2017 Statutory Accounting Updates - Investments · – Public accountant and insurance examiner consultant ... market mutual funds as short-term investments with ... Statement (SSAP

© 2017 National Association of Insurance Commissioners All Rights Reserved 1

© 2017 National Association of Insurance Commissioners

2017 Statutory Accounting Updates -Investments

2017 Statutory Accounting Updates -Investments

Julie Gann, Senior Manager II – Accounting and ReportingFatima Sediqzad, SCA Valuation and Accounting Policy Advisor

Robin Marcotte, Senior Manager II – AccountingJake Stultz, Senior Accounting and Reinsurance Policy Advisor


This presentation is pre-qualified for NAIC Designation Renewal Credits (DRCs). If you currently hold an NAIC APIR, PIR, or SPIR designation and are pursuing continuing education credit to maintain it, you may be awarded credits for your participation. To receive credit, you must be in attendance for the duration of the presentation.

Attention APIR, PIR, or SPIR Designees…



Learning Objectives

1. Key Investment Changes in Statutory Accounting

2. Investment Issues Under Discussion

Objectives:

• Identify new and revised statutory accounting guidance pertaining to investments accounting and reporting.

• Identify the hot topics involving investments currently being considered by the Statutory Accounting Principles (E) Working Group.


Julie GannNAIC Senior Manager II – Accounting & Reporting

– Supports Statutory Accounting Principles (E) Working Group

– Supports Restricted Asset (E) Subgroup

– Supports Reinsurance Investment Security (E) Subgroup

– Provides technical & advisory services in the areas of SAP, GAAP & IFRS

Joined NAIC in February 2001. Prior Positions Include:

– NAIC Financial Examination Manager

– NAIC International Insurance Accountant

– Public accountant and insurance examiner consultant

CPA, FLMI, ARA and AIRC; Member of AICPA & MSCPA

4



Robin Marcotte

• Senior Manager II – Accounting

– Supports Accounting Practices and Procedures Task Force

– Supports Statutory Accounting Principles Working Group

– Supports Risk Limiting Contracts Working Group

– Provides technical & advisory services in SAP, GAAP & IFRS

Joined the NAIC in August 2000

– Prior to joining the NAIC employed at a Dept. of Insurance

CPA, CFE, Associate in Reinsurance, CISA

Member of AICPA, MSCPA, and SOFE


Fatima Sediqzad

• SCA Valuation and Statutory Accounting Policy Advisor

– Supports Statutory Accounting Principles Working Group

– Reviews subsidiary, controlled and affiliated entity filings

– Provides technical & advisory services in SCA’s, SAP andGAAP

Joined the NAIC in January 2016

Prior to joining the NAIC – employed in public accounting and a private financial services firm

CPA



Jake Stultz

• Senior Accounting Policy Advisor

– Supports SAPWG

– Supports Reinsurance Task Force

– Provides technical & advisory services in SAP, GAAP &Reinsurance

Joined the NAIC in February 2017

Prior to joining the NAIC – employed in public accounting, realestate and insurance


Topics

• SSAP No. 2 – Cash, Drafts and Short-term Investments

• SSAP No. 26R – Bonds

• SSAP No. 37 – Mortgage Loans

• SSAP No. 86 – Derivatives

• SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities



SSAP No. 2R - MMMF

• Agenda Item 2016-18, Effective Dec. 31, 2017 Reclassifies money market mutual funds from short-term investments to cash equivalents.

• Agenda Item 2016-35, Effective Dec. 31, 2017Requires all money market mutual funds be reported at fair value (allowing NAV as a practical expedient).

• Agenda Item 2016-05, Prior to Dec. 31, 2017Eliminates concept of “Class 1” and clarifies money market mutual funds as short-term investments with reported measurement based on the underlying Statement (SSAP No. 26 or SSAP No. 30).


SSAP No. 2: Removal of Class 1• SVO removed Class 1 Money Market Mutual Fund

listing as a result of changes in SEC Regulations.

• 2016 and Interim 2017 Reporting:

– All MMMFs are short-term investments under SSAP No. 2R and reported on Schedule DA-Short-Term Investments.

– MMMFs on the SVO “exempt” listing will be reported under the measurement method of SSAP No. 26 and receive a 0% RBC charge. All other MMMFs shall be reported with a fair value measurement with a .03% or .04% RBC Charge.

• 2017 Year-End Reporting:

– all MMMFs are cash equivalents under SSAP No. 2R and reported on Schedule E-2. No Change in RBC.



SSAP No. 26R—Bonds Investment Classification Project

• Agenda Item 2013-36 / Effective Dec. 31, 2017

• Substantive revisions to SSAP No. 26:

– Definition of Bond

– Inclusion of Non-Bond Instruments

• Fixed-Income Instruments

• SVO-Identified Investments

– Accounting for SVO-Identified Investments



• Bond Definition:

• Incorporates definition of security in bond definition.

• 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 specific characteristics.




