities denominated in U.S. dollars, generally meet both the current and proposed
definition of a bond in SSAP 26, and are not considered hybrid securities, unless they have equitylike features.
American Depository Receipts (ADRs) – Similar to Yankee bonds, ADRs are ordinary securities and
not considered hybrid securities. The only significant difference between an ADR and a bond is an
ADR represents an interest in a bond of a foreign corporation, where the interest is traded on a U.S.
exchange.
Zero Coupon Bond – We offer no comments on the definition, while noting that the zero coupon
feature in itself does not make this investment a hybrid security. Zero coupon bonds meet both the
current and proposed definition of a bond in SSAP 26.
Convertible Securities
The proposed definition (which was taken from U.S. GAAP) is accurate. The NAIC staff recommends a
separate project to review and define these investments. While the economics of these instruments are
very complex and they can be designed in many different forms, the amount of these investments
actually held by the insurance industry is extremely small. We do not believe a separate project to
address these investments is worth the efforts of the NAIC staff or Working Group.
Page 15 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 5
Attachment 15
Ref #2014-24: ASU 2014-01 Accounting for Investments in Qualified Affordable Housing Projects
ASU 2014-01: Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01) is
an Emerging Issues Task Force consensus, which the FASB issued as amendments to the accounting
standards codification in January 2014. The amendments are expected to allow more entities to qualify
to use the election of applying the proportional amortization method to account for affordable housing
project investments than the number of entities that currently qualify for the effective yield method.
The Working Group exposed for comment proposed revisions to SSAP No. 93 to adopt ASU 2014-01
with the following modifications:
a. Continued application of a modified amortized cost methodology for insurer reporting
entities (no optionality).
b. A gross presentation in the income statement. With this approach, which is consistent with
current guidance in SSAP No. 93, the amortization will be reflected as a component of
investment income, and the use of the tax credits and other benefits will continue to be
reflected as a decrease to income tax expense.
The exposure draft includes additional changes presented during the 2015 Spring National Meeting, and
displayed as shaded changes in paragraphs 1, 5, 6, 7, 8, 30, 32, 36 and 37 of Appendix 1 of the exposure
draft.
Interested parties have no comment on the proposed revisions.
Ref #2014-25: Holders of Surplus Notes
NAIC staff has received questions on the current guidance for the holders of surplus notes within
paragraph 10 of SSAP No. 41—Surplus Notes. This agenda item proposes to clarify this guidance for
consistency purposes. Particularly, this agenda item proposes to clarify the application of the guidance
in paragraph 10a and 10b to what has been termed: the paragraph 10 “hanging paragraph” guidance. In
addition, it asks questions regarding whether the valuation method used for surplus notes designated at
NAIC 1 for holders of surplus notes should always be amortized cost, or if the hanging paragraph which
introduces a “lessor of value” threshold was intended to possibly reduce amortized cost if the
outstanding face value is less. Questions have also been raised as to what aspects of paragraph 10 of this
guidance are intended to apply. In reviewing older guidance (and Issue Paper No. 41—Surplus Notes),
the placement of this paragraph has not changed and it appears to be applicable to the entire paragraph
10 (not just paragraph 10.b.).
The Working Group exposed for comment proposed revisions to SSAP No. 41 illustrated in the updated
March 2015 Revised Staff Recommendation. The proposed revisions are summarized as follows:
1) Surplus notes with a CRP rating equivalent to an NAIC 1 are to be reported at amortized
cost.
2) Surplus notes that are not rated by a CRP, or have a CRP rating that is anything other than
NAIC 1 are to be reported at the lower of amortized cost or fair value. This proposed
guidance eliminates the concept of reporting the surplus note at “outstanding face value” or
a calculated amount based on a “statement factor”. Staff believes the prior guidance in
SSAP No. 41 for determining which method to use is outdated, and the reporting process on
Schedule BA does not encompass these concepts. Additionally, if the statement factor is
Page 16 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 6
Attachment 15
used, it is not possible on Schedule BA to identify the calculation and the resulting amount.)
By using the lower of amortized cost or fair value for everything other than NAIC 1, the
measurement method is consistent with the SAP method for other lower-quality debt-like
investments, and the highest possible value reported would reflect an amount the reporting
entity should be able to obtain if they sold the surplus note (FV). For some surplus notes, the
amount currently reported (if using a statement factor) may be increased with these
revisions. As this would only happen in situations in which amortized cost is greater than the
fair value, and the surplus note is not an NAIC 1, staff does not have concerns with this
increase in value. As previously noted, since fair value is the amount that would be received
if selling the surplus note under, staff is not concerned with fair value being the amount
recognized.
3) The previous guidance in SSAP No. 41 seemed to commingle when changes in the value for
surplus notes should impact unrealized losses or be non-admitted. With the proposed
revisions, valuation changes (e.g., fair value fluctuations, or moving from amortized cost to
fair value) would result in unrealized changes. The other aspects that impact the value of
surplus notes (such as if the issuer is under regulatory action) would result in a nonadmission of the surplus notes.
Interested parties do not object to carrying lower credit quality or non-rated surplus notes at the lower of
amortized cost or fair value as this measurement attribute is consistent with existing guidance for bonds
and preferred stock held by insurance entities. However, we believe that both NAIC 1 and NAIC 2
surplus notes should be carried at amortized cost, not just NAIC 1 rated surplus notes. NAIC 2 rated
surplus notes are considered high quality investment grade securities by market participants and should
be afforded the same measurement guidance as other high-quality investments in statutory accounting.
This approach would be consistent with guidance for other high-quality fixed-income investments as
stated in paragraph 7 of SSAP 26: bonds that are designated highest-quality and high-quality (NAIC
designations 1 and 2, respectively) shall be reported at amortized cost; with all other bonds (NAIC
designations 3 to 6) reported at the lower of amortized cost or fair value.” SSAP 32 also refers to NAIC
Rated 2 preferred stock as “high quality.
We note that surplus notes are predominately issued by mutual companies and represent an efficient way
for them to access capital from third parties including investments made by other insurers. We do not
believe companies that issue investment grade surplus notes, nor the insurers that purchase these high
quality investments, should be penalized by requiring a measurement consistent with lower quality
investments.
Additionally, the exposure proposes the following changes to SSAP 41 paragraph 10:
Capital or surplus notes shall be valued in accordance with paragraph 11. Pursuant to that
paragraph, the value is determined by CRP ratings. If the notes are rated and monitored by two
NAIC CRPs, the lowest of the ratings shall be assigned. In case of notes rated and monitored by
three or more NAIC CRPs, the NAIC CRP ratings will be ordered according to their NAIC
equivalents and the rating falling second lowest will be selected, even if that rating is equal to
that of the first lowest.
This language refers to the process of determining the NAIC designation for a security when it is rated
by one or more Credit Rating Provider. The rules for determining the NAIC designation for a security
are housed in in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P
Manual). We recommend changing the paragraph above to read:
Page 17 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 7
Attachment 15
Capital or surplus notes shall be valued in accordance with paragraph 11 and the Purposes and
Procedures Manual of the NAIC Investment Analysis Office.
This language is consistent with SSAPs 26, 30, 32 and 43R, where they reference the P&P Manual
rather than quote the guidance contained within the manual. This approach eliminates the need to modify
SSAPs when the Valuation of Securities Task Force adopts changes to the P&P Manual. We would also
note that surplus notes are private placement securities where there is typically no incentive for issuers to
obtain more than one credit rating.
Ref #2014-27: Medicare Advantage and Medicare Part D Risk Adjustment Premium Receivables
and Payables
During the Fall NAIC National Meeting, the Working Group directed staff to work with Working Group
members and industry to develop a recommendation on the reporting for contracts subject to
redetermination including amounts resulting from Medicare Part D and Medicare Advantage, and risk
adjustment receivables under the ACA. In addition, related reporting guidance is to be developed for the
Blanks (E) Working Group. The Working Group also approved a joint referral to the Health Actuarial
(B) Task Force and the Life Actuarial (A) Task Force to clarify inclusion in the Statement of Actuarial
Opinion regarding the receivables and payables from these amounts.
In 2015, staff met with Working Group representatives from Ohio, Connecticut, Michigan and Texas
and industry representatives from AHIP, BCBSA and United Healthcare to develop recommendations.
Interim discussions noted a concern that contracts subject to redetermination should be reflected as
direct adjustments to written premium when accrued as opposed to going through the change in
unearned and reserve and reserve for rate credits. This issue is being addressed primarily in the annual
statement instructions for the sub schedules.
