NAIC Summer Update - Accounting Investments, and Solvency Modernization

September 15, 2016

Cristina Ahn

National Professional Services Group

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Course agenda

IntroductionSection I − Adoption of revisions to SSAPs

Section II − Exposure of new guidance and discussions of new and on-going projects

Section III − Solvency ModernizationSummary and Q&A

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By the end of this course participants will be able to:• Describe current statutory accounting guidance from the NAIC’s SAP Working

Group

• Discuss projects in process at the NAIC

• Describe progress on solvency modernization proposals

Course objectives

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Adoption of revisions to SSAPs

NAIC Summer Update – Accounting, Investments and Solvency Modernization

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New Disclosures for 2016

SAPWG adopted revisions to SSAP 1 to disclose ALLpermitted practices not just those that affect surplus or RBC• e.g. net reporting in the balance sheet where NAIC

requires gross reporting • Expanded disclosures in the annual and audited

financial statements to reflect which line items are affected and the related SSAP

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Amendments to Statutory Investment Guidance

Quarterly Reporting of Restricted Assets• SAPWG adopted a revision to SSAP 1 clarifying that the restricted asset

disclosure shall be included in the quarterly statements only if significant changes have occurred since the annual statement disclosure.

Investments in SCAs• SAPWG adopted a clarification to SSAP 97 that ownership of an Exchange

Traded Fund or mutual fund does not represent ownership in an underlying entity within the scope of SSAP 97, unless ownership of the ETF results in “control” of an underlying company.

Collateral Received• New disclosure to capture the aggregate total of collateral assets reported as

assets on the insurer’s financial statement and the corresponding recognized liability to return the assets.

All are effective for 2016

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Amendments to Statutory Investment Guidance

Prepayment Penalties and Acceleration Fees• SAPWG adopted amendments to SSAP 26 and SSAP 43R to clarify what portion of

proceeds reflects the prepayment penalty of a callable bond with make-whole provisions, effective January 1, 2017.

• The amount of investment income reported is equal to the total proceeds (consideration) received less the Par value of the investment. Any difference between the BACV and Par at the time of disposal is RCG/Loss

• Also adopted is a new 2017 disclosure for callable bonds: disclose the number of CUSIPs sold, disposed or otherwise redeemed as a result of a callable feature and the aggregate amount of investment income generated as a result.

• Change to Schedule D to report this for individual investments was deferred to 1/1/2018

NAIC 5 rated bonds• New disclosure was adopted for 2017 to capture current and prior period totals on

the number of 5* securities and the BACV and FV for those securities by category: bonds, loan-backed and structured securities and preferred stock.

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Removal of Class 1 List

• SAPWG adopted revisions to SSAPs 2, 26, 30 and 32 to remove Class 1 Bonds Funds in response to actions taken by the VOS Task Force as a result of the regulations adopted by the SEC to preclude the use of a stable value NAV for these money market funds. • These revisions were adopted in June effective September 30 ,2016• These investments will now be included in Schedule DA as ““All Other

MMMFs”. (Exempt MMMFs already have a separate line.) • After very extensive discussion in June, SAP Working Group decided to

draft a separate agenda item as to whether MMMFs should be cash equivalents.• Proposal expected at the Summer National Meeting to reclassify these

instruments as cash equivalents vs short term investments effective January 1, 2018• Industry is asking for the change to be effective in 2017 if possible.

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SCA Filing Requirements and Disclosures

• New appendix to SSAP 97 to include SCA Reporting/Filing process• All non-insurance SCAs that an insurer has an equity interest in are

subject to filing requirements: • SUB 1 and SUB 2 filings• SAPWG to consider as a separate issue whether to require th filings

when the SCA is non-admitted or is immaterial• NAIC staff contend this was always required by the SVO P&P

Manual• SSAP 48 entities are not subject to the disclosure or filing requirements

even if controlled by the insurer. • Revised data capture template was also exposed for comment.

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Exposure of new guidance and discussions of new and on-going projects

NAIC Summer Update – Accounting, Investments and Solvency Modernization

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Proposed Amendments to Statutory Investment Guidance

Quarterly Reporting of Full Investment Schedules• SAP Working Group had initially suggested that full investment schedules be filed every

quarter; revised alternatives based on feedback from interested parities were exposed for comment

1) hire a consultant to aggregate NAIC investment data,

2) in the event the working group adopts additional quarterly reporting, extend the deadline to complete the electronic-only supplemental investment information, and

3) replace the quarterly acquisition and disposition schedules with a schedule of owned holdings.

• Discussion at Summer National Meeting resulted in exposure for comment of a new option:

• Insurers would submit a mid-year electronic only data filing for Schedule D investments detailing CUSIP, par value, book/adjusted carrying value and fair value to be filed with the second quarter filing due August 15

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Investment classification review

• SAPWG has been recently focusing on the Exchange Traded Fund issue.• Issue paper for revisions to SSAP 26 for bond approved exchange-traded

funds and also to include bond mutual funds • The issue paper will propose the use of fair value (using NAV as a

practical expedient) as the default accounting. However, insurers with a documented approach as a proxy for amortized cost (such as the BlackRock methodology) could use that option.

• Summer National Meeting – SAPWG exposed for comment BlackRock’s “Systematic Value” Calculation for Fixed Income ETFs

• After long discussion, the working group agreed to keep both systematic value and fair value as options

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Investment classification review

• VOS TF adopted a revised LBaSS Definition that “recognizes that the dynamic cash flow pattern that SSAP 43R was originally concerned with is the result of a specific structural construct:• the legal isolation and pooling of; • a finite number of cash generating assets; • each from a different obligor;• in a trust; and • the use of the cash flow from the collateral assets to pay the holders of

the securities.”• Consideration of the revised definition by the SAP WG will occur as part of

their larger investment classification review.

