Statutory Accounting Principles (E) Working Group Meeting Agenda August 6, Ref # Title Attachment # SSAP No.

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1 Meeting Agenda Statutory Accounting Principles (E) Working Group Meeting Agenda August 6, 2017 A. Consideration Of Maintenance Agenda Active Listing Ref # Title Attachment # SSAP No. 22 (Jake) ASU Leases A & Additional Handout Summary: Pursuant to the direction received August 26, 2016, NAIC staff has drafted substantive revisions to SSAP No. 22. The current version is shown as tracked-changes to SSAP No. 22 to show the proposed revisions, but it is anticipated that an issue paper will be developed to discuss and detail the changes. The revisions shown to SSAP No. 22R are significant, but are not intended to result in significant changes to statutory accounting: Revisions reflect GAAP guidance from ASU , with modifications to continue following the operating lease approach for statutory accounting for lessees. (From ASU , this modification rejects ASC guidance on treatment of leases as financing leases.) The intent is that all guidance in SSAP No. 22R will agree to that of ASC Topic 842, with the exception of the treatment of operating leases for statutory accounting. Statutory accounting treatment for lessors will remain largely unchanged. Revisions intend to clarify the language and flow of the document while maintaining the treatment of leases from a statutory accounting standpoint. SSAP No. 22 has had several changes since the original implementation, and because of this a user would have to look in multiple areas of the SSAP for guidance. The updated version groups information together more clearly. Guidance for sale leaseback transactions have been updated in the newer version of the SSAP to bring in language from Subtopic This guidance only contains language updates and is not intended to change statutory accounting for sale leaseback transactions. Specific guidance for statutory accounting from the prior SSAP was retained in the current version. Guidance for leveraged leases has been updated to bring in language from Subtopic , while the intent is for leveraged lease treatment to remain the same as the prior SSAP. Recommendation: NAIC staff recommends that the Working Group expose the substantive revisions to SSAP No. 22R with a request for comment on whether the proposed changes are appropriate to clarify the statutory accounting guidance, while retaining the operating lease concept, and to advise if the revisions are anticipated to impact the accounting and reporting of leases for statutory accounting. Ref # Title Attachment # SSAP No. 41R (Robin) Amortization and Accretion Surplus Notes B Summary: This agenda item is regarding premium and discount on surplus notes. The primary focus is regarding a surplus note issued at a discount. There is a perceived disconnect between SSAP No. 41R, paragraph 4, which requires that proceeds received by the issuer to be in the form of cash or other admitted assets having readily determinable values and satisfactory liquidity and SSAP No. 41R, paragraph 8 which provides guidance regarding discount or premium, if any, for the issuer. On June 8, 2017, the Statutory Accounting Principles (E) Working Group directed 2017 National Association of Insurance Commissioners 1

2 Meeting Agenda NAIC staff to redraft the proposal for future Working Group review using a different approach from the April exposure for discounted and zero coupon surplus note. Recommendation: NAIC staff has prepared revisions in accordance with the June 8, 2017, Working Group directions noted below. Staff recommends that the agenda item be moved to the active listing, categorized as substantive, and that substantive revisions to SSAP No. 41R, reflected in Exhibit B, of the agenda item be exposed: 1. The fundamental principle is that the net balance of a surplus note issued at a discount or zero coupon should never be greater than the amount of cash and liquid admitted assets received on issue. 2. Incurring a liability and not receiving liquid assets in exchange should be surplus negative. For example, if an entity receives $95 and owes $100 it should be a $5 surplus negative event. 3. Surplus notes principal amounts issued at a discount or a zero coupon or other transactions such as an exchange would follow the same principal and not accreted up the balance of the surplus note in surplus. 4. Principal amounts owed for the discounted or zero coupon surplus note, which are greater than the cash and liquid assets received are recognized as a liability. 5. If the reporting entity under any situation incurs a greater principal obligation than the amount of cash and liquid assets received, the amounts greater than the liquid assets received shall either be charged to operations when incurred (consistent with the cost of issuing the surplus note) or recognized as a liability on incurral (for amounts deemed by the domiciliary commissioner to be more consistent with the concept of a discount which requires future repayment). 6. While staff still recommends that illustrations may be beneficial at a future point in time, we recommend determining the language prior to developing additional illustrations. 7. Staff has also proposed a disclosure related to any amounts (discount etc. reported in surplus). B. Consideration Of Maintenance Agenda Pending List Staff Note: NAIC staff will present each of the following items with Working Group members requested to provide comments on whether they oppose the proposed exposure. After the presentation of all items, the Working Group will be requested to vote to expose all of the presented items. Ref # Title Attachment # SSAP Nos. 92 and 102 (Jake) ASU , Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost Summary: FASB issued ASU Compensation Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This update also includes amendments to the overview and background sections of the FASB Accounting Standards Codification as part of the initiative to unify and improve the sections across topics and subtopics. Under existing U.S. generally accepted accounting principles (GAAP), defined benefit pension cost and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer s financial arrangements as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements. Topic 715, Compensation Retirement Benefits, does not C 2017 National Association of Insurance Commissioners 2

3 2017 National Association of Insurance Commissioners 3 Meeting Agenda prescribe where the amount of net benefit cost should be presented in an employer s income statement and does not require entities to disclose by line item the amount of net benefit cost that is included in the income statement or capitalized in assets. The amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The ASU is effective for public entities for fiscal years beginning after Dec. 15, 2017 (generally Jan. 1, 2018). For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2018 and interim periods beginning after Dec. 15, (This guidance would generally make the amendments effective beginning with the year-end 2019 financial statements.) Recommendation: Staff recommends that the Working Group move this item to the nonsubstantive active listing and expose revisions to SSAP No. 92 and SSAP No. 102 to reject ASU , with notation that the disclosures in the SSAPs shall be followed. Staff notes that guidance in SSAP No. 92 and SSAP No. 102 requires disaggregation of pension and OPEB costs for statutory disclosure purposes. With the information captured in the disclosures, staff does not believe it is necessary to capture the information separately within the income statement as required within the ASU. Staff would request comments from regulators or industry if they believe this income statement presentation is needed for insurance reporting entities providing statutory financial statements. Ref # Title Attachment # Appendix D (Jake) ASU , Financial Services Investment Companies Amendments to the Scope, Measurement, and Disclosure Requirements Summary: ASU Financial Services Investment Companies Amendments to the Scope, Measurement, and Disclosure Requirements was issued in June 2013 to clarify accounting and reporting for investment companies, as defined by the Investment Company Act of This ASU amends Financial Accounting Standards Board (FASB) Codification Topic 946 Financial Services Investment Companies. There are three main provisions for this update: 1. Change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company and provide comprehensive guidance for assessing whether an entity is an investment company. 2. Require an investment company to measure non-controlling ownership interests in other investment companies at fair value rather than using the equity method of accounting. 3. Require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. D

4 Meeting Agenda Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and expose nonsubstantive revisions to reject ASU as not applicable to statutory accounting in Appendix D. Staff notes that statutory accounting guidance for investments does not differentiate by the issuer (e.g., whether the issuer is an investment company), and existing statutory accounting guidance is based on the type of investment. As the ASU is specific to investments held by investment companies, in investment companies, NAIC staff recommends rejecting as not applicable (rather than a noted rejected of the ASU in the investment SSAPs). Under existing guidance, unaffiliated equity investments would be captured within SSAP No. 30 Unaffiliated Common Stock (reported at fair value), and SCA investments would be captured in SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities (reported at either the market valuation or equity method). For noncontrolling and controlling investments in joint ventures, partnerships and limited liability companies the investment would be captured in SSAP No. 48 (reported at an equity method). Ref # Title Attachment # SSAP No. 104R (Julie/Fatima) ASU , Stock Compensation Scope of Modification Accounting E Summary: FASB issued ASU Stock Compensation Scope of Modification Accounting to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Substantive changes to the terms or conditions of an award would require application of modification accounting. A modification is described as a change in any of the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for different reasons. An entity should account for the effects of a modification unless all of the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The updates to GAAP provide guidance regarding which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to adopt ASU in SSAP No. 104R as detailed in the agenda item. NAIC staff highlights that prior guidance pertaining to modifications of share-based payments has previously been adopted for statutory accounting National Association of Insurance Commissioners 4

5 2017 National Association of Insurance Commissioners 5 Meeting Agenda Ref # Title Attachment # SSAP No. 22 (Julie/Fatima) ASU , Determining the Customer of the Operation Services F Summary: The FASB issued ASU Determining the Customer of the Operation Services (ASU ) in May This update was issued to address the diversity in practice in how an operating entity determines the customer of the operation services for transactions within the scope of Topic 853, Service Concession Arrangements. A service concession arrangement is an arrangement between a grantor and an operating entity where the operating entity will operate the grantor s infrastructure for a specified period of time. The operating entity may also maintain the infrastructure, and it also may be required to provide periodic capital-intensive maintenance to enhance or extend the life of the infrastructure. The infrastructure may already exist or may be constructed by the operating entity during the period of the service concession arrangement. Topic 853 provides guidance for operating entities when they enter into a service concession arrangement with a public-sector grantor who both: 1. Controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price. 2. Controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. In a service concession arrangement, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment. Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP No. 22 Leases to adopt with modification ASU to clarify the customer of service concession arrangements. These revisions ensure consistency between SAP, GAAP and IFRS for service concession arrangements. ASU is recommended for adoption with modification as the recommendations are currently limited to clarifying the customer of the operation services, but would not propose revisions regarding revenue recognition of the contracts. This treatment is similar to agenda item Service Concession, which adopts with modification ASU , Service Concession Arrangements. Ref # Title Attachment # SSAP Nos. 68 and 97 (Julie/Fatima) Goodwill Limitation in SSAP Nos. 68 and 97 G Summary: Statutory accounting principles require investments in the common stock of subsidiaries to be reported within the investments in common stock category on the face of the balance sheet, rather than as a separate investment. The amount included in the common stock line of the balance sheet for investments in subsidiaries also includes any goodwill generated from the investment. SSAP No. 68 Business Combinations (SSAP No. 68) calculates goodwill as the purchase price less the book value of the investment and requires aggregate goodwill exceeding 10% of the adjusted capital and surplus of the books of the insurance reporting entity to be nonadmitted. The capital and surplus limit is calculated as 10% of the previous quarter s capital and surplus after first deducting EDP equipment, operating system software, goodwill and net deferred tax assets. Staff has noted during the review of subsidiary, controlled and affiliated entity (SCA) Sub 2 filings that some insurance reporting entities are

6 2017 National Association of Insurance Commissioners 6 Meeting Agenda including a substantial amount of goodwill in the claimed value of SCAs. Although the goodwill is still within the limitation amount of 10% of the insurance reporting entity s surplus, a question is raised as to the perceived solvency of an insurance reporting entity that reports substantial goodwill on its balance sheet. Although there is an aggregate limitation, there are no other restrictions on the amount of goodwill in a particular subsidiary paid by a reporting entity. That is a reporting entity can vastly overpay for the value of a subsidiary and claim it as goodwill as long as the goodwill is not impaired and is below the aggregate limitation.. Staff believes that since the value claimed for an SCA is included in the insurance reporting entity s Annual Statement, reasonableness should be verified. Goodwill is an asset that is not available for policyholder claims unless the entire SCA is sold, so it could be misleading if substantial amounts of goodwill are included in the value of an SCA. It is recommended that the Working Group consider additional limitations on the admission of goodwill on an insurance reporting entity s balance sheet. Below are some examples taken from SCA filings; company names are omitted for confidentiality. The examples demonstrate the large amounts of goodwill that some entities have claimed as part of the value of the SCA. Filing Year SCA Equity SCA Goodwill SCA Total Value Goodwill as % of Total Value ,564, ,897, ,462,168 92% ,215,580 6,242,993 20,458,573 31% ,163,478 46,763, ,927,470 35% ,553,000 6,744,309 15,297,309 44% ,473,000 13,167,261 45,640,261 29% Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose the agenda item with a specific request for comments from industry and regulators on five proposed options for the admission of goodwill. Once feedback from the exposure is received, NAIC staff will propose revisions to SSAP No. 68 and SSAP No. 97 for subsequent review. Proposed Options Option 1: Further decrease the 10% limitation of admissible goodwill to 5%. Option 2: The amount of admissible goodwill is limited based on a percentage of the dollar amount of goodwill remaining after the initial 10% limitation amount based on the parent s capital and surplus (as described above). The additional limitation increases exponentially as the dollar amount of goodwill after the 10% limitation increases. Dollar amount of goodwill after 10% of parent s capital limitation Additional limitation of goodwill $0 - $1,000,000 10% $1,000,001 - $5,000,000 15% $5,000,001 - $10,000,000 20% $10,000, % Assuming Parent Capital and Surplus is $4,000,000,000 ($4 Billion), under current statutory accounting guidance all goodwill is admitted up to 10% of parent capital and surplus (so $400,000,000: $400 Million.) Filing Year SCA Equity SCA Goodwill Further Limitation SCA Total Value CURRENT ACTUAL PROPOSED ,564, ,897,488 9,564,680 A 104,897,488 B 0 (26,224,372) 25% of Goodwill C Goodwill as % of Total Value 114,462,168 92% 88,237,796 (A+B-C) 89%

7 Meeting Agenda Option 3: Cap the amount of goodwill at the asset or net asset value ($$) of the SCA. This would only allow an amount equal to the SCA value to be reported as goodwill. (So the maximum amount reported for an SCA could only represent 50% goodwill.) As an example of the calculation with the cap at net asset value of the SCA: CURRENT ACTUAL Filing Year SCA Equity SCA Goodwill SCA Total Value Goodwill as % of Total Value ,564, ,897, ,462,168 92% OPTION ,564,680 Option 4: Eliminate the admissibility of goodwill. 9,564,680 (Capped at SCA value) Option 5: Do not change the amount of goodwill admissible as an admitted asset. 19,129,360 50% Ref # Title Attachment # SSAP Nos. 68 and 90 (Julie/Fatima) Intangibles ASUs H Summary: The FASB has issued guidance on accounting for goodwill from 2010 to This agenda item considers the following five ASUs for statutory accounting and proposes updates to accounting for goodwill and recoverability. ASU When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts ASU Testing Goodwill for Impairment ASU Testing Indefinite-Lived Intangible Assets for Impairment ASU Accounting for Goodwill (a consensus of the Private Company Council) ASU Simplifying the Test for Goodwill Impairment ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This step has been modified as some entities passed on step 1 of this test because the fair value of their reporting unit will generally be greater than zero. As a result, concerns were raised that step 2 of the test was not being performed despite factors indicating goodwill impairment. For reporting units with zero or negative carrying amounts, an entity is required to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. To determine whether it is more likely than not, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. Goodwill should be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to allow an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the entity concludes otherwise, it must perform the first step of the two-step impairment test by calculating the fair 2017 National Association of Insurance Commissioners 7

8 Meeting Agenda value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of impairment loss. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to allow an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired (the more-likely-than-not threshold is defined as having a likelihood of more than 50 percent). If it is determined that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action; if the entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the qualitative assessment in any subsequent period. When conducting a qualitative assessment, an entity should consider the extent to which relevant events and circumstances could have affected the significant inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment. Then entity should also consider whether there have been changes to the carrying amount of the indefinitely-lived intangible asset when evaluating whether it is more likely than not that the asset is impaired. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to allow an accounting alternative for the subsequent measurement of goodwill. All entities, except for public business entities and not-for-profit entities that elect the accounting alternative should amortize goodwill on a straight-line basis over ten years, or less than ten years if the entity demonstrates that another useful life is more appropriate. The entity is then required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an entity may be below its carrying amount. When a triggering event occurs, an entity has the option to assess qualitative factors to determine whether the quantitative impairment test is necessary. If the qualitative assessment indicates that it is more likely than not that goodwill is impaired, the entity must perform the quantitative test to compare the entity s fair value with its carrying amount, including goodwill. If the qualitative assessment indicates that it is not more likely than not that goodwill is impaired, further testing is not necessary. The goodwill impairment loss is the excess of the carrying amount over the entity s fair value and cannot exceed the entity s carrying amount of goodwill. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to simplify the subsequent measurement of goodwill, by eliminating step two from the goodwill impairment test. The requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment, and to perform step two of the goodwill impairment test with failure of the qualitative test, is also eliminated. Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP Nos. 68 and 90 as detailed in the agenda item. This agenda item proposes to reject all of the noted ASUs, but has incorporated guidance for triggering events from SSAP No. 90 into SSAP No. 68 so that the guidance in SSAP No. 68 discusses the impairment process in its entirety. NAIC staff requests comments from regulators and industry on whether any components from the noted ASUs should be considered for statutory accounting National Association of Insurance Commissioners 8

9 Meeting Agenda Ref # Title Attachment # SSAP No. 97 (Julie/Fatima) SSAP No. 97 Foreign Entity Clarification I Summary: SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities (SSAP No. 97) requires that the limited statutory basis of accounting for investments in SCAs be adjusted for investments captured in paragraph 8.b.ii (SCAs that engage in specific transactions), and investments captured in paragraph 8.b.iv (foreign insurance entities). This guidance is explicit in paragraph 9, but could be more clear in paragraph 8.b.iv. that the paragraph 9 adjustments apply to both audited GAAP basis and audited foreign GAAP financial statements. This agenda item updates paragraph 8.b.iv as a readability edit to clarify the guidance. Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP No. 97 as detailed in the agenda item. These revisions clarify that the limited statutory adjustments shall apply to all foreign insurance SCAs (8.b.iv entities) regardless of whether they have audited U.S. GAAP or audited U.S. foreign GAAP financial statements. As noted, this is consistent with paragraph 9, so these revisions are intended to just clarify the guidance. Ref # Title Attachment # SSAP Nos. 41R and 97 (Julie/Fatima) Double-Counting of Surplus Notes J Summary: Surplus notes have the characteristics of both debt and equity. They are used for a variety of reasons, including but not limited to the following: 1) providing regulators with flexibility in dealing with problem situations to attract capital to reporting entities whose surplus levels are deemed inadequate to support their operations; 2) providing a source of capital to mutual and other types of non-stock reporting entities who do not have access to traditional equity markets for capital needs; and 3) providing an alternative source of capital to stock reporting entities, although not for the purpose of initially capitalizing the reporting entity. Surplus notes issued by a reporting entity that are subject to strict control by the commissioner of the reporting entity s state of domicile and have been approved as to form and content are reported as surplus, not debt, if the note contains the following provisions: 1) subordination to policyholders; 2) subordination to claimant and beneficiary claims; 3) subordination to all other classes of creditors other than surplus note holders; and 4) interest payments and principal repayments require prior approval of the commissioner of the state of domicile. SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities (SSAP No. 97) explicitly states that [i]nvestments in common stock, preferred stock and surplus notes are reported separately. Care should be taken to avoid double counting of the separate investments. The current guidance is specific to a situation in which the SCA issues the surplus note, which is held by the parent, but an SCA holding a surplus note issued by the parent also creates a double-counting situation when the parent reports the investment in the SCA if the investment includes the parent-issued surplus note. The recognition of a surplus note as equity on an issuing entity s consolidated financial statements and simultaneous inclusion of the surplus note in the value of the SCA on the issuing entity s financial statements is prohibited. Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP Nos. 41R and 97. These revisions clarify that the doublecounting concept applies to surplus notes that are issued by the parent and held by an SCA, which is 2017 National Association of Insurance Commissioners 9

10 Meeting Agenda reported as an investment in SCA on the parent s financial statements. (Previously, the double-counting concept was only captured for surplus notes issued by an SCA, but the concept should apply to both scenarios.) The guidance would require elimination of parent-issued surplus notes in a manner similar to equity investments. (It is noted that this guidance is specific to surplus notes (as they are reported as equity) and would not apply to debt instruments issued by the parent and held by the SCA.) Ref # Title Attachment # R (Julie) Remove 2009 SSAP No. 43R Implementation Guidance K Summary: With a recent review of SSAP No. 43R, it was identified that the effective date and transition guidance as well as the implementation guidance continue to reflect guidance that should have been applied with the 2009 effective date. Furthermore, some elements in the implementation guidance have not been updated when guidance was added directly to the SSAP. The revisions proposed in this agenda item are not expected to result with any application changes for investments within scope of SSAP No. 43R. Recommendation: Staff recommends that the Working Group move this item to the active listing, characterized as nonsubstantive, and expose revisions to SSAP No. 43R as detailed in the agenda item. These revisions are focused on removing outdated guidance and pertain to the following two elements: 1. Revisions to update the effective date guidance removing explicit guidance on transition from the adoption of the 2009 SSAP No. 43R substantive revisions. 2. Update to the Q&A to remove outdated guidance, mostly pertaining to the 2009 transition, but also removing issues subsequently addressed or revised in the SSAP. As identified, the revisions proposed in this agenda item are not expected to result with any application changes for investments within scope of SSAP No. 43R. Ref # Title Attachment # SSAP Nos. 2R and 103R (Julie) Wash Sales Involving Money Market Mutual Funds L Summary: In accordance with the 2014 SEC adopted final rules governing the structure and operation of money market mutual funds, IRS revisions were also adopted to exempt the redemption of shares in a MMMF as part of a wash sale for purposes of Section 1091 of the Internal Revenue Code. Under the SEC rules, effective October 14, 2016, institutional prime money market funds are required to report a floating net asset value (NAV) instead of a stable NAV. A redemption of shares in a MMMF that has a floating NAV could produce a loss and potentially implicate the IRS wash sale rules. The IRS exemption (Revenue Procedure ), effective July 8, 2016, was determined appropriate as the perceived safety and simplicity of MMMFs has led to widespread use for cash management purposes, and it is common for investors to purchase and redeem MMMF shares frequently. A MMMF is often used as an account into which, or from which, cash is automatically deposited, or withdrawn, on a daily basis (commonly referred to as a sweep account). MMMFs generally declare dividends daily and distribute them monthly, with MMMF shareholders typically reinvesting the distributions automatically into the MMMF. The IRS also noted that the share-prices of floating NAV MMMFs 2017 National Association of Insurance Commissioners 10

11 Meeting Agenda will be relatively stable and that monitoring floating-nav MMMF transactions for wash sales would be unreasonably burdensome. To qualify for the exception, the share issuer must be a regulated as a MMMF under Rule 2a-7 under the Investment Company Act of 1940, hold itself out to investors as a MMMF, and be a floating-nav MMMF. Under existing statutory accounting guidance, MMMF could be captured in the SSAP No. 103R wash sale disclosure. This disclosure captures securities with NAIC designations of 3-6, and that do not have an NAIC designation, if they have been sold / reinvested within 30 days. Similar to the rationale provided for the IRS exemption, redemption of shares in MMMFs are expected to have relatively stable values even when share prices float, and with the expected volume of transactions in floating-nav MMMF, tracking wash sales of MMMF will present significant practical challenges. Recommendation: It is recommended that the Working Group move this agenda item to the active listing, categorized as nonsubstantive, and expose draft revisions to clarify that acquisitions / disposals of shares in money market mutual funds are not subject to the SSAP No. 103R wash sale disclosure. Although this agenda item was drafted to specifically consider MMMF, NAIC staff requests comments on whether all cash equivalents should be excluded from the wash sale disclosure. As detailed in SSAP No. 103R, paragraph 28.l. the disclosure involving wash sales is only required for investments with NAIC designations of 3 or below or if the investment does not have an NAIC designation. As cash equivalents are not reported with NAIC designations, investments within these categories would always be captured if a company was to sell / reacquire within 30-days. NAIC staff also requests comments on whether wash sale disclosures would be beneficial for investments with an NAIC 1-2 designation (as those are not currently captured in the disclosure), and whether information on all wash sales involving securities reported on Schedule D-2-2 is beneficial to the regulators. (Common stock / mutual funds reported on D-2-2 do not have NAIC designations, therefore these would always be captured in the disclosure.) Ref # Title Attachment # SSAP No. 100 (Julie) Use of Net Asset Value instead of Fair Value M Summary: In 2009 and 2015 the FASB issued guidance regarding a practical expedient to measure the fair value of an investment on the basis of net asset value (NAV) per share of the investment (or its equivalent). This agenda item considers the following two ASUs for statutory accounting, and proposes specific guidance and reporting revision to clarify when NAV is permitted to be used, and how NAV shall be reported in the investment schedules / related disclosures. ASU Investments in Certain Entities that Calculate Net Asset Value Per Share (or Its Equivalent) ASU Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or Its Equivalent) This agenda item considers whether insurance reporting entities shall be permitted to utilize NAV in lieu of fair value in a manner consistent with U.S. GAAP, and/or when specifically identifiable within a SSAP. Furthermore, if NAV is used, it considers disclosure or reporting changes to identify use of NAV in the statutory financial statements. Although NAV is often considered an estimate of fair value, it should be noted that NAV may not represent the fair value of the investment in all instances. The FASB identifies that certain attributes of the investments (such as restrictions on redemption at the measurement date) and transaction prices from principal-to National Association of Insurance Commissioners 11