During the Spring 2015 NAIC National Meeting, the Working Group exposed revisions to SSAP No. 54,
paragraph 30, as illustrated in the updated 2015 Spring National Meeting recommendation.
Interested parties support this proposal. We would suggest that it be amended to definitively state that
companies should restate the prior year numbers to provide comparability.
Ref #2014-31: Disclosure Related to PBR Framework Implementation
The Principle-Based Reserving Implementation (EX) Task Force adopted the XXX/AXXX Reinsurance
Framework in concept and adopted the charges needed to further develop the Framework. The Executive
(EX) Committee adopted the Framework at the 2014 Summer National Meeting. The following charges
have been assigned to the Statutory Accounting Principles (E) Working Group:
1. Develop the proposed definition for “Primary Security” for use in the Principle-Based Reserving
Implementation (EX) Task Force’s future consideration of a proposed NAIC XXX/AXXX
Reinsurance Model Regulation.—Essential
2. Develop a Note to the Audited Financial Statements regarding compliance with the NAIC
XXX/AXXX Reinsurance Model Regulation.—Essential
This agenda item proposes to address the disclosure related to the charge, and proposes revisions to
which references the NAIC XXX/AXXX Reinsurance Model Regulation and the audit requirements in a
note.
Page 18 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 8
Attachment 15
The Working Group re-exposed revisions to SSAP No. 61R to incorporate a disclosure related to
compliance with XXX/AXXX Reinsurance Model Regulation, Actuarial Guideline 48 or a state’s
variation, as illustrated in the 2015 Spring National Meeting updated recommendation. The disclosures
required in the audited statutory financial statements (paragraph 73), was extensively re-drafted.
Interested parties have no comment on the proposed revisions.
Ref #2014-36: ASU 2013-06 – Not-For-Profit Entities – Services Received from Personnel of
Affiliate
In November 2014, the Working Group exposed revisions to SSAP No. 25 to reject ASU 2013-06 as
guidance requiring reasonable charges is detailed in Model Act #440, and exposed revisions to
incorporate references and disclosures for services provided. In March 2015, the Working Group
directed NAIC staff to move the proposed disclosure into a new subparagraph directly under paragraph
19 and re-expose this agenda item.
Because the re-exposure of this item simply moved the disclosure that was proposed in November 2014,
interested parties still have the same concerns that were noted in our letter to the Working Group dated
January 16, 2015. Specifically:
•
Interested parties believe the proposed revisions to SSAP 25 paragraph 18 are not necessary, as
these revisions do not represent or clarify accounting guidance. In addition, we do not believe it
is necessary or prudent to attempt to clarify, in accounting guidance outside of Appendix A-440,
narrow aspects of a particular type of holding company transaction that would be encompassed
by Appendix A-440.
•
Regarding the proposed disclosures for new paragraph 19g of SSAP 25, we do not believe that a
new fair value disclosure is necessary or useful to statutory financial statements, especially when
such a disclosure is not even required under U.S. GAAP, which makes more use of fair value
accounting than statutory accounting. In fact, ASU 2013-06 allows the use of cost or fair value
in certain circumstances in transactions involving services between not-for-profit affiliates, but
does not require any such disclosure involving fair value.
•
Interested parties also note that material service contracts between affiliates are already
disclosed in statutory financial statements under the requirements of SSAP No. 25 paragraph
19f, are subject to domiciliary state regulatory scrutiny and approval, and such transaction
amounts are typically recorded at cost. Furthermore, amounts pertaining to such service
transactions are disclosed in Schedule Y – Part 2, column 8 (“Management and Service
Contracts”).
Interested parties again request that the proposed revisions of Ref# 2014-36 be rejected. However, if the
Working Group still believes some disclosures are necessary as a result of NAIC staff’s review of ASU
2013-06, we recommend that such disclosure be limited to services that are in the scope of ASU 201306. Specifically, we request that the disclosure be limited to services that are provided by the reporting
entity to a not-for-profit (NFP) affiliate that directly benefit the recipient NFP affiliate and for which the
reporting entity does not charge the recipient NFP. Charging the recipient NFP means requiring
payment from the recipient NFP at least for the approximate amount of the direct costs (for example,
compensation and any payroll-related fringe benefits) incurred by the reporting entity in providing a
service to the recipient NFP or the approximate fair value of that service.
Page 19 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 9
Attachment 15
Ref #2015-01: ASU 2010-23 – Health Care Entities, Measuring Charity Care
ASU 2010-23, Health Care Entities, Measuring Charity Care (ASU 2010-23), effective under GAAP on
a retrospective basis for fiscal years beginning after Dec. 15, 2010, requires that “cost” be used as the
measurement basis for charity care disclosure purposes and that “cost” be identified as the direct and
indirect costs of providing the charity care. ASU 2010-23 also requires disclosure of the method used to
determine the costs. This GAAP update was issued to reduce the diversity in practice regarding the
measurement basis used in the disclosure of charity care as some entities have determined charity cost
disclosures on a cost measurement, whereas others have used a revenue measurement.
The Working Group exposed revisions to adopt with modification ASU 2010-23, Health Care Entities,
Measuring Charity Care. The exposed statutory accounting revisions adopt the charity care definition
from ASU 2010-23, and adopt with modification the charity care disclosure.
Interested parties have no comment on the proposed revisions.
Ref #2015-02: Short-Sales
Over the last several years, NAIC staff has received questions regarding the statutory accounting
treatment for “short sales.” Previously the staff response to these questions have directed the caller to
inquire with their state of domicile, as it was believed that several states prohibit short sales in their state
laws. Recently, the amount of questions have increased, with inquiries on whether statutory accounting
guidance addresses these transactions, and if these actions should fall within the scope of SSAP No.
103—Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SSAP No. 103) and/or SSAP No. 86—Accounting for Derivative Instruments and Hedging, Income
Generation and Replication (Synthetic Asset) Transactions (SSAP No. 86).
The Working Group exposed this agenda item requesting comments on short-sale transactions.
Particularly, comments are requested on whether short sales should be permitted under statutory
accounting principles.
We are unaware of a significant use of short sales by insurance entities and do not believe it is worth the
efforts of the Working Group to address this topic. We would note if regulators wish to consider
prohibiting these transactions, the appropriate way to address permissible investments by insurers is
through state regulation, not Statutory Accounting Principles. If regulators do wish to address the
accounting for short-sales, a simple solution would be to adopt the U.S. GAAP guidance in Topic 942405, which requires fair value measurement of these transactions.
With respect to comments on other topics at the end of the Form A, it is unclear why the NAIC would
issue a Form A on Short Sales, and then diverge the document toward two seemingly unrelated topics. If
regulators see a need to address the accounting for securities lending or receivable for securities, these
issues should be addressed in a separate Form A.
Ref #2015-03: Sale-Leasebacks with Nonadmitted Assets
Several questions have recently been presented to NAIC staff regarding sale-leaseback transactions
involving non-admitted assets with unrelated parties. Although these transactions may include real
estate, the questions received have specifically identified non-real estate depreciating assets (e.g.,
software) as the non-admitted assets being sold and leased-back. With the existing guidance in SSAP No.
22—Leases, and references to “property” in the sale-leaseback section, questions have been received on
whether these assets were intended to be excluded from the sale-leaseback guidance. In addition to the
Page 20 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 10
Attachment 15
types of assets captured within the guidance, clarification is requested on the statutory accounting
guidance for sale-leaseback transactions involving non-admitted assets.
In response to these questions and based on input from NAIC staff, the Working Group requested public
feedback on sale-leaseback transactions, with a specific request for comment on the following three
items:
1) Incorporate guidance to clarify that the reference to “property” in the sale-leaseback section has
the same scope as the full SSAP - property, plant or equipment (land or depreciable assets). The
proposal also suggests clarifying the guidance specific to “real estate” versus “non-real estate.”
2) Incorporate guidance to clarify when sale-leaseback transactions involving non-admitted assets
shall follow the deposit method of accounting. (These revisions would be proposed to either
require all such transactions to follow the deposit method of accounting, or, if the Working
Group wants to allow these items, clarify that they are permitted within SSAP No. 22.)
3) Incorporate guidance / revisions to clearly identify and reflect the guidance adopted under
GAAP. The proposal would incorporate the current GAAP guidance in ASC 840-40 to the
extent that the pre-codification GAAP standards were adopted by the Working Group, with the
modifications previously adopted unless items are specifically noted for reconsideration.
