IASA's Central Illinois Chapter Spring Meeting STAT GAAP Slides … · · 2017-03-01IASA's Central Illinois Chapter Spring Meeting Matt Hisey –Manager, PwC April 21, ... • EITF

Statutory & GAAP Update

IASA's Central Illinois Chapter Spring Meeting

Matt Hisey – Manager, PwCApril 21, 2016

PwC

Course agenda

Introduction

Section I − Adoption of revisions to SSAPs – NAIC Spring Update

Section II− Exposure of New Guidance & New and On-going

Projects

Section III − GAAP Update – Insurance Contracts

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2016 – New Adoption of Revisions to SSAP’s

1NAIC Spring Update

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Adoptions of Revisions to Statutory Guidance

Surplus Notes (SSAP 41R) (2014-25)

• SAPWG adopted revisions to SSAP 41R and Issue Paper 151, Valuation for Holders of Surplus Notes, effective 1/1/2017.

- 1) NAIC 1 and 2 rated surplus notes would be reported at amortized cost, and

- 2) unrated surplus notes or those rated other than NAIC 1 and 2 would be valued at the lower of amortized cost or fair value.

◦ Changes would be reflected within unrealized gain or loss

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Quarterly Reporting of Restricted Assets (SSAP 1) (2015-19)

• SAPWG adopted a revision to SSAP 1 clarifying that the restricted asset

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

- The quarterly disclosure shall include sufficient information on the significant changes and updated totals of restricted assets to ensure the information presented is not misleading.

- The revisions to the restricted asset disclosures (first effective for 2014 financial statements) were requested industry, which did not see the need to include full restricted asset disclosures in the quarterly statements when no changes

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Permitted and Prescribed Practices Disclosure (SSAP 1) (2015-52)

• SAPWG adopted clarification that disclosure in the financial statements is required for all permitted and state prescribed practices that differ from NAIC, not just those that affect surplus or RBC.

• During the Spring National Meeting, the working group also adopted a footnote to allow for references to multiple SSAPs if the permitted/prescribed practice impacts more than one SSAP

• The working group also exposed for comment proposed guidance that requires disclosure for permitted practices “that result in different statutory accounting reporting (e.g., gross or net presentation, financial statement reporting lines). Related annual statement illustration and instructions changes were also referred to the Blanks Working Group.

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New Disclosures for ACA Risk Corridor Receivables (2015-54)

• The working group adopted new disclosures related to risk corridor receivables starting with the first quarter 2016 statement (with data capture expected for the 2016 annual statement).

• The disclosure should include recoverables by program benefit year and also require additional information to improve transparency of the recoverable amounts, specifically the amounts requested from the program and amounts reported gross and net of nonadmission.

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ACA Section 9010 Assessment 207 Moratorium as an interpretation of SSAP 106, ACA Section 9010 Assessment (2016-01)

• The working group exposed during its February 22 call a proposed interpretation of SSAP 106 to reflect the adoption by Congress in December 2015 of a moratorium in 2017 of the health insurance providers’ fee (HIPF). The proposal was adopted in New Orleans; a summary of the guidance is as follows:

• Accrual of liability on January 1, 2016 for HIPF based on 2015 data year net written premiums.

• No segregation of surplus in 2016 for HIPF based on 2016 data year net written premiums.

• No accrual of HIPF liability on January 1, 2017 based on 2016 data year net written premiums, because no HIPF will be paid during 2017.

• Segregation of surplus for HIPF based on 2017 data year net written premiums resumes during 2017.

• Accrual of liability on January 1, 2018 for HIPF based on 2017 data year net written premiums.

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Investments in Subsidiary, Controlled and Affiliated Entities

(SSAP 97) (2015-49)

• The working group adopted an ETF-related proposal which recommends a clarification to SSAP 97 that ownership of an ETF 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.

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Asbestos and Environmental Exception Reporting (2014-28)

• SAPWG adopted Issue Paper 153, Counterparty Reporting Exception for Asbestos and Pollution Contracts, which includes a new Appendix C; this appendix illustrates the reporting of such retroactive reinsurance on Parts 3-5 of Schedule F and a new Supplemental Schedule for aggregation regarding retroactive reinsurance for asbestos and environmental exposures.