12 Meeting Agenda principal or brokered transactions may indicate that it is necessary to make adjustment to the NAV to estimate the fair value of the investment. (Specific information on the ASUs is provided in the agenda item.) Since the issuance of the above ASU s, the FASB has also revised the guidance for determining an investment company within Topic 946 (ASU ). Pursuant to the current FASB guidance, an investment must not have a readily determinable fair value, and be an investment in an investment company (defined under ( through 15-8) in order for a reporting entity to utilize NAV as a practical expedient to fair value. The definition of Net Asset Value per Share from the FASB Codification Master Glossary is as follows: Net Asset Value per Share - See Topic(s) 820, 946: Net asset value per share is the amount of net assets attributable to each share of capital stock (other than senior equity securities, that is, preferred stock) outstanding at the close of the period. It excludes the effects of assuming conversion of outstanding convertible securities, whether or not their conversion would have a diluting effect. Recommendation: It is recommended that the Working Group move this agenda item to the active listing, categorized as substantive, and expose draft revisions to illustrate the proposed guidance to allow net asset value per share as a practical expedient to fair value either when specifically named in a SSAP, or when specific conditions exist. With the classification as a substantive change (as a new concept is being proposed for SSAP No. 100), an issue paper and substantively revised SSAP would be drafted. However, NAIC staff recommends exposing this agenda item, with draft revisions, to get preliminary feedback from regulators and industry on the overall proposal, and whether additional concepts should be considered for inclusion. As detailed in the preliminary revisions, NAIC staff has drafted guidance to allow NAV as a practical expedient when specifically identified in a SSAP or when specific conditions are met. The proposed conditions intend to mirror the concepts of the FASB guidance, therefore allowing insurance reporting entities the ability to reflect the same measurement method / valuation for investments reported at fair value in both U.S. GAAP and SAP financial statements. If these concepts are adopted, the revisions would reflect the adoption, with modification, of ASU and ASU If the revisions are adopted, corresponding blanks revisions would be necessary to incorporate changes to the fair value disclosure illustrations to separately capture investments reported at NAV. Additionally, a new code would be proposed to the Fair Value Hierarchy (captured in the investment schedule electronic columns) to identify when an investment is reported at NAV. In addition to the revisions proposed through consideration of ASU and ASU , this Form A proposes to remove the illustrations previously included in SSAP No. 100, paragraph 44 (for the disclosure of fair value by financial instrument), as well as the SSAP No. 100 Exhibit A Implementation Guide and Disclosure Illustration. NAIC staff notes that example illustrations for the required disclosures are included in the Blanks Annual Statement Illustrations and recommends removing these duplicative illustrations from the SSAP. Ref # Title Attachment # SSAP No. 26R (Julie) Wholly-Owned Ultra-short Bond Portfolio in an LLC Series N Summary: This agenda item has been submitted by the sponsor, Payden Active Cash Management, LLC, with a request for the Working Group to consider an investment in a wholly-owned series fund, that solely owns fixed-income securities, which has been reviewed by the NAIC SVO and received an NAIC 1-2 designation to be reported as bonds on Schedule D-1. The sponsor suggests the following provisions as governing elements of this proposal: 2017 National Association of Insurance Commissioners 12

13 Meeting Agenda 1) Fund guidelines restrict investment holdings to permissible Schedule D assets only, 2) Third-party trust company acting as a fiduciary confirms the ongoing compliance with all investment guidelines, 3) Guidelines may only be changed with notification to the SVO, 4) SVO can be provided with transparency of holdings and transactions on a daily basis to confirm guidelines are being met, 5) The Fund should be recorded on Schedule D at the fair value NAV, and 6) All entities investing in the Fund fall under a single parent, maintaining all risk and return (after fees). The sponsor has suggested consideration by the Working Group as high quality (NAIC rated 1 or 2) money market instruments and short duration bonds held within a private, wholly-owned LLC Series have performed in a manner consistent with similar bonds held directly by an insurer. They also note that this reporting would be consistent with the true nature of the underlying risk exposures. Recommendation: Although NAIC staff believes that the issues raised in the agenda item should be considered by the Working group as part of the investment classification project, NAIC staff does not recommend that the Working Group expose revisions as suggested by the sponsor. NAIC staff highlights that the sponsor recommendation would influence investment reporting (the applicable SSAP and reporting schedule) not just by the investment structure, but by the qualifying NAIC designation. This proposal would be inconsistent with existing statutory accounting guidance, as NAIC designations do not impact the SSAP an investment should be captured in, or the investment reporting schedule in which an investment is reported. Under statutory accounting principles, the structure of certain investments (e.g., SVO-Identified Bond ETFs) may impact the SSAP / schedule, but these allocations are not driven by NAIC designation, but are driven by the overall structure of the investment. In speaking with the sponsor, NAIC staff believes the key driver for this agenda item is the RBC charge for investments in certain LLCs for property/casualty entities reported on Schedule BA. Under existing reporting guidelines, life / fraternal companies are permitted to report certain Schedule BA investments with underlying fixed-income securities with an NAIC designation. By reporting with an NAIC designation, the investment is able to receive an improved risk-based capital charge. This capability is not allowed for property/casualty companies, and all Schedule BA investments reported for property/casualty entities receive a 20% RBC. Rather than the sponsor recommendation, NAIC staff provides the following suggestions for consideration: 1. Send referrals inquiring whether property/casualty companies should have ability to report NAIC designations on Schedule BA, as permitted by life insurance companies, to obtain improved RBC for certain investments. Any change would require support and ultimate action from the applicable groups. NAIC staff would recommend that these groups send a response regarding whether they will consider this issue in order to allow NAIC staff and the Working Group to appropriately consider future requests. (These referrals would be sent to the Valuation of Securities (E) Task Force, Capital Adequacy (E) Task Force and the Blanks (E) Working Group, but would not likely require statutory accounting revisions.) This option would continue investment reporting based on the nature of the investment (e.g., LLCs would be captured in scope of SSAP No. 48 and reported on Schedule BA) and ensure that like investments are measurement / reported consistently. This option would prevent the need to established exception reporting for certain LLCs and prevent the need for revisions to SSAP No. 26R (and Schedule D-1) for these investments. For example, LLCs are reported using an equity method under SSAP No. 48. If certain LLCs were captured in 2017 National Association of Insurance Commissioners 13

14 Meeting Agenda scope of SSAP No. 26, the Working Group would need to consider revisions to clarify the measurement method for these investments, as they would not be able to apply the existing guidance in SSAP No. 26 (amortized cost). If captured in SSAP No. 26R as a non-bond item, revisions would also need to be considered to Schedule D-1 to separately identify these investments on that schedule. Any change under this option would be subject to the decisions of the noted groups. NAIC staff believes this would be most appropriate as the ultimate issue is whether certain investments should be attributed a better RBC based on their underlying risk profile. Staff Note: NAIC staff prefers this option, as staff does not generally support statutory accounting revisions that are driven by RBC. Rather, NAIC staff believes that RBC changes (if appropriate) should be considered for the investments by the applicable groups. NAIC staff defers to the Working Group on whether classification changes are preferred. 2. Consider revisions to allow certain LLC investments that solely hold fixed-income securities to be in scope of SSAP No. 26R and reported on Schedule D-1. (This proposal is different from the sponsor s recommendation as it would allow all LLC investments whose structural analysis fits the fixed-income profile to be included, and this provision would not be based on NAIC designation. This proposal could require the LLC structure to maintain various structural requirements, including a retention of the highest credit rating given by an NAIC CRP (similar to the SVO-Identified Bond Mutual fund list), but it would not impact reporting based on NAIC SVO designations. With the existing SVO-Listings the assessment is a two-step process. The first step is whether the structural analysis is met. If the structural analysis if met, then the investment is permitted to be captured within the noted SSAP / reporting schedule. Once included on an SVO-Listing, the investment would then have to be acquired by an insurer, and then submitted to the NAIC SVO for an NAIC designation.) Staff Note: As previously noted, NAIC staff does not support creating more exceptions for SSAP No. 26 to achieve desired RBC, but this approach, would allow reporting based on a set structure if that was supported by the Working Group. This option would incorporate a new exception (non-bond investment) to SSAP No. 26R (and Schedule D-1) and would require revisions to capture the provisions / guidance for these LLCs in SSAP No. 26R. Although LLCs are reported under an equity method in SSAP No. 48, if this option is supported, NAIC staff would recommend that all LLCs reported in scope of SSAP No. 26R be reported at fair value. (An amortized cost measurement method would not be applicable.) The corresponding NAIC designation would not impact measurement of the investment, but would strictly be used for RBC purposes. Corresponding reporting changes (to identify the LLCs) would also be recommended to Schedule D-1. This option would require consideration on how to limit / regulate the LLC investments reported in scope of SSAP No. 26R. If this proposal is supported, NAIC staff would suggest (consistent with the sponsor recommendation), that the Valuation of Securities (E) Task Force be requested to establish a new listing for specific LLC investments permitted to be reported in scope of SSAP No. 26R. (This option would require an initial referral to the Task Force to assess whether they are open / able to complete such reviews and determinations.) 3. Dispose this agenda item without statutory accounting revisions. This option would continue the current process of reporting LLCs with fixed-income components in scope of SSAP No. 48, and the reporting of these items on Schedule BA, without sending referrals to other groups. (This action would not prevent the VOSTF, CATF or Blanks from considering changes that they thought were appropriate, but would remove the SAPWG from suggesting consideration of these changes.) 2017 National Association of Insurance Commissioners 14

15 Meeting Agenda NAIC staff recommends that the Working Group move this agenda item to the active listing, classified as nonsubstantive, and expose the agenda item with a request for comments on the three options proposed by NAIC staff, the initial proposal by the sponsor, as well as other options that could be considered. Ref # Title Attachment # SSAP No. 107 (Robin) High-Cost Risk Pooling in ACA Risk Adjustment O Summary This agenda item is sponsored by the Health Financial Reporting and Solvency Committee of the American Academy of Actuaries. It notes that the Patient Protection and Affordable Care Act of 2010 (ACA) introduced a risk adjustment program impacting the individual and small group medical insurance markets, effective in In December 2016, the U.S. Department of Health and Human Services (HHS) adopted a new regulation that changed how the ACA risk adjustment would function, starting in Specifically, as of 2018, the ACA risk adjustment program will now include an element similar to reinsurance called high-cost risk pooling (HCRP). The academy has outlined two potential conclusions: Alternative #1 The NAIC had previously concluded that, from the standpoint of issuers in the individual market, the ACA transitional reinsurance program should be treated for accounting purposes as if it were an involuntary pool. The same reasoning would appear to imply that the HCRP element of ACA risk adjustment should be treated for accounting purposes as if it were an involuntary pool. Based on this reasoning, starting in 2018, an issuer in the individual or small group markets would need to decompose its risk adjustment payables and receivables into three pieces: 1. The piece representing proportionate reimbursement for the issuer s claims above the HCRP threshold would be accounted for as a reinsurance ceded claim recovery, consistent with how paragraph 33 of SSAP No. 107 treated payments made to the issuer under ACA transitional reinsurance. 2. The piece representing the percent-of-premium charge to the issuer in order to fund reimbursements across all issuers of claims above the HCRP threshold would be accounted for as reinsurance ceded premium, consistent with how paragraph 30 of SSAP No. 107 treated payments made by the issuer to fund the ACA transitional reinsurance program. 3. The residual piece would be accounted for consistent with existing guidance in paragraph 13 of SSAP No. 107 (i.e., as a premium adjustment subject to redetermination). Changes to SSAP No. 107 would be warranted in order to implement this accounting approach. Alternative #2 One difference between HCRP and transitional reinsurance is that the HCRP is going to be embedded within risk adjustment, rather than being a separate calculation. Because of this, it is somewhat unclear at this point in time whether issuers would have reliable information available to them in order to decompose the overall risk adjustment estimate into the three pieces that the proposed accounting approach above would require. An alternative view is that applying involuntary pool accounting to the HCRP element of ACA risk adjustment would introduce unnecessary complexity to issuers financial statements National Association of Insurance Commissioners 15

16 Meeting Agenda If NAIC were to endorse this view, an interpretation of SSAP No. 107 would be beneficial, in order to clarify that the NAIC wants the existing accounting for ACA risk adjustment to remain unchanged notwithstanding the introduction of the HCRP element in Recommendation: NAIC Staff recommends moving this items to the nonsubstantive active listing and exposing revisions, which implement the sponsor s Alternative #1 to report the high cost risk pool similar to an involuntary pool, for comment. This recommendation would report the percent-of-premium charge to the issuer that funds reimbursements as premium ceded thereby reducing premium written. Reimbursements for specific high cost claims would be reported consistent with for ceded claims benefits reinsurance recoveries and reduce claims. NAIC staff notes that reporting large claims net of reimbursements would also be less distorting to loss ratios. The remainder of the risk adjustment program would be continue to reported as it was previously, which is primarily as adjustments to premium. Staff has proposed high cost risk pool, disclosures and recommends deleting the 2018 disclosures for the transitional ACA reinsurance program, which has ended. Although the risk corridors program has also ended, staff has not proposed deleting the risk corridors disclosures because of ongoing federal lawsuits. However, comments are requested regarding any additional updates that are needed to the SSAP No. 107 disclosures. Staff recommends that comments on this item be considered in an interim conference call to ensure adoption prior to year-end. HHS Notice of Benefit and Payment Parameters for 2018 final payment rule regulations indicates that the primary risk adjustment calculation will not be directly impacted by payments to or from the HCRP. However, the overall risk adjustment calculations should be more accurate because distorting high-risk claims are being coinsured by the respective individual or small group HCRP. The timing of all cash flows has not yet been operationalized, but the pooling payment is expected to be billed based on filings in the year following the plan year (for example July 2019 for 2018 plan year). Receipts for HCRP reimbursements for claims over the threshold of $1 million (for 2018) will be distributed after pooling payments are received (for example August or September of 2019 for 2018 plan year). Any shortfalls in the receipts of payments will not be funded separately. However, as the premium payments will be billed based on claim submissions, the primary variable should be collections. Ref # Title Attachment # SSAP No. 35R (Robin) Updates to Issue Paper No. 143 for Long Term Care Assessments 2017 National Association of Insurance Commissioners 16 P & Additional Handout Summary: The Statutory Accounting Principles (E) Working Group adopted substantive changes to SSAP No. 35 Revised Guaranty Fund and Other Assessments (SSAP No. 35R) in two separate agenda items and directed NAIC staff to document the revisions in existing Issue Paper No. 143 Prospective-Based Guaranty Fund Assessments (IP No. 143). The first agenda item, adopted in December 2016, was : Guaranty Fund Credits for Short-Duration Contract. It was effective January 1, 2017, and allowed expected renewals of short-term health contracts to be considered in determining the assets recognized from accrued guaranty fund liability assessments from insolvencies of entities that wrote long-term care. The revisions resulted with more comparable accounting treatment between life insurers and health insurers subject to similar retrospective guaranty assessments for longterm care products. The second agenda item was : Discounting of Long-Term Care Guaranty Fund Assessments was adopted in March It was effective for first quarter 2017 reporting. This change was requested by the health insurance

17 2017 National Association of Insurance Commissioners 17 Meeting Agenda industry in December 2016 to address the large liabilities that some entities were expecting due to a 2017 insolvency of a large long-term care writer. This change requires discounting of guaranty fund assessments and related tax credit recoverables from insolvencies of insurers that wrote long-term care (LTC) that are in excess of one year to payment or recovery. The discount rate applied is the whole life discount rate in effect as of the reporting date. Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as substantive and expose revisions to Issue Paper No. 143 as shown in the additional handout. In addition to documenting the changes to SSAP No. 35R, staff has recommended an update to the name from Issue Paper No. 143 Prospective-Based Guaranty Fund Assessments to Issue Paper No. 143R Guaranty Fund Assessments. This name change is recommended because the focus of the prior two agenda items was on retrospective-based assessments. Ref # Title Attachment # SSAP No. 61R (Robin) Reinsurance Risk Transfer for Short Duration Contracts FAWG Ref. Q & Additional Handout Summary: Regulators brought to the attention of the Working Group concerns regarding short duration health reinsurance contracts which were termed quota share treaties but which had features that limited the reinsurer s risk. Concerns were noted that the contracts may not adequately transfer risk per statutory accounting. In addition, concerns were noted regarding whether similar contracts that may meet risk transfer requirements were taking a larger reinsurance credit than appropriate because the risk limiting features in the contracts limit the amount of insurance risk transferred. The Working Group directed NAIC staff to research and prepare an agenda item for subsequent discussion. Subsequent to this direction, the Working Group also received a referral from the Financial Analysis (E) Working Group noting additional concerns with short duration contacts in particular and noted a preference that finite reinsurance disclosures required for SSAP No. 62 should also be in SSAP No. 61 (See Activity to Date). This agenda item addresses reinsurance risk transfer and or accounting issues for clarification in statutory accounting primarily focused on reinsurance of short duration products. In April 2017, a referral was received from the Financial Analysis (E) Working Group on this issue, which also noted property and casualty entity concerns and concerns regarding health disclosures. The following provides a summary of this referral: The Financial Analysis (E) Working Group (FAWG) has recently discussed a number of troubled and potentially troubled insurers that have participated in quota share/proportional reinsurance contracts with significant risk-limiting features. In many of these situations, the motivation for the contracts appears to be surplus relief, without a significant amount of insurance risk being transferred to the reinsurer. The contracts often utilize loss corridors, sliding scale commissions, or other risk-limiting features to significantly limit the risk transferred to the reinsurer. Often these limitations result in a quota share reinsurance agreement operating more like an excess of loss reinsurance agreement, but the ceding insurer is accounting for the contract as if full, proportional reinsurance were in place. In certain cases, the ceding insurers have lost millions of dollars on certain blocks of business and even reached insolvency, while the reinsurers have continued to recognize profits on the contracts. While P&C insurers are required to disclose some of these features in the interrogatories, health insurers are not, and FAWG continues to be surprised by the fact that GAAP seems to prevent some of these contracts from being recorded as meeting risk transfer requirements while SAP may not. Although the number of P&C companies reporting these features and differences in GAAP/SAP reporting may be limited, they appear to be more prevalent in

18 2017 National Association of Insurance Commissioners 18 Meeting Agenda troubled company situations and are being offered by otherwise well-regarded reinsurers. Therefore, FAWG suggests further changes to SAP to prevent these situations. Recommendation: NAIC staff recommends that the Working Group receive the referral from the Financial Analysis (E) Working Group, move this item to the active listing, categorized as nonsubstantive and expose revisions to be provided in an additional handout. The following summarizes the recommended course of action, and the related revisions are illustrated in the additional handout: 1. Risk transfer clarifications SSAP No. 61R Expose revisions to the guidance in SSAP No. 61R that emphasize categorizing contracts correctly as either being proportional or nonproportional and make more explicit the interaction between Appendix A-791 which is for proportional contracts and the SSAP No. 61R risk transfer guidance. The proposed revisions also emphasize that the calculated reinsurance credit taken for contracts that meet Appendix A-791 or reinsurance contracts that meet the risk transfer criteria in SSAP No. 61R is only for the portion risks, which are actually transferred under the contracts. Reinsurance credit should take into account all features of a contract including deductibles, loss ratio corridors, a loss caps, aggregate limits or any similar provisions. 2. Risk transfer clarifications SSAP No. 61R Expose clarifications to the risk transfer guidance in SSAP No. 62R that make the existing guidance more clear that contracts which meet the risk transfer requirements should not take a greater credit for greater than the amounts of risk transferred under the contract. These clarifications are intended to be consistent with the existing concepts in the SSAP No. 62, which are highlighted in the SSAP No. 62R, paragraph 93 disclosure. It highlights that quota share treaties, which contain features that limit the reinsurer s losses below the stated quota share percentage (e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions), should reduce the amount of reinsurance credit taken by the effects of any applicable limiting provision(s). 3. Disclosures Expose disclosures and or annual statement interrogatories, for SSAP No. 61R for which are based on the existing finite reinsurance disclosures in SSAP No. 62R (adapted as needed for short duration health products). The disclosures would be to assist regulators in identifying contracts, which may require from additional regulatory scrutiny regarding risk transfer. 4. Updates to the glossary Expose updates to the glossary in SSAP No. 61R for specific terms including the definition of proportional and nonproportional. Exposure questions Request comments on the current SSAP No. 61R glossary definitions, which are currently defined in a life specific context: coinsurance, modified coinsurance and retention. In addition, request comments regarding whether incorporating a modified version of the GAAP a list of things that are indicative of a short duration contract be decision useful for SSAP No. 61R or the Master glossary as short duration was also noted in recent SSAP No. 35R revisions. Note that short duration and long duration are GAAP terms (quoted in Authoritative literature) which have historically not been adopted in statutory accounting. Comments are requested whether adding versions of the following in either the SSAP No. 61 R glossary or the master glossary would be decision useful (modified for statutory accounting differences in classification), such as when reviewing adopted GAAP guidance. 5. Model 791 interactions with risk transfer guidance Expose updates to Appendix A-791 to incorporate language from the preamble of the model law 791. This language in the model is indicative of the intent behind the model, which was to prevent reinsurance credit for contracts, which provide temporary surplus aid without transferring all of the significant risks so that the expected potential liability of the ceding insurer remains basically unchanged. This includes much of the existing language in paragraph 2k of Appendix A-791, but also provides additional detail regarding intent.