Interested parties comments are as follows:
Summary
•
As to whether non-admitted assets should be included in the sale-leaseback guidance, interested
parties believe the present guidance in SSAP No. 22, paragraph 27(d) is very explicit that nonadmitted assets can be subject to sale-leaseback accounting. Paraphrasing that section, saleleaseback accounting shall be used if a transaction meeting certain criteria involves “(d)
admitted assets, if the lessor is a related party, or either admitted or nonadmitted assets if the
buyer-lessor is not a related party” (bolding added). Statutory guidance explicitly allows the
inclusion of non-admitted assets as qualifying for a sale-leaseback today. Clarification is not
needed on that point. Any confusion on the history of the statutory consideration of numerous
GAAP developments should not detract from the explicit guidance.
•
Interested parties also agree with the current guidance that a sale-leaseback transaction with
related parties involving nonadmitted assets should be excluded from sale-leaseback accounting.
Both SSAP No. 25 and SSAP No. 97 also have provisions to prevent such transactions from
enhancing surplus. We distinguish such transactions with related parties from the financing with
an unrelated third party. In financing transactions with an unrelated third party, new money has
been injected into the group and the insurance company is better off by monetizing a nonadmitted asset like software, converting it into cash that is available to pay policyholder claims
or be invested for future earnings.
•
Regarding staff’s request to review and update SSAP No. 22, we do not believe that it is
necessary to make significant changes to the current guidance in SSAP No. 22. The FASB is
expected to issue significant revisions to lease guidance later this year which will require the
Working Group to consider the applicability of that guidance for statutory purposes. Therefore it
seems wise to wait until that guidance is issued. SSAP 22 has generally been well understood
and worked fine so the use of any resources on this point does not seem well advised. Any
Page 21 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 11
Attachment 15
inconsistencies in the various references to property can be addressed by adding basic
definitions to SSAP No. 22 to clarify that all depreciable property is eligible for sale-leaseback
accounting.
Detailed Discussion
The remainder of the comments discusses our positions in greater detail and provides our responses to
the three questions that staff asked to solicit feedback to assist the Working Group in providing staff
direction:
1. Incorporate the guidance to clarify that the reference to “property” in the sale-leaseback
section has the same scope as the full SSAP – property plant or equipment (land or
depreciable assets). This proposal also suggests clarifying the guidance specific to “real
estate” versus “non-real estate.”
Interested parties believe that all depreciable assets are included under the sales-leaseback
accounting guidance in SSAP No. 22 today and should continue to be included. Sale-leaseback
transactions are a valid form of financing to monetize an asset. In practice there are no
limitations on the types of depreciable assets that could be included in a sale-leaseback
transaction. As such, we recommend that the term Property, Plant or Equipment be used in the
sale-leaseback accounting guidance in SSAP No. 22 to describe the assets included in this
guidance. Property, plant or equipment is an all-inclusive term which encompasses all
depreciable assets, while the term property could be interpreted to refer to real estate only. We
recommend adding the following clarifying language to define the assets included under the
guidance in the Sale-Leaseback Transactions section of SSAP No. 22:
21. The guidance in this section applies to all depreciable assets, including but not
limited to real-estate, leasehold improvements, furniture and fixtures, transportation
vehicles, equipment, software, etc. The term property, plant or equipment shall be used
to describe the assets covered in this section.
The numbering sequence for all paragraphs subsequent to this new paragraph should be revised
accordingly. We suggest that wherever the term property is used in SSAP No. 22, including
Appendix A, it be replaced by property, plant or equipment. We also suggest that to avoid
confusion as to which assets are included in this guidance, the references to real estate and real
estate with equipment in paragraph 26 be replaced with property, plant or equipment, as the
guidance in SSAP No. 22 applies to all depreciable assets.
2. Incorporate guidance to clarify when sale-leaseback transactions involving nonadmitted
assets shall follow the deposit accounting method. (These revisions would be proposed to
either require such transactions to follow the deposit method of accounting, or, if the working
group wants to allow these items, clarify that they are permitted within SSAP No. 22.)
Interested parties strongly object to this statement. We believe that an arms-length saleleaseback transaction with a non-affiliate involving nonadmitted assets should follow saleleaseback accounting. As stated in our response to Question 1 above, sale-leaseback
transactions with a non-affiliate is a valid form of financing. In order to apply the SSAP No.
22 sale-leaseback guidance, the following criteria in paragraph 27 of SSAP No. 22 must be
met:
Page 22 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 12
Attachment 15
a. A normal leaseback as described in paragraph 28.
b. Payment terms and provisions that adequately demonstrate the buyer-lessor’s initial and
continuing investment in the property (refer to Appendix A, paragraphs 50-58).
c. Payment terms and provisions that transfer all of the other risks and rewards of ownership
as demonstrated by the absence of any other continuing involvement by the seller-lessee
described in paragraphs 31- 33 of this section and paragraphs 25 – 29 and 41- 43 of FAS
66.
d. Admitted assets, if the buyer – lessor is a related party, or either admitted or nonadmitted
assets if the buyer-lessor is not a related party. For purposes of this paragraph, related
parties include those identified in SSAP No. 25 and entities created for the purpose of
buying and leasing nonadmitted assets for the reporting entity and/or its affiliates.
If these criteria are met, the leased asset is sold and is permanently deleted from the balance
sheet.
Insurance entities should not be penalized by having to follow deposit accounting rules
because the sale-leaseback transaction with a non-affiliate involved a nonadmitted asset. Some
potential adverse impacts from having to follow deposit accounting rules even though the
transaction was at arms-length and with a non-affiliate are:
a.
b.
c.
d.
Preventing an insurer from taking advantage of a viable financing alternative.
Having to borrow at higher rates.
Having to follow more complicated accounting method.
Taking a surplus charge where a nonadmitted asset was cleared from the books through a
legitimate arms-length transaction.
We recommend the following wording be added to SSAP No. 22:
Sale-leaseback transactions with non-affiliates involving nonadmitted assets shall follow the saleleaseback accounting guidance in SSAP No. 22, if the transaction meets the requirements of
paragraph 27 of SSAP No. 22.
3. Incorporate guidance/revisions to clearly reflect the guidance adopted under GAAP. This proposal
would incorporate current GAAP guidance in ASC 840-40 to the extent that the pre-codification
GAAP standards were adopted by the Working Group, with the modification previously adopted
unless items are specifically noted for reconsideration.
Interested parties believe that the suggested wording changes noted in responding to questions 1&2
above provide sufficient guidance and no further GAAP revisions to the guidance are necessary at
this time. GAAP does not include the concept of nonadmitted assets and to add more GAAP
guidance to SSAP No. 22 when the salient issue involves nonadmitted assets may only cause
confusion.
Ref #2015-04: Prepayment Penalties and Amortization on Callable Bonds
SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities currently has guidance
requiring bonds containing call provisions (where the issue can be called away from the reporting entity
at the issuer’s discretion), except “make whole” call provisions, to amortize the premium or discount to
the call or maturity value/date which produces the lowest asset value (yield to worst). NAIC staff has
Page 23 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 13
Attachment 15
received questions on this accounting guidance for make whole call provision bonds and continuous
callable bonds.
The Working Group exposed revisions to SSAP No. 26. These exposed revisions, if adopted, would
require prepayment penalties and acceleration fees to be reported as realized capital gains, clarify the
yield-to-worst concept for continuously callable bonds, and revise the guidance for bonds with makewhole call provisions. Illustrations for the application of the exposed guidance are also included for
comment.
This item proposes three changes to the accounting for bonds and mortgage loans (1) Require
prepayment penalties and acceleration fees on bonds and mortgage loans to be reported as realized
capital gains instead of net investment income, (2) Incorporate guidance to clarify the yield to worst
concept for bonds, and (3) Require make-whole provisions on bonds to be considered in applying the
yield to worst guidance. We will address each of these items separately.
Accounting for Prepayment Penalties and Acceleration Fees
The proposed changes to SSAP No. 26 and SSAP No. 37 would require that prepayment penalties and
acceleration fees be reported as realized gains, rather than the current treatment as net investment
income. We do not see a compelling reason to make this change. Below we will outline some reasons
why the current treatment is appropriate, but first we would like the Working Group to consider whether
the costs exceed the benefits of this proposal. Prepayment and make-whole fees represent an
insignificant proportion of investment income received by insurers and generally are not exercised often
by issuers. So, this change will not significantly impact the financial statements of insurers. However,
the costs of implementing this change will be significant.
Insurers will be required to reprogram their investment systems to accommodate the change.