• Non-Bond Items in Scope

• Removes non-bond items from “bond examples”

• Identifies specific “fixed-income” instruments:

– Bank Loans Acquired

– Certification of Deposit (maturity date over 1 year)

– Hybrid Securities

– Debt instruments in CAPCO



• Non-Bond Items in Scope

• Specifically identifies that equity/fund investments are not within the definition of bond, but identifies SVO-Identified Investments that receive special accounting treatment in scope of SSAP No. 26R:

– SVO-Identified Exchange Traded Funds (ETFs)

– SVO Identified Bond Mutual Funds




• Accounting for SVO-Identified Investments

• Required at Fair Value (NAV as expedient)

Unless Investment Qualifies AND Company Elects

• “Systematic Value”

Systematic value is an approach to amortize or accrete the investment in a manner that represents expected

cash flows from the underlying bond holdings.


Investment Classification

Provisions for Systematic Value:

• Qualifying NAIC designation

• Irrevocable election by CUSIP

– Measurement method can change with full sale, if reacquired after 90-days from the sale.

• Must follow established Systematic Approach

• Specific OTTI provisions

– OTTI assessed on whether the net present value of projected cash flows have materially declined.




• Effective Date – Dec. 31, 2017

• Fair value unless designated for systematic value.

• If designated for systematic value, identify investment with code in the investment schedules, and continue prior measurement method for year-end 2017. Begin systematic value as of Jan. 1, 2018.

• Specific transition guidance in SSAP No. 26R.


SSAP No. 26R—Bonds Bank Loans

• Agenda Item 2016-10/ Hot Topic

• “Bank loans” replaced “bank participations”

• Definition added in SSAP and glossary:

Bank loan - Fixed-income instruments, representing indebtedness of a borrower, made by a financial institution and acquired by a reporting entity through an assignment, participation or syndication.



SSAP No. 26R—Bonds Bank Loans

• Consider Directly Issued Bank Loans

• Bank loan terms do not depend on who originates.

• Terms are similar to bond, including transferability.

• Agenda item exposed with a request for comments.

• Possibly allow bank loans issued by an insurer (which qualifies as a financial institution) to be reported as bonds within SSAP No. 26R.


SSAP No. 37—Mortgage LoansMultiple Lenders

• Agenda Item 2016-39/ Hot Topic

• Clarifies guidance when a reporting entity is a “participant in a mortgage loan”

• Exposure: In addition to mortgage loans directly originated, also includes mortgages acquired through assignment, syndication, or participations.

• Investments that reflect “participating mortgages,” “mortgage loan fund,” or the “securitization of assets” are excluded from SSAP No. 37.



SSAP No. 37—Mortgage LoansMultiple Lenders

• Examples of Mortgage Loans in Scope

• Participant in a single mortgage loan agreement that identifies more-than-one lender, with each lender noted on the loan documents.

• Participation agreement to invest in mortgages issued by another. Although not on original loan agreement, the entity (co-lender) purchases portion of loan with documented sale. Rights and obligations of co-lenders are similar to those of direct loans.


SSAP No. 86 – Derivatives

Adopted Revisions:

• Notional Definition – Jan. 1, 2017

• Swaption Definition – Dec. 31, 2016

• Weather Derivatives –Dec. 31, 2016

Derivative Hot Topics:

• Deferred / Financing Premiums

• Settlement of Variation Margin

• Special Accounting – Variable Annuities



SSAP No. 86 – DerivativesDefinition of a Notional

• Agenda Item 22015-51, Effective Jan. 1 ,2017

• Notional amount is defined as the face value of a financial instrument in a derivatives transaction as of a reporting date which is used to calculate future payments in the reporting currency.

• Definition represents the “principal/intent” of determining notional to assist entities in consistently applying the definition in derivative agreements.


SSAP No. 86 – DerivativesDefinition of Swaptions

• Agenda Item 2016-14, Effective Dec. 31, 2016

• Swaptions” are contracts granting the owner the right, but not the obligation, to enter into an underlying swap.

• Although options can be traded on a variety of swaps, the term “swaption” typically refers to options on interest rate swaps.

• A swaption hedges the buyer against downside risk, as well as lets the buyer take advantage of any upside benefits.



SSAP No. 86 – DerivativesWeather Derivatives

• Agenda Item 2015-43 / Effective Dec. 31, 2016

• Weather derivatives are a forward-based or option-based contract for which settlement is based on a climatic or geological variable. Weather derivatives shall be accounted and reported as other derivatives,

• Excludes contracts written by insurers that entitle the holder to be compensated only if, as a result of an insurable event, the holder incurs a liability or there is an adverse change in the value of a specific asset or liability for which the holder is at risk.


SSAP No. 86 – DerivativesWeather Derivatives

• Derivative: Insurer issues “security” directly or through a broker in which settlement is based on a climatic or geological event.

Example: Debt instrument where return of principal is contingent on extent of tornado damage in Missouri.

• Insurance: Insurer issues “policy” in which coverage is based on a climatic or geological event.

Example: Damage caused by tornado covered by homeowners policy.



SSAP No. 86 – DerivativesDeferred / Financing Premiums

• Agenda Item 2016-48, Hot Topic

• Deferred Premium – Payment to enter / acquire derivative contract occurs at end of contract.

• Financing Premium – Payment to enter/acquire derivative contract occurs throughout contract.