19 Meeting Agenda Exposure questions Comments are requested on clarifications needed on the interaction of Appendix A- 791 and the risk transfer guidance. Would adding to the questions and answers in A-791 regarding application be useful? What questions should be addressed? Ref # Title Attachment # EP Editorial Process Memo R (Robin/ Julie) Summary: The editorial process memo has recommended updates to the following: 1. Delete transition footnotes detailing the application for the 2016 year-end and interim 2017 financial statements for money market mutual funds. These footnotes were added after adoption of SSAP No. 2R Cash, Cash Equivalents, Drafts and Short-Term Investments, which requires MMMF to be reported as cash equivalents for year-end With the inclusion of SSAP No. 2R in the 2017 AP&P Manual, the footnotes were added clarify the guidance prior to the SSAP No. 2R effective date. 2. Delete Actuarial Guideline XXXIV Variable Annuity Minimum Guaranteed Death Benefit Reserves (AG-34) and Actuarial Guideline XXXIX Reserves For Variable Annuities With Guaranteed Living Benefits (AG 39) from Appendix C of the AP&P Manual publication. AG 34 was repealed effective December 30, 2009 and was replaced by Actuarial Guideline XLIII CARVM for Variable Annuities (AG 43) effective December 31, The AG 43 project history notes that AG 39 was adopted as a temporary measure with an original sunset date of January 1, AG 39 sunset on December 30, Recommendation: NAIC staff recommends that the editorial process memo be exposed for comment. In addition, staff has notified Life Actuarial (A) Task Force support staff of the planned exposure. C. ANY OTHER MATTERS a. Response to Valuation of Securities (E) Task Force: Affiliated Transactions (Attachment S Julie) Summary: This memo responds to an April 18, 2017 referral requesting assistance in formulated additional procedures / limitations for assignment of NAIC designations to investments in an insurance entity s subsidiary, controlled or affiliated (SCA) entity. The memo recommends revisions to the SVO procedures in issuing NAIC designations investments in an SCA, with proposed changes to clarify that an NAIC designation, or a CRP rating, only reflects a credit assessment, and does not consider collectability based on independent payment ability, does not reflect whether a transaction was conducted as armslength, and does not reflect whether a transaction is considered economic under SSAP No. 25. The memo highlights that the assessment of these affiliate components required a detailed review of the transactions, which is beyond the scope of an SVO credit assessment. Action: Consider adoption of the referral response for submission to the Task Force. b. Revisions to the AICPA Audit and Accounting Guides (Attachment T Robin) Action: Receive information on the AICPA audit guide changes and the impact of Working Group review of GAAP disclosures for audited statutory financial statements accounting National Association of Insurance Commissioners 19

20 Meeting Agenda c. Update from industry on ASU : Credit Losses History: On December 10, 2016, the Statutory Accounting Principles (E) Working Group directed staff to work with interested parties and representatives of the AICPA to obtain further assessments on how the ASU shall be considered for statutory accounting. The Working Group agreed to forego active discussion of this agenda item at that time, with plans to conduct additional discussion on this agenda item during the second half of 2017, to allow staff time to complete the recommended assessments and evaluate whether additional FASB guidance may be forthcoming. Update: Industry is requested to provide an update on FASB technical / implementation guidance. d. Restricted Assets Subgroup (Julie) Action: Receive update on Subgroup and its remaining projects. NAIC staff recommendation is to dissolve the subgroup, with remaining projects to be addressed by the Working Group directly. (If there is preference to retain the Subgroup, a new chair will need to be appointed as Tomoko Stock has retired.) e. Review of GAAP Exposures (Attachment U Jake) Exposed FASB Guidance Technical Corrections and Improvements to Topic 942, Financial Services Depository and Lending Elimination of Certain Guidance for Bad Debt Reserves of Savings and Loans Technical Corrections and Improvements to Topic 995, U.S. Steamship Entities Elimination of Topic 995 Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities Comment Deadline & Initial Staff Comments August 28, 2017 Review ASU under the SAP Maintenance Process August 28, 2017 Review ASU under the SAP Maintenance Process September 5, 2017 Review ASU under the SAP Maintenance Process f. Report on Valuation Manual Updates (V Robin) Action: Receive information on the updates to the Valuation Manual as part of ongoing coordination. Comment deadline for exposed and new items is Sept. 22, G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\ Meeting Agenda.doc 2017 National Association of Insurance Commissioners 20

21 Attachment A Ref # Issue: ASU Leases (ASC Topic 842) Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: In February 2016, the FASB issued ASU Leases, which increases transparency and comparability among organizations by recognizing all leases (both operating and financing and the lease assets and lease liabilities) on the balance sheet and disclosing key information about leasing arrangements. This ASU created ASC Topic 842 (supersedes ASC Topic 840) and along with IFRS 16 Leases is the result of FASB s and IASB s efforts to improve financial reporting on lease accounting. The main difference between previous GAAP (Topic 840) and Topic 842 (new GAAP) is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP (staff note: lessor accounting for leases did not fundamentally change as a result of this ASU). For all leases (operating and financing), a company will now recognize in the statement of financial position a liability to make leases payments (lease liability) and a right-of-use asset (lease asset) representing its right to use the underlying asset for the lease term. There is an exception to this guidance for short term leases (12 months or less), in which a lessee is permitted to make an accounting policy election to not recognize the lease asset or liability and just recognize the lease expense similarly to operating leases under previous GAAP. The following information summarizes the key information on the accounting and reporting of leases for lessees under Topic 842: 1) The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. 2) For financing leases, a lessee is required to do the following: a) Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position b) Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income c) Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. 3) For operating leases, a lessee is required to do the following: a) Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position b) Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis c) Classify all cash payments within operating activities in the statement of cash flows 2017 National Association of Insurance Commissioners 1

22 Attachment A Ref # ) The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including periods within those fiscal years for any of the following: 1) a public business entity; 2) a not-forprofit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market and 3) an employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC). For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019 and interim periods with fiscal years beginning after December 15, Early application of the amendments in this Update is permitted for all entities. Currently, SSAP No. 22 Leases, paragraph 12 prescribes that all leases shall be considered operating leases with rent being expensed in accordance with paragraphs The Working Group previously elected to account for all leases as operating leases, using the accounting method for leases that qualified as operating under FAS 13 (adopted in SSAP No. 22), which was incorporated into ASC Topic (previous GAAP, superseded by ASC Topic 842 as detailed in ASU ). Existing Authoritative Literature: The chart in Appendix A shows the prior statutory accounting consideration of lease GAAP pronouncements. Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda items : ASU : Fees Paid in a Cloud Computing Arrangement and Agenda Item : Sales-Leasebacks with Nonadmitted Assets were deferred until consideration of the new FASB lease standard. Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None Convergence with International Financial Reporting Standards (IFRS): The leases project began as a joint project with the IASB and many of the requirements in Topic 842 are the same as the requirements in IFRS 16. The main differences relate to the accounting by lessees for operating leases (as financing leases are accounted for similarly between ASC 842 and IFRS 16). Refer to Appendix B of this agenda item for further information on ASC 842 and IFRS 16 differences. Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as substantive, and expose the agenda item with a specific request for comments from industry and regulators on three proposed staff options for accounting of operating and financing leases under SAP: 1. Maintain existing statutory accounting guidance in SSAP No. 22 for the treatment of operating and financing leases, with potential new disclosures to capture information on the lease asset and lease liability that would be required under GAAP. 2. Adopt ASU , with modification, to recognize the lease asset and lease liability, but requiring nonadmittance of the lease asset as an asset not available for policyholder obligations pursuant to SSAP No. 4. Staff Comments: As described in ASU , a right-of-use asset (lease asset) represents the lessee s right to use the underlying asset over the lease term. As such, the lease asset would not meet the definition of an admitted asset as prescribed in SSAP No. 4 Assets and Nonadmitted Assets. Paragraph 3 of SSAP No. 4 states: As stated in the Statement of Concepts, "The ability to meet policyholder obligations is predicated on the existence of readily marketable assets available when both current and future obligations are due. Assets having economic value other than those which can be used to fulfill policyholder 2017 National Association of Insurance Commissioners 2

23 Attachment A Ref # obligations, or those assets which are unavailable due to encumbrances or other third party interests should not be recognized on the balance sheet," and are, therefore, considered nonadmitted. Nonadmitting lease assets is consistent with other nonadmitted assets that are not available to meet current or future policyholder obligations, including deferred acquisition costs and furniture, fixtures and equipment 3. Adopt ASU , with modification, to recognize lease assets and lease liabilities for a lessee s operating and financing leases. Although some modifications from GAAP would be anticipated, this option would allow the lease asset to be an admitted asset under SAP. Staff Comments: As detailed in the previous staff comments, recognition of the lease asset as an admitted asset would be inconsistent with current statutory accounting principles and previous discussion/actions of the Working Group Additionally, staff envisions the various components of ASU being addressed in multiple steps/agenda items. This agenda item intends to address the initial determination of whether the Working Group elects to retain the current operating lease statutory accounting treatment in SSAP No. 22, or whether revisions should be made to incorporate elements from ASU into statutory accounting. If the Working Group elects to change the current statutory accounting for leases, staff recommends that the Working Group direct staff to begin drafting an issue paper and a new SSAP. Subsequent to the Working Group s determination, staff recommends that Working Group direct staff to further evaluate ASU , including an analysis of the specific amendments from ASC Topic 840 (previous GAAP), and present additional agenda items to the Working Group for consideration of potential revisions to for statutory accounting, including: 1) Lessor Accounting; 2) Leveraged Leases; 3) Nonlease Components; 4) Sale and Leaseback Transactions; 5) Definition of a Lease; 6) Effective Date and Disclosures; 7) Review of ASU s impact on previously adopted GAAP guidance and 8) Review of ASU s impact on previously deferred agenda items. Staff Review Completed by: Josh Arpin, NAIC Staff March 2016 Status: On April 3, 2016, the Working Group moved the agenda item to the active listing, categorized as substantive, and exposed three proposed options for the statutory accounting of operating and financing leases, as detailed above. On August 26, 2016, the Working Group elected to retain the current statutory accounting treatment for operating and financing leases by lessees, as prescribed in SSAP No. 22 (all leases are considered operating leases). Additionally, the Working Group directed NAIC staff to further evaluate ASU and prepare a draft issue paper to document the Working Group s actions and discussions on ASU Summer 2017 Updated Staff Recommendation Jake Stultz (NAIC Staff) Pursuant to the direction received August 26, 2016, NAIC staff has drafted substantive revisions to SSAP No. 22. The current version is shown as tracked-changes to SSAP No. 22 to initially show the proposed revisions, but it is anticipated that an issue paper will be developed to discuss and detail the changes. The revisions shown to SSAP No. 22R are significant, but are not intended to result in significant change to statutory accounting: 2017 National Association of Insurance Commissioners 3

24 Attachment A Ref # Revisions reflect GAAP guidance from ASU , with modifications to continue following the operating lease approach for statutory accounting for lessees. (From ASU , this modification rejects ASC guidance on treatment of leases as financing leases.) The intent is that all guidance in SSAP No. 22R will agree to that of ASC Topic 842, with the exception of the treatment of operating leases for statutory accounting. Statutory accounting treatment for lessors will remain largely unchanged. Revisions intend to clarify the language and flow of the document while maintaining the treatment of leases from a statutory accounting standpoint. SSAP No. 22 has had several changes since the original implementation, and because of this a user would have to look in multiple areas of the SSAP for guidance. The updated version groups information together more clearly. Guidance for sale leaseback transactions have been updated in the newer version of the SSAP to bring in language from Subtopic This guidance only contains language updates and is not intended to change statutory accounting for sale leaseback transactions. Specific guidance for statutory accounting from the prior SSAP was retained in the current version. Guidance for leveraged leases has been updated to bring in language from Subtopic , while the intent is for leveraged lease treatment to remain the same as the prior SSAP. During the 2017 Summer National Meeting, NAIC staff recommends that the Working Group expose the substantive revisions to SSAP No. 22R with a request for comment on whether the proposed changes are anticipated to impact the accounting and reporting of leases for statutory accounting National Association of Insurance Commissioners 4

25 Attachment A Ref # Appendix A GAAP Pronouncements Previously Considered for Statutory Accounting SSAP No. 22 Leases Relevant Literature 40. This statement rejects FAS 13, as amended and interpreted, except for certain of the guidance on operating leases, sale-leaseback transactions and leveraged leases (i.e., paragraphs 15, 16.(b., c., d.), 19.(a., b.), 23.(b., c.), 36, 37, 39.c. and, 42-47). A complete list of all FASB Statements, Interpretations and Technical Bulletins adopted and rejected in this statement is as follows: a. Accounting Standards Codification (ASC) paragraphs and ASC paragraph 8 regarding the recognition of costs to terminate an operating lease before the end of the term and costs that will continue to be incurred under the contract for its remaining term without economic benefit are adopted. Other provisions of ASC 420 are rejected in SSAP No. 24. b. ASU , Service Concession Arrangements (Adopted with modification to only exclude service concession arrangements from the lease definition.) c. FASB Statement No. 13, Accounting for Leases, [paragraphs 15, 16.(b., c., d.), 19.(a., b.), 23.(b., c.), 36, 37, 39.c., adopted; all other paragraphs rejected]; d. FASB Statement No. 22, Changes in the Provisions of Lease Agreements Resulting from Refundings of Tax-Exempt Debt (an amendment of FASB Statement No. 13) [rejected in its entirety]; e. FASB Statement No. 23, Inception of the Lease (an amendment of FASB Statement No. 13) [paragraph 10 adopted; all other paragraphs rejected]; f. FASB Statement No. 27, Classification of Renewals or Extensions of Existing Sales-Type or Direct Financing Leases (an amendment of FASB Statement No. 13) [rejected in its entirety]; g. FASB Statement No. 28, Accounting for Sales with Leasebacks (an amendment of FASB Statement No. 13) [adopted in its entirety, except guidance on capital leases is not applicable other than those leases that qualify as leveraged leases and modifications for sale-leaseback transactions involving real estate settled entirely in cash]; h. FASB Statement No. 29, Determining Contingent Rentals (an amendment of FASB Statement No. 13) [paragraphs 8 and 11 adopted; all other paragraphs rejected]; i. FASB Statement No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate Sales-Type Leases of Real Estate Definition of the Lease Term Initial Direct Costs of Direct Financing Leases (an amendment of FASB Statements No. 13, 66 and 91 and a rescission of FASB Statement No. 26 and Technical Bulletin No ) (paragraphs 1-13, a., b., d., and e. adopted, paragraph j. adopted with modification to exclude references to sales-type lease classification criterion, paragraphs 27, 30, 31, adopted with modification to reference applicable statements of statutory 2017 National Association of Insurance Commissioners 5

26 Attachment A Ref # accounting principles and reject guidance associated with capital leases; all other paragraphs rejected); j. FASB Statement No. 109, Accounting for Income Taxes [paragraphs adopted; all other paragraphs addressed in SSAP No. 101 Income Taxes (SSAP No. 101)]; k. FASB Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections [paragraph 9.c.c. adopted; all other paragraphs rejected]; l. FASB Interpretation No. 19, Lessee Guarantee of the Residual Value of Leased Property (an interpretation of FASB Statement No. 13) [rejected in its entirety]; m. FASB Interpretation No. 21, Accounting for Leases in a Business Combination (an interpretation of FASB Statement No. 13) [rejected in its entirety]; n. FASB Interpretation No. 23, Leases of Certain Property Owned by a Governmental Unit or Authority (an interpretation of FASB Statement No. 13) [rejected in its entirety]; o. FASB Interpretation No. 24, Leases Involving Only Part of a Building (an interpretation of FASB Statement No. 13) [rejected in its entirety]; p. FASB Interpretation No. 26, Accounting for Purchase of a Leased Asset by the Lessee during the Term of the Lease (an interpretation of FASB Statement No. 13) [rejected in its entirety]; q. FASB Interpretation 27, Accounting for a Loss on a Sublease (an interpretation of FASB Statement No. 13 and APB Opinion No. 30) [adopted in its entirety]; r. FASB Technical Bulletin 79-10, Fiscal Funding Clauses in Lease Agreements [rejected in its entirety]; s. FASB Technical Bulletin 79-12, Interest Rate Used in Calculating the Present Value of Minimum Lease Payments [rejected in its entirety]; t. FASB Technical Bulletin 79-13, Applicability of FASB Statement No. 13 to Current Value Financial Statements [rejected in its entirety]; u. FASB Technical Bulletin 79-14, Upward Adjustment of Guaranteed Residual Values [rejected in its entirety]; v. FASB Technical Bulletin 79-15, Accounting for Loss on a Sublease Not Involving the Disposal of a Segment [adopted in its entirety]; w. FASB Technical Bulletin 79-16(R), Effect of a Change in Income Tax Rate on the Accounting for Leveraged Leases [adopted in its entirety]; x. FASB Technical Bulletin 79-17, Reporting Cumulative Effect Adjustment from Retroactive Application of FASB Statement No. 13 [rejected in its entirety]; y. FASB Technical Bulletin 79-18, Transition Requirement of Certain FASB Amendments and Interpretations of FASB Statement No. 13 [rejected in its entirety]; z. FASB Technical Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent Increases [adopted in its entirety]; 2017 National Association of Insurance Commissioners 6

27 Attachment A Ref # aa. FASB Technical Bulletin 86-2, Accounting for an Interest in the Residual Value of a Leased Asset: Acquired by a Third Party or Retained by a Lessor That Sells the Related Minimum Rental Payments [adopted in its entirety]; bb. FASB Technical Bulletin 88-1, Issues Related to Accounting for Leases: Time Pattern of the Physical Use of the Property in an Operating Lease Lease Incentives in an Operating Lease Applicability of Leveraged Lease Accounting to Existing Assets of the Lessor Money-Over-Money Lease Transactions Wrap Lease Transactions [paragraphs 1-12 adopted; all other paragraphs rejected]; cc. dd. ee. ff. gg. hh. ii. jj. kk. ll. FASB Staff Position 13-2: Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction [adopted in its entirety]; FASB Emerging Issues Task Force No , Leveraged Leases [adopted in its entirety]; FASB Emerging Issues Task Force No , Deferred Profit on Sale-Leaseback Transaction with Lessee Guarantee of Residual Value [rejected in its entirety]; FASB Emerging Issues Task Force No , Tax Indemnifications in Lease Agreements [adopted in its entirety]; FASB Emerging Issues Task Force No , Effect of a Change in Tax Law or Rates on Leveraged Leases [adopted in its entirety]; FASB Emerging Issues Task Force No. 87-7, Sale of an Asset Subject to a Lease and Nonrecourse Financing: Wrap Lease Transactions [rejected in its entirety]; FASB Emerging Issues Task Force No. 87-8, Tax Reform Act of 1986:Issues Related to the Alternative Minimum Tax [Issue No. 10 adopted]; FASB Emerging Issues Task Force No , Costs Associated with Lease Modification or Termination, previously adopted in its entirety in SSAP No. 22, has been nullified with the adoption of ASC paragraphs and ASC paragraph 8; FASB Emerging Issues Task Force No , Accounting for the Sale of Property Subject to the Seller's Preexisting Lease [rejected in its entirety]; FASB Emerging Issues Task Force No , Consideration of Executory Costs in Sale- Leaseback Transactions [adopted in its entirety]; 2017 National Association of Insurance Commissioners 7

28 Attachment A Ref # mm. nn. oo. pp. qq. rr. ss. tt. uu. vv. FASB Emerging Issues Task Force No , Unsecured Guarantee by Parent of Subsidiary's Lease Payments in a Sale-Leaseback Transaction [adopted in its entirety]; FASB Emerging Issues Task Force No , Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions [rejected in its entirety]; FASB Emerging Issues Task Force No , Impact of an Uncollateralized Irrevocable Letter of Credit on a Real Estate Sale-Leaseback Transaction [adopted in its entirety]; FASB Emerging Issues Task Force No. 92-1, Allocation of Residual Value or First-Loss Guarantee to Minimum Lease Payments in Leases Involving Land and Building(s) [rejected in its entirety]; FASB Emerging Issues Task Force No. 93-8, Accounting for the Sale and Leaseback of an Asset That Is Leased to Another Party [adopted in its entirety]; FASB Emerging Issues Task Force No , Accounting for Modifications to an Operating Lease That Do Not Change the Lease Classification [adopted in its entirety]; FASB Emerging Issues Task Force No , Implementation Issues in Accounting for Leasing Transactions involving Special-Purpose Entities [rejected in its entirety]; FASB Emerging Issues Task Force No. 98-9, Accounting for Contingent Rent (adopted with modification); FASB Emerging Issues Task Force No , Lessors' Evaluation of Whether Leases of Certain Integral Equipment Meet the Ownership Transfer Requirements of FASB Statement 13 [adopted with modifications to GAAP references]; FASB Emerging Issues Task Force No. 08-3: Accounting by Lessees for Maintenance Deposits (adopted with modification) to require reimbursable deposits to be reflected as nonadmitted assets National Association of Insurance Commissioners 8

29 Attachment A Ref # Appendix B ASC 842 Comparisons to IFRS 16 The following information is detailed within ASU Leases. The leases project began as a joint project with the IASB, and many of the requirements in Topic 842 are the same as the requirements in IFRS 16. The main differences between Topic 842 and IFRS 16 are in relation to certain aspects of the lessee accounting model. In contrast to the lessee accounting model in Topic 842, which distinguishes between finance leases and operating leases in the financial statements, the lessee accounting model in IFRS 16 requires all leases to be accounted for consistent with the Topic 842 approach for finance leases. Consequently, leases classified as operating leases under Topic 842 will be accounted for differently under GAAP than under IFRS and will have a different effect on the statement of comprehensive income and the statement of cash flows under IFRS 16 than under previous IFRSs. The following are the other notable requirements of IFRS 16 that are not consistent with the requirements in Topic Lessee accounting model a. IFRS 16 has a lessee recognition and measurement exemption for leases of assets with values of less than $5, Lessor accounting model a. IFRS 16 does not distinguish between sales-type and direct financing leases; therefore, IFRS16 permits recognition of selling profit on direct financing leases at lease commencement. b. IFRS 16 does not include any explicit guidance on collectibility of the lease payments and amounts necessary to satisfy a residual value guarantee. c. IFRS 16 applies a model to modifications of sales-type and direct financing leases that is predicated on IFRS financial instruments guidance. 3. Measurement of the right-of-use asset a. IFRS 16 allows alternative measurement bases for the right-of-use asset (for example, the fair value model under IAS 40, Investment Property, or at a revalued amount in accordance with IAS 16, Property, Plant and Equipment). 4. Variable lease payments 5. Subleases a. IFRS 16 requires reassessment of variable lease payments that depend on an index or a rate when there is a change in the cash flows resulting from a change in the reference index or rate (that is, when an adjustment to the lease payments takes effect). a. When classifying a sublease, IFRS 16 requires an intermediate lessor to determine the classification of the sublease with reference to the right-of-use asset arising from the head lease. 6. Sale and leaseback transactions a. IFRS 16 does not include application guidance on whether the transfer of an asset in a sale and leaseback transaction is a sale, other than to state that if the seller-lessee has a substantive repurchase option regarding the underlying asset, then no sale has occurred National Association of Insurance Commissioners 9

30 Attachment A Ref # b. IFRS 16 restricts the gain recognized by a seller-lessee in a sale and leaseback transaction to the amount of the gain that relates to the buyer-lessor s residual interest in the underlying asset at the end of the leaseback. 7. Private companies a. IFRS 16 does not have guidance specifically for private companies; however, Topic 842 permits an accounting policy election for private companies to use a risk-free rate to discount the lease liability for each lease. 8. Statement of cash flows 9. Disclosure 10. Transition a. IFRS 16 accounts for payments of interest in accordance with IAS 7, Statement of Cash Flows. IAS 7 allows interest to be classified within operating, investing, or financing activities. a. IFRS 16 has similar but not identical qualitative and quantitative disclosure requirements to Topic 842. a. IFRS 16 has different transition provisions than Topic 842 as a result of the differences in the lessee and lessor accounting provisions. 11. Existing differences in other areas of GAAP and IFRS that affect the accounting for leases a. The key areas of difference are the existing requirements for impairment (of financial instruments and long-lived assets other than goodwill) and the accounting for investment properties G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\A ASU Leases.docx 2017 National Association of Insurance Commissioners 10

31 Attachment B Ref # Issue: Amortization and Accretion Surplus Notes Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: Surplus notes are unique statutory accounting items, which have the characteristics of both debt and equity. Surplus notes are debt which is subordinated to the policyholders, claimants and all other creditors. The strict control of form, terms and repayment by the issuing entity s state of domicile and subordination to all other claimants, give the surplus notes equity-like characteristics. Under statutory accounting, surplus notes are reported in the equity section of the issuer s balance sheet. (Surplus notes are reported as debt under U.S. GAAP.) SSAP No. 41R Surplus Notes (SSAP No. 41R) includes issuer guidance regarding surplus notes issued at a discount or a premium. In addition, SSAP No. 41R provides that proceeds received by the issuer must be in the form of cash or other admitted assets having readily determinable values and liquidity satisfactory to the commissioner of the state of domicile. NAIC Staff has received regulator inquiries requesting illustrations regarding accretion of discount or amortization of premium for surplus notes issued at an amount other than face value. Because surplus notes are reflected in equity, one state noted that their law requires receipt of cash or other liquid admitted asset for the amount of the note. Therefore, to the extent that liquid assets were not received for the amount of the discount, some state regulators noted that they did not believe they had the ability or desire to approve the issuance of surplus notes at a discount. In addition, concerns were noted that surplus notes issued at a discount could create possible artificial inflation of surplus when the surplus note was accreted up over time. In inquiring about surplus notes issued at a discount with regulators, staff noted a possible disconnect between SSAP No. 41R, paragraph 4, which requires that proceeds received by the issuer to be in the form of cash or other admitted assets having readily determinable values and satisfactory liquidity and SSAP No. 41R, paragraph 8 which provides guidance regarding discount or premium, if any, for the issuer. Some regulators noted that they would be unable and or unwilling to approve surplus notes issued at a discount because liquid funds would not be available for the full principal amount. It was also noted that the discounts if any were expected to be de minimis. That is the surplus note should be at fair and reasonable market terms and therefore, there should only be minute differences between the surplus note terms and the market interest rates which would occur just prior to issuance of the surplus note. Because surplus notes are reported in equity and have distinct differences from bonds, this agenda item proposes to provide illustrations regarding amortization and accretion for the issuer of surplus notes. This guidance is more detailed than the existing guidance for surplus notes issued at a premium or a discount. It also proposes to address concerns about possible inflation of surplus for a surplus note issued at a discount and incorporate guidance regarding the size of discounts National Association of Insurance Commissioners 1

32 Attachment B Ref # Existing Authoritative Literature: Issuers of Surplus Notes 2. Reporting entities sometimes issue instruments that have the characteristics of both debt and equity. These instruments are commonly referred to as surplus notes, the term used herein, but are also referred to as surplus debentures or contribution certificates. These instruments are used for various reasons, including but not limited to: a. Providing regulators with flexibility in dealing with problem situations to attract capital to reporting entities whose surplus levels are deemed inadequate to support their operations; b. Providing a source of capital to mutual and other types of non-stock reporting entities who do not have access to traditional equity markets for capital needs; c. Providing an alternative source of capital to stock reporting entities, although not for the purpose of initially capitalizing the reporting entity. 3. Surplus notes issued by a reporting entity that are subject to strict control by the commissioner of the reporting entity's state of domicile and have been approved as to form and content shall be reported as surplus and not as debt only if the surplus note contains the following provisions: a. Subordination to policyholders; b. Subordination to claimant and beneficiary claims; c. Subordination to all other classes of creditors other than surplus note holders; and d. Interest payments and principal repayments require prior approval of the commissioner of the state of domicile. 4. Proceeds received by the issuer must be in the form of cash or other admitted assets having readily determinable values and liquidity satisfactory to the commissioner of the state of domicile. 5. Interest shall not be recorded as a liability nor an expense until approval for payment of such interest has been granted by the commissioner of the state of domicile. All interest, including interest in arrears, shall be expensed in the statement of operations when approved for payment. Unapproved interest shall not be reported through operations, shall not be represented as an addition to the principal or notional amount of the instrument, and shall not accrue further interest, i.e., interest on interest. 6. As of the date of approval of principal repayment by the commissioner of the state of domicile, the issuer shall reclassify such approved payments from surplus to liabilities. 7. Costs of issuing surplus notes (e.g., loan fees and legal fees) shall be charged to operations when incurred. 8. Discount or premium, if any, shall be reported in the balance sheet as a direct deduction from or addition to the face amount of the note. Such discount or premium shall be charged or credited to the statement of operations concurrent with approved interest payments on the surplus note and in the same proportion or percentage as the approved interest payment is to the total estimated interest to be paid on the surplus note. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None 2017 National Association of Insurance Commissioners 2