Additionally, new processes and controls will need to identify these payments and reclassify them as a
capital gain. Also, a new difference between U.S. GAAP and statutory accounting will be created
requiring insurers to audit and explain this difference. Insurers and regulators are faced with an everincreasing number of regulatory proposals dealing with accounting, reporting, capital, reserves and other
areas. We believe it would be beneficial to all parties for regulators to consider the materiality and
costs/benefits of individual proposals when deciding whether they should be adopted. On this basis, we
believe this proposed change should be rejected. If regulators are concerned with the impact of these
payments to the financial statements of insurers, a much more cost effective solution would be to create
a new disclosure or other mechanism for identifying them in the Schedule D. If the Working Group is
concerned with the impact of these payments to the financial statements of insurers, a far more cost
effective solution would be to create a new footnote in the Exhibit of Net Investment Income or a new
disclosure identifying prepayment penalties and acceleration fees.
With respect to the nature and appropriate treatment for prepayment penalties including make-whole
provisions, these payments are generally considered compensation for lost investment income by
investors. The provisions in loan agreements generating these payments can only be invoked by the
issuer, which makes them distinct from capital gains and losses from sales, which occur at the option of
the investor. As a result, we believe treatment as net investment income is appropriate. If, however, the
Working Group decides to move forward with the proposal, the guidance would need to be made
effective on a prospective basis, to avoid requiring insurers to go back in time and adjust historical IMR
balances.
Page 24 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 14
Attachment 15
Requiring Make Whole Provisions to Be Considered In the Yield To Worst Guidance
The proposed changes to SSAP No. 26 to consider to make whole provisions when determining the
timeframe for amortizing bond premium or discount and the amount to which a bond is amortized is
non-operational. Make-whole provisions are most commonly found in private placement fixed income
transactions originated by insurance entities. Most of these investments can be called at any time by the
borrower and have some form of a make-whole provision. The make-whole provision is typically equal
to a benchmark interest rate (Treasury, LIBOR) plus a spread. These provisions are designed to
compensate the insurer for loss investment income should the bond be called when the bond’s interest
rate is higher than current market rates.
Make-whole provisions vary with changes in interest rates and investors cannot determine the call price
of the bond in advance. As a result, it is not practical to incorporate make-whole provisions in the
amortization or measurement guidance of SSAP No. 26, unless information is known by the insurer
indicating that the issuer is expected to invoke the provision in the near future, and the call price can be
estimated. SSAP No. 26 as written, including the clarifications adopted in 2013-21, provides adequate
and appropriate guidance for these situations.
If insurers were required to estimate call prices by forecasting make-whole provisions, this would be a
very costly and time consuming exercise. The result would be amortizing premium or discount to a
hypothetical amount that would have to be adjusted each period as interest rates and the amount of the
call price changes. If the call price couldn’t be estimated and insurers were required to immediately
expense any premium above par (as suggested in the proposal), private placement securities would
become a less attractive investment for insurers. We do not believe this result to be a desired outcome by
regulators.
Guidance Clarifying the Yield to Worst Guidance
The Working Group previously adopted 2013-21, which clarified the amortization requirements for
bonds with make whole call provisions and bonds that are continuously callable. The revisions did not
require insurers to consider make-whole call provisions in determining the timeframe for amortizing
bond premium or discount unless information is known by the reporting entity indicating that the issuer
is expected to invoke the provision. Interested parties did not object to this proposal as it clarified our
interpretation of the existing amortization guidance and was generally consistent with long-standing
industry practice. We do not believe additional clarifications to SSAP No. 26 are necessary, but if the
Working Group moves forward with this part of the proposal, then we offer the following additional
comments:
•
•
We believe the amortization guidance proposed in paragraph 7 sections a, b, and c of SSAP No.
26 is generally consistent with how our investment systems currently amortize premiums and
discounts.
We object to the proposed requirement in section b that states “For callable bonds without a
lockout period (which includes bonds with make whole call provisions) the BACV (at the time of
acquisition) of the callable bonds shall equal the lesser of the next call price (subsequent to
acquisition) or cost.” This statement would change the measurement of these bonds from
amortized cost to a “lower-of” approach. We believe this situation to be very uncommon, as the
market price would typically not exceed any potential call price. In addition, since make-whole
provisions are typically not fixed, we would not be able to apply this guidance to the acquisition
of bonds with make-whole provisions. Since this is a measurement change, the costs of re-
Page 25 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 15
•
•
Attachment 15
programming our investment system would be significant, and given this situation is unlikely to
occur, we believe the costs far outweigh any benefits of this proposed change.
We do not believe the situation described in paragraph 7 section d (a bond having scheduled call
dates and a make-whole provision) exists and recommend deleting this example from the
proposal.
Examples 1-4 in the proposal are generally consistent with how our investment systems treat
amortization today. We do not believe the situation described in Example 5 exists and
recommend it be deleted. We recommend deleting Examples 6-7 because they involve
estimating make-whole provisions as described earlier.
Ref #2015-05: SSAP Title Revisions
In an effort to make the Accounting Practices & Procedures Manual more user-friendly for regulators,
companies and other users of the manual, this agenda item proposes revisions to the titles of various
SSAP’s. In most of the noted instances, the titles are long, and often contain duplicative information
that is also outlined within the Scope of Statement section of the SSAP.
The Working Group exposed revisions to change SSAP titles as detailed in Appendix A of the exposure
draft.
Interested parties note that if this proposal goes forward, other NAIC documents such as VOS manual,
Annual Statement Instructions, etc. will be impacted and need to be updated.
Ref #2015-06: ASU 2015-01: Income Statement – Extraordinary and Unusual Items
ASU 2015-01: Income Statement—Extraordinary and Unusual Items (ASU 2014-15) was issued in
January 2015 to eliminate the concept of extraordinary items from U.S. GAAP. In issuing this standard,
the FASB noted that it is extremely rare for an event or transaction to be presented as an extraordinary
item. Additionally, the ASU identifies that the term “extraordinary” causes uncertainty because it is
often unclear when an item should be considered both unusual and infrequent and what might be
considered extraordinary in one industry may not be considered extraordinary to another. Also, the
concept of extraordinary items has been interpreted narrowly in practice so entities, rarely, if ever, reach
a conclusion that the conditions for presentation have been met. The FASB concluded to remove the
concept of extraordinary items and notes that the amendments will not result with a loss of information
as presentation and/or disclosure will now occur for items that are unusual in nature or infrequently
occurring, or both.
The Working Group exposed revisions to SSAP No. 24 to adopt with modification ASU 2015-01. The
proposed modifications intend to be consistent with existing guidance that prohibits separate reporting
for extraordinary items. Additionally, corresponding revisions are identified in the proposal to other
SSAPs and Appendix D of the Accounting Practices and Procedures Manual.
Interested parties have no comment on the proposed revisions.
Ref #2015-07: ASU 2014-08 – Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity
ASU 2014-08: Presentation of Financial Statements and Property, Plant and Equipment - Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08) was
issued in April 2014 to develop an improved definition of discontinued operations that also enhances
Page 26 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 16
Attachment 15
convergence of U.S. GAAP and IFRS, with improved clarity on disposals through disclosures. In
making these changes, it was noted that the revisions are intended to improve existing presentation as the
amendments limit discontinued operations to components of an entity that represent strategic shifts that
have (or will have) a major effect on an entity’s operations and financial results. Prior to these
amendments, it was noted that under U.S. GAAP many disposals, some of which may be routine in
nature and not a change in strategy, were reported in discontinued operations.
The amendments in ASU 2014-08 require an entity to present, for each comparative period, the assets
and liabilities of a disposal group that includes a discontinued operation separately in the asset and
liability sections, respectively, of the statement of financial position.
The Working Group exposed revisions to SSAP No. 24 to adopt with modification ASU 2014-07. The
proposed modifications are intended to be consistent with existing guidance that prohibits separate
reporting and prohibit gain recognition until the disposal transaction is complete. Additionally, the
modifications proposed would not require all of the disclosures in ASU 2014-08. The proposed
revisions marked in this agenda item are specific to the consideration of ASU 2014-08. However, agenda
item 2015-06 (which considers ASU 2015-01) also proposes revisions to SSAP No. 24. The two agenda
items address completely different guidance, so they have been evaluated separately, but as they both
impact SSAP No. 24, the proposed revisions are somewhat overlapping. A separate exposure document
includes the proposed revisions to SSAP No. 24 for both agenda item 2015-06 and 2015-07 to reflect
how they will appear if the proposed revisions for both ASUs are adopted. (By including the revisions
separately in each agenda item, the Working Group could elect to move forward with one agenda item,
if more time is needed for the other.)
Interested parties have no comment on the proposed revisions.
