SSAP and Blank Updates to the Statutory Financial Statements – January 8, 2020 SAPWG Conference Call

The Statutory Accounting Principles Working Group (“SAPWG”) held a conference call on January 8, 2020 to consider industry and interested party comments on Agenda Item AP&P Ref #2019-21: Equity Interests. However, to maximize the opportunity and the call, the SAPWG first adopted exposed editorial revisions that were exposed with a shortened comment deadline at the NAIC Fall National Meeting in December. Both topics are summarized below to keep our readers abreast of what is changing as a result of the conference call, as well as what to expect as we move closer to the NAIC Spring National Meeting (March 21-24, 2020).

Adopted Item

The lone exposure considered was adopted as proposed, with no additional feedback from the SAPWG, regulators, or other interested parties. The adoption has been categorized as a nonsubstantive revision of SSAP and therefore is effective immediately and will be included in the Accounting Practices and Procedures Manual as of March 2020.

  • Ref #2019-44: Editorial Updates – This item incorporates editorial revisions to SSAP No. 62R – Property and Casualty Reinsurance to update references in the SSAP as well as other annual statement publication references (e.g., combining life and fraternal references).
Primary Discussion Topic

During the NAIC Summer National Meeting, the SAPWG exposed revisions to SSAP No. 43R – Loan-backed and Structured Securities to exclude collateralized fund obligations (“CFOs”), and similar structures that reflect underlying equity interests, from the scope of SSAP No. 43R, as well as prevent existing equity assets from being repackaged as securitizations and reported as long-term bonds.

For context and in short, the NAIC was contacted by a ratings provider seeking information on how CFOs are treated under statutory accounting, which led to a deeper dive into CFOs by NAIC staff. Out of that, there were multiple issues noted for further consideration for statutory accounting, two of which we wanted to highlight:

  • CFOs, in the past, have at times been formed through the repackaging of existing owned assets.
  • CFOs can include both debt and equity components, which can be kept as one structure or as witnessed by the rating agency, companies in the past have typically sold the debt component and retained the equity component.

A primary issue is that if a holding is improperly classified, it can impact the measurement, the RBC charge, and ultimately the reporting, among other things. In the past, abuses have been noted, for example, with a structure created and reported on Schedule D under SSAP No. 43R, even if the underlying assets belong, at least in-part, on Schedule BA. 

In the interest of statutory accounting, the NAIC is looking to ensure structures are reported appropriately and items that more closely resemble structured securities than bonds are not reported under SSAP No. 26R – Bonds. Although loan-backed and structured securities (“LBSS”) meet the definition of a bond, they are excluded from SSAP No. 26R  and follow the accounting and reporting guidance in SSAP No. 43R. Similar to reporting for bonds, LBSS is carried at the measurement method determined in accordance with the NAIC designation of the security, whether that is amortized cost or the lower of amortized cost or fair value.

Key elements noted in Ref #2019-21: Equity Interests included:

  • The intent for SSAP No. 43R securities to have “bond-like cash flows”.
  • Exclusion of equity instruments, investments with underlying assets that include equity instruments, or structures representing an equity interest.
  • Exclusion of assets that were previously reported as standalone assets by the reporting entity to change the investment schedule (and ultimately the reporting value or RBC charge).
  • Clarification that lease-backed securities and equipment trust certificates are in scope.

NAIC staff recommended the SAPWG classify the project as substantive and direct NAIC staff to move forward with writing an issue paper to formally propose the necessary revisions to SSAP No. 43R, alongside interested party representatives and NAIC SVO staff.

Interested party representatives added to a healthy discussion around the proposal for the future treatment of CFOs for statutory accounting and reporting. A point of emphasis among interested parties is that the proposal suggested the possibility that items that do not meet the asset-backed securities definition are proposed to be retained within SSAP No. 43R, with revised accounting and reporting guidance, which could possibly include:

  • Reporting these investment structures at the lower of amortized cost or fair value, regardless of NAIC designation.
  • An NAIC designation will continue to be required for RBC purposes, but these items may not be eligible for “FE” classification and may be required to be submitted to the NAIC SVO. If not submitted, the default designation would be NAIC 6.

The discussion targeted concerns with the updated definitions and resulting classifications. Moving forward the NAIC is planning to collaborate with interested parties and the NAIC SVO to determine the range of investment structures to be included in the AP&P Manual and expressed the desire to move beyond classifying these assets by name and towards classification using principle-based concepts.

The January 8, 2020 call served as the next step in what will likely be a slow process, for the sake of due diligence on the part of the NAIC, regulators, and interested party representatives. NAIC staff was optimistic that an issue paper could be prepared and exposure item presented by the NAIC Spring National Meeting (March 21-24, 2020).

As always, Gain Compliance integrates the latest changes into the NAIC guidelines to streamline the reporting process. If there are any further questions or comments, please do not hesitate to reach out.