33 Attachment B Ref # Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): None Staff Review Completed by: Robin Marcotte March 2017 NAIC Staff Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and expose proposed revisions to SSAP No. 41R to provide guidance regarding surplus notes issued at a discount or a premium and to incorporate illustrations into a new SSAP No. 41R Exhibit A as illustrated below. Note that staff has maintained the existing guidance that any discount or premium shall be charged or credited to the statement of operations concurrent with approved interest payments on the surplus note and in the same proportion or percentage as the approved interest payment is to the total estimated interest to be paid on the surplus note. Because surplus notes should have fair and reasonable terms which reflect market conditions at issue, discounts on surplus notes are expected to be de minimis that is, immaterial, in relation to the principal of the surplus note. Because of questions received on this issue, de minimis guidance has been incorporated into the proposed discounting guidance. Staff believes that amortization or accretion is contingent on interest approval was to match the timing of recognition with interest expense (which provide a more accurate view of overall interest expense). However, deferring recognition of premium may be unnecessary, as ultimately the principal owed on the surplus note will not change. (For example, if the face amount of a surplus note was $100, and premium received was $20, under the current guidance, if interest was not approved, the surplus note would continue to be reported at $120 in the financial statements, even though the reporting entity only owes $100 to the holder at maturity.) Comments are requested on this aspect. Status On April 8, 2017, the Statutory Accounting Principles (E) Working Group moved this agenda item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 41R and proposed illustrations for a new Exhibit A to SSAP No. 41R as reflected below. April 2017 Exposed Revisions to SSAP No. 41R: Issuers of Surplus Notes 2. Reporting entities sometimes issue instruments that have the characteristics of both debt and equity. These instruments are commonly referred to as surplus notes, the term used herein, but are also referred to as surplus debentures or contribution certificates. These instruments are used for various reasons, including but not limited to: a. Providing regulators with flexibility in dealing with problem situations to attract capital to reporting entities whose surplus levels are deemed inadequate to support their operations; b. Providing a source of capital to mutual and other types of non-stock reporting entities who do not have access to traditional equity markets for capital needs; c. Providing an alternative source of capital to stock reporting entities, although not for the purpose of initially capitalizing the reporting entity National Association of Insurance Commissioners 3

34 Attachment B Ref # Surplus notes issued by a reporting entity that are subject to strict control by the commissioner of the reporting entity's state of domicile and have been approved as to form and content shall be reported as surplus and not as debt only if the surplus note contains the following provisions: a. Subordination to policyholders; b. Subordination to claimant and beneficiary claims; c. Subordination to all other classes of creditors other than surplus note holders; and d. Interest payments and principal repayments require prior approval of the commissioner of the state of domicile. 4. Proceeds received by the issuer must be in the form of cash or other admitted assets having readily determinable values and liquidity satisfactory to the commissioner of the state of domicile. Any discounts shall be de minimis in relation to the principal of the surplus note as discussed in paragraph Interest shall not be recorded as a liability nor an expense until approval for payment of such interest has been granted by the commissioner of the state of domicile. All interest, including interest in arrears, shall be expensed in the statement of operations when approved for payment. Unapproved interest shall not be reported through operations, shall not be represented as an addition to the principal or notional amount of the instrument, and shall not accrue further interest, i.e., interest on interest. 6. As of the date of approval of principal repayment by the commissioner of the state of domicile, the issuer shall reclassify such approved payments from surplus to liabilities. 7. Costs of issuing surplus notes (e.g., loan fees and legal fees) shall be charged to operations when incurred. 8. Surplus notes issuesd at a Discount discount,or premium or with a zero coupon, if any, shall be reported in the balance sheet as a direct deduction from, or addition to, the face amount of the note as illustrated in Exhibit A and described below. Such discount or premium shall be charged or credited to the statement of operations concurrent with approved interest payments on the surplus note and in the same proportion or percentage as the approved interest payment is to the total estimated interest to be paid on the surplus note. a. Discount Discount, if any, should be de minimis in relation to the principal of the surplus note. Regardless if the discount is de minimis, some states of domicile may choose not to approve, or may be unable to approve, the issuance of surplus notes at any discount. If surplus notes are approved to be issued with a de minimis discount by the domiciliary commissioner, total surplus shall not increase for the amount of the discount. This is because a discount on a surplus note indicates that proceeds were not received by the issuer in the form cash or other admitted assets having readily determinable values and liquidity for the amount of the discount. The amount of the discount shall be initially reported as a reclassification from unassigned funds to special surplus and reflected as a direct deduction from the face amount of the note. The discount shall be accreted from special surplus to the surplus note, such that there is no increase in total surplus. Such discount shall be charged to the statement of operations concurrent with approved interest payments on the surplus note and in the same proportion or percentage as the approved interest payment is to the total estimated interest to be paid on the surplus note. Exhibit A provides an illustration of the accounting for the issuer of a surplus note issued at a discount. b. Zero coupon If surplus note was issued as a zero coupon, the surplus note would follow the guidance for a surplus note issued at a discount. The principle to be followed is that that total surplus should only increase for cash and admitted liquid assets received. The 2017 National Association of Insurance Commissioners 4

35 Attachment B Ref # difference between the principal of the note and the amount of cash and other admitted liquid assets received shall follow the illustration for a discount on a surplus note. c. Premium If a surplus note is issued at a premium, funds in excess of the principal amount were received. The premium shall be reflected as an addition to the face amount of the note. The excess premium is amortized down to reduce the reported value of the surplus note as interest payments are approved. Such premium shall be credited to the statement of operations as a contra interest expense concurrent with approved interest payments on the surplus note and in the same proportion or percentage as the approved interest payment is to the total estimated interest to be paid on the surplus note. Exhibit A provides an illustration of the accounting for the issuer of a surplus note issued at a premium. Disclosures 17. The notes to the financial statements of a reporting entity that issues surplus notes shall disclose the following as long as the surplus notes are outstanding: a. Date issued; b. Description of the assets received; c. Holder of the note or if public the names of the underwriter and trustee; d. Amount of note, the amount of any discount, premium or zero coupon (if any) and the portion that is remaining to be accreted or amortized; e. Carrying value of note; f. The rate at which interest accrues; g. Maturity dates or repayment schedules, if stated; h. Unapproved interest and/or principal and any unapproved premium amortization or discount accretion; i. Interest and/or principal paid in the current year; j. Total interest and/or principal paid on surplus notes; k. Subordination terms; l. Liquidation preference to the reporting entity's common and preferred shareholders; m. The repayment conditions and restrictions. Exhibit A Illustrations of Discount and Premium Accounting for Issuers of Surplus Notes is on the following pages National Association of Insurance Commissioners 5

36 Surplus notes issued at discount illustration of journal entries Attachment B Ref # Exhibit A April 2017 exposed illustration Surplus Note principal amount: $130,000,000 Cash Received: $127,000,000 Amount of the discount: $3,000,000 Interest rate: 5% Term: 30 years At issuance Description Debit Credit 1/1/x1 Cash $127,000,000 Surplus Notes (reflected net of discount) $127,000,000 To reflect the issuance of the surplus note sold at a discount 1/1/x1 Unassigned surplus $3,000,000 Special surplus $3,000,000 To reflect the reclassification from unassigned surplus to special surplus for the amount of the discount. Total surplus does not increase for the amount of the discount because cash or other liquid admitted assets were not received. Annually when initial interest payment is approved 12/31/x1 Interest expense $6,500,000 Cash $6,500,000 To record the interest expense and payment as approved by the Department of Insurance. 12/31/x1 Interest expense $100,000 Surplus notes $100,000 To record the accretion of the surplus note 12/31/x1 Special surplus $100,000 Unassigned surplus $100,000 To record the reclassification from special surplus to unassigned. This entry reduces special surplus as the surplus note discount is expensed through the income statement. This is consistent with the corresponding increase to record the accretion of the surplus note. At maturity These entries would be recorded annually to the extent that interest payments were approved in full 12/31/2x30 Surplus Note $130,000,000 Cash $130,000,000 To record the extinguishment of the principal of the surplus note after domiciliary commissioner approval National Association of Insurance Commissioners 6

37 April 2017 exposed Illustration of accretion of discount on surplus note impact on surplus Attachment B Ref # Exhibit A April 2017 exposed illustration Before issuance At issuance Annual Accretion Entries 2x00 2x01 2x01 2x02 2x30 Common Stock $200,000,000 $200,000,000 $200,000,000 $200,000,00 $200,000, Paid in Capital $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000 Surplus notes $0 $127,000,000 $127,100,000 $127,200,00 $130,000, Special Surplus $0 $3,000,000 $2,900,000 $2,800,000 $0 Unassigned funds (surplus) $170,000,000 $164,000,000 $164,000,000 $164,000,00 0 Total surplus $390,000,000 $514,000,000 $514,000,000 $514,000,00 0 $164,000,00 0 $514,000,00 0 Amortization of discount on Surplus Notes (cumulative) * ($100,000) ($200,000) ($3,000,000) Cumulative Impact to Surplus $124,000,000 $0 $0 $0 Note the initial impact to surplus represents the amount of cash and admitted liquid assets received for the surplus note This does not illustrate the annual payment of interest National Association of Insurance Commissioners 7

38 Surplus notes issued at a premium illustration of journal entries Attachment B Ref # Exhibit A April 2017 exposed illustration Surplus note issued at a premium Surplus Note principal amount: $130,000,000 Cash Received: $170,000,000 Amount of the premium: $40,000,000 Interest rate: 5% Term: 20 years At issuance Description Debit Credit 1/1/x1 Cash $170,000,000 Surplus Notes with premium $170,000,000 To reflect the issuance of the surplus note sold at a premium. Note that total surplus does increase for the amount of the premium because cash or other liquid admitted assets were received. Annually when initial interest payment is approved At maturity 12/31/x1 Interest expense $6,500,000 Cash $6,500,000 To record the interest expense and payment as approved by the Department of Insurance. 12/31/x1 Surplus notes $2,000,000 Interest expense $2,000,000 To record the amortization of the surplus note premium. Note the full amount was recorded because the full amount of interest was approved for the year. This is recorded as a contra interest expense. These entries would be recorded annually to the extent that interest payments were approved in full 12/31/2x30 Surplus Note $130,000,000 Cash $130,000,000 To record the extinguishment of the principal of the surplus note after domiciliary commissioner approval National Association of Insurance Commissioners 8

39 Illustration of amortization of premium on surplus note impact on surplus Attachment B Ref # Exhibit A April 2017 exposed illustration before issuance At issuance Annual Accretion Entries 2x00 2x01 2x01 2x02 2x20 Common Stock $200,000,000 $200,000,00 $200,000,000 $200,000,000 $200,000,000 0 Paid in Capital $20,000,000 $20,000,000 $20,000,000 $20,000,000 $20,000,000 Surplus notes $0 $170,000,00 $168,000,000 $166,000,000 $130,000,000 0 Special Surplus $0 $0 $0 $0 $0 Unassigned funds (surplus) $170,000,000 $170,000,00 0 Total surplus $390,000,000 $560,000,00 0 $170,000,000 $170,000,000 $170,000,000 $558,000,000 $556,000,000 $520,000,000 Amortization of premium on Surplus Notes (cumulative) * $2,000,000 $4,000,000 $40,000,000 Impact to Surplus $170,000,000 ($2,000,000) ($4,000,000) $ (40,000,000) The initial impact to surplus of $170 million represents the amount of cash and admitted liquid assets received for the surplus note The 2x20 balance of $130 million represents the amount of the surplus note principal after amortization of the premium. This does not illustrate the annual payment of interest National Association of Insurance Commissioners 9

40 Attachment B Ref # Exhibit B August 2017 On June 8, 2017, the Statutory Accounting Principles (E) Working Group directed NAIC staff to redraft the proposal for future Working Group review using a different approach for discounted and zero coupon surplus notes by using Working Group member input and the following key points: 1. Incurring a liability and not receiving liquid assets in exchange should be surplus negative. For example if an entity receives $95 and owes $100 it should be a surplus negative event. 2. The fundamental principle is that the net balance of a surplus note issued at a discount or zero coupon should never be greater than the amount of cash and liquid admitted assets received on issue. 3. Surplus notes issued at a discount or a zero coupon would not be accreted up. 4. Amounts owed for the discounted or zero coupon surplus note which are greater than the funds received would be recognized as a liability on the issue date of the surplus note. While staff considered an approach to accrete the liability to be accreted over time, however recognizing the liability for the amount owed at inception is more consistent with the definition of a liability. 5. Illustrations should be incorporated to provide clarity on this topic. Staff update for August 2017 Working Group discussion: NAIC staff has prepared revisions in accordance with the June 8, 2017, Working Group directions noted below. NAIC staff recommends that the agenda items be moved to active listing categorized as substantive and that the substantive revisions to SSAP No. 41R reflected on the following pages in Exhibit B be exposed for comment: 1. The fundamental principle is that the net balance of a surplus note issued at a discount or zero coupon should never be greater than the amount of cash and liquid admitted assets received on issue. 2. Incurring a liability and not receiving liquid assets in exchange should be surplus negative. For example if an entity receives $95 and owes $100 it should be a $5 surplus negative event. 3. Surplus notes principal amounts issued at a discount or a zero coupon or other transactions such as an exchange would follow the same principal and not accreted up the balance of the surplus note in surplus. 4. Principal amounts owed for the discounted or zero coupon surplus note which are greater than the cash and liquid assets received are recognized as a liability. 5. If the reporting entity under any situation incurs a greater principal obligation than the amount of cash and liquid assets received, the amounts greater than the liquid assets received shall either be charged to operations when incurred (consistent with the cost of issuing the surplus note) or recognized as a liability on incurral (for amounts deemed by the domiciliary commissioner to be more consistent with the concept of a discount which requires future repayment). 6. While staff still recommends that illustrations may be beneficial at a future point in time, we recommend determining the language prior to developing additional illustrations would be most beneficial. 7. Staff has also proposed a disclosure related to any amounts (discount etc. reported in surplus) National Association of Insurance Commissioners 10

41 Attachment B Ref # Exhibit B August 2017 Proposed Revisions to SSAP No. 41R for August 2017 Discussion SCOPE OF STATEMENT 1. This statement establishes statutory accounting principles for issuers and holders of surplus notes, and for holders of capital notes. Statutory accounting principles for issuers of capital notes are provided in SSAP No. 15 Debt and Holding Company Obligations. SUMMARY CONCLUSION Issuers of Surplus Notes 2. Reporting entities sometimes issue instruments that have the characteristics of both debt and equity. These instruments are commonly referred to as surplus notes, the term used herein, but are also referred to as surplus debentures or contribution certificates. These instruments are used for various reasons, including but not limited to: a. Providing regulators with flexibility in dealing with problem situations to attract capital to reporting entities whose surplus levels are deemed inadequate to support their operations; b. Providing a source of capital to mutual and other types of non-stock reporting entities who do not have access to traditional equity markets for capital needs; c. Providing an alternative source of capital to stock reporting entities, although not for the purpose of initially capitalizing the reporting entity. 3. Surplus notes issued by a reporting entity that are subject to strict control by the commissioner of the reporting entity s state of domicile and have been approved as to form and content shall be reported as surplus and not as debt only if the surplus note contains the following provisions: a. Subordination to policyholders; b. Subordination to claimant and beneficiary claims; c. Subordination to all other classes of creditors other than surplus note holders; and d. Interest payments and principal repayments require prior approval of the commissioner of the state of domicile. 4. Proceeds received by the issuer must be in the form of cash or other admitted assets having readily determinable values and liquidity satisfactory to the commissioner of the state of domicile. 5. Surplus notes are accorded special statutory reporting in surplus of the issuing entity because cash and other admitted liquid assets are received in exchange for future principal and interest repayment. Accordingly, the amount of the surplus notes reported in surplus of the issuing entity shall not be greater than the amount of cash and liquid admitted assets received for the principal amount of the surplus note Interest shall not be recorded as a liability nor an interest expense until approval for payment of such interest has been granted by the commissioner of the state of domicile. All interest, including interest in arrears, shall be expensed in the statement of operations when approved for payment. Unapproved interest shall not be reported through operations, shall not be represented as an addition to the principal or notional amount of the instrument, and shall not accrue further interest, i.e., interest on interest As of the date of approval of principal repayment by the commissioner of the state of domicile, the issuer shall reclassify such approved payments from surplus to liabilities. Other liabilities related to 2017 National Association of Insurance Commissioners 11

42 2017 National Association of Insurance Commissioners 12 Attachment B Ref # Exhibit B August 2017 discounts, zero coupons, other transactions where principal repayment is greater than cash and liquid assets received are reported in accordance with paragraphs Costs of issuing surplus notes (e.g., loan fees and legal fees) shall be charged to operations when incurred. Discounts, Premiums, Zero Coupons and other Exchanges 9. A surplus note discount is defined as the difference resulting when the principal repayment obligation is greater than the cash and liquid admitted assets received by the issuer for surplus note principal. The amount of any discount on the principal of the surplus note shall be reported as a liability and shall not be reported as part of surplus section of the balance sheet of the issuing entity at any time. 10. Similar to the reporting of a discount, surplus notes issued at a zero coupon or any similar feature shall also follow the principle of not reporting in surplus of the issuing entity amounts which are greater that the cash and liquid admitted assets received. Amounts of surplus note principal repayment obligation which are greater than the amount of cash and liquid assets received shall be reported as a liability. 11. Surplus notes exchanged by the issuer or surplus notes which have their terms amended shall also follow the principle that the amount of the surplus note reported in surplus shall not be greater than the cash and liquid admitted assets received by the reporting entity. If the reporting entity under any situation incurs a greater principal obligation than the amount of cash and liquid assets received, the amounts greater than the liquid assets received shall either be charged to operations when incurred (consistent with the cost of issuing the surplus note) or recognized as a liability when incurred (for amounts deemed by the domiciliary commissioner to be more consistent with the concept of a discount which requires future repayment) Any increases in the repayment obligations of the reporting entity which are greater than cash and liquid assets received shall be an immediate surplus negative event for the issuing entity. The expense of repayment of the amount of the discount or zero coupon amounts shall be recognized as principal repayments are approved. Principal repayment shall apply first to any amounts recognized as a liability, prior to reclassifying amounts for the surplus note from surplus Discount or Ppremium, if any, shall be reported in the balance sheet as a direct deduction from or addition to the face amount of the note. Such discount or premium shall be charged or credited to the statement of operations concurrent with approved interest payments on the surplus note and in the same proportion or percentage as the approved interest payment is to the total estimated interest to be paid on the surplus note. This results in a premium on a surplus note decreasing the interest expense on the note as the surplus note premium is amortized down. Disclosures The notes to the financial statements of a reporting entity that issues surplus notes shall disclose the following as long as the surplus notes are outstanding: a. Date issued; b. Description of the assets received; c. Holder of the note or if public the names of the underwriter and trustee; d. Amount of note; e. Carrying value of note reported in surplus; f. Any amounts of discount or zero coupon amounts or other increases in repayment obligation reported as a liability in accordance with paragraphs 9-12.

43 Attachment B Ref # Exhibit B August 2017 f.g. g.h. h.i. i.j. j.k. k.l. l.m. m.n. The rate at which interest accrues; Maturity dates or repayment schedules, if stated; Unapproved interest and/or principal; Interest and/or principal paid in the current year; Total interest and/or principal paid on surplus notes; Subordination terms; Liquidation preference to the reporting entity s common and preferred shareholders; The repayment conditions and restrictions In addition to the above, a reporting entity shall identify all affiliates that hold any portion of a surplus debenture or similar obligation (including an offering registered under the Securities Act of 1933 or distributed pursuant to rule 144A under the Securities Act of 1933), and any holder of 10% or more of the outstanding amount of any surplus note registered under the Securities Act of 1933 or distributed pursuant to Rule 144A under the Securities Act of Effective Date and Transition This statement is effective for years beginning January 1, A change resulting from the adoption of this statement shall be accounted for as a change in accounting principle in accordance with SSAP No. 3 Accounting Changes and Corrections of Errors. The provisions of paragraph 3, which are required for an instrument to qualify as a surplus note, apply to all surplus notes issued or amended after December 12, Surplus notes issued on or before December 12, 1991, shall not be required to meet the provisions of paragraph 3 in order to be accounted for as a surplus note. Guidance reflected in paragraph 9.b., incorporated from INT 04-02: Surplus Notes Issued by Entities Under Regulatory Action, was originally effective June 13, In April 2016 substantive revisions were adopted to change the valuation method for holders of surplus notes. With the adopted substantive revisions, surplus notes with a designation equivalent to NAIC 1 or NAIC 2 shall be reported at amortized cost. All other surplus notes are required to be reported at the lesser of amortized cost or fair value. The substantive revisions also incorporated guidance to clarify when surplus notes shall be nonadmitted, have an unrealized loss and undergo an other-thantemporary impairment assessment. The substantive revisions, detailed for historical purposes in Issue Paper No. 151, are effective January 1, 2017, and shall be accounted for as a change in accounting principle in accordance with SSAP No. 3 Accounting Changes and Corrections of Errors. G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\B Surplus note discount or premium7-17.docx 2017 National Association of Insurance Commissioners 13

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45 Attachment C Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: ASU Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: FASB issued ASU Compensation Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This update also includes amendments to the overview and background sections of the FASB Accounting Standards Codification as part of the initiative to unify and improve the sections across topics and subtopics. Under existing U.S. generally accepted accounting principles (GAAP), defined benefit pension cost and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer s financial arrangements as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements. Topic 715, Compensation Retirement Benefits, does not prescribe where the amount of net benefit cost should be presented in an employer s income statement and does not require entities to disclose by line item the amount of net benefit cost that is included in the income statement or capitalized in assets. Many stakeholders observed that the presentation of defined benefit cost on a net basis combines elements that are heterogeneous. As such, these stakeholders stated that the current presentation requirement is less transparent, reduces the decision usefulness of the financial information, and requires users to incur greater costs in analyzing financial statements. To improve the reporting of net benefit cost in the financial statements, the board added a standard-setting project to provide additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The amendments in this update apply to all employers, including not-for-profit entities, which offer to their employees defined benefit pension plans, other postretirement benefit plans or other types of benefits accounted for under Topic 715. The amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs and are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset). The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this update intend to improve 2017 National Association of Insurance Commissioners 1

46 Attachment C Ref # the consistency, transparency, and usefulness of financial information to users that have communicated that the service cost component generally is analyzed differently from the other components of net benefit cost. The ASU is effective for public entities for fiscal years beginning after Dec. 15, 2017 (generally Jan. 1, 2018). For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2018 and interim periods beginning after Dec. 15, (This guidance would generally make the amendments effective beginning with the year-end 2019 financial statements.) Existing Authoritative Literature: SSAP No. 92 Postretirement Benefits Under Than Pensions Generally adopts, with modifications, U.S. GAAP guidance. Detail of the FASB standards adopted or rejected, as well as modifications to adopted items are detailed in paragraph 102: 3. A defined benefit postretirement plan is one that defines the postretirement benefits in terms of (a) monetary amounts) or (b) benefit coverage to be provided. In some cases, an employer may limit its obligation through an individual or an aggregate "cap" on the employer's cost or benefit obligation. Plans of that nature are considered to be defined benefit postretirement plans. (Hybrid postretirement plans or cash-balance plans are considered defined benefit plans for purposes of applying this statement.) For defined benefit plans, reporting entities shall adopt FAS 158: Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R) (FAS 158) and FASB Staff Position FAS 136(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets (FSP FAS 136(R)-1) with modifications as discussed in paragraph This statement adopts with modification paragraphs 1-7 and as well as Appendix D Amendments to Statement 106 and Appendix E Amendments to Statement 132(R) of FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (FAS 158). Paragraphs 8-10 and D2.u providing specific guidance for not-for-profit organizations are rejected. Paragraphs regarding the effective dates for FAS 158 are rejected and paragraph 19 providing an alternative method for remeasuring plan assets and benefits obligations as of the fiscal year the measurement date provisions are applied is also rejected. The disclosure included within FAS 132 (R), as amended by FAS 158, pertaining specifically to pensions (paragraph 5.e.) has been rejected for inclusion within this standard. This Statement adopts the revisions to paragraph 5.d. of FAS 132(R) as amended by FASB Staff Position FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1) and ASU , Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU ). Other revisions to disclosure requirements as amended by FSP FAS 132(R)-1 relate to nonpublic entities and are rejected. This statement adopts EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This statement adopts by reference revisions to ASC as detailed in ASU , Compensation Retirement Benefits Multiemployer Plans with limited additional disclosures required within statutory financial statements. This statement adopts by reference FSP FASB 158-1, Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides (FSP FAS 158-1) to the extent that the examples and related implementation guides comply with the adopted GAAP guidance previously identified within this statement, as modified for statutory accounting. The following modifications from the adopted paragraphs of FAS 158 and FAS 106 have been incorporated within this standard: a. All references to other comprehensive income or accumulated other comprehensive income within FAS 158 have been revised to reflect unassigned funds (surplus). b. Any prepaid asset resulting from the excess of the fair value of plan assets over the accumulated postretirement benefit obligation shall be nonadmitted. Furthermore, any asset recognized from the cost of a participation right of an annuity contract per paragraph 59 shall also be nonadmitted National Association of Insurance Commissioners 2