Ref #2015-08: SSAP No. 97 – Nonadmitted Assets and Application of the SAP Guidance
SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities, A Replacement of SSAP No.
88 provides the statutory accounting guidance for determining the measurement method and value for an
investment in an SCA. NAIC staff has received questions regarding the application of guidance in the
following three areas:
1) Non-admittance of assets in non-insurance SCAs;
2) Valuation of U.S. insurance SCAs (paragraph 8bi);
3) Valuation of non-insurance SCAs engaging in insurance activities (8bii) and foreign insurance
entities (8biv).
The Working Group exposed this agenda item requesting comments on these issues and related
discussion questions regarding the reporting of investments in SCAs under SSAP No. 97.
To give context to our response, we believe that it is important to understand the history and evolution of
previous decisions made by regulators in the development of the accounting guidance for subsidiaries,
controlled and affiliated (SCA) entities. Therefore, we have provided a brief summary of this history
along with our responses below.
Item 1: Nonadmitted assets in non-insurance SCAs - non-insurance SCAs can either be measured
under the “market valuation approach” (paragraph 8a) or under the equity methods described in
paragraphs 8bii or 8biii
Page 27 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 17
Attachment 15
Issue – Reporting entities can transfer nonadmitted assets into a non-insurance SCA, thereby
improving the surplus position of a reporting entity.
This issue has been a source of much debate from the inception of the development of the NAIC
Accounting Practices and Procedures Manual (AP&P Manual). SSAP No. 46-Accounting for
Investments in Subsidiary, Controlled and Affiliated Entities was the original authoritative guidance on
this topic. It was well understood by the regulators in the development of this SSAP that they intended
to establish accounting guidance that would preclude reporting entities from transferring nonadmitted
assets to a downstream subsidiary, thereby creating an asset that would be admitted. Unfortunately, the
guidance in paragraph 7 of SSAP No. 46 created a situation that caused insurers to nonadmit items that
would typically be admitted. The words “Investments in non-insurance SCA entities that have no
significant ongoing operations other than to hold assets” proved problematic.
To correct the unintended consequence of SSAP No. 46 paragraph 7, the regulators developed SSAP No.
88 under the same name to address this matter. Paragraphs 8b and 9 of SSAP No.88 introduced critical
guidance that corrected the problem of SSAP No. 46. After many hours of formal debate and discussion
that included input from interested parties, a rule-based approach was developed that became the
cornerstone of paragraph 8b.ii. The objective of this new guidance was to specifically identify those
nonadmitted assets identified in the AP&P Manual most likely to create an abuse. Recognizing that in
some cases a downstream subsidiary could, in fact, have a legitimate business reason that went beyond
holding assets on behalf of the reporting entity, the 20% rule was introduced as part of the guidance.
Subsequent to the adoption of SSAP No. 88, issues emerged with regard to the types of audited
statements that would be accepted with regard to admitting an investment in an SCA entity. These
issues were addressed in the guidance of SSAP No. 97, which carried forward the language of
paragraphs 8 and 9 of SSAP No. 88. Additionally, SSAP No. 97 contains a number of illustrations, as
well as a Q&A, to facilitate the preparation and audit of statutory financial statements.
To address Item 1, NAIC Staff asks two questions:
1. Should guidance be considered to restrict the amount of assets held in an SCA that would not be
admitted assets if held directly by the reporting entity?
2. Should guidance be considered to restrict or eliminate the extent to which nonadmitted assets
can be transferred to an SCA and included in the reported value of the SCA?
Developing guidance, as contemplated by the two questions, that further adjusts or restricts the admitted
value of an SCA based on whether the underlying assets of the SCA would be admitted if held directly
by the reporting entity would require the identification of any non-admitted asset that may be held by a
downstream Schedule Y investment. Such a practice would be an extremely labor intensive exercise, for
little or no benefit. Additionally, obtaining information to exclude certain assets from the valuation of
an SCA would be problematic when a reporting entity has an insignificant ownership in the SCA or if
the SCA had equity method investees. Furthermore, it would also result in a significant departure from
reporting SCA entities based upon the audited financial statements of the SCA. We do not believe such
a deviation from current practice sets a good precedent as it loses the accounting control of being able to
directly tie to the reporting economics of an SCA entity to that SCA entity’s audited financial
statements.
Guidance in SSAP No. 25 paragraph 16d as well as SSAP no. 97 paragraph 9 effectively restricts or
eliminates the extent to which non-admitted assets can be transferred to an SCA, contrary to the staff
Page 28 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 18
Attachment 15
statement “it is not believed that this guidance is widely enforced with SCA transactions”. The audited
statutory financial statements would report such a departure from the AP&P Manual. Since each
insurance entity is subject to state examinations, that examination would likely uncover and report such
a departure. In addition, information regarding investments in SCAs, including audited financial
statements of SCAs, is required to be filed annually with the Securities Valuation Office (SVO), and
SVO staff often sends follow-up questions to insurers as part of this process.
We are deeply troubled and concerned by this issue being brought before the regulators given the history
of this matter. We are also not aware of any developments that would require that this guidance be
reconsidered, nor are we aware of any abuses in applying the standard. If there is a specific issue that
has come to the attention of regulators necessitating a review, it would be helpful if the issue would have
been articulated in this exposure draft. Absent notice of any specified issues, we strongly encourage the
regulators to dismiss this issue from further deliberation, since the guidance in SSAP No. 97 and SSAP
No. 25 is quite clear.
Item 2: Valuation of U.S. Insurance SCAs (8bi)
Issue-The statutory equity reported by the SCA may be impacted by permitted or prescribed
practices, and this impact is not detailed when the reporting entity recognizes their investment in
the SCA.
Three discussion options are listed for the regulators to consider regarding this issue. The first option
asks if the guidance should require the value reported for investments in U.S. insurance SCAs be
calculated at the value dictated in the AP&P Manual rather than the value based on prescribed or
permitted practices.
The second option is a modification of the first option that would allow the reported value of the
investment in the insurance SCA to be allowed where there is a prescribed practice. The third option
considers a disclosure requirement for the reporting entity where the SCA has a prescribed or permitted
practice that differs from the AP&P Manual. Interested parties believe the third option is the least
disruptive to current practice because it would not require the reporting of the SCA at a value that differs
from the audited capital and surplus of the SCA.
The AP&P Manual already contains a disclosure requirement in SSAP No. 1, Disclosure of Accounting
Policies, Risks & Uncertainties, and Other Disclosures (as illustrated in Appendix A-205) which
requires a reporting entity (in this context, the SCA) to reconcile the amount reported in its statutory
financial statements where the amount differs from the AP&P Manual as a result of a permitted or
prescribed practice. Clarification could be easily made to the scope of this disclosure requirement to
also include the aggregate impact to a reporting entity of prescribed or permitted practices of the
reporting entity’s SCAs.
Item 3: Valuation of Non--Insurance SCAs Engaging in Insurance Activities (8bii) and Foreign
Insurance Entities (8biv).
Issue – The adjustments required in paragraph 9 detail specific changes required to determine the
value of the SCAs captured under paragraphs 8bii and 8biv. However, as these are only
adjustments for specific items within certain SSAPs, the adjustments do not result in a value that
reflects a “statutory basis of accounting” for the SCA. Furthermore, some of the adjustments do
not appear consistent with the current statutory accounting guidance (e.g., adjustment for DTAs).
Page 29 of 46
Statutory Accounting Principles Working Group
May 26, 2015
Page 19
Attachment 15
The item proposes three options. The first option asks whether the guidance should be revised to require
a “full statutory accounting basis” and that paragraph 9 of SSAP No. 97 (it appears the reference to
SSAP No. 9 was inadvertent) be removed. Interested parties strongly recommend that this option be
rejected given the history in the development of the accounting guidance for SCAs. We believe the rulebased approach as described in SSAP No. 97 paragraph 9 captures the significant adjustments and is
reasonable and appropriate.
Likewise, we believe the second option is not necessary since it appears to preserve the guidance in
paragraph 9, and does not offer any specific language to clarify what may be needed. The third option
asks if the guidance in paragraph 9 should be updated to reflect more SAP adjustments, or be updated to
reflect changes in SSAPs. As stated above, we believe that this guidance currently captures the
significant adjustments. However, there may be situations where a SSAP is revised or a new SSAP is
adopted (e.g., SSAP No. 101), where regulators may need to modify the impact of those standards on
other standards. Where consequential amendments are needed to existing standards, we encourage
regulators to make this an integral part of the process when implementing a new standard.