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GAAP Cross Reference to Statutory Accounting

• The working group adopted the rejection of the following GAAP revisions as not applicable to statutory accounting:

• ASU 2015-12 – Plan Accounting: Defined Benefit Pension Plans ; Defined Contribution Pension Plans; and Health and Welfare Benefit Plans. (2015-38) (Rejected as revisions are specific to “plan accounting,” not accounting by the reporting entity for benefit obligations.)

• ASU 2015-15: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (2015-40)

• EITF 99-1: Accounting for Debt Convertible into the Stock of a Consolidated Subsidiary (2015-48)

• EITF 99-3: Application of Issue No. 96-13 to Derivative Instruments with Multiple Settlement Alternatives (2015-48)

• EITF 98-12: Application of Issue 00-19 to Forward Equity Sales Transactions (2015-48)

• EITF 00-7: 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 (2015-48)

• ASU 2014-06 – Technical Corrections and Improvements Related to Glossary Terms (2015-50)

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Exposure of New Guidance & New and On-going Projects

2NAIC Spring Update (selected updates)

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Exposure of New Guidance & New and On-going Projects – NAIC Spring Update

ASU 2016-02 Leases (2016-02)

• Intends to increase the transparency across companies by recognizing all leases on the balance sheet and by disclosing key information about the lease agreements.

• At the Spring National Meeting, the working group 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 requiring 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.

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SSAP 51 Life Contracts (2015-47)

• The working group exposed proposed revisions to the life insurance guidance to incorporate references to the valuation model and to facilitate the implementation of principle-based reserving

• Expected to be effective January 1, 2017.

• The proposed revisions are the result of NAIC staff’s work with an informal PBR drafting group of regulators and life insurers. Although the adoption of PBR is very significant, the proposed changes to SSAP 51 are not pervasive, as the guidance references the adopted Valuation Manual.

• “Substantive changes that reference the Valuation Manual in this statement are effective for January 1, 2017 and thereafter. However, the Valuation Manual provides for a 3-year period, starting from the operative date, during which companies are able to continue using the current reserve methodologies.”

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SSAP 86 Variable Annuities (2016-03)

• The Financial Condition Committee issued a charge to the working group to develop and adopt changes to SSAP 86 Derivatives for certain limited derivative contracts (e.g. interest rate hedges with counterintuitive effects) that otherwise do not meet hedge effectiveness requirements.

• In adopting such an allowance, the working group was asked to consider if the requirement to meet hedge effectiveness can be replaced by some other information that demonstrates strong risk management is in place over the identified hedges.

• Subsequent to the Fall National Meeting, interested parties had provided NAIC staff with an Industry Derivatives Proposal as a recommendation for “special accounting provisions” for these specific derivative contracts. The proposal was modified and exposed, comments are due June 5.

• The goal of the working group is to have the guidance adopted in 2016 and effective January 1, 2017.

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Short Sales (Issue Paper 152 – 2015-02)

• At Spring Meeting, the SAPWG group voted to expose a revised Issue Paper 152, Short Sales, for comment, which would revise SSAP 103.

• Provides guidance for situations in which state regulations do not prohibit, or otherwise provide specific guidance for short-sale transactions. The issue paper proposes deviating from U.S. GAAP and would require a short sale to be recorded as a contra asset in the balance sheet.

• The more significant revisions to the previously exposed Issue Paper, which reflects comments from interested parties include:

• The revised draft removes language for treatment of short sales in Schedule D, which will be included in the annual statement instructions.

• Additional guidance added on short sales supported by a securities borrowing transaction, as well as revisions to clarify the when the contra-asset from a short sale should be eliminated

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SSAP 1 - Collateral Received (2016-09)

• The working group exposed a proposal for an additional 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.

• The staff is requesting feedback from regulators on the amount of detail that would be beneficial for their use. Currently, the location and classification of the corresponding liability may not be consistent between across companies which can skew financial assessments made off this data.

SSAP 1 - Insurance-Linked Securities (2016-11)

• As a follow up to the new 2015 disclosure requirement of insurance-linked securities, the working group exposed a proposed a data-capture disclosure template for these securities and language clarifying how disclosure components should be completed.

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SSAP 3 – Accounting Changes and Corrections of Errors (2015-46)

• At the Spring National Meeting, the working group re-exposed revisions to clarify that the error correction guidance in SSAP 3 should not preclude companies from amending their annual or quarterly statement filings due to reporting/data validity errors.