47 Attachment C Ref # c. Provisions within paragraph 57 and 58 of FAS 106, as amended by FAS 158, permitting a calculated market-related value of plan assets has been eliminated with only the fair value measurement method for plan assets retained. d. The reduced disclosure requirements for nonpublic entities described in paragraph 8 of FAS 132(R), as amended by FAS 158, are rejected. All reporting entities shall follow the disclosure requirements within this statement which have been adopted from paragraph 5 of FAS 132(R), as amended by FAS 158. e. Clarification has been included within this standard to ensure both vested and nonvested employees are included within the recognition of net postretirement benefit cost and in the accumulated postretirement benefit obligation. Although this is consistent with GAAP, this is a change from previous statutory accounting. As nonvested employees were excluded from statutory accounting under SSAP No. 14, guidance has been included to indicate that the unrecognized prior service cost attributed to nonvested individuals is not required to be included in net postretirement benefit cost entirely in the year this standard is adopted. The unrecognized prior service cost for nonvested employees shall be amortized as a component of net postretirement benefit cost by assigning an equal amount to each expected future period of service before vesting occurs for nonvested employees active at the date of the amendment. Unassigned funds (surplus) is then adjusted each period as prior service cost is amortized. (Guidance is included within the transition related to the recognition of the prior service cost for nonvested employees through unassigned surplus.) f. Conclusion of Interpretation 99-26: Offsetting Pension Assets and Liabilities (INT 99-26) prohibiting the offset of defined benefit liabilities of one plan with prepaid assets of another plan has been incorporated within paragraph 33 of this statement. g. Provisions within paragraph 44B of FAS 106, as amended by FAS 158, regarding the classification of underfunded liabilities as current or noncurrent liabilities and the classification of assets from overfunded plans as noncurrent assets has been rejected as inconsistent with statutory accounting. h. Provisions within paragraph 65 of FAS 106, as amended by FAS 158, defining the fair value of investments have been rejected. Fair value definitions and measurement for investments shall be determined in accordance with statutory accounting guidance. i. Provisions within paragraph 72 of FAS 106, as amended by FAS 158, regarding the plan assets measurement date for consolidating subsidiaries or entities utilizing the equity method under APB Opinion No. 18 has been rejected. For statutory accounting, all entities shall follow the measurement date guidance within paragraph 62 of this statement. j. The disclosure requirement included within paragraph 5.e. of FAS 132(R) has been rejected for this statement as it specifically pertains to pensions. k. Transition under FAS 158 is different from the requirements of this statement. FAS 158 requires publicly traded equity securities to initially apply the requirement to recognize the funded status of a postretirement benefit plan; the gains/losses, prior service costs/credits and transition obligations/assets that have not yet been included in net periodic benefit cost; and the disclosure requirements as of the end of the fiscal year ending after December 15, Transition guidelines for statutory accounting are defined in paragraphs l. FAS 158 provided two approaches for an employer to transition to a fiscal year-end measurement date. For purposes of statutory accounting, the second approach permitting reporting entities to use earlier measurements determined for year-end reporting as of the fiscal year immediately preceding the year that the measurement date provisions is rejected. For consistency purposes, all reporting entities shall follow the first approach and remeasure plan assets and benefit 2017 National Association of Insurance Commissioners 3

48 2017 National Association of Insurance Commissioners 4 Attachment C Ref # obligations as of the beginning of the fiscal year that the measurement date provisions are applied. SSAP No. 102 Pensions - Generally adopts, with modifications, U.S. GAAP guidance. Detail of the FASB standards adopted or rejected, as well as modifications to adopted items are detailed in paragraph 87: 3. A defined benefit pension plan is one that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service, or compensation. (Hybrid pension plans that refer to an account balance, rather than a monthly annuity at retirement (also known as cash balance plans) are considered defined benefit plans for purposes of applying this statement.) For defined benefit plans, reporting entities shall adopt FAS 158: Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (FAS 158) and FASB Staff Position FAS 136(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets (FSP FAS 136(R)-1) with modifications as discussed within paragraph This statement adopts with modification paragraphs 1-7 and as well as Appendix C Amendments to Statements 87 and 88 and Appendix E Amendments to Statement 132(R) of FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (FAS 158). Paragraphs 8-10 providing specific guidance for not-for-profit organizations is rejected. Paragraphs regarding the effective dates for FAS 158 is rejected and paragraph 19 providing an alternative method for remeasuring plan assets and benefits obligations as of the fiscal year the measurement date provisions are applied is also rejected. Appendix D Amendments to Statement 106 has not been incorporated within this statutory statement as it will be considered in accordance with revisions to SSAP No. 14 Postretirement Benefits Other Than Pensions (SSAP No. 14). Disclosures included within FAS 132(R), as amended by FAS 158, pertaining to health care (paragraphs 5.l. and 5.m.) have been rejected for inclusion within this standard, but will also be considered in accordance with revisions to SSAP No. 14. This statement adopts the revisions to paragraph 5.d. of FAS 132(R) as amended by FASB Staff Position FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1) and ASU , Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU ). Other revisions to disclosures requirements as amended by FSP FAS 132(R)-1 relate to nonpublic entities and are rejected. This statement adopts by reference revisions to ASC as detailed in ASU , Compensation Retirement Benefits Multiemployer Plans with limited additional disclosures required within statutory financial statements. This statement adopts by reference FSP FASB 158-1, Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides (FSP FAS 158-1) to the extent that the examples and related implementation guides comply with the adopted GAAP guidance previously identified within this statement, as modified for statutory accounting. The following modifications from the adopted paragraphs of FAS 158 have been incorporated within this standard: a. All references to other comprehensive income or accumulated other comprehensive income within FAS 158 have been revised to reflect unassigned funds (surplus). b. Any prepaid asset resulting from the excess of the fair value of plan assets over the projected benefit obligation shall be nonadmitted. Furthermore, any asset recognized from the cost of a participation right of an annuity contract per paragraph 54 shall also be nonadmitted. c. Provisions within paragraph 30 of FAS 87, as amended by FAS 158, permitting a market-related value of plan assets have been eliminated with only the fair value measurement method for plan assets being retained. d. The reduced disclosure requirements for nonpublic entities described in paragraph 8 of FAS 132(R), as amended by FAS 158, are rejected. All reporting entities shall follow the disclosure requirements included in paragraph 5 of FAS 132(R) as amended by FAS 158. e. Clarification has been included within this standard to ensure both vested and nonvested employees are included within the recognition of net periodic pension cost and in the pension

49 2017 National Association of Insurance Commissioners 5 Attachment C Ref # benefit obligation. Although this is consistent with GAAP, this is a change from previous statutory accounting. As nonvested employees were excluded from statutory accounting under SSAP No. 89, guidance has been included to indicate that the unrecognized prior service cost attributed to nonvested individuals is not required to be included in net periodic pension cost entirely in the year this standard is adopted. The unrecognized prior service cost for nonvested employees shall be amortized as a component of net periodic pension cost by assigning an equal amount to each expected future period of service before vesting occurs for nonvested employees active at the date of the amendment. Unassigned funds (surplus) is then adjusted each period as prior service cost is amortized. (Guidance is included within the transition related to the recognition of the prior service cost for nonvested employees through unassigned funds (surplus).) f. Conclusion of Interpretation 04-12: EITF 03-4: Determining the Classification and Benefit Attribution Method for a Cash Balance Pension Plan (INT 04-12) indicating that cash balance plans are considered defined benefit plans has been incorporated within paragraph 3 of this statement. g. Conclusion of Interpretation 99-26: Offsetting Pension Assets and Liabilities (INT 99-26) prohibiting the offset of defined benefit liabilities of one plan with prepaid assets of another plan has been incorporated within paragraph 26 of this statement. h. Provisions within paragraph 36 of FAS 87, as amended by FAS 158, regarding the classification of underfunded liabilities as current or noncurrent liabilities and the classification of assets from overfunded plans as noncurrent assets has been rejected as inconsistent with statutory accounting. i. Provisions within paragraph 49 of FAS 87, as amended by FAS 158, defining the fair value of investments have been rejected. Fair value definitions and measurement for investments shall be determined in accordance with statutory accounting guidance. j. Provisions within paragraph 52 of FAS 87, as amended by FAS 158, regarding the plan assets measurement date for consolidating subsidiaries or entities utilizing the equity method under APB Opinion No. 18 has been rejected. For statutory accounting, all entities shall follow the measurement date guidance within paragraph 45 of this statement. k. Transition under FAS 158 is different from this statement. FAS 158 requires entities with publicly traded equity securities to initially apply the requirement to recognize the funded status of a benefit plan; the gains/losses, prior service costs/credits and transition obligations/assets that have not yet been included in net periodic benefit cost; and the disclosure requirements as of the end of the fiscal year ending after December 15, Transition guidelines for statutory accounting are defined in paragraphs l. FAS 158 provided two approaches for an employer to transition to a fiscal year-end measurement date. For purposes of statutory accounting, the second approach permitting reporting entities to use earlier measurements determined for year-end reporting as of the fiscal year immediately preceding the year that the measurement date provisions is rejected. For consistency purposes, all reporting entities shall follow the first approach and remeasure plan assets and benefit obligations as of the beginning of the fiscal year that the measurement date provisions are applied. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): ASU brings US GAAP more consistent with IFRS for financial reporting.

50 Attachment C Ref # Staff Recommendation: It is recommended that the Working Group move this item to the nonsubstantive active listing and expose nonsubstantive revisions to SSAP No. 92 and SSAP No. 102 to reject ASU , with notation that the disclosures in the SSAPs shall be followed. Staff notes that guidance in SSAP No. 92 and SSAP No. 102 requires disaggregation of pension and OPEB costs for statutory disclosure purposes. With the information captured in the disclosures, staff does not believe it is necessary to capture the information separately within the income statement as proposed within the ASU. Staff would request comments from regulators or industry if they believe this income statement presentation is needed for insurance reporting entities providing statutory financial statements. Staff Review Completed by: Jake Stultz, NAIC Staff May 2017 G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\C ASU Comp-Retirement Benefits.docx 2017 National Association of Insurance Commissioners 6

51 Attachment D Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: ASU : Financial Services Investment Companies Amendments to the Scope, Measurement, and Disclosure Requirements Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: ASU Financial Services Investment Companies Amendments to the Scope, Measurement, and Disclosure Requirements was issued in June 2013 to clarify accounting and reporting for investment companies, as defined by the Investment Company Act of This ASU amends Financial Accounting Standards Board (FASB) Codification Topic 946 Financial Services Investment Companies. There are three main provisions for this update: 1. Change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company and provide comprehensive guidance for assessing whether an entity is an investment company. 2. Require an investment company to measure non-controlling ownership interests in other investment companies at fair value rather than using the equity method of accounting. 3. Require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. Existing Authoritative Literature: SSAP No. 30 Unaffiliated Common Stock covers investments in unaffiliated common stock and requires companies to report investments at in unaffiliated common stock at fair value, which agrees to provision 2 from ASU SSAP No. 48 Joint Ventures, Partnerships and Limited Liability Companies states that investments in joint ventures, partnerships and limited liability companies should be reported using the equity method, which differs from the guidance in provision 2 from ASU Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): There are two significant scope differences between US GAAP for investment companies and IFRS for investment companies: 2017 National Association of Insurance Commissioners 1

52 Attachment D Ref # U.S. GAAP provides comprehensive accounting and reporting guidance for investment companies within the scope of Topic 946. Investments held by investment companies generally are measured at fair value under U.S. GAAP, including controlling financial interests in investees that are not investment companies. Rather than providing comprehensive accounting and reporting guidance, IFRS only provides an exception from consolidation requirements for entities that are investment entities. Under IFRS, an entity must have at least one controlled investee to be within the scope of the investment entities guidance. An entity that has at least one controlled investee and that meets the definition of an investment entity is required to measure its controlled investees at fair value (except those investees that provide services to the investment entity). Consequently, for investment companies with controlling financial interests in investees that are not investment companies, the amendments in this update improve the comparability of financial statements prepared by entities that are investment companies under U.S. GAAP and those that are investment entities under IFRS. However, differences exist between the accounting and reporting requirements for investment companies that report under U.S. GAAP and investment entities that report under IFRS. The basis for conclusions of this update highlights some of those differences. 2. Under the amendments in this update, an entity that is regulated as an investment company under the Investment Company Act of 1940 is also an investment company for accounting purposes. Because regulatory and legal requirements may differ depending on a particular jurisdiction, the IASB decided not to link its definition of an investment company to whether the entity is an investment company under local regulations or laws. Staff Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and expose nonsubstantive revisions to reject ASU as not applicable to statutory accounting in Appendix D. Staff notes that statutory accounting guidance for investments does not differentiate by the issuer (e.g., whether the issuer is an investment company), and existing statutory accounting guidance is based on the type of investment. As the ASU is specific to investments held by investment companies, in investment companies, NAIC staff recommends rejecting as not applicable (rather than a noted rejected of the ASU in the investment SSAPs). Under existing guidance, unaffiliated equity investments would be captured within SSAP No. 30 Unaffiliated Common Stock (reported at fair value), and SCA investments would be captured in SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities (reported at either the market valuation or equity method). For noncontrolling and controlling investments in joint ventures, partnerships and limited liability companies the investment would be captured in SSAP No. 48 (reported at an equity method). Staff Review Completed by: Jake Stultz, NAIC Staff June 2017 Status: G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\D ASU Investment Companies.docx 2017 National Association of Insurance Commissioners 2

53 Attachment E Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: ASU Stock Compensation Scope of Modification Accounting Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: FASB issued ASU Stock Compensation Scope of Modification Accounting to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. A modification is described as a change in any of the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for different reasons. An entity should account for the effects of a modification unless all of the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Existing Authoritative Literature: SSAP No. 104R Share-Based Payments SUMMARY OF ISSUE 2. The objective of accounting for transactions under share-based payment arrangements with employees is to recognize in the financial statements the employee services received in exchange for equity instruments issued or liabilities incurred and the related cost to the entity as those services are consumed. The objective of accounting for share-based payment transactions with non-employees is to recognize in the financial statements the most reliably measurable fair values of such transactions. This statement uses the terms compensation and payment in their broadest senses to refer to the consideration paid for employee services and goods and services regardless of whether the supplier is an employee. 3. The accounting for all share-based payment transactions shall reflect the rights conveyed to the holder of the instruments and the obligations imposed on the issuer of the instruments, regardless of how those transactions are structured. This statement requires that the cost resulting from all sharebased payment transactions be recognized in the financial statements. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method 1 in accounting for share-based 1 Accounting pronouncements that require fair value measurements but that are excluded from SSAP No. 100 Fair Value is limited to this statement addressing share-based payment transactions. The fair value measurement objective in this statement is generally consistent 2017 National Association of Insurance Commissioners 1

54 Attachment E Ref # payment transactions with employees except for equity instruments held by employee stock ownership plans. Scope and Scope Exceptions 4. Employees - This statement applies to all share-based payment transactions in which an entity acquires employee services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities to an employee that meet either of the following conditions: a. The amounts are based, at least in part 2, on the price of the entity s shares or other equity instruments. b. The awards require or may require settlement by issuing the entity s equity shares or other equity instruments. 5. Share-based payments awarded to an employee of the reporting entity by a related party or other holder of an economic interest in the entity as compensation for services provided to the entity are share-based payment transactions to be accounted for under this statement unless the transfer is clearly for a purpose other than compensation for services to the reporting entity. The substance of such a transaction is that the economic interest holder makes a capital contribution to the reporting entity, and that entity makes a share-based payment to its employee in exchange for services rendered. An example of a situation in which such a transfer is not compensation is a transfer to settle an obligation of the economic interest holder to the employee that is unrelated to employment by the entity. 6. Non-Employees - This statement applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share-options, or other equity instruments or by incurring liabilities to a goods or service provider that is not an employee in amounts based, at least in part 3, on the price of the entity s shares or other equity instruments or that require or may require settlement by issuing the entity s equity shares or other equity instrument. 7. The guidance in this statement does not apply to equity instruments held by an employee stock ownership plan. Such equity instruments shall follow the guidance in SSAP No. 12 Employee Stock Ownership Plans (SSAP No. 12). The guidance in this statement does not apply to transactions involving equity instruments either issued to a lender or investor that provides financing to the issuer or issued in a business combination. 8. The guidance for share-based payments to employees is contained in paragraphs 9-115, and the guidance for share-based payments to non-employees is contained in paragraphs The guidance for employees is further divided as follows: a. Compensatory Share-Based Payment Plans: Paragraphs b. Noncompensatory Share-Based Payment Plans: Paragraphs with the fair value measurement objective in SSAP No However, for certain share-based payment transactions with employees, the measurements at the grant date are fair-value-based measurements, not fair value measurements. Although some measurements in this statement are fair value measurements, for practical reasons this statement is excluded in its entirety from SSAP No To be consistent with GAAP guidance on share-based payment transactions, the definition of fair value for use in this statement is: the amount at which the asset (or liability) could be bought (or incurred) or sold (settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Observable market prices of identical or similar equity or liability instruments in active markets are the best estimate of fair value and, if available, should be used as the basis for the measurement of equity and liability instruments awarded in a share-based payment transaction with employees. 2 The phrase at least in part is used because an award of share-based compensation may be indexed to both the price of an entity s shares and something else that is neither the price of the entity s shares nor a market, performance, or service condition. 3 See Footnote National Association of Insurance Commissioners 2

55 Attachment E Ref # c. Consolidated/Holding Company Share-Based Payment Plans: Paragraphs Employee Share-Based Payments - Compensatory Recognition Principle for Share-Based Payment Transactions 9. Stock purchase and stock option plans that do not meet the criteria of a non-compensatory plan (paragraphs ) and are not otherwise excluded from the scope of this statement shall be classified as compensatory and follow the recognition, measurement and disclosure guidance in paragraphs An entity shall recognize the services received in a share-based payment transaction with an employee as services are received. Employee services themselves are not recognized before they are received. The entity shall recognize either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria (see paragraphs 14-27). As the services are consumed, the entity shall recognize the related cost. 11. The accounting for all share-based payment transactions shall reflect the rights conveyed to the holder of the instruments and the obligations imposed on the issuer of the instruments, regardless of how those transactions are structured. For example, the rights and obligations embodied in a transfer of equity shares to an employee for a note that provides no recourse to other assets of the employee (that is, other than the shares) are substantially the same as those embodied in a grant of equity share options. Thus, that transaction shall be accounted for as a substantive grant of equity share options. 12. Assessment of both the rights and obligations in a share-based payment award and any related arrangement and how those rights and obligations affect the fair value of an award requires the exercise of judgment in considering the relevant facts and circumstances. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda item ASU Improvements to Employee Share-Based Payment Accounting, was exposed at the Spring 2017 National Meeting. The revisions propose adoption with modification of ASU guidance for share-based payments, which simplify several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): None Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to adopt ASU in SSAP No. 104R as detailed below. NAIC staff highlights that prior guidance pertaining to modifications of share-based payments has previously been adopted for statutory accounting. Proposed Revisions to SSAP No. 104R: Determining Whether to Classify a Financial Instrument as a Liability or As Equity 14. Paragraphs 14-27, provide guidance for determining whether certain financial instruments awarded in share-based payment transactions are liabilities. In determining whether an instrument not specifically discussed in those paragraphs shall be classified as a liability or as equity, an entity shall 2017 National Association of Insurance Commissioners 3

56 2017 National Association of Insurance Commissioners 4 Attachment E Ref # apply statutory accounting principles applicable to financial instruments issued in transactions not involving share-based payment. 15. Unless paragraphs require otherwise, an entity shall apply the classification criteria in Exhibit A, as they are effective at the reporting date, in determining whether to classify as a liability a freestanding financial instrument given to an employee in a share-based payment transaction. Paragraphs provide criteria for determining when instruments subject to this statement subsequently become subject to other applicable statutory accounting principles. 16. In determining the classification of an instrument, an entity shall take into account the classification requirements that are effective for that specific entity at the reporting date as established by Exhibit A. In addition, a call option written on an instrument that is not classified as a liability under those classification requirements also shall be classified as equity so long as those equity classification requirements for the entity continue to be met, unless liability classification is required under the provisions of paragraphs 19 and Exhibit A does not apply to outstanding shares embodying a conditional obligation to transfer assets, for example, shares that give the employee the right to require the employer to repurchase them for cash equal to their fair value (puttable shares). A put right may be granted to the employee in a transaction that is related to a share-based compensation arrangement. If exercise of such a put right would require the entity to repurchase shares issued under the share-based compensation arrangement, the shares shall be accounted for as puttable shares. A puttable (or callable) share awarded to an employee as compensation shall be classified as a liability if either of the following conditions is met: a. The repurchase feature permits the employee to avoid bearing the risks and rewards normally associated with equity share ownership for a reasonable period of time from the date the requisite service is rendered and the share is issued. An employee begins to bear the risks and rewards normally associated with equity share ownership when all the requisite service has been rendered. A repurchase feature that can be exercised only upon the occurrence of a contingent event that is outside the employee s control (such as an initial public offering) would not meet this condition until it becomes probable that the event will occur within the reasonable period of time. b. It is probable that the employer would prevent the employee from bearing those risks and rewards for a reasonable period of time from the date the share is issued. For this purpose, a period of six months or more is a reasonable period of time. 18. A puttable (or callable) share that does not meet either of those conditions shall be classified as equity. 19. Options or similar instruments on shares shall be classified as liabilities if either of the following conditions is met: a. The underlying shares are classified as liabilities. b. The entity can be required under any circumstances to settle the option or similar instrument by transferring cash or other assets. A cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee s control (such as an initial public offering) would not meet this condition until it becomes probable that event will occur. 20. For example, a reporting entity that is a Securities and Exchange Commission (SEC) registrant may grant an option to an employee that, upon exercise, would be settled by issuing a mandatorily redeemable share. Because the mandatorily redeemable share would be classified as a liability under Exhibit A (as well as under SSAP No. 72 Surplus and Quasi-Reorganizations), the option also would be classified as a liability.