• Standard Premium – Payment to enter/acquire derivative contract occurs at inception.



• Info on derivatives with deferred or financing premiums is not captured on Schedule DB.

• Current industry approach for reporting results with a “net zero” at inception.

• Impacts use of financial tools to identify and assess derivative activity.

• Impacts RBC on derivatives.




Current Discussion:

• Premium cost meets liability definition at inception. The premium cost is not impacted by derivative.

• Schedule DB should detail derivatives with deferred and financing premiums, with information on the total premium and how the premium is impacting the reported value.

• Industry is working with NAIC staff to present reporting options and establish accounting guidance.


SSAP No. 86 – DerivativesSettlement of Variation Margin


• Clearinghouse legally characterizes variation margin payments to be settlement payments as opposed to collateral for Over-The-Counter Derivatives.

• SEC did not oppose conclusions that variation margin would be viewed as a single unit of account, and no longer considered collateral.



SSAP No. 86 – DerivativesSettlement of Variation Margin

• Possible Accounting Impact:

• Daily change in variation margin would be a realizedchange instead of unrealized change. Although the change can reverse the following day. (Derivative contract is still outstanding.)

• Variation margin is used as acceptable collateral to determine “exposure net of collateral” for RBC.

• May impact gross reporting on Schedule DB.


New SSAP: Special Accounting for Limited Derivatives


• Proposes new accounting guidance for certain limited derivative contracts hedging variable annuity guarantees reserved under AG 43 subject to fluctuations from interest rate risk.

• Intends to encourage risk-management transactions and reduce non-economic surplus volatility.

• Draft hedge accounting provisions not permitted under SSAP No. 86.



New SSAP: Special Accounting for Limited Derivatives

• Fair Value Hedge

• All Derivatives Reported at Fair Value

• Hedged Item - Macro / Flexible Portfolio

• Hedging Instrument – Dynamic Strategy

• Specific Assessment of Effectiveness

• Permits Deferred Assets and Deferred Liabilities


SSAP No. 97 – Filing Process

• September 2016 – VISION launched as new filing platform for SCAs

-Requires new login information

-Instructions and tutorials for filing are available on the SCA website, as well as any necessary documents

• Previous platform, ISIS, is no longer active

http://www.naic.org/sca_subsidiary_controlled_affiliated.htm



SSAP No. 97 – OverviewOverview of SSAP No. 97 Accounting:

8.a: Market Value – Must Qualify and Be Elected

Traded on NYSE, ASE, NASDAQ, or Tokyo Stock Exchange

8.b: Equity Method: – 8.b.i – Statutory Equity

U.S. Insurance SCA – Statutory Financial Statements

– 8.b.ii – Adjusted GAAP Equity – Limited SAP Adjustments

Noninsurance SCAs Meeting Revenue and Activity Tests

– 8.b.iii – GAAP Equity

Noninsurance SCAs NOT Meeting Revenue and Activity Tests

– 8.b.iv – GAAP Equity / Foreign Basis – Limited Adjustments

Foreign insurance SCAs


SSAP No. 97 – Filing Exclusions• General:

– 8bi entities

– Investments captured within SSAP No. 48

• Limited Exclusions for Nonadmitted, Zero-Value and Immaterial SCAs

– Unless 8bi all SCAs should file a Sub 1

– Nonadmitted or zero-value for entire annual reporting period are excluded from Sub 2

– Immaterial can be excluded from Sub 2 with domiciliary state approval



SSAP No. 97 – Extension of SCA Filing Deadlines

Hot Topic

• Exposed agenda item 2017-08 at Spring NM

• Extends Sub 1 deadline to 60 days after acquisition or formation (from 30)

• Extends Sub 2 deadline to July 31 (from June 30)

Regulators have noted that these extensions should improve compliance with filing deadlines


SSAP No. 97 – Footnote 10M, 1



SSAP No. 97 – Footnote 10M, 1 Continued

• Note that the exact table form must be used in the Annual Statement

• Table summarizes all SCAs except 8bi entities

• Information should tie to SCA filing for the previous filing year

• SCAs listed in this table with an admitted value should be filed with the NAIC


SSAP No. 97 – Footnote 10M, 2



SSAP No. 97 – Footnote 10M, 2 Continued

• Table summarizes NAIC’s response to SCA filings in VISION

• SCA review letters are sent to summarize the approval of an SCA filing

• “NAIC Valuation Amount” is what the NAIC approves as total value claimed


SSAP No. 97 – Footnote 10N



SSAP No. 97 – Footnote 10N Continued

• Note that the exact table form must be used in the Annual Statement.

• Table summarizes only 8bi entities with an effect on net income and surplus as a result of using an accounting practice different from NAIC SAP.


-- QUESTIONS --

2017 SAP UPDATES - INVESTMENTSJulie Gann – [email protected] / Robin Marcotte – [email protected]

Fatima Sediqzad – [email protected] / Jake Stultz – [email protected]

Documents

2017 Statutory Accounting Updates - Investments · – Public accountant and insurance examiner consultant ... market mutual funds as short-term investments with ... Statement (SSAP