Ref #2015-09: Technical edits to APP Manual
During a review of the Accounting Practices and Procedures Manual, NAIC staff noted areas where
they believed technical edits would be beneficial to the guidance. However, these revisions were deemed
too extensive to incorporate without review and approval by the Working Group. Appendix A of the
agenda item includes the proposed revisions to various SSAPs. This table includes three sections to
differentiate between the types of revisions proposed:
•
The first section details language updates, including a clarification to SSAP No. 106–Affordable
Care Act Section 9010 Assessment to address inconsistencies regarding the disclosure of the
risk-based capital sensitivity test. The proposed edit to SSAP No. 106 for the ACA section 9010
disclosure is to address consistency issues noted within the 2014 annual filings. Some reporting
entities incorrectly reported an impact on Authorized Control Level (ACL). The impact of the
risk-based capital sensitivity test in the risk based capital formula determines the effect on Total
Adjusted Capital only. NAIC staff has also prepared a related annual statement blanks proposal
to clarify this in the annual statement note.
•
The second section addresses a few references to interpretations (INTs) and their effective dates
that were not included in the SSAPs’ Effective Date and Transition sections when the INTs were
incorporated into the SSAP. Additionally, with the nullification of some INTs that were related
to GAAP pronouncements, the GAAP literature was not listed under Relevant Literature.
•
The third section moves paragraphs to keep the overall format of the SSAPs in line with other
SSAPs. The edits within this agenda item do not propose to change any guidance.
Interested parties have no comment on the proposed revisions.
Ref #2015-11: Wholly-Owned Real Estate – Mortgage Loan Encumbrances
NAIC staff has received questions on whether a mortgage loan on real estate held in an LLC would
disqualify the real estate investment from being classified as wholly-owned real estate in an LLC under
SSAP No. 40R, paragraph 4. (The Working Group adopted this SSAP No. 40R guidance in Dec. 2014,
with a Jan. 1, 2015 effective date.) Specifically, the questions have inquired whether an encumbered
Page 30 of 46
Attachment 15
Statutory Accounting Principles Working Group
May 26, 2015
Page 20
property would allow the reporting entity to assert that they solely and distinctly possess all risks and
rewards of ownership of the real estate, as required in paragraph 4d of SSAP 40R.
The Working Group exposed revisions to SSAP 40R to clarify when an encumbrance on wholly owned
real estate held in an LLC is allowed for Schedule A (Real Estate) reporting.
Interested parties support the proposed revisions.
Ref #2015-12: Update A-821 for 2012 Individual Annuity Mortality Table
Model Regulation 821 Annuity Mortality Table for Use in Determining Reserve Liabilities for Annuities
(Model 821) specifies the annuity mortality table to be used for determining the minimum reserves for
individual and group annuities. The 2012 Individual Annuity Mortality Table was developed by the
Society of Actuaries and the American Academy of Actuaries in cooperation with the Life Actuarial (A)
Task Force and reflects improved mortality experience.
Excerpts of Model 821 are included in the Accounting Practices and Procedures Manual, Appendix A821 Annuity Mortality Table for Use in Determining Reserve Liabilities for Annuities.
A preliminary review of legislative activity indicates that at least 27 states have taken action on this
model since the 2012 Individual Annuity Mortality Table was adopted by the NAIC. The majority of
identified adopting states have applied an effective date January 1, 2015 (a few appear to apply earlier).
This is significant because the table needs to be recognized in 26 states to be used for establishing
reserves for federal income tax purposes.
The Working Group exposed revisions to update Appendix A-821 to include revisions to incorporate the
2012 Individual Annuity Mortality Table, as illustrated in Attachment B of the agenda item, with a
January 1, 2015 effective date.
Interested parties are pleased to submit the following comments:
1)
In the Form A, under ‘Information or issues’, it states that a few states appear to apply the table
earlier than January 1, 2015. Please note that none of the 30 states that have adopted the table
use an effective date earlier than January 1, 2015.
2)
Paragraph 10 should begin “Except as provided in paragraph 12 . . .” paragraph 10 applies to
business issued January 1, 2001 to December 31, 2014. Paragraph 11, currently referenced, is
mutually exclusive and applies to business issued January 1, 2015 or later, and therefore
provides no exception. Paragraph 12 provides an exception to both paragraphs 10 and 11 for a
special class of business issued during the respective time periods.
3)
Interested parties recommends that this Appendix recognize that while a majority of states (28)
did adopt this table effective for business issued January 1, 2015 and later, an increasing
number of the remaining states are adopting with a date of January 1, 2016. We recommend
that for business issued during the calendar year 2015, either table be recognized as meeting the
accounting standard since the states were largely split on the standard, and to avoid unnecessary
reporting long term of a difference that is not meaningful.
We will be glad to answer any questions and to work with you to provide final guidance.
*
*
*
*
Page 31 of 46
Attachment 15
Statutory Accounting Principles Working Group
May 26, 2015
Page 21
Thank you for considering interested parties’ comments. We look forward to working with you and the
Working Group at the Summer National Meeting in Chicago, Il. If you have any questions in the
interim, please do not hesitate to contact either one of us.
Sincerely,
D. Keith Bell
cc:
Rose Albrizio
Julie Gann, NAIC staff
Robin Marcotte, NAIC staff
Interested parties
Page 32 of 46
Attachment 15
Page 33 of 46
Attachment 15
Page 34 of 46
Attachment 15
May 26, 2014
Dale Bruggeman, Chair
Statutory Accounting Principles Working Group
National Association of Insurance Commissioners
2301 McGee Street, Suite 800
Kansas City, MO 64108-2604
Attn:
Robin Marcotte (NAIC) and
Julie Gann (NAIC)
Re:
Investment Classification Project – Discussion Papers 1-5
(Reference Number 2013-36)
Dear Chairman Bruggeman:
We would again like to thank the Working Group for this opportunity to offer our comments and
observations regarding the Investment Classification Project – Discussions Topics:
1. Inclusion of Security Definition in SSAP No. 26 (hereafter “Discussion Paper 1”)
2. Requirement for ‘Contractual Amount of Principal Due’ (hereafter “Discussion Paper 2”)
3. ETF – Financial Data Summary as of Year-End 2013 (hereafter “Discussion Paper 3”)
4. Definitions of Non-Bond Items (hereafter “Discussion Paper 4”)
5. ETF – Financial Data Summary as of Year-End 2014 (hereafter “Discussion Paper 5”)
Our comments on the various Discussion Papers are set forth below (Discussion Paper wording
is highlighted in gray).
As the world’s largest asset manager and provider of exchange traded funds (ETFs) we are
happy to share our perspective and offer assistance to the regulatory community regarding the
treatment of bond ETFs for statutory accounting purposes. This is an issue of great importance
for the insurance industry, particularly those small to mid-size insurers who have continued to
struggle to gain access to bonds and who benefit greatly from the liquidity and diversification
attributes of bond ETFs, which are essentially transparent portfolios of bonds that trade on an
exchange.1
We stand ready to work with the regulators and provide any follow-up data or analysis that
would be helpful in reviewing our proposal.
1
ETFs as referenced in this comment letter are managed funds which trade on an exchange and most often track a passive
benchmark with clearly defined index methodology. There are fund expenses and fees which come out of the performance of
the net asset value of the underlying bond portfolio.
Page 35 of 46
Attachment 15
BlackRock Comments:
We agree that industry and regulators alike would benefit from greater clarity in reporting NAIC
designated bond ETFs, and clearly there are demonstrable reporting inconsistencies (as
highlighted in Discussion Papers 3 & 5). However, we propose adhering to the current rationale
of including NAIC designated bond ETFs within SSAP 26 along with the other investments
mentioned in Discussion Paper 4 that do not meet the new “Security” definition for SSAP 26
based upon the assessed risk of the underlying securities (e.g. consideration for a “SSAP 26 –
A” for bonds and “SSAP 26 – B” for bond-like investments). There are a number of reasons for
this, which are broken out and described in greater detail below under “Rationale.”
We put forth an alternative proposal to resolve the current transparency issues & reporting
inconsistencies: similar to other fixed income investments on Schedule D Part 1, NAIC
designated bond ETFs should continue to be reported on Schedule D Part 1 but broken out into
their own separate sub-section. This would alleviate regulators’ concerns about not being able
to locate each ETF within the other reported bond holdings, help clarify important reporting
differences for insurance companies who hold ETFs, and hopefully reduce the number of
reporting inconsistencies going forward. Importantly, it would continue to group NAIC
designated bond ETFs, which are generally simple, transparent pass-through portfolios of
bonds, along with other fixed income investments and would eliminate the potential for several
other unintended consequences caused by inclusion within a new “Funds” SSAP and a move to
a new reporting schedule.