57 Attachment E Ref # An award may be indexed to a factor in addition to the entity s share price. If that additional factor is not a market, performance, or service condition, the award shall be classified as a liability for purposes of this statement, and the additional factor shall be reflected in estimating the fair value of the award. 22. For this purpose, an award of equity share options granted to an employee of an entity s foreign operation that provides for a fixed exercise price denominated either in the foreign operation s functional currency or in the currency in which the employee s pay is denominated shall not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award is not required to be classified as a liability if it otherwise qualifies as equity. For example, equity share options with an exercise price denominated in euros granted to employees of a U.S. entity s foreign operation whose functional currency is the euro are not required to be classified as liabilities if those options otherwise qualify as equity. In addition, such options are not required to be classified as liabilities even if the functional currency of the foreign operation is the U.S. dollar, provided that the employees to whom the options are granted are paid in euros. 23. The accounting for an award of a share-based payment shall reflect the substantive terms of the award and any related arrangement. Generally, the written terms provide the best evidence of the substantive terms of an award. However, an entity s past practice may indicate that the substantive terms of an award differ from its written terms. For example, an entity that grants a tandem award under which an employee receives either a stock option or a cash-settled stock appreciation right is obligated to pay cash on demand if the choice is the employee s, and the entity thus incurs a liability to the employee. In contrast, if the choice is the entities, it can avoid transferring its assets by choosing to settle in stock, and the award qualifies as an equity instrument. However, if an entity that nominally has the choice of settling awards by issuing stock predominately settles in cash or if the entity usually settles in cash whenever an employee asks for cash settlement, the entity is settling a substantive liability rather than repurchasing an equity instrument. In determining whether an entity that has the choice of settling an award by issuing equity shares has a substantive liability, the entity also shall consider whether: a. It has the ability to deliver the shares. (Federal securities law generally requires that transactions involving offerings of shares under employee share option arrangements be registered, unless there is an available exemption. For purposes of this statement, such requirements do not, by themselves, imply that an entity does not have the ability to deliver shares and thus do not require an award that otherwise qualifies as equity to be classified as a liability.) b. It is required to pay cash if a contingent event occurs (see paragraphs 19-20). 24. A provision that permits employees to effect a broker-assisted cashless exercise of part or all of an award of share options through a broker does not result in liability classification for instruments that otherwise would be classified as equity if both of the following criteria are satisfied: a. The cashless exercise requires a valid exercise of the share options. b. The employee is the legal owner of the shares subject to the option (even though the employee has not paid the exercise price before the sale of the shares subject to the option). 25. A broker that is a related party of the entity must sell the shares in the open market within a normal settlement period, which generally is three days, for the award to qualify as equity. 26. Similarly, a provision for either direct or indirect (through a net-settlement feature) repurchase of shares issued upon exercise of options (or the vesting of nonvested shares), with any payment due employees withheld to meet the employer s minimum statutory withholding requirements resulting from the exercise, does not, by itself, result in liability classification of instruments that otherwise would be classified as equity. However, if an amount in excess of the minimum statutory requirement is 2017 National Association of Insurance Commissioners 5

58 Attachment E Ref # withheld, or may be withheld at the employee s discretion, the entire award shall be classified and accounted for as a liability. 27. Minimum statutory withholding requirements are to be based on the applicable minimum statutory withholding rates required by the relevant tax authority (or authorities, for example, federal, state, and local), including the employee s share of payroll taxes that are applicable to such supplemental taxable income. Modification of an Award 28. An entity shall account for the effects of a modification as described in paragraphs 75 through 78, unless all of the following are met: a. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. b. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. c. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. Short-Term Inducements 75. Except as described in paragraph 28, Aa short-term inducement shall be accounted for as a modification of the terms of only the awards of employees who accept the inducement, and. Oother inducements areshall be accounted for as modifications of the terms of all awards subject to them and shall be accounted for as such. Equity Restructuring or Business Combination 76. Exchanges of share options or other equity instruments or changes to their terms in conjunction with an equity restructuring or a business combination are modifications for purposes of this statement. An entity shall apply the guidance in paragraph 28 to those exchanges or changes to determine whether it shall account for the effects of those modifications. Except for a modification to add an antidilution provision that is not made in contemplation of an equity restructuring, accounting for a modification in conjunction with an equity restructuring requires a comparison of the fair value of the modified award with the fair value of the original award immediately before the modification in accordance with paragraph 73. If those amounts are the same, for instance, because the modification is designed to equalize the fair value of an award before and after an equity restructuring, no incremental compensation cost is recognized. See paragraph 66 for an additional exception. Repurchase or Cancellation 77. The amount of cash or other assets transferred (or liabilities incurred) to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the equity instruments repurchased at the repurchase date. Any excess of the repurchase price over the fair value of the instruments repurchased shall be recognized as additional compensation cost. An entity that repurchases an award for which the requisite service has not been rendered has, in effect, modified the requisite service period to the period for which service already has been rendered, and 2017 National Association of Insurance Commissioners 6

59 Attachment E Ref # thus the amount of compensation cost measured at the grant date but not yet recognized shall be recognized at the repurchase date. Cancellation and Replacement 78. Except as described in paragraph 28, Ccancellation of an award accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration shall be accounted for as a modification of the terms of the cancelled award. (The phrase offer to grant is intended to cover situations in which the service inception date precedes the grant date.) Therefore, incremental compensation cost shall be measured as the excess of the fair value of the replacement award or other valuable consideration over the fair value of the cancelled award at the cancellation date in accordance with paragraph 73. Thus, the total compensation cost measured at the date of a cancellation and replacement shall be the portion of the grant-date fair value of the original award for which the requisite service is expected to be rendered (or has already been rendered) at that date plus the incremental cost resulting from the cancellation and replacement. Relevant Literature 144. This statement adopts ASU Compensation Stock Compensation Scope of Modification Accounting (ASU ). The guidance from ASU will be effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, Early adoption is permitted, including adoption in any interim period, for all entities for reporting periods for which financial statements have not yet issued. The guidance shall be applied prospectively to a modification that occurs on or after the effective date This statement adopts ASU , Compensation Stock Compensation, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU ) with an effective date of January 1, 2016, with early adoption permitted. ASU allows prospective or retrospective adoption based on the election of the reporting entity. This election is adopted for statutory financial statements; however, reporting entities shall follow the approach used when completing their GAAP financials (if applicable). The disclosures in SSAP No. 3 Accounting Changes and Corrections of Errors shall be completed in the first interim and annual reporting period of adoption. Staff Note: All paragraphs will be re-numbered accordingly. Staff Review Completed by: Fatima Sediqzad - NAIC Staff May 2017 G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\E ASU Scope of Modification Accounting.docx 2017 National Association of Insurance Commissioners 7

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61 Attachment F Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: ASU Determining the Customer of the Operation Services Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: The FASB issued ASU Determining the Customer of the Operation Services (ASU ) in May This Update was issued to address the diversity in practice in how an operating entity determines the customer of the operation services for transactions within the scope of Topic 853, Service Concession Arrangements. A service concession arrangement is an arrangement between a grantor and an operating entity where the operating entity will operate the grantor s infrastructure for a specified period of time. The operating entity may also maintain the infrastructure, and it also may be required to provide periodic capital-intensive maintenance to enhance or extend the life of the infrastructure. The infrastructure may already exist or may be constructed by the operating entity during the period of the service concession arrangement. Topic 853 provides guidance for operating entities when they enter into a service concession arrangement with a public-sector grantor who both: 1. Controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price. 2. Controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. In a service concession arrangement, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment. Existing Authoritative Literature: SSAP No. 22 Leases 2. A lease is defined as an agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets) usually for a stated period of time. This definition does not include agreements that are contracts for services that do not transfer the right to use property, plant, or equipment from one contracting party to the other (i.e., employee lease contracts) or service concession arrangements 1. On the other hand, agreements that do transfer the right to use property, plant, or equipment meet the 1 A service concession arrangement is an arrangement between a public sector entity grantor and an operating entity under which the operating entity operates the grantor s infrastructure (for example, airports, roads, bridges, tunnels, prisons and hospitals) for a specified period of time. A public-sector entity includes a governmental body or an entity to which the responsibility to provide public service has been delegated. In a service concession arrangement, both of the following conditions exist: a. The grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price. b. The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement National Association of Insurance Commissioners 1

62 Attachment F Ref # definition of a lease even though substantial services by the contractor (lessor) may be called for in connection with the operation or maintenance of the assets. SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements 1. This statement establishes statutory accounting principles for furniture, fixtures, and equipment (excluding electronic data processing equipment and software that is addressed in SSAP No. 16R Electronic Data Processing Equipment and Software (SSAP No. 16R), leasehold improvements paid by the reporting entity as lessee, and depreciation of property and amortization of leasehold improvements. Concession service arrangements, as defined in SSAP No. 22, are not leases, nor should they be recognized as property, plant or equipment. Therefore, these arrangements, and improvements to infrastructures within concession service arrangements, are outside of the scope of this standard. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): ASU Leases is also being considered by the Working Group in agenda item Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): The IFRS Interpretations Committee met on May 10, As part of its agenda, the committee discussed a situation that involves three parties: a grantor, an operator and a lessor. A question was posed to clarify whether the arrangement is within the scope of IFRIC 12 Service Concession Arrangements. The Interpretations Committee noted that the requirements in IFRS Standards provide an adequate basis to enable an entity to determine how to account for the arrangement. In the light of the existing requirements in IFRS Standards, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda. Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP No. 22 Leases to adopt with modification ASU to clarify the customer of service concession arrangements. These revisions ensure consistency between SAP, GAAP and IFRS for service concession arrangements. ASU is recommended for adoption with modification as the recommendations are currently limited to clarifying the customer of the operation services, but would not propose revisions regarding revenue recognition of the contracts. This treatment is similar to agenda item Service Concession, which adopts with modification ASU , Service Concession Arrangements. SSAP No A lease is defined as an agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets) usually for a stated period of time. This definition does not include agreements that are contracts for services that do not transfer the right to use property, plant, or equipment from one contracting party to the other (i.e., employee lease contracts) or service concession arrangements 2. On the other hand, agreements that do transfer the right to use property, plant, or equipment meet the definition of a lease even though substantial services by the contractor (lessor) may be called for in connection with the operation or maintenance of the assets. 1 A service concession arrangement is an arrangement between a public sector entity grantor and an operating entity under which the operating entity operates the grantor s infrastructure (for example, airports, roads, bridges, tunnels, prisons and hospitals) for a specified period of time. A public-sector entity includes a governmental body or an entity to which the responsibility to provide public service 2017 National Association of Insurance Commissioners 2

63 Attachment F Ref # has been delegated. An operating entity shall consider the grantor to be the customer of its operation services in all cases for service concession arrangements within the scope of this SSAP. In a service concession arrangement, both of the following conditions exist: a. The grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price. b. The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. Staff Review Completed by: Fatima Sediqzad - NAIC Staff May 2017 G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\F ASU Determining the Customer of the Operation Services.docx 2017 National Association of Insurance Commissioners 3

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65 Attachment G Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: Goodwill Limitation in SSAP Nos. 68 and 97 Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: Statutory accounting principles require investments in the common stock of subsidiaries to be reported within the investments in common stock category on the face of the balance sheet, rather than as a separate investment. The amount included in the common stock line of the balance sheet for investments in subsidiaries also includes any goodwill generated from the investment. SSAP No. 68 Business Combinations (SSAP No. 68) calculates goodwill as the purchase price less the book value of the investment and requires aggregate goodwill exceeding 10% of the adjusted capital and surplus of the books of the insurance reporting entity to be nonadmitted. The capital and surplus limit is calculated as 10% of the previous quarter s capital and surplus after first deducting EDP equipment, operating system software, goodwill and net deferred tax assets. Staff has noted during the review of subsidiary, controlled and affiliated entity (SCA) Sub 2 filings that some insurance reporting entities are including a substantial amount of goodwill in the claimed value of SCAs. Although the goodwill is still within the limitation amount of 10% of the insurance reporting entity s surplus, a question is raised as to the perceived solvency of an insurance reporting entity that reports substantial goodwill on its balance sheet. Although there is an aggregate limitation, there are no other restrictions on the amount of goodwill in a particular subsidiary paid by a reporting entity. That is a reporting entity can vastly overpay for the value of a subsidiary and claim it as goodwill as long as the goodwill is not impaired and is below the aggregate limitation.. Staff believes that since the value claimed for an SCA is included in the insurance reporting entity s Annual Statement, reasonableness should be verified. Goodwill is an asset that is not available for policyholder claims, so it could be misleading if substantial amounts of goodwill are included in the value of an SCA. It is recommended that the Working Group consider additional limitations should be set on the admission of goodwill on an insurance reporting entity s balance sheet. Below are some examples taken from SCA filings; company names are omitted for confidentiality. The examples demonstrate the large amounts of goodwill that some entities have claimed as part of the value of the SCA. Filing Year SCA Equity SCA Goodwill SCA Total Value Goodwill as % of Total Value ,564, ,897, ,462,168 92% ,215,580 6,242,993 20,458,573 31% ,163, , ,927,470 35% ,553,000 6,744,309 15,297,309 44% ,473,000 13,167,261 45,640,261 29% Existing Authoritative Literature: SSAP No. 68 Business Combinations and Goodwill 2. A business combination shall be accounted for as either a statutory purchase or a statutory merger. Business combinations that create a parent-subsidiary relationship shall be accounted for as a 2017 National Association of Insurance Commissioners 1

66 Attachment G Ref # statutory purchase. Business combinations where equity of one entity is issued in exchange for the equity of another entity, which is then canceled, and prospectively only one entity exists, shall be accounted for as a statutory merger. 3. The statutory purchase method of accounting is defined as accounting for a business combination as the acquisition of one entity by another. It shall be used for all purchases of SCA entities including partnerships, joint ventures, and limited liability companies. The acquiring reporting entity shall record its investment at cost. Cost is defined as the sum of: (a) any cash payment, (b) the fair value of other assets distributed, (c) the fair value of any liabilities assumed, and (d) any direct costs of the acquisition. Contingent consideration issued in a purchase business combination that is embedded in a security or that is in the form of a separate financial instrument shall be recorded by the issuer at fair value at the acquisition date. 4. For those acquired SCA entities accounted for in accordance with paragraphs 8.b.i., 8.b.ii., 8.b.iii. or 8.b.iv. of SSAP No. 97, and joint venture, partnership or limited liability company entities accounted for in accordance with paragraph 8 of SSAP No. 48, goodwill is defined as the difference between the cost of acquiring the entity and the reporting entity s share of the book value of the acquired entity. When the cost of the acquired entity is greater than the reporting entity s share of the book value, positive goodwill exists. When the cost of the acquired entity is less than the reporting entity s share of the book value, negative goodwill exists. Goodwill resulting from assumption reinsurance shall be recorded as a separate write-in for other-than-invested assets. All other goodwill shall be reported in the carrying value of the investment. 5. A business combination accounted for under the statutory purchase method and in which the acquired entity is valued in accordance with paragraphs 8.b.ii., 8.b.iii. or, 8.b.iv. of SSAP No. 97 shall determine the amount of positive goodwill or negative goodwill created by the combination using the reporting entity s share of the GAAP net book value of the acquired entity, adjusted to a statutory basis of accounting in accordance with paragraph 9 of SSAP No. 97 in the case of acquired entities valued in accordance paragraphs 8.b.ii. or 8.b.iv. of SSAP No. 97. Business combinations accounted for under the statutory purchase method and in which the acquired entity is valued in accordance with, paragraph 8.b.i. of SSAP No. 97 shall determine the amount of positive or negative goodwill created by the business combination using the insurer s share of the statutory book value of the acquired entity. 6. For those acquired SCA entities accounted for in accordance with paragraph 8.b.i. of SSAP No. 97 under the statutory purchase method, the historical bases of the acquired entity shall continue to be used in preparing its statutory financial statements. Therefore, pushdown accounting is not permitted. 7. Positive goodwill recorded under the statutory purchase method of accounting shall be admitted subject to the following limitation: Positive goodwill from all sources, including life, accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to 10% of the acquiring entity s capital and surplus as required to be shown on the statutory balance sheet of the reporting entity for its most recently filed statement with the domiciliary state commissioner adjusted to exclude any net positive goodwill, EDP equipment and operating system software, and net deferred tax assets. Additionally, all positive goodwill shall be nonadmitted when the underlying investment in the SCA or partnership, joint venture and limited liability company is nonadmitted. When negative goodwill exists, it shall be recorded as a contra-asset. Positive or negative goodwill resulting from the purchase of an SCA, joint venture, partnership or limited liability company shall be amortized to unrealized capital gains and losses on investments over the period in which the acquiring entity benefits economically, not to exceed 10 years. Positive or negative goodwill resulting from life, accident and health, and deposit-type assumption reinsurance shall be amortized to operations as a component of general insurance expenses over the period in which the assuming entity benefits economically, not to exceed 10 years. Goodwill shall be evaluated separately for each transaction National Association of Insurance Commissioners 2

67 Attachment G Ref # SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities 9. The limited statutory basis of accounting for investments in noninsurance SCA entities, subject to paragraph 8.b.ii. and foreign insurance SCA entities, subject to paragraph 8.b.iv., shall be adjusted for the following: a. Nonadmit assets pursuant to the following statutory accounting principles as promulgated by the NAIC in the Accounting Practices and Procedures Manual; i. SSAP No. 6 Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers ii. iii. iv. SSAP No. 16R Electronic Data Processing Equipment and Software SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements SSAP No. 20 Nonadmitted Assets v. SSAP No. 21 Other Admitted Assets (e.g., collateral loans secured by assets that do not qualify as investments are nonadmitted under SAP) vi. vii. SSAP No. 29 Prepaid Expenses SSAP No. 105 Working Capital Finance Investments b. Expense costs that are capitalized in accordance with GAAP but are expensed pursuant to statutory accounting as promulgated by the NAIC in the Accounting Practices and Procedures Manual (e.g., deferred policy acquisition costs, preoperating, development and research costs, etc.); c. Adjust depreciation for certain assets in accordance with the following statutory accounting principles: i. SSAP No. 16R Electronic Data Processing Equipment and Software ii. iii. SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements SSAP No. 68 Business Combinations and Goodwill d. Nonadmit the amount of goodwill of the SCA in excess of 10% of the audited U.S. GAAP equity of the SCA s last audited financial statements. Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): Several agenda items have recently updated guidance in SSAP No. 97 for the accounting and reporting of SCAs. These revisions have primarily focused on the equity method detailed in paragraph 8.b. Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None Convergence with International Financial Reporting Standards (IFRS): None Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose the agenda item with a specific request for comments from industry and regulators on the five proposed options for the admission of goodwill. Once feedback from the exposure is received, NAIC staff will propose revisions to SSAP Nos. 68 and 97 for subsequent review National Association of Insurance Commissioners 3

68 Attachment G Ref # Proposed Options Option 1: Further decrease the 10% limitation of admissible goodwill to 5%. Option 2: The amount of admissible goodwill is limited based on a percentage of the dollar amount of goodwill remaining after the initial 10% limitation amount (as described above). The additional limitation increases exponentially as the dollar amount of goodwill after the 10% limitation increases. Dollar amount of goodwill after 10% limitation Additional limitation of goodwill $0 - $1,000,000 10% $1,000,001 - $5,000,000 15% $5,000,001 - $10,000,000 20% $10,000, % Assuming Parent Capital and Surplus is $4,000,000,000 ($4 Billion), under current statutory accounting guidance all goodwill is admitted up to 10% of parent capital and surplus (so $400,000,000 ($400 Million.) Filing Year SCA Equity SCA Goodwill Additional Limitation SCA Total Value CURRENT ACTUAL PROPOSED ,564, ,897,488 9,564,680 A 104,897,488 B 0 (26,224,372) 25% of Goodwill C Option 3: Cap the amount of goodwill at the asset or net asset value ($$) of the SCA. Goodwill as % of Total Value 114,462,168 92% 88,237,796 (A+B-C) This would only allow an amount equal to the SCA value to be reported as goodwill. (So the maximum amount reported for an SCA could only represent 50% goodwill.) As an example of the calculation with the cap at net asset value of the SCA: CURRENT ACTUAL Filing Year SCA Equity SCA Goodwill SCA Total Value Goodwill as % of Total Value ,564, ,897, ,462,168 92% OPTION ,564,680 Option 4: Eliminate the goodwill option altogether. 9,564,680 (Capped at SCA value) Option 5: Do not change the amount of goodwill admissible as an admitted asset. Staff Review Completed by: Fatima Sediqzad - NAIC Staff July % 19,129,360 50% G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\G Goodwill Limitation in SSAP Nos. 68 and 97.docx 2017 National Association of Insurance Commissioners 4

69 Attachment H Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: Intangibles ASUs Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: The FASB has issued guidance on accounting for goodwill from 2010 to This agenda item considers the following five ASUs for statutory accounting and proposes updates to accounting for goodwill and recoverability: ASU When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts ASU Testing Goodwill for Impairment ASU Testing Indefinite-Lived Intangible Assets for Impairment ASU Accounting for Goodwill (a consensus of the Private Company Council) ASU Simplifying the Test for Goodwill Impairment ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This step has been modified as some entities passed on step 1 of this test because the fair value of their reporting unit will generally be greater than zero. As a result, concerns were raised that step 2 of the test was not being performed despite factors indicating goodwill impairment. For reporting units with zero or negative carrying amounts, an entity is required to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. To determine whether it is more likely than not, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. Goodwill should be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to allow an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the entity concludes otherwise, it must perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of impairment loss. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to allow an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired (the more-likely-than-not threshold is defined as having a likelihood of more than 50 percent). If it is determined that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action; if the entity 2017 National Association of Insurance Commissioners 1

70 2017 National Association of Insurance Commissioners 2 Attachment H Ref # concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the qualitative assessment in any subsequent period. When conducting a qualitative assessment, an entity should consider the extent to which relevant events and circumstances could have affected the significant inputs used to determine the fair value of the indefinite-lived intangible asset since the last assessment. Then entity should also consider whether there have been changes to the carrying amount of the indefinitely-lived intangible asset when evaluating whether it is more likely than not that the asset is impaired. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to allow an accounting alternative for the subsequent measurement of goodwill. All entities, except for public business entities and not-for-profit entities that elect the accounting alternative should amortize goodwill on a straight-line basis over ten years, or less than ten years if the entity demonstrates that another useful life is more appropriate. The entity is then required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. Goodwill should be tested for impairment when a triggering event occurs that indicates that the fair value of an entity may be below its carrying amount. When a triggering event occurs, an entity has the option to assess qualitative factors to determine whether the quantitative impairment test is necessary. If the qualitative assessment indicates that it is more likely than not that goodwill is impaired, the entity must perform the quantitative test to compare the entity s fair value with its carrying amount, including goodwill. If the qualitative assessment indicates that it is not more likely than not that goodwill is impaired, further testing is not necessary. The goodwill impairment loss is the excess of the carrying amount over the entity s fair value and cannot exceed the entity s carrying amount of goodwill. ASU : This ASU amends FASB Topic 350, Intangibles Goodwill and Other to simplify the subsequent measurement of goodwill, by eliminating step two from the goodwill impairment test. The requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment, and to perform step two of the goodwill impairment test with failure of the qualitative test, is also eliminated. Existing Authoritative Literature: Existing statutory guidance in SSAP No. 68 Business Combinations and Goodwill specifies accounting guidance for goodwill and impairment of goodwill. Existing statutory guidance in SSAP No. 90 Impairment or Disposal of Real Estate Investments specifies accounting guidance for testing of recoverability. SSAP No. 68 Statutory Purchases of SCA Investments 3. The statutory purchase method of accounting is defined as accounting for a business combination as the acquisition of one entity by another. It shall be used for all purchases of SCA entities including partnerships, joint ventures, and limited liability companies. The acquiring reporting entity shall record its investment at cost. Cost is defined as the sum of: (a) any cash payment, (b) the fair value of other assets distributed, (c) the fair value of any liabilities assumed, and (d) any direct costs of the (INT 00-28) acquisition. Contingent consideration issued in a purchase business combination that is embedded in a security or that is in the form of a separate financial instrument shall be recorded by the issuer at fair value at the acquisition date. 4. For those acquired SCA entities accounted for in accordance with paragraphs 8.b.i., 8.b.ii., 8.b.iii. or 8.b.iv. of SSAP No. 97, and joint venture, partnership or limited liability company entities accounted for in accordance with paragraph 8 of SSAP No. 48, goodwill is defined as the difference between the cost of acquiring the entity and the reporting entity s share of the book value of the acquired entity. When the cost of the acquired entity is greater than the reporting entity s share of the book value, positive goodwill exists. When the cost of the acquired entity is less than the reporting entity s share of the book value, negative goodwill exists. Goodwill resulting from assumption reinsurance shall be recorded as a separate

71 Attachment H Ref # write-in for other-than-invested assets. All other goodwill shall be reported in the carrying value of the investment. 5. A business combination accounted for under the statutory purchase method and in which the acquired entity is valued in accordance with paragraphs 8.b.ii., 8.b.iii. or, 8.b.iv. of SSAP No. 97 shall determine the amount of positive goodwill or negative goodwill created by the combination using the reporting entity s share of the GAAP net book value of the acquired entity, adjusted to a statutory basis of accounting in accordance with paragraph 9 of SSAP No. 97 in the case of acquired entities valued in accordance paragraphs 8.b.ii. or 8.b.iv. of SSAP No. 97. Business combinations accounted for under the statutory purchase method and in which the acquired entity is valued in accordance with, paragraph 8.b.i. of SSAP No. 97 shall determine the amount of positive or negative goodwill created by the business combination using the insurer s share of the statutory book value of the acquired entity. 6. For those acquired SCA entities accounted for in accordance with paragraph 8.b.i. of SSAP No. 97 under the statutory purchase method, the historical bases of the acquired entity shall continue to be used in preparing its statutory financial statements. Therefore, pushdown accounting is not permitted. 7. Positive goodwill recorded under the statutory purchase method of accounting shall be admitted subject to the following limitation: Positive goodwill from all sources, including life, accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to 10% of the acquiring 1 entity s capital and surplus as required to be shown on the statutory balance sheet of the reporting entity for its most recently filed statement with the domiciliary state commissioner adjusted to exclude any net positive goodwill, EDP equipment and operating system software, and net deferred tax assets. Additionally, all positive goodwill shall be nonadmitted when the underlying investment in the SCA or partnership, joint venture and limited liability company is nonadmitted 2. When negative goodwill exists, it shall be recorded as a contra-asset. Positive or negative goodwill resulting from the purchase of an SCA, joint venture, partnership or limited liability company shall be amortized to unrealized capital gains and losses on investments over the period in which the acquiring entity benefits economically, not to exceed 10 years. Positive or negative goodwill resulting from life, accident and health, and deposit-type assumption reinsurance shall be amortized to operations as a component of general insurance expenses over the period in which the assuming entity benefits economically, not to exceed 10 years. Goodwill shall be (INT 01-18) evaluated separately for each transaction. Impairment 8. For any decline in the fair value of an entity, acquired through a purchase, that is other than temporary (INT 06-07), the investment shall be written down to fair value as the new cost basis and the amount of the write down shall be accounted for as a realized loss. The write down shall first be considered as an adjustment to any portion of the investment that is nonadmitted (e.g., nonadmitted goodwill). The new cost basis shall not be changed for subsequent recoveries in fair value. Future declines in fair value, which are determined to be other than temporary, shall be recorded as realized losses. 9. An impairment shall be considered to have occurred if it is probable that the reporting entity will be unable to recover the carrying amount of the investment or there is evidence indicating inability of the investee to sustain earnings which would justify the carrying amount of the investment. A fair value of an investment that is below the carrying amount based on the statutory equity method or the existence of investee operating losses may indicate a loss in value; however, they are not necessarily indicative of a loss in value that is other than temporary. 1 The acquiring entity is intended to reflect the insurance reporting entity that reports the investment resulting in goodwill. The goodwill limitation test shall be completed at the individual reporting company level. 2 This includes, but is not limited to, situations in which the investment is nonadmitted as the audited financial statements for the SCA, joint venture, partnership or limited liability company includes substantial doubt on the entity s ability to continue as a going concern, or on the basis/contents of the audit opinion pursuant to paragraph 20 of SSAP No National Association of Insurance Commissioners 3