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Error Correction

• SAP Working Group re-exposed proposed revisions to SSAP 3 to distinguish between accounting errors and reporting/validation errors

• Interested parties have concerns with the proposal and disagree that the NAIC’s Quality Assurance function can require an insurer to refile a quarterly or annual statement.

• Proposed guidance of “Corrections of accounting errors in previously issued financial statements shall be reported as adjustments to unassigned funds (surplus) in the period an error is detected. If a reporting entity becomes aware of a material accounting error in a previously filed financial statement after it has been submitted to the appropriate regulatory agency, the entity shall file or be directed to file an amended financial statement if approved unless otherwise directed by its the domiciliary regulator” appears to modify current guidance but not might change practice

• i.e. the domiciliary regulator will not require the insurer to refile the quarterly or annual statement

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NAIC Consideration of ASU 2015-09 Disclosures about Short Duration Contracts

• NAIC is required to consider all newly issued US GAAP guidance under its SAP Maintenance Process

• Preparers of statutory financial statements and auditors are required to consider GAAP disclosures when the SAP and GAAP accounting are the same or similar, regardless of whether the accounting has been accepted, rejected or not yet addressed by the NAIC.

• Industry has a draft paper recommending that most of the ASU 2015-09 disclosures be rejected because of the detailed reporting in Schedule P. • Schedule P is subject to certain auditing procedures but Schedule P is

not included in the audited FS footnotes• AICPA/NAIC Task Force is reviewing the industry proposal and has

provided feedback to industry. • Task Force has also prepared proposed auditing guidance

interpretation for consideration by Insurance Expert Panel and ASB.

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At the Spring National Meeting, the SAP WG exposed for comments three proposed options for accounting of operating and financing leases under SAP.• Maintain existing statutory guidance with potential new disclosure

guidance on the lease asset and lease liability required under GAAP.• Recognize the lease asset and lease liability, but require

nonadmittance of the lease asset as the right of use asset is not available for policyholder obligations.

• Adopt ASU 2016-02 with some modifications to recognize lease assets and lease liabilities for a lessee’s operating and financing leases, which would allow the lease asset to be admitted for statutory purposes.

Leases – Consideration of ASU 2016-02

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• Revised proposal from NAIC staff at Summer National Meeting• Reject ASU 2016-02 and keep current lease accounting and disclosure – all

leases are operating leases• Further evaluate ASU 2016-02 for potential Working Group consideration of

revisions to statutory accounting. This review will include, but not limited to: • Leveraged Leases• Sale and Leaseback Transaction• Definition of a Lease

• This is likely to include consideration of SAPWG agenda item 2015-03, Sale-Leaseback with Nonadmitted Assets which currently allows sale treatment for sale and leaseback of non-admitted assets such as application systems software and PP&E.

Leases – Consideration of ASU 2016-02

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Financial Instruments• SAP Working Group has proposed rejected of the ASU

• Interested parties are suggesting that certain elements be adopted to improve statutory accounting or eliminate unnecessary differences between statutory accounting and U.S. GAAP

• SAPWG agreed only to remove the disclosure of the fair value of deposit liabilities with no defined or contractual maturities.

Credit LossesRecommendation from NAIC staff• To prevent GAAP to SAP differences on the recognition of impairment,

concepts from ASU 2016-13 are anticipated to be incorporated into SAP. It is initially recommended that a new “Credit Loss” SSAP will be developed (reflecting updated impairment guidance) that will nullify INT 06-07, as well as the paragraphs in various SSAPs that address impairment.

Consideration of ASU 2016-01 and ASU 2016-13

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• Reporting Exceptions – The Reporting Exceptions Analysis Working Group was formed to investigate why a large population of securities (totaling $100 billion per the SVO Jumpstart exception report) are reported as filing exempt but do not appear on credit rating provider data feeds.

• Private placement comprises 41% of the nearly 5,000 exceptions

• RMBS/CMBS Modeling • Eliminate requirement for a series of public meetings to set macro-economic

assumptions, scenarios and risk weightings for the annual financial modeling.• The SSG proposed a “through the cycle” framework for financial modeling of RMBS

and CMBS to focus on changing economic conditions throughout the business cycle causing capital treatment to vary from year to year.

• The SSG reported on updates to BlackRock’s CMBS financial model, which focuses on capturing the potential effect on credit risk related to specific property level events.

VOS Task Force projects

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Cyber Security Task ForceInsurance Data Security Model Law

• First draft circulated in March for comment; new version dated August 17• Purpose of the model law, “to establish the exclusive standards for

data security and investigation and notification of a breach of data security applicable to licensees in this state” was supported by many but with significant revisions.

• Other industry groups stated they would oppose the law as drafted, noting “fundamental and foundational” revisions needed.

• Two day public meeting in May and conference call and meeting this summer to allow more in depth comments.”

• Goal of the task force is to complete the model law by the end of 2016.

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Solvency Modernization

NAIC Summer Update - Accounting, Investment and Solvency Modernization

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Projects of the Group Solvency Working Group and ORSA Implementation Subgroup

• Survey of Effectiveness of Enterprise Risk (Form F) Reports• 58% of DOI respondents said the report is only “somewhat effective” in

providing valuable information on enterprise risk. • 28% responded it is “ineffective”• Next steps – detailed filing instructions or a guidance manual?

• ORSA Implementation Subgroup has been re-formed to “identify, discuss and address issues that arise in state implementation and review of ORSA reporting requirements”

• AAA has recently finalized two reports ORSA and the Regulator and Quantifying Risk Exposures for Own Risk and Solvency Assessment Reports.

• Subgroup also exposed a Best Practices document on information sharing for comment.

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Questions?

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