Recognizing that SSAP No. 26 uses an amortized cost measurement for bonds, however, and
that an “original cost” valuation method is no longer supported by ICP 14, we propose that NAIC
consider an amortized cost valuation methodology akin to that of other fixed income
investments with multiple individual positions and fluctuating cashflows. The method used to
value NAIC designated bond ETFs must be able to account for the changing composition of the
ETF’s underlying bond portfolio over time without introducing noise into the valuation process, in
the form of interest rate fluctuations and market influences, which should not be present from a
statutory accounting perspective for fixed income investments. Accordingly, BlackRock puts
forth a preliminary proposal of an amortized cost valuation methodology below. We are happy
to work with regulators to assess the feasibility of this proposal.
Page 36 of 46
Attachment 15
Valuation Proposal2
Each NAIC designated fixed income ETF holding shall be revalued each quarter using the
current underlying bond portfolio’s projected cash flows and using the prospective adjustment
methodology:
1. The prospective approach recognizes, through the recalculation of the effective yield to be
applied to future periods, the effects of all cash flows whose amounts differ from those
estimated earlier and the effects and changes in projected cash flows.
2. Under the prospective method, the recalculated effective yield will equate the carrying
amount of the investment to the present value of the anticipated future cash flows.
a. “Carrying amount” at T0 = purchase price
b. “Carrying amount” for all subsequent periods = Book Value, where:
c. Book Value = Original Cost –/+ Amortization/Accretion
d. Amortization/Accretion Amount = Earned Income – Sum of monthly distributions
e. Earned Income = (Recalculated effective yield x current book value) / 4
(NB: using “4” in this case for quarterly earned income)
f. Recalculated effective (book) yield = Implied yield on the difference between book
value and the current PV of future cashflows
g. The amortization period shall reflect the dollar weighted average maturity of the
underlying bonds in the portfolio.
ETFs are effectively already handling the accounting of the underlying bonds in the portfolio
within the ETF. Investors are essentially receiving the book yield of the fund via the periodic
distributions, since the fund distributes the Earned Income less the net amortizations/accretions
of each bond within the portfolio (calculated daily by the fund custodian).
This amortized cost valuation method provides a solution that is both relatively simple to
calculate and auditable. This valuation method would also solve the previous issues with ETFs
being a “square peg in a round hole” on Schedule D Part 1. The other columns which are
currently left blank or “N/A” could now be filled with available information, for example:
1. Maturity: Dollar weighted average maturity of the bond portfolio
2. Book Yield: Recalculated effective yield
3. Par Value: Dollar weighted average face value
4. IMR: gain or loss at the point of sale could be amortized over the dollar weighted average
maturity of the ETF’s bond portfolio at that point in time.
5. OTTI: credit gain/loss would occur if there was a downgrade of the ETF’s NAIC designation.
Impairments of individual bonds within the ETF portfolio are typically removed from the fund
when the bond falls out of the index that the ETF is tracking.
2
The method proposed may be subject to further revisions.
Page 37 of 46
Attachment 15
Rationale
As stated in our previous comment letters, SAP and GAAP accounting standards have always
had distinct differences, given SAP’s focus on solvency regulation. The process of codification
to include bond ETFs within SSAP No. 26 in the Accounting Practices & Procedures manual
was based upon this premise and the decision was made that NAIC designated bond ETFs
should be treated like other fixed income investments. These fundamentals have not changed,
and bond ETFs, as a transparent portfolio of bonds, continue to have the economic profile of
bonds and should continue to be treated as such. By working with the regulators to address the
needs around clarifying the reporting of bond ETFs we believe the promulgation of a new SSAP
is unwarranted.
Potential unintended consequences should be carefully considered before bond ETFs are
removed from SSAP 26 to a new “Funds” SSAP and changing the valuation methodology to
“fair value.” Since bond ETFs simply hold a portfolio of bonds, if interest rates go up, under
normal circumstances the value of these bond portfolios will go down (just as an insurer’s own
portfolio of bonds would if they were forced to mark to market).
Thus, a valuation change to a fair value-based standard would significantly impair an insurer’s
ability to invest in NAIC designated bond ETFs, and potentially disadvantage bond ETF holders
relative to other insurers.
It is important to note that the investors with the greatest potential to be adversely impacted by
any change to reporting, accounting, and capital treatment of bond ETFs are the small to midsize insurers who currently struggle to gain access to bonds and who currently enjoy the low
cost, liquidity and diversification benefits of NAIC designated bond ETFs. As the Working
Group noted in Discussion Paper 5: “Concerns regarding the potential impact to small
companies may be overstated due to the limited number of Bond ETFs held by most
companies. (75% of companies with Bond ETFs own 3 or less, 83% own 4 or fewer, and 89%
own 5 or less).” While it is true that insurers may hold a limited number of bond ETFs, this is not
surprising given the fact that each of these investments holds a diversified portfolio of several
hundred (and sometimes several thousand) bonds. Therefore there is much less of a need to
hold a large number of bond ETFs. Since insurers tend to gravitate towards buying the ETF with
the
lowest
total
cost
of
ownership
which
best
maps
over
to
the
credit/duration/yield/sector/geography of their fixed income benchmark(s), there is little need for
insurers to buy more than one bond ETF to obtain a given exposure. For example, if an insurer
primarily holds IG corporate bonds, they may only hold one IG Corporate Bond ETF which
correlates to their benchmark.
Page 38 of 46
Attachment 15
84
6
83
5
82
4
81
3
80
2
79
1
78
77
12/31/2003
12/31/2004
SHY NAV
12/31/2005
Fed Funds Rate
12/31/2006
Itnerest Trate (%)
SHV NAV ($)
The comments within Discussion Papers 3 and 5 regarding the assessed “negligible” impact of
a change from original cost to fair value3 overlook several considerations:
1. While it is true that changing the valuation of a fixed income investment from original cost to
fair value in a flat rate environment would have a “negligible” impact, once rates increase
there will be a very real and negative impact to the valuations of bond ETFs if they are held
at fair value.
2. The potential negative impact to NAV of rising rates can be demonstrated by looking at a
historical example: From June 2004 to June 2006, the Fed steadily raised the Fed Funds
target rate from 1% to 5.25%. During that period, the NAV of the iShares 1–3 Year Treasury
Bond ETF (SHY) fell from a high of $83.03 to a low of $79.26, as reflected in the table
below. Over the same period, SHY’s index’s yield rose from 2.62% to 5.18% as the index
continuously reinvested in new bonds offered at higher yields throughout the period. As a
result, the ETF’s total return was positive from the additional income gained by holding
higher yielding bonds.
0
12/31/2007
2-Yr Treasury Rate
3. SAP has allowed insurers to use an amortized cost valuation method for fixed income
investments to stabilize this volatility of valuations through different rate environments.
4. As noted in previous comment letters, bond ETFs share a number of similarities with other
pass-through securities that are comprised of multiple individual positions with changing
cashflows (currently reported on Schedule D Part 1) and that are using a modified amortized
cost valuation method.
3
“By requiring a fair value measurement method (or Net Asset Value - NAV - as a practical expedient) for all ETFs at this time, in
most instances, the individual company impact would be negligible to the reporting company,” Reference: 2013-36 Investment
Classification Project - Discussion Paper 3
Page 39 of 46
Attachment 15
Additionally it was noted in Discussion Paper 3 that changing ETFs to fair value “would
result [in] companies consistently reporting these assets at a publicly-traded value which
represents the amount available for policyholder claims.” To the extent this reflects a
concern that bond ETFs don’t mature and insurers will be receiving fair value if they decide
to sell their exposure, below is a comparison of two hypothetical insurers’ portfolios which
illustrates how bond ETFs can be viewed as a HTM fixed income investment, and how the
liquidity and diversification benefits of the ETF ultimately provide benefits over and above
that which insurers receive from holding only individual bonds in their portfolio:
1. Insurance Company A: Buys individual bonds that collectively have an average duration
that (ideally) broadly matches the duration of its liabilities. In the case of most liabilities,
this is not a 1-for-1 match (i.e. the insurer is not buying a bond which it knows will mature
at the same time that a certain liability comes due - excepting certain liabilities like fixed
annuities). Over time the bonds in Company A’s portfolio roll down the curve, payout
principal, and get reinvested in another bond which matches the rough benchmark for
their portfolio (i.e. in terms of duration, yield target, credit, etc.). As liabilities come due
there is an ongoing cash buffer, but to the extent that there is an unexpected larger cash
outflow, the company raises cash by selling bonds in its portfolio. Although Company A
may have intended to hold these bonds to maturity when it originally purchased them, it
nevertheless decided to sell them to raise the necessary cash. When deciding which
bonds in the portfolio to sell, the insurer will generally gravitate towards selling the most
liquid securities (e.g. very liquid IG bonds, MBS, etc.), as those will have the least
amount of impact in terms of trading costs & price. Importantly, when Company A sells
these bonds (which were previously HTM and valued at amortized cost), it will be getting
fair value. In this case, Company A would likely be selling higher quality bonds, which
tend to be more liquid. To the extent that it sells a disproportionately larger amount of
higher quality bonds, Company A is left with a more concentrated portfolio in less liquid,
lower quality bonds.