SSAP 26 – Common Stock and SSAP 30 Preferred Stock - (2016-05)

• The working group exposed necessary revisions to SSAP 26 and SSAP 30 to remove the 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 funds

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SSAP 26 (2015-41)

• In response to the Valuation of Securities Task Force proposal to whether to remove the SVO from the 5* process and have insurers self-designate all 5* securities held, the working group exposed a new disclosure to capture current and prior period information on the number of 5* securities and the book adjusted carrying value and the fair value for those securities by category:

• Bonds, loan-backed and structured securities and preferred stock.

• This will “provide regulators sufficient information regarding 5* securities collectively in the financial statements, and allow transparency on any significant changes (particularly increases) with regards to insurer self-certification.”

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Fees Incurred for Salvage and Subrogation (2015-21)

• At the 2015 Summer National Meeting, exposed for comment a requirement for fees to recover salvage and subrogation to be reported gross regardless of whether the fees are paid to third parties or are allocated internally.

• At the Fall National Meeting, the working group heard strong comments from insurers that this proposal is inconsistent with current guidance to record salvage and subrogation at net realizable value.

• In response the working group has asked the Casualty Actuarial Task Force for its views and for comments as to whether explicit netting of subrogation recovery expenses is supported by regulators and industry.

• At the Spring National Meeting, exposed proposed revisions to SSAP 55 received from interested parties to clarify that the reporting of salvage and subrogation should be net of associated expenses. NAIC staff also asked the SAPWG whether additional disclosure would be beneficial.

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Method for Applying Discount Rates to Measure Net Periodic Benefit Cost (2016-08)

• At the Spring National Meeting, the working group exposed revisions to SSAP 92 and 102 to reflect the allowance of the Spot Rate method for measuring service cost and interest cost components of net periodic benefit cost.

• Currently, as permitted under ASC 715-30-35-45, the most commonly used approach is to develop a single weighted average discount rate.

• Recently, the SEC staff indicated that it would not object to the use of a Spot Rate approach, which provides for a more precise estimate and measurement of the cost.

• As a result, the SAP Working Group is proposed explicit adoption of this method for statutory reporting.

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SSAP 97 SCA Appendix (2015-25)

• The working group re-exposed a new appendix to SSAP 97 that will include the SCA Reporting/Filing process.

• As part of the re-exposure, the working group incorporated revisions to clarify that SCA entities, with an equity interest, are subject to filing guidance.

• As joint ventures, partnerships and limited liability companies are accounted for under SSAP 48, the revisions clarify that those investments are not subject to the SCA filing guidance.

• Lastly, there are no exclusions to the equity interest filing requirements in the Accounting Policies and Procedures Manual (except for domestic SCA insurance company investments).

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Investment Schedules (2015-27)

• The SAPWG exposed for comment alternatives for quarterly investment reporting. Interested parties do not support additional quarterly investment reporting.

• Alternative options presented by interested parties include:

• hiring a consultant to aggregate NAIC investment data

• expanding time to complete electronic only supplemental investment information, and

• replace quarterly acquisition and disposition schedules with a schedule of owned holdings.

• Although the interested parties have recommended that full investment schedules may not be necessary for quarterly reporting, the working group would like to understand which schedules or columns from schedule D would not be needed for quarterly reporting.

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GAAP Update

3Insurance Contracts

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Impacts

• FASB and IASB 2013 EDs had proposed fundamental changes to theaccounting for insurance contracts

• Improve, simplify and converge the financial reporting requirements

• In February 2014, the FASB changed course, toward making targetedimprovements to insurer accounting/disclosures:

• Q2 2015: ASU issued requiring additional disclosure for short durationcontracts, effective 2016

• Ongoing 2015 deliberations: Potential targeted accounting changes for longduration contracts; exposure draft possible in 2016

Insurance Contracts - GAAP

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The FASB released the new disclosure standard in May 2015, which requires enhanceddisclosures:

• Disaggregated claims development tables and related information, including:• Tabular presentation of undiscounted, incurred and paid claims and allocated

claim adjustment expenses by AY, on a net basis, for up to 10 years;• The sum of IBNR claims liabilities plus expected development on reported

claims included within the incurred claims development tables including adescription of the estimation methodologies for these components;

• Cumulative claim frequency information for each accident year; and• Reconciliation of the claims development tables to the balance sheet claim

liabilities

• Historical average annual percentage payout of incurred claims

• Information regarding any loss reserves that have been discounted

• Tabular interim claim liability rollforward (aggregated for reportingentity) in addition to currently required annual rollforward

Short Duration Insurance Contracts - GAAP

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Who is impacted?