72 Attachment H Ref # SSAP No. 90 Recognition and Measurement of an Impairment Loss 4. An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability, whether in use or under development. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value as discussed in paragraph 16. When to Test a Long-Lived Asset for Recoverability 5. A long-lived asset shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances: a. A significant decrease in the fair value of a long-lived asset b. A significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset f. A current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. 6. Real estate investment properties occupied by the company (per SSAP No. 40R) shall not be subject to recoverability testing under paragraphs 4 and 5 of this statement. However, if any of the following conditions are present, the reporting entity s property occupied by the company on a property by property basis shall be subject to immediate recoverability testing, by determining the fair value of the property using the criteria in SSAP No. 40R, paragraph 13: a. The financial condition of the reporting entity is in question as described in paragraph 7 of this statement. b. The property occupied by the company is held for sale as defined in paragraph 21 of this statement. c. A significant adverse change in the physical condition of the property occupied by the company has occurred. d. The management of the reporting entity has voluntarily determined a need for recoverability testing. 7. The following, while not meant to be an all-inclusive listing, are factors, which would indicate that the financial condition of the reporting entity is in question: 2017 National Association of Insurance Commissioners 4

73 Attachment H Ref # a. Entity is subject to regulatory action such as administrative supervision, corrective order based on hazard to policyholders, or substantially similar proceeding, whether voluntary or involuntary; b. Entity is at any action or control level under Risk Based Capital; c. Grounds exist for conservation, receivership, rehabilitation or liquidation; d. Independent certified public accounting report issues a going concern opinion, adverse opinion or disclaimer of opinion. 8. When a long-lived asset is tested for recoverability, it also may be necessary to review depreciation estimates and methods as required by SSAP No. 3 Accounting Changes and Corrections of Errors (SSAP No. 3). Any revision to the remaining useful life of a long-lived asset resulting from that review also shall be considered in developing estimates of future cash flows used to test the asset for recoverability. However, any change in the accounting method for the asset resulting from that review shall be made only after applying this statement. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): IAS 36, Impairment of Assets, requires an entity to test an indefinite-lived intangible asset for impairment by comparing its carrying amount with its recoverable amount. The impairment test must be performed annually regardless of whether there is any indication of impairment and in between annual tests whenever there is an indication of impairment. An entity can carry forward the most recent detailed calculation of an asset s recoverable amount when performing its current period impairment test, provided that certain criteria are met. Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP Nos. 68 and 90 as detailed under Proposed Revisions below. This agenda item proposes to reject all of the noted ASUs, but has incorporated guidance for triggering events from SSAP No. 90 into SSAP No. 68 so that the guidance in SSAP No. 68 discusses the impairment process in its entirety. NAIC staff requests comments from regulators and industry on whether any components from the noted ASUs should be considered for statutory accounting. Proposed Revisions: SSAP No. 68: Statutory Purchases of SCA Investments 3. The statutory purchase method of accounting is defined as accounting for a business combination as the acquisition of one entity by another. It shall be used for all purchases of SCA entities including partnerships, joint ventures, and limited liability companies. The acquiring reporting entity shall record its investment at cost. Cost is defined as the sum of: (a) any cash payment, (b) the fair value of other assets distributed, (c) the fair value of any liabilities assumed, and (d) any direct costs of the (INT 00-28) acquisition. Contingent consideration issued in a purchase business combination that is embedded in a security or that is in the form of a separate financial instrument shall be recorded by the issuer at fair value at the acquisition date National Association of Insurance Commissioners 5

74 Attachment H Ref # For those acquired SCA entities accounted for in accordance with paragraphs 8.b.i., 8.b.ii., 8.b.iii. or 8.b.iv. of SSAP No. 97, and joint venture, partnership or limited liability company entities accounted for in accordance with paragraph 8 of SSAP No. 48, goodwill is defined as the difference between the cost of acquiring the entity and the reporting entity s share of the book value of the acquired entity. When the cost of the acquired entity is greater than the reporting entity s share of the book value, positive goodwill exists. When the cost of the acquired entity is less than the reporting entity s share of the book value, negative goodwill exists. Goodwill resulting from assumption reinsurance shall be recorded as a separate write-in for other-than-invested assets. All other goodwill shall be reported in the carrying value of the investment. 5. A business combination accounted for under the statutory purchase method and in which the acquired entity is valued in accordance with paragraphs 8.b.ii., 8.b.iii. or, 8.b.iv. of SSAP No. 97 shall determine the amount of positive goodwill or negative goodwill created by the combination using the reporting entity s share of the GAAP net book value of the acquired entity, adjusted to a statutory basis of accounting in accordance with paragraph 9 of SSAP No. 97 in the case of acquired entities valued in accordance paragraphs 8.b.ii. or 8.b.iv. of SSAP No. 97. Business combinations accounted for under the statutory purchase method and in which the acquired entity is valued in accordance with, paragraph 8.b.i. of SSAP No. 97 shall determine the amount of positive or negative goodwill created by the business combination using the insurer s share of the statutory book value of the acquired entity. 6. For those acquired SCA entities accounted for in accordance with paragraph 8.b.i. of SSAP No. 97 under the statutory purchase method, the historical bases of the acquired entity shall continue to be used in preparing its statutory financial statements. Therefore, pushdown accounting is not permitted. 7. Positive goodwill recorded under the statutory purchase method of accounting shall be admitted subject to the following limitation: Positive goodwill from all sources, including life, accident and health, and deposit-type assumption reinsurance, is limited in the aggregate to 10% of the acquiring 3 entity s capital and surplus as required to be shown on the statutory balance sheet of the reporting entity for its most recently filed statement with the domiciliary state commissioner adjusted to exclude any net positive goodwill, EDP equipment and operating system software, and net deferred tax assets. Additionally, all positive goodwill shall be nonadmitted when the underlying investment in the SCA or partnership, joint venture and limited liability company is nonadmitted 4. When negative goodwill exists, it shall be recorded as a contra-asset. Positive or negative goodwill resulting from the purchase of an SCA, joint venture, partnership or limited liability company shall be amortized to unrealized capital gains and losses on investments over the period in which the acquiring entity benefits economically, not to exceed 10 years. Positive or negative goodwill resulting from life, accident and health, and deposit-type assumption reinsurance shall be amortized to operations as a component of general insurance expenses over the period in which the assuming entity benefits economically, not to exceed 10 years. Goodwill shall be (INT 01-18) evaluated separately for each transaction. Impairment 8. For any decline in the fair value of an entity, acquired through a purchase, that is other than temporary (INT 06-07), the investment shall be written down to fair value as the new cost basis and the amount of the write down shall be accounted for as a realized loss. The write down shall first be considered as an adjustment to any portion of the investment that is nonadmitted (e.g., nonadmitted goodwill). The new cost basis shall not be changed for subsequent recoveries in fair value. Future declines in fair value, which are determined to be other than temporary, shall be recorded as realized losses. A long-lived asset shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such triggering events or changes in circumstances: 3 The acquiring entity is intended to reflect the insurance reporting entity that reports the investment resulting in goodwill. The goodwill limitation test shall be completed at the individual reporting company level. 4 This includes, but is not limited to, situations in which the investment is nonadmitted as the audited financial statements for the SCA, joint venture, partnership or limited liability company includes substantial doubt on the entity s ability to continue as a going concern, or on the basis/contents of the audit opinion pursuant to paragraph 20 of SSAP No National Association of Insurance Commissioners 6

75 Attachment H Ref # SSAP No. 90: a. A significant decrease in the fair value of a long-lived asset b. A significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset f. A current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life An impairment shall be considered to have occurred if it is probable that the reporting entity will be unable to recover the carrying amount of the investment or there is evidence indicating inability of the investee to sustain earnings which would justify the carrying amount of the investment. A fair value of an investment that is below the carrying amount based on the statutory equity method or the existence of investee operating losses may indicate a loss in value; however, they are not necessarily indicative of a loss in value that is other than temporary. Relevant Literature 18. This statement adopts paragraph 12 of FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (FAS 121) to the extent that it addresses impairment of goodwill. Paragraphs 14.a. and 14.b. of FAS 121 are also adopted. Paragraphs 13, 14.c. and 14.d. of FAS 121 are rejected. FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144) supersedes FAS 121, but specifically scopes out the concept of goodwill. Given the applicability of the guidance found in paragraph 12 of FAS 121 to statutory accounting principles, the impairment guidance found in FAS 121, paragraph 12 is retained. 19. This statement adopts FASB Emerging Issues Task Force No , Determination of the Measurement Date for the Market Price of Securities Issued in a Purchase Business Combination and FASB Emerging Issues Task Force No. 97-8: Accounting for Contingent Consideration Issued in a Purchase Business Combination. 20. This statement rejects ASU Simplifying the Test for Goodwill Impairment, ASU , Intangibles Goodwill and Other, Business Combinations, Consolidation, Derivatives and Hedging, ASU Accounting for Goodwill (a consensus of the Private Company Council), ASU Testing Indefinite-Lived Intangible Assets for Impairment, ASU Testing Goodwill for Impairment, and ASU When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts; Accounting Principles Board Opinion No. 16, Business Combinations; FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, an amendment of APB Opinion No. 16; Accounting Principles Board Opinion No. 17, Intangible Assets; FASB Statement No. 79, Elimination of Certain Disclosures for Business Combinations by Nonpublic Enterprises; FASB Statement No. 141, Business Combinations; and FASB Statement No. 142, Goodwill and Other Intangible Assets. The following related interpretative pronouncements are also rejected: Impairment 8. For any decline in the fair value of an entity, acquired through a purchase, that is other than temporary (INT 06-07), the investment shall be written down to fair value as the new cost basis and the 2017 National Association of Insurance Commissioners 7

76 Attachment H Ref # amount of the write down shall be accounted for as a realized loss. The write down shall first be considered as an adjustment to any portion of the investment that is nonadmitted (e.g., nonadmitted goodwill). The new cost basis shall not be changed for subsequent recoveries in fair value. Future declines in fair value, which are determined to be other than temporary, shall be recorded as realized losses. 9. An impairment shall be considered to have occurred if it is probable that the reporting entity will be unable to recover the carrying amount of the investment or there is evidence indicating inability of the investee to sustain earnings which would justify the carrying amount of the investment. A fair value of an investment that is below the carrying amount based on the statutory equity method or the existence of investee operating losses may indicate a loss in value; however, they are not necessarily indicative of a loss in value that is other than temporary. Relevant Literature 20. This statement rejects ASU Simplifying the Test for Goodwill Impairment, ASU , Intangibles Goodwill and Other, Business Combinations, Consolidation, Derivatives and Hedging, ASU Accounting for Goodwill (a consensus of the Private Company Council), ASU Testing Indefinite-Lived Intangible Assets for Impairment, ASU Testing Goodwill for Impairment, and ASU When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts; Accounting Principles Board Opinion No. 16, Business Combinations; FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, an amendment of APB Opinion No. 16; Accounting Principles Board Opinion No. 17, Intangible Assets; FASB Statement No. 79, Elimination of Certain Disclosures for Business Combinations by Nonpublic Enterprises; FASB Statement No. 141, Business Combinations; and FASB Statement No. 142, Goodwill and Other Intangible Assets. The following related interpretative pronouncements are also rejected: Staff Review Completed by: Fatima Sediqzad - NAIC Staff July 2017 G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\H Intangibles ASUs.docx 2017 National Association of Insurance Commissioners 8

77 Attachment I Ref # Issue: SSAP No. 97 Foreign Entity Clarification Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities (SSAP No. 97) requires that the limited statutory basis of accounting for investments in SCAs be adjusted for investments captured in paragraph 8.ii (SCAs that engage in specific transactions), and investments captured in paragraph 8.iv (foreign insurance entities). This guidance is explicit in paragraph 9, but could be more clear in paragraph 8.iv. that the paragraph 9 adjustments apply to both audited GAAP basis and audited foreign GAAP financial statements. This agenda item updates paragraph 8.iv as a readability edit to clarify the guidance. Existing Authoritative Literature: SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities Applying the Market Valuation, Audited Statutory Equity and Audited GAAP Equity Methods 8. The admitted investments in SCA entities shall be valued using either the market valuation approach (as described in paragraph 8.a.), or one of the equity methods (as described in paragraph 8.b.) adjusted as appropriate in accordance with the guidance in SSAP No. 25 Affiliates and Other Related Parties (SSAP No. 25), paragraph 16.d. a. In order to use the market valuation approach for SCA entities, the following requirements apply: i. The subsidiary must be traded on one of the following major exchanges: (1) the New York Stock Exchange, (2) the NASDAQ, or (3) the Japan Exchange Group; ii. iii. iv. The reporting entity must submit subsidiary information to the NAIC SCA analysts for calculation of the subsidiary s market value. Such calculation could result in further discounts in market value above the established base discounts based on ownership percentages detailed below; Ownership percentages for determining the discount rate shall be measured at the holding company level; If an investment in a SCA results in an ownership percentage between 10% and 50%, a base discount percentage between 0% and 20% on a sliding scale basis is required; v. If an investment in a SCA results in an ownership percentage greater than 50% up to and including 80%, a base discount percentage between 20% and 30% on a sliding scale basis is required; vi. If an investment in a SCA results in an ownership percentage greater than 80% up to and including 85%, a minimum base discount percentage of 30% is required National Association of Insurance Commissioners 1

78 Attachment I Ref # vii. viii. Further, the SCA must have at least two million shares outstanding, with a total market value of at least $50 million in the public s control; and Any ownership percentages exceeding 85% will result in the SCA being recorded on an equity method. b. If a SCA investment does not meet the requirements for the market valuation approach in paragraph 8.a. or, if the requirements are met, but a reporting entity elects not to use that approach, the reporting entity s proportionate share of its investments in SCAs shall be recorded as follows: i. Investments in U.S. insurance SCA entities shall be recorded based on either 1) the underlying audited statutory equity of the respective entity s financial statements, adjusted for any unamortized goodwill as provided for in SSAP No. 68 Business Combinations and Goodwill (SSAP No. 68) 1 or 2) the underlying audited statutory equity of the respective entity s financial statements, adjusted for any unamortized goodwill, modified to remove the impact of any permitted or prescribed accounting practices that depart from the NAIC Accounting Practices and Procedures Manual. Reporting entities shall record investments in U.S. insurance SCA entities on at least a quarterly basis, and shall base the investment value on the most recent quarterly information available from the SCA. Entities may recognize their investment in U.S. insurance SCA entities based on the unaudited statutory equity in the SCAs year-end Annual Statement if the annual SCA audited financial statements are not complete as of the filing deadline. The recorded statutory equity shall be adjusted for audit adjustments, if any, as soon as the annual audited financial statements have been completed. Annual consolidated or combined audits are allowed if completed in accordance with the Model Regulation Requiring Annual Audited Financial Reports as adopted by the SCA s domiciliary state; ii. Investments in both U.S. and foreign noninsurance SCA entities that are engaged in the following transactions or activities: (a) (b) (c) (d) (e) Collection of balances as described in SSAP No. 6 Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers Sale/lease or rental of EDP Equipment and Software as described in SSAP No. 16R Electronic Data Processing Equipment and Software Sale/lease or rental of furniture, fixtures, equipment or leasehold improvements as described in SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements Loans to employees, agents, brokers, representatives of the reporting entity or SCA as described in SSAP No. 20 Nonadmitted Assets Sale/lease or rental of automobiles, airplanes and other vehicles as described in SSAP No. 20 Nonadmitted Assets 1 If the insurance SCA employs accounting practices that depart from the NAIC accounting practices and procedures, and the reporting insurance entity has not adjusted the valuation of the insurance SCA to be consistent with the NAIC accounting practices and procedures, (i.e., retains the effect of the permitted or prescribed practice in its valuation), disclosure about those accounting practices that affect the insurance SCA s net income and surplus shall be made pursuant to paragraph 36. If the reporting entity has adjusted the investment in the insurance SCA with the resulting valuation being consistent with the accounting principles of the AP&P Manual, the disclosures in paragraph 36 are not required National Association of Insurance Commissioners 2

79 Attachment I Ref # (f) (g) (h) Providing insurance services on behalf of the reporting entity including but not limited to accounting, actuarial, auditing, data processing, underwriting, collection of premiums, payment of claims and benefits, policyowner services Acting as an insurance or administrative agent or an agent for a government instrumentality performing an insurance function (e.g. processing of state workers compensations plans, managing assigned risk plans, Medicaid processing etc). Purchase or securitization of acquisition costs and if 20% or more of the SCA s revenue is generated from the reporting entity and its affiliates, then the underlying equity of the respective entity s audited U.S. Generally Accepted Accounting Principles (GAAP) financial statements shall be adjusted to a limited statutory basis of accounting in accordance with paragraph 9. For purposes of this section, revenue means GAAP revenue reported in the audited U.S. GAAP financial statements excluding realized and unrealized capital gains/losses. Foreign SCA entities are defined as those entities incorporated or otherwise legally formed under the laws of a foreign country. Paragraphs provide guidance for investments in holding companies; iii. iv. Investments in both U.S. and foreign noninsurance SCA entities that do not qualify under paragraph 8.b.ii., shall be recorded based on the audited U.S. GAAP equity of the investee. Foreign SCA entities are defined as those entities incorporated or otherwise legally formed under the laws of a foreign country. Additional guidance on investments in downstream holding companies is included in paragraphs Additional guidance on the use of audited foreign GAAP basis financial statements for the U.S. GAAP equity valuation amount is included in paragraph 22.b. Investments in foreign insurance SCA entities shall be recorded based on the underlying U.S. GAAP equity from the audited U.S. GAAP basis financial statements, if available. If the audited U.S. GAAP basis financial statements are not available, the investment can be recorded on the audited foreign statutory basis financial statements of the respective entity adjusted to a limited statutory basis of accounting in accordance with paragraph 9 and adjusted for reserves of the foreign insurance SCA with respect to the business it assumes directly and indirectly from a U.S. insurer using the statutory accounting principles promulgated by the NAIC in the Accounting Practices and Procedures Manual. The audited foreign statutory basis financial statements must include an audited footnote that reconciles net income and equity on the foreign statutory basis of accounting to the U.S. GAAP basis. Foreign insurance SCA entities are defined as alien insurers formed according to the legal requirements of a foreign country. 9. The limited statutory basis of accounting for investments in noninsurance SCA entities, subject to paragraph 8.b.ii. and foreign insurance SCA entities, subject to paragraph 8.b.iv., shall be adjusted for the following: a. Nonadmit assets pursuant to the following statutory accounting principles as promulgated by the NAIC in the Accounting Practices and Procedures Manual; i. SSAP No. 6 Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers ii. iii. iv. SSAP No. 16R Electronic Data Processing Equipment and Software SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements SSAP No. 20 Nonadmitted Assets 2017 National Association of Insurance Commissioners 3

80 Attachment I Ref # v. SSAP No. 21 Other Admitted Assets (e.g., collateral loans secured by assets that do not qualify as investments are nonadmitted under SAP) vi. vii. SSAP No. 29 Prepaid Expenses SSAP No. 105 Working Capital Finance Investments b. Expense costs that are capitalized in accordance with GAAP but are expensed pursuant to statutory accounting as promulgated by the NAIC in the Accounting Practices and Procedures Manual (e.g., deferred policy acquisition costs, preoperating, development and research costs, etc.); c. Adjust depreciation for certain assets in accordance with the following statutory accounting principles: i. SSAP No. 16R Electronic Data Processing Equipment and Software ii. iii. SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements SSAP No. 68 Business Combinations and Goodwill d. Nonadmit the amount of goodwill of the SCA in excess of 10% of the audited U.S. GAAP equity of the SCA s last audited financial statements. e. Nonadmit amount of the net deferred tax assets (DTAs) of the SCA in excess of 10% of the audited U.S. GAAP equity of the SCA s last audited financial statements. f. Nonadmit any surplus notes held by the SCA issued by the reporting entity. g. Adjust the U.S. GAAP annuity account value reserves of a foreign insurance SCA, with respect to the business it wrote directly, using the commissioners' annuity reserve valuation method (CARVM) as defined in paragraphs 14 and 15 of Appendix A-820 (including the reserving provisions in the various Actuarial Guidelines which support CARVM). The valuation interest rate and mortality tables to be used in applying CARVM should be that prescribed by the foreign insurance SCA's country of domicile. If the Foreign SCA s country of domicile does not prescribe the necessary tables and/or rates, no reserve adjustment shall be made. Note that the outcome of these adjustments, as well as guarantees or commitments of the parent entity to provide additional funding, can result in a negative equity valuation of the investment. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): None Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP No. 97 as detailed under Proposed Revisions below. These revisions clarify that the limited statutory adjustments shall apply to all foreign insurance SCAs (8.b.iv entities) regardless of whether they have audited U.S. GAAP or audited U.S. foreign GAAP financial statements. As noted, this is consistent with paragraph 9, so these revisions are intended to just clarify the guidance National Association of Insurance Commissioners 4

81 Attachment I Ref # Proposed Revisions: 8.b.iv Investments in foreign insurance SCA entities shall be recorded based on the underlying U.S. GAAP equity from the audited U.S. GAAP basis financial statements, adjusted to a limited statutory basis of accounting in accordance with paragraph 9, if available. If the audited U.S. GAAP basis financial statements are not available, the investment can be recorded on the audited foreign statutory basis financial statements of the respective entity adjusted to a limited statutory basis of accounting in accordance with paragraph 9 and adjusted for reserves of the foreign insurance SCA with respect to the business it assumes directly and indirectly from a U.S. insurer using the statutory accounting principles promulgated by the NAIC in the Accounting Practices and Procedures Manual. The audited foreign statutory basis financial statements must include an audited footnote that reconciles net income and equity on the foreign statutory basis of accounting to the U.S. GAAP basis. Foreign insurance SCA entities are defined as alien insurers formed according to the legal requirements of a foreign country The limited statutory basis of accounting for investments in noninsurance SCA entities, subject to paragraph 8.b.ii and foreign insurance SCA entities, subject to paragraph 8.b.iv., shall be adjusted for the following: a. Nonadmit assets pursuant to the following statutory accounting principles as promulgated by the NAIC in the Accounting Practices and Procedures Manual; i. SSAP No. 6 Uncollected Premium Balances, Bills Receivable for Premiums, and Amounts Due From Agents and Brokers ii. iii. iv. SSAP No. 16R Electronic Data Processing Equipment and Software SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements SSAP No. 20 Nonadmitted Assets v. SSAP No. 21 Other Admitted Assets (e.g., collateral loans secured by assets that do not qualify as investments are nonadmitted under SAP) vi. vii. SSAP No. 29 Prepaid Expenses SSAP No. 105 Working Capital Finance Investments b. Expense costs that are capitalized in accordance with GAAP but are expensed pursuant to statutory accounting as promulgated by the NAIC in the Accounting Practices and Procedures Manual (e.g., deferred policy acquisition costs, preoperating, development and research costs, etc.); c. Adjust depreciation for certain assets in accordance with the following statutory accounting principles: i. SSAP No. 16R Electronic Data Processing Equipment and Software ii. iii. SSAP No. 19 Furniture, Fixtures, Equipment and Leasehold Improvements SSAP No. 68 Business Combinations and Goodwill d. Nonadmit the amount of goodwill of the SCA in excess of 10% of the audited U.S. GAAP equity of the SCA s last audited financial statements. e. Nonadmit amount of the net deferred tax assets (DTAs) of the SCA in excess of 10% of the audited U.S. GAAP equity of the SCA s last audited financial statements National Association of Insurance Commissioners 5

82 Attachment I Ref # f. Nonadmit any surplus notes held by the SCA issued by the reporting entity. g. Adjust the U.S. GAAP annuity account value reserves of a foreign insurance SCA, with respect to the business it wrote directly, using the commissioners' annuity reserve valuation method (CARVM) as defined in paragraphs 14 and 15 of Appendix A-820 (including the reserving provisions in the various Actuarial Guidelines which support CARVM). The valuation interest rate and mortality tables to be used in applying CARVM should be that prescribed by the foreign insurance SCA's country of domicile. If the Foreign SCA s country of domicile does not prescribe the necessary tables and/or rates, no reserve adjustment shall be made. Staff Review Completed by: Fatima Sediqzad - NAIC Staff June 2017 G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\I SSAP No Foreign Entity Clarification.docx 2017 National Association of Insurance Commissioners 6

