Certain Notes are more difficult than others to disclose properly, and as a result, our customers tend to ask questions on those Notes more frequently. One such note is Note 20.C, which we wanted to highlight and provide some background on for the benefit of our customers. The content below is based upon conversations with the NAIC and state regulators, independent research, the NAIC AP&P Manual, and the 2019 NAIC Instructions. We hope you find the following overview insightful and welcome any questions on this or other Notes. As a disclaimer, any specific determination is subject to the input of your state regulator, which is a conversation we are happy to participate in.
To best highlight Note 20.C, we first need to begin with a solid understanding of what the table is looking for, and how it differs from the table in Note 20.A(1). These two tables on the surface appear to be redundant, but the objective of the tables differ, and therefore, so does the data. Note 20.A(1) is a subset of what is included in Note 20.C. The key words in the instructions for Note 20.A(1) are “measured and reported”, which refer to how the investment is reported on the balance sheet. So, if the investment is measured and reported at fair value or net asset value (“NAV”) on the balance sheet, then it would be reported in 20.A(1).
Conversely from Note 20.A(1), Note 20.C includes the values for all investments measured at fair value, regardless of whether or not the investments are reported that way on the balance sheet.
One hint when determining which assets to include in Note 20.C: If the “Detail” (Owned) investment schedule (i.e. E page) provides a column for ‘Fair Value’, then the investments on that schedule would likely be included in the table for Note 20.C.
Due to the fact that the values reported in Note 20.C may be measured at fair value, but carried differently on the balance sheet, there may be differences between the ‘Admitted Assets’ and the ‘Aggregate Fair Value’ columns. Stated differently, it is unlikely that the fair values will sum to match the values reported in the ‘Admitted Assets’ column of 20.C, unless of course, all investments in that asset class are measured and reported at fair value on the balance sheet.The values captured in the ‘Admitted Assets’ column will match what the assets were carried at on the balance sheet, while the ‘Aggregate Fair Value’ column will disclose the sum of the investments reported according to the fair value hierarchy and the assets held at NAV. This, similar to 20.A(1), also infers that investments reported at NAV shall not be captured within the fair value hierarchy, as they are separately identified. Therefore, the correct calculation to attain the sum of the Aggregate Fair Value is: Level 1 + Level 2 + Level 3 + NAV. In summary, many times there will be a difference between the fair values (‘Aggregate Fair Value’) and what is reported on the balance sheet (‘Admitted Assets’), which is part of what Note 20.C is looking to compare.
Another common question relates to the “Not Practicable” column on Note 20.C. Per the NAIC*, the “Not Practicable” column is not a contributor in the calculation to attain the aggregate fair value. Further, per the NAIC*, the determination that obtaining a fair value is “Not Practicable” should be fairly uncommon, as in the opinion of the NAIC, an assessment of fair value – even if only a Level 3 fair value measurement – can be determined. (*See end note regarding NAIC guidance.)
If an investment historically was reported as “Not Practicable” to estimate, but no longer meets that criteria, it should then be reclassified within the proper category of the leveling structure. Generally, if an investment does not have a readily determinable fair value, it would be classified as a Level 3 investment, which includes entity-specific data used to determine fair value (per SSAP 100R, para. 37). This Level 3 classification is why most investments do not fall in the “Not Practicable” category, as generally an entity can make a reasonable and supportable estimate of fair value using internal valuation and assessment.
For an investment previously classified as “Not Practicable”, regulators would expect the asset to enter the leveling at Level 3 once the investment has a determinable fair value or class; then, as the investment matures (or when the value can be confirmed with sufficient documentation), it can be recategorized into Level 1 or Level 2, per the instructions for Note 20 (20.A(3)) and the guidance under SSAP 100R – Fair Value. Transfers between levels need to be disclosed in 20.A(1) (for transfers between Level 1 and Level 2) and 20.A(2) (transfers in or out of Level 3) following the policy outlined in 20.A(3) and consistent with the valuation techniques and inputs described in 20.A(4).
If an investment does meet the criteria to be captured as “Not Practicable”, the investment would be disclosed at the carrying value in the appropriate column and then reported by individual security in Note 20.D with explanations as to why it is not practicable to estimate fair value. For additional context around the practicability determinations, please consult SSAP 100R, para. 56.
We hope this brief summary provides some insight on the calculation and disclosures in Note 20.C, as well as the adjacent subsections of Note 20. As always, we welcome any further questions, discussion, or feedback as we hope to continue to be a valuable resource for each of our customers.
Lastly, while on the topic of Note 20, we did want to offer a friendly reminder that 20.E was new beginning with the 2018 Annual Statement. To summarize, Note 20.E calls for reporting entities to disclose information that helps users of its financial statements understand the nature and risks of investments reported at NAV. Like the rest of Note 20, 20.E is a required quarterly disclosure and therefore, a disclosure is needed to satisfy NAIC requirements unless a disclosure state of ‘None’ or ‘Not Applicable’ is reported, either of which are acceptable according to NAIC guidelines.
*Opinions of NAIC staff have no authority and are based on the information provided and existing NAIC guidance. The state of domicile should be contacted with any specific questions as to the appropriate accounting or reporting, as the insurance departments decisions are the final authority for statutory accounting and reporting when guidance is not specific.