• Insurance entities that issue US GAAP financial statements, both public and non-public entities.

• With the exception of the claim liability rollforward guidance, the additional

disclosures pertain to short-duration insurance contracts only

• Health insurance contracts:

◦ Historical average annual percentage payout is not required

◦ IBNR+ is required in both interim and annual financial statements

◦ Rollforward disclosure must be disaggregated


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Differences between current SEC/NAIC and new FASB requirements

*Information for any additional interim periods should be provided to the extent necessary to keep the annual information frombeing misleading, such as where a material change in the information presented or the trend evidenced thereby has occurred.

Item SEC NAIC FASB

Claim development table

Basis Consolidated LoB by entity Disaggregated

Organized by Financial reporting year

Accident year Accident year

Annual payout percentage Not required Not required Annual requirement

Narrative disclosures Required Limited Increased transparency

Claim liability rollforward Annually* (per Guide 6)

Annually Interim & Annually

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Disaggregation

• Disclosures should be “aggregated or disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have

different characteristics”

- Consider how liabilities have been presented for other purposes (e.g., earnings releases) and information reviewed by chief decision makers

- Examples of categories to consider include type of coverage, geography,

reportable segment, market or type of customer and claim duration

- Precluded from aggregating amounts from different reportable segments


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Required disclosures – Incurred and paid claimsdevelopment tables example

The FASB material included above is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.

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Required disclosures – Incurred and paid claimsdevelopment tables example (continued)

The FASB material included above is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.

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Excerpt from ASC 944-40-55-9E: copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.

Example – reconciliation

Reconciliation of the Disclosure of Incurred and Paid Claims Development

to the Liability for Unpaid Claims and Claims Adjustment Expenses

December 31, 2016

Net Outstanding Liabilities

Homeowners' Insurance

Other short-duration insurance lines

40,550

1,976

$

Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 42,526

Reinsurance recoverable on unpaid claims

Homeowners' Insurance

Other short-duration insurance lines

13,880

283

Total reinsurance recoverable on unpaid claims 14,163

Non-short duration items

Insurance lines other than short-duration

Unallocated claims adjustment expenses

Other

3,315

2,420

10

Subtotal - non-short duration unpaid claims 5,745

Total gross liability for unpaid claims and claim adjustment expense 62,434$

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When is it effective?

• Effective date for public business entities: annual reporting periods beginning after December 15, 2015 (i.e., 2016 for calendar year end entities), and interim reporting periods thereafter.

• Non-public business entities: one year deferral (i.e., 2017 forcalendar year end entities).

• Early application is permitted.

• Upon transition, the claims development table need not exceed fiveyears if presenting prior years’ information is deemed impractical. An additional year should be added to the disclosure in each subsequent year of financial reporting, but need not exceed 10 years.


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Potential updates to the model – Long duration

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Proposed targeted improvements

• Update assumptions for the liability for future policy benefits; eliminate provision for adverse deviation.

• Assumption update would be done by retrospectively unlocking the net premium ratio for cash flow changes and recording the impact of changes in discount rates immediately through OCI.

• Discount rate liability calculation would be rate of return on a reference portfolio of high-quality fixed income investments (as a proxy for a liability rate).

• Simplified DAC amortization based on insurance in-force, or straight-line in proportion to contracts outstanding if in-force cannot be reliably predicted; no interest accretion.

• GMXBs to be marked to market. Own credit risk to be discussed further (income vs. OCI)

Expected topics at future meetings

• Continue to discuss whether assumptions should be unlocked more frequently than annually in Q4.

• Participating contracts (FAS 120)

In February 2014, the FASB changed course from the exposure draft and diverged from the IASB.

In subsequent meetings, we gained visibility to the potential changes.

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Questions?

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IASA's Central Illinois Chapter Spring Meeting STAT GAAP Slides … · · 2017-03-01IASA's Central Illinois Chapter Spring Meeting Matt Hisey –Manager, PwC April 21, ... • EITF