2. Insurance Company B: buys fixed income ETFs which map over to the broader
benchmark of its fixed income portfolio (e.g. in terms of duration, credit, yield, etc.). Like
the individual bond portfolio of Company A, Company B also maps to the duration/yield
needs of its liabilities and is buying these ETFs as a liquid core holding within its broader
fixed income portfolio. The economics that Company B receives from the fixed income
ETF as it buys & holds it are almost identical to the economics from its own individual
bond portfolio: bonds in the ETF portfolio are rolling down the curve and getting
reinvested into similar bonds in the index, with the amortizations/accretions handled
within the ETF wrapper as coupons are partially paid out and the aggregate premium
amortization/ discount accretions are held back and reinvested into similar bonds in the
index. As Company B holds the ETF it receives the effective book yield of the ETF’s
underlying bond portfolio. When Company B has an unexpected cash outflow, the fact
that it decides to sell the more liquid bond ETF to raise cash does not necessarily
indicate that its intention at the time of purchase was not to buy & hold the investment
(any more than it was for the liquid IG bonds or MBS that Company A had to sell to raise
cash). Like Company A, Company B will be receiving fair value for the fixed income ETF
it sells. The only difference is that Company B will be able to sell its ETF holding for a
fraction of the trading costs that would be required to sell the underlying bonds, and it
will be able to do so quickly and easily. Importantly, by selling a diverse portfolio of
bonds through the ETF, Company B is less likely to adversely impact the overall credit
quality of its remaining bond portfolio.
Page 40 of 46
Attachment 15
ETFs provide insurance companies a liquid, low cost means of accessing the bond market. This
particularly benefits the small to mid-size companies who struggle most to source new bonds.
Additionally, ETFs offer diversified fixed income exposure that matches the needs of insurers’
liabilities and provides all the related risks and benefits of bonds; therefore the accounting
should mirror/reflect that. Continuing to include bond ETFs in SSAP 26 and report them in a
separate sub-section on Schedule D Part 1, in conjunction with implementing the above
amortized cost valuation method, would resolve many of the current issues around reporting
inconsistencies and avoid potential unintended consequences of changing the accounting and
reporting of ETFs. We hope that the working group will take all of the above points into
consideration before making a decision that could potentially hurt insurers’ ability to access fixed
income exposure through NAIC designated bond ETFs in the future.
Thank you for your consideration of these comments. If the Statutory Accounting Principles
Working Group has any questions or desires any additional information, please do not hesitate
to contact us and we will be pleased to assist. We remain ready to work with you and your
colleagues on these issues.
Sincerely,
Katie Garvey
Vice President
BlackRock
Page 41 of 46
Attachment 15
May 20, 2015
Dale Bruggeman
Statutory Accounting Principles Working Group
National Association of Insurance Commissioners
2301 McGee Street, Suite 800
Kansas City, MO 64108-2662
SSAP No. 22 - Sale-Leasebacks with Nonadmitted Assets
The American Institute of Certified Public Accountants’ AICPA/NAIC Task Force (Task
Force) appreciates the opportunity to discuss our comments on Form A: Issue 2015-03,
Sale-Leasebacks with Nonadmitted Assets.
Issue 2015-03 notes that clarification has been requested on the statutory accounting
guidance for sale-leaseback transactions involving nonadmitted assets, and whether the
guidance in SSAP No. 22, Leases, was intended to allow the sale/leaseback of
nonadmitted assets with unrelated parties.
Paragraph 27 of SSAP 22 states the following and appears to be explicit that a
sale/leaseback of a non-admitted asset with unrelated third parties is specifically allowed.
If the SAP Working Group choses the modify the accounting for these transactions, we
suggest the change be considered a revision to the current guidance, with appropriate
transition, as opposed to a “clarification” as proposed in the Form A.
27. Sale-leaseback accounting shall be used by a seller-lessee only if a sale-leaseback
transaction includes all of the following:
d. Admitted assets, if the buyer-lessor is a related party, or either admitted or
non-admitted assets if the buyer-lessor is not a related party. For purposes of
this paragraph, related parties include those identified in SSAP No. 25 and
entities created for the purpose of buying and leasing non-admitted assets for
the reporting entity and/or its affiliates.
We appreciate the opportunity to express our views. If you should have any questions
regarding our comments, please contact me at 440-893-0010 or Kim Kushmerick,
AICPA at (212) 596-6160.
Yours truly,
Jean Connolly
Chair – AICPA NAIC Task Force
Page 42 of 46
Attachment 15
cc:
Jim Dolinar, Chair – AICPA Financial Reporting Executive Committee
Chuck Landes, Vice President – AICPA Professional Standards and Services
Dan Noll, Director – AICPA Accounting Standards
Bruce Webb, Chair – AICPA Auditing Standards Board
Page 43 of 46
Attachment 15
Conning
One Financial Plaza
Hartford, CT 06103
860-299-2000
conning.com
David Chellgren
Director
Investment Accounting
860-299-2112
David.Chellgren@Conning.com
May 27, 2015
Dale Bruggeman
Chair of the Statutory Accounting Principles Working Group
National Association of Insurance Commissioners
2301 McGee Street, Suite 800
Kansas City, MO 64108-2604
Dear Mr Bruggeman:
We appreciate the opportunity to comment on the items exposed for comment by the Working
Group on March 28th at the NAIC National Meeting.
Ref# 2015-04: Prepayment Penalties and Amortization on Callable Bonds
Prepayment Penalties
We support the NAIC staff’s goal to disclose investment activity in a clear and transparent
manner. However, we do not believe reporting Prepayment Penalties/Fees as a capital gain
accomplishes this goal. Capital gains and losses result from a market based decision made by
the investor to sell securities. Prepayment penalties/fees result from a decision made by the
issuer to compensate the investor for foregone future interest payments that will be lost. This
forces the investor to take the prepayment fees paid and reinvest those funds presumably at a
lower interest rate. Therefore we believe the current guidance to report these fees as investment
income is appropriate. This can be reported in one of two ways.
1. The prepayment fee can be reported as interest received in column in column 20 of the
Schedule D-4
2. The prepayment fee can be reported in column 12 as an “increase by adjustment” (accrual
of discount) to the basis of the bond.
When an investor purchases a bond with a prepayment penalty/make-whole provision, that
information is used by the investor to determine the cost of the investment and correspondingly
is reflected in the ultimate yield associated with the security. As a result, any ultimate realization
of that event should also be recorded as an adjustment to yield through “investment income”.
Asset Management
Insurance Research
Risk & Capital Management Solutions
Page 44 of 46
Attachment 15
GAAP Philosophy on Prepayment fees:
Regarding the income statement, the Board believes that the measurement objective of interest
income is to reflect the rate of return implicit in a debt instrument (that is, the contractual interest
rate adjusted for any net deferred loan fees, premiums, or discounts existing upon initial
recognition, which is referred to as the effective interest rate). Importantly, that rate of return
includes the compensation that a lender receives for taking on the credit risk inherent in the debt
instrument and the contractual cash flows. (Source: Financial Instrument – Credit Losses (Subtopic 825-15) FAQ document dated 3/25/2013
Finally the reporting of prepayment fees as investment income, is consistent with existing
statutory guidelines (SSAP 26 paragraphs 15, 18, SSAP 37 and SSAP 43R).
Amortization on Callable Bonds
We have no opposition to the language relating to callable bonds and amortization on a yield to
worst basis. However, some of the examples highlighted by the NAIC staff include the
infrequent combination of several different call features and may require enhancements from
current Vendors that support the statutory investment schedules.
Sincerely
David Chellgren
Cc: Julie Gann
Robin Marcotte
Asset Management
Insurance Research
Risk & Capital Management Solutions
Page 45 of 46
This page intentionally left blank.