83 Attachment J Ref # Issue: Double-Counting of Surplus Notes Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: Surplus notes have the characteristics of both debt and equity. They are used for a variety of reasons, including but not limited to the following: 1) providing regulators with flexibility in dealing with problem situations to attract capital to reporting entities whose surplus levels are deemed inadequate to support their operations; 2) providing a source of capital to mutual and other types of non-stock reporting entities who do not have access to traditional equity markets for capital needs; and 3) providing an alternative source of capital to stock reporting entities, although not for the purpose of initially capitalizing the reporting entity. Surplus notes issued by a reporting entity that are subject to strict control by the commissioner of the reporting entity s state of domicile and have been approved as to form and content shall be reported as surplus, not debt, if the note contains the following provisions: 1) subordination to policyholders; 2) subordination to claimant and beneficiary claims; 3) subordination to all other classes of creditors other than surplus note holders; and 4) interest payments and principal repayments require prior approval of the commissioner of the state of domicile. While SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities (SSAP No. 97) explicitly states that [i]nvestments in common stock, preferred stock and surplus notes are reported separately. Care should be taken to avoid double counting of the separate investments, clarification of what is considered double counting is not provided. The current guidance is specific to a situation in which the SCA issues the surplus note, which is held by the parent, but an SCA holding a surplus note issued by the parent also creates a double-counting situation when the parent reports the investment in the SCA if the investment includes the parent-issued surplus note. The recognition of a surplus note as equity on an issuing entity s financial statements and simultaneous inclusion of the surplus note in the value of the SCA on the issuing entity s financial statements is prohibited. Existing Authoritative Literature: SSAP No. 41R Surplus Notes Holders of Capital or Surplus Notes 9. Investments in capital or surplus notes meet the definition of assets as defined in SSAP No. 4 Assets and Nonadmitted Assets and are admitted assets to the extent they conform to the requirements of this statement. Additionally, the amount admitted is specifically limited to the following two provisions: a. The admitted asset value of a capital or surplus note shall not exceed the amount that would be admitted if the instrument was considered an equity instrument and added to any other equity instruments in the issuer held directly or indirectly by the holder of the capital or surplus note. b. The surplus note shall be nonadmitted if issued by an entity that is subject to any order of liquidation, conservation, rehabilitation or any company action level event based on its risk-based capital. Subsequent to this nonadmittance, if any of the conditions described ceased to exist, the holder may admit the surplus note at the value determined under paragraph 11. If a surplus note was nonadmitted pursuant to this paragraph, and the surplus note was ultimately determined to be other-than-temporarily impaired, the reporting entity shall recognize a realized loss for the 2017 National Association of Insurance Commissioners 1

84 Attachment J Ref # portion of the surplus note determined to be other-than-temporarily impaired, with elimination of a corresponding amount of the previously nonadmitted assets. SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities 18. A reporting entity that owns an interest in itself via direct ownership of shares of an upstream intermediate or ultimate parent shall reduce the value of such shares for the reciprocal ownership. If the shares of the parent are owned indirectly by a reporting entity, via a downstream SCA entity, the directly held entity, which owns the parent s shares, shall have its value reduced for the reciprocal ownership. 19. Any parent reporting entity that owns an interest in itself via either direct or indirect ownership of a downstream affiliate, which in turn owns shares of the parent reporting entity, shall eliminate its interest in these shares from the valuation of such affiliate. Investment in Preferred Stock or Surplus Notes of a Subsidiary, Controlled and Affiliated Entity 27. Investments in common stock, preferred stock and surplus notes are reported separately. Care should be taken to avoid double counting of the separate investments. When the SCA investee has issued multiple equity components such as common stock, preferred stock and/or surplus note(s) the total reported equity of the SCA investee must be separated into the respective components in order to determine the equity attributable to each class. 28. In order to establish the equity value of the common stock investment in an SCA, the reporting entity reduces the total equity of the SCA by the SCA's (issuer s) value of the preferred stock and/or surplus notes on the issuer s balance sheet (not the reporting entity's book/adjusted carrying value for the SCA s preferred stock and/or surplus notes held). 29. Investments in the preferred stock of an SCA shall be accounted for and reported in accordance with the provisions of SSAP No. 32 Preferred Stock (SSAP No. 32). 30. Investments in the surplus notes of an SCA shall be accounted for and reported in accordance with the provisions of SSAP No. 41R Surplus Notes (SSAP No. 41R). 31. The following example is provided to illustrate the accounting and reporting. The reporting entity holds 100% of the preferred stock. The SCA issued the preferred stock for $50,000. The investment in the SCA, measured in accordance with this SSAP is $250,000 including the preferred stock of the SCA. The investment in the SCA is $200,000 ($250,000-50,000) and the preferred stock is measured and reported in accordance with SSAP No. 32. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): None Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive and expose revisions to SSAP Nos. 41R and 97 as detailed below. These revisions clarify that the double-counting concept applies to surplus notes that are issued by the parent and held by an SCA, which is reported as an investment in SCA on the parent s financial statements. (Previously, the double-counting concept was only captured for surplus notes issued by an SCA, but the concept should apply to both scenarios.) The guidance would require elimination of parent-issued surplus notes in a manner similar to equity investments. (It is noted that this guidance is specific to surplus notes (as they are reported as equity) and would not apply to debt instruments issued by the parent and held by the SCA.) 2017 National Association of Insurance Commissioners 2

85 Attachment J Ref # SSAP No. 41R Surplus Notes Holders of Capital or Surplus Notes 9. Investments in capital or surplus notes meet the definition of assets as defined in SSAP No. 4 Assets and Nonadmitted Assets and are admitted assets to the extent they conform to the requirements of this statement. Additionally, the amount admitted is specifically limited to the following two provisions: Impairment a. The admitted asset value of a capital or surplus note shall not exceed the amount that would be admitted if the instrument was considered an equity instrument and added to any other equity instruments in the issuer held directly or indirectly by the holder of the capital or surplus note. b. The surplus note shall be nonadmitted if issued by an entity that is subject to any order of liquidation, conservation, rehabilitation or any company action level event based on its risk-based capital. Subsequent to this nonadmittance, if any of the conditions described ceased to exist, the holder may admit the surplus note at the value determined under paragraph 11. If a surplus note was nonadmitted pursuant to this paragraph, and the surplus note was ultimately determined to be other-than-temporarily impaired, the reporting entity shall recognize a realized loss for the portion of the surplus note determined to be other-than-temporarily impaired, with elimination of a corresponding amount of the previously nonadmitted assets. 17. For surplus notes issued and held between insurance reporting entities and subsidiary, controlled and affiliated entities, the guidance in SSAP No. 97 requires adjustment to prevent double-counting of surplus notes. For example, an insurance reporting entity is not permitted to issue a surplus note, acquired by an SCA, and report both the issuance as an increase in surplus, and an asset representing the investment in the SCA. Pursuant to SSAP No. 97, the investment in the SCA shall be adjusted to eliminate the surplus note issued by the insurance reporting entity. SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities Investment in Preferred Stock or Surplus Notes of a Subsidiary, Controlled and Affiliated Entity 20. Any parent reporting entity that has issued a surplus note, which has been acquired by SCA, shall adjust the investment in the SCA to eliminate the issued surplus note to prevent double counting of the surplus note at the parent reporting entity. Without adjustment, the issued surplus note would be reported both as an increase in surplus by the parent reporting entity, as well as an admitted asset of the parent through the investment in an SCA. Investments in Preferred Stock or Surplus Notes of a Subsidiary Controlled and Affiliated Entity 27. Investments in common stock, preferred stock and surplus notes are reported separately. Care should be taken to avoid double counting of the separate investments. When the SCA investee has issued multiple equity components such as common stock, preferred stock and/or surplus note(s) the total reported equity of the SCA investee must be separated into the respective components in order to determine the equity attributable to each class. 28. In order to establish the equity value of the common stock investment in an SCA, the reporting entity reduces the total equity of the SCA by the SCA's (issuer s) value of the preferred stock and/or surplus notes on the issuer s balance sheet (not the reporting entity's book/adjusted carrying value for the SCA s preferred stock and/or surplus notes held). Staff Review Completed by: Fatima Sediqzad - NAIC Staff, June 2017 G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\J Double-Counting of Surplus Notes.docx 2017 National Association of Insurance Commissioners 3

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87 Attachment K Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: Remove 2009 SSAP No. 43R Implementation Guidance Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: With a recent review of SSAP No. 43R, it was identified that the effective date and transition guidance as well as the implementation guidance continue to reflect guidance that should have been applied with the 2009 effective date. Furthermore, some elements in the implementation guidance have not been updated when guidance was added directly to the SSAP. The revisions proposed in this agenda item are not expected to result with any application changes for investments within scope of SSAP No. 43R. Existing Authoritative Literature: SSAP No. 43R Loan-backed and Structured Securities Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda item considered a new definition of LBSS for inclusion in SSAP No. 43R. The proposed updates within that agenda item were disposed, but the proposed revisions to remove old implementation guidance is captured in this new item. Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None Convergence with International Financial Reporting Standards (IFRS): N/A Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, characterized as nonsubstantive, and expose the following revisions to SSAP No. 43R: 1. Revisions to update the effective date guidance removing explicit guidance on transition from the adoption of the 2009 SSAP No. 43R substantive revisions. 2. Update to the Q&A to remove outdated guidance, mostly pertaining to the 2009 transition, but also removing issues subsequently addressed or revised in the SSAP. As identified, the revisions proposed in this agenda item are not expected to result with any application changes for investments within scope of SSAP No. 43R. Staff Review Completed by: Julie Gann - NAIC Staff, June National Association of Insurance Commissioners 1

88 Attachment K Ref # Proposed Revisions to SSAP No. 43R 2017 Summer National Meeting Exposure: 10. For reporting entities required to maintain an IMR, the accounting for realized capital gains and losses on sales of loan-backed and structured securities shall be in accordance with SSAP No. 7 Asset Valuation Reserve and Interest Maintenance Reserveparagraph 37 of this statement. For reporting entities not required to maintain an IMR, realized gains and losses on sales of loan-backed and structured securities shall be recorded on the trade date and shall be reported as net realized capital gains or losses in the Statement of Income. (Drafting Note: Revised to be consistent with paragraphs 28 and 37.) Unrealized Gains and Losses and Impairment Guidance 28. For reporting entities required to maintain an AVR, the accounting for unrealized gains and losses shall be in accordance with paragraph 37 of this statement. For reporting entities not required to maintain an AVR, unrealized gains and losses shall be recorded as a direct credit or charge to unassigned funds (surplus). 37. For reporting entities required to maintain an AVR or IMR, the accounting for unrealized gains and losses shall be in accordance with paragraph 37.a. For realized gains and losses, the AVR and IMR analysis required and provision to allocate gains and losses between AVR and IMR is the same regardless whether the realized loss results from an impairment write-down or whether there was a gain or loss upon sale. Guidance on specific scenarios resulting in realized gains and losses are addressed in paragraphs 37.b. through 37.f.: a. Unrealized Gains and Losses Record all unrealized gains and losses through AVR. At the time an unrealized gain or loss is realized, the accounting shall follow the premise in paragraph 37, as detailed in paragraphs 37.b. through 37.f. for specific transactions. Unrealized gains or losses that are realized shall be reversed from AVR before the recognition of the realized gain or loss within AVR and IMR. Gains and losses shall only be reflected in IMR when realized and as appropriate based on the analysis of interest and non-interest factors. b. Other-Than-Temporary Impairment Non-interest related other-than-temporary impairment losses shall be recorded through the AVR. If the reporting entity wrote the security down to fair value due to the intent to sell or does not have the intent and ability to retain the investment for a period of time sufficient to recover the amortized cost basis, the non-interest related portion of the other-than-temporary impairment losses shall be recorded through the AVR; the interest related other-than-temporary impairment losses shall be recorded through the IMR. The analysis for bifurcating impairment losses between AVR and IMR shall be completed as of the date when the other-than-temporary impairment is determined. c. Security Sold at a Loss Without Prior OTTI An entity shall bifurcate the loss into AVR and IMR portions depending on interest and non-interest related declines in accordance with the analysis performed as of the date of sale. As such, an entity shall report the loss in separate AVR and IMR components as appropriate. d. Security Sold at a Loss With Prior OTTI An entity shall bifurcate the current realized loss into AVR and IMR portions depending on interest and non-interest related declines in accordance with the analysis performed as of the date of sale. An entity shall not adjust previous allocations to AVR and IMR that resulted from previous recognition of other-than-temporary impairments. e. Security Sold at a Gain With Prior OTTI An entity shall bifurcate the gain into AVR and IMR portions depending on interest and non-interest factors in accordance with the analysis performed as of the date of sale. The bifurcation between AVR and IMR that 2017 National Association of Insurance Commissioners 2

89 2017 National Association of Insurance Commissioners 3 Attachment K Ref # occurs as of the date of sale may be different from the AVR and IMR allocation that occurred at the time of previous other-than-temporary impairments. An entity shall not adjust previous allocations to AVR and IMR that resulted from previous recognition of other-than-temporary impairments. f. Security Sold at a Gain Without Prior OTTI An entity shall bifurcate the gain into AVR and IMR portions depending on interest and non-interest factors in accordance with the analysis performed as of the date of sale. Effective Date and Transition 55. This statement is effective for years beginning January 1, A change resulting from the adoption of this statement shall be accounted for as a change in accounting principle in accordance with SSAP No. 3 Accounting Changes and Corrections of Errors. Subsequent revisions to this SSAP include: a. Substantive revisions pertaining to valuation and impairment based on expected cash flows, as detailed in Issue Paper No. 140, were effective September. 30, (Transition guidance previously included in SSAP No. 43R was removed from the SSAP in the as of 2018 Manual, but is retained for historical purposes in the issue paper.) b. Substantive revisions to incorporate a new method to determine the final NAIC designation were effective, on a prospective basis, for reporting periods ending on or after December. 31, In 2011, revisions were incorporated to this process to be consistent with the Purposes and Procedures Manual of the Investment Analysis Office. These revisions expanded the guidance to explicitly detail the process for financial modeling and modified filing exempt securities. (Drafting Note: The original paragraph in the SSAP referred to the initial RMBS process. The modified filing exempt process was not adopted until The current guidance in SSAP No. 43R does not detail the revisions related to the 2011 adoption. The language shaded above would identify these revisions in the guidance.) c. Nonsubstantive revisions to clarify the accounting for gains and losses between AVR and IMR securities were adopted in June 2010, with a January 1, 2011 effective date, with early application allowed. Reporting entities that had previously bifurcated gains and losses between AVR and IMR for sale transactions were restricted from reversing prior bifurcations and were prohibited from reverting to a process that did not bifurcate gains and losses in the period between adoption and the effective date. d. Nonsubstantive revisions, reflected in paragraph 49, to incorporate guidance from INT 00-11: EITF 98-15: Structured Notes Acquired for a Specified Investment Strategy were effective September 11, e. Nonsubstantive revisions pertaining to the calculation of investment income for prepayment penalty and/or acceleration fees, reflected in paragraph 12, were effective January 1, 2017, on a prospective basis with early application permitted. 56. For securities purchased prior to January 1, 1994, where historical cash flows are not readily available for applying the retrospective method, the reporting entity may use January 1, 1994 as the acquisition date and the then book value as the cost for purposes of determining yield adjustments in future periods. 57. This revised statement (except for the guidance in paragraph 26 inserted in December 2009) supersedes SSAP No. 98 and paragraph 13 of SSAP No. 99 effective September 30, For reporting entities that either early adopted the requirements of SSAP No. 98 or previously adopted a statutory accounting policy that was in accordance with the prescriptions of SSAP No. 98, and if such reporting entities do not intend to sell the security, and have the intent and ability

90 Attachment K Ref # to retain the investment in the security for a period of time sufficient to recover the amortized cost basis, those reporting entities shall recognize the cumulative effect of reversing the impact of the adoption of SSAP No. 98, or an equivalent statutory accounting policy, and paragraph 13 of SSAP No. 99 as an adjustment to the opening balance of unassigned funds (surplus) as of July 1, 2009, with a corresponding adjustment to applicable financial statement elements. 58. The accounting and reporting requirements of this revised statement (except for the guidance in paragraph 26 inserted in December 2009) shall be applied to existing and new investments held by a reporting entity on or after September 30, For loan-backed and structured securities held at the beginning of the interim period of adoption (July 1, 2009) and continue to be held as of September 30, 2009, if a reporting entity does not intend to sell the security, and has the intent and ability to retain the investment in the security for a period of time sufficient to recover the amortized cost basis, the reporting entity shall recognize the cumulative effect of initially applying this revised statement as an adjustment to the opening balance of unassigned funds (surplus) as of July 1, 2009, with a corresponding adjustment to applicable financial statement elements. The cumulative effect on unassigned funds (surplus) shall be calculated by comparing the present value of the cash flows expected to be collected determined in accordance with the methodology in paragraph 34, as applicable, with the amortized cost basis of the loan-backed and structured security as of the beginning of the interim period in which this revised statement is adopted (July 1, 2009). The cumulative-effect adjustment shall include related tax effects. The discount rate used to calculate the present value of the cash flows expected to be collected shall be the rate in effect before recognizing any other-than-temporary impairments and not a rate that has been adjusted to reflect those impairments. 59. The amortized cost basis of a security for which an other-than-temporary impairment was previously recognized shall be adjusted by the amount of the cumulative-effect adjustment before taxes. The difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted as interest income (see paragraph 39). 60. In the period of adoption, an entity shall provide the disclosures required by SSAP No. 3 for changes in accounting principles. 61. In December 2009, guidance in paragraph 26 was inserted and subsequent paragraphs were renumbered. These changes were related to a new method of determining the final NAIC designation. Substantive revisions related to determining the final NAIC designation, are effective for reporting periods ending on or after December 31, Changes related to determining the final NAIC designation will be accounted for on a prospective basis. No cumulative effect adjustments or application of the NAIC designation guidance to prior events or periods are permitted, similar to a change in accounting estimate. 62. In June 2010, nonsubstantive revisions were adopted to paragraphs 28 and 37 to clarify the accounting for gains and losses between AVR and IMR for SSAP No. 43R securities. As illustrated within paragraph 37, the AVR and IMR analysis required and provision to allocate gains and losses between AVR and IMR is the same regardless whether the security is written down as a result of an impairment analysis or whether the security was sold. Although the revisions to paragraphs 28 and 37 are considered nonsubstantive and are in accordance with the communicated intent provided in the Question and Answer Implementation Guide, it was identified that some entities had not correctly interpreted the Question and Answer Implementation Guide and such entities would need to make significant system changes to comply with the AVR and IMR bifurcation requirements for sale transactions. As a result, the revisions to paragraphs 28 and 37 adopted in June 2010 have an effective date of January 1, 2011 with early application allowed. Entities that have previously bifurcated gains and losses between AVR and IMR for sale transactions shall not reverse previous bifurcations, and shall not revert to a process that does not bifurcate gains and losses between AVR and IMR when conducting future sales transactions before the January 1, 2011 effective date. Thus, if an entity bifurcated gains and losses from sale transactions between AVR and IMR any time after the adoption of SSAP No. 43R (September 2009), that entity must continue to bifurcate gains and 2017 National Association of Insurance Commissioners 4

91 Attachment K Ref # losses resulting from sale transactions for SSAP No. 43R securities in accordance with the nonsubstantive revisions to paragraphs 28 and 37 adopted in June The guidance in paragraph 49 was originally contained within INT 00-11: EITF 98-15: Structured Notes Acquired for a Specified Investment Strategy and was effective September 11, Revisions adopted in October 2010 to paragraphs 2, 3 and 4 are effective January 1, The nonsubstantive revisions clarify the definitions of loan-backed and structured securities. 0. The guidance in paragraph 12, with respect to the calculation of investment income for prepayment penalty and/or acceleration fees, is effective January 1, 2017, on a prospective basis and is required for interim and annual reporting periods thereafter. Early application is permitted. REFERENCES Other Purposes and Procedures Manual of the NAIC Investment Analysis Office NAIC Valuation of Securities product prepared by the Securities Valuation Office Relevant Issue Papers Issue Paper No. 43 Loan-Backed and Structured Securities Issue Paper No. 140 Loan-Backed and Structured Securities, Revised September, National Association of Insurance Commissioners 5

92 Attachment K Ref # Appendix A Question and Answer Implementation Guide SSAP No. 43R Loan-Backed and Structured Securities Revised (SSAP No. 43R), with an effective date of September 30, 2009, was issued to provide revised guidance on the accounting and impairment treatment for loan-backed and structured securities. SSAP No. 43R superseded SSAP No. 43 Loanbacked and Structured Securities (SSAP No. 43), SSAP No. 98 Treatment of Cash Flows When Quantifying Changes in Valuations and Impairments, an Amendment of SSAP No. 43 (SSAP No. 98) and paragraph 13 of SSAP No. 99 Accounting for Certain Securities Subsequent to an Other-Than- Temporary Impairment (SSAP No. 99). Questions regarding implementation of SSAP No. 43R were raised by reporting entities, regulators and auditors. It was determined that this Question & Answer Implementation Guide should be issued as an aid in understanding and implementing SSAP No. 43R due to the relatively high number of inquiries received. This Q&A is effective for reporting periods ending on or after December 31, The Statutory Accounting Principles (E) Working Group assumes that industry made their best efforts to adopt the guidance set forth under SSAP No. 43R in the third quarter of The Statutory Accounting Principles (E) Working Group also acknowledges that at year-end 2009 there were many outstanding questions which resulted in this Q&A. It is recommended that any adjustment to the other-than-temporary impairment cumulative effect as a result of this Q&A be reflected in the 2009 Annual Statement with no restatement of the prior quarterly statement.this appendix addresses common questions regarding the valuation and impairment guidance detailed in SSAP No. 43R: Index to Questions: Staff Note: Reference numbers will be updated once revisions are adopted. No. Question 1 Are reporting entities permitted to establish an accounting policy to write down a SSAP No. 43R other-than-temporarily impaired security, for which a non-interest related decline exists, to fair-value regardless of whether the reporting entity intends to sell, or has the intent and ability to hold? 2 Can a reporting entity avoid completing a cash-flow assessment or testing for a specific other-than-temporarily impaired security when the entity believes there is a clear cash-flow shortage (i.e., non-interest related impairment) and elect to recognize a full impairment for the SSAP No. 43R security (no impairment bifurcation), with fair value becoming the new amortized cost basis, and recognition of the full other-than-temporary impairment as a realized loss? 3 Can reporting entities change their intend to sell or unable to hold assertions and recover previously recognized other-than-temporary impairments? 4 Under SSAP No. 43R, in accordance with the cumulative adjustment provisions, is it possible for a previously other-then-temporarily impaired security to be completely unimpaired (not recognized as OTTI)? Drafting Note: Delete Related to Initial Application. 5 How do the regulators intend the phrase intent and ability to hold as used within SSAP No. 43R to be interpreted? 6 How do contractual prepayments affect the determination of credit losses? 2017 National Association of Insurance Commissioners 6

93 No. Question 7 Paragraph 37 states that AVR and IMR should be accounted for in accordance with SSAP No. 7, however paragraph 37 also states that AVR and IMR should be separated into two components if the entity has the intent to sell or does not have the intent and ability to retain the investment for a time sufficient to recover the amortized cost basis. This guidance is different from the treatment when the gain or loss is due to an actual sale and also different from the treatment for SSAP No. 26 investments. When an impairment is recognized, should an entity follow SSAP No. 7 when an investment changes by two or more NAIC categories (i.e., reported entirely in AVR) or stay within the guidance of SSAP No. 43R? Drafting Note: Delete Follow guidance in paragraph 37. Updated in If a security is sold and no previous other-than-temporary impairment was recognized, how should the entity record the loss within AVR and IMR? Drafting Note: Delete Follow guidance in paragraph 37. Updated in If a security with a recognized other-than-temporary impairment is subsequently sold for a gain, how should the gain be recognized within AVR and IMR? Drafting Note: Delete Follow guidance in paragraph 37. Updated in Shall a cumulative effect adjustment be recorded to reflect other-than-temporary impairments for securities for which an other-than-temporary impairment was not previously recorded under SSAP No. 43 or for securities for which an other-than-temporary impairment was previously recorded under SSAP No. 43, but not to the extent required under SSAP No. 43R? Drafting Note: Delete Related to Initial Application. 11 If a reporting entity had previously adopted SSAP No. 98, or had a company policy in accordance with SSAP No. 98, and had previously recognized an other-than-temporary impairment to fair value, if at September 30, 2009, the entity has the intent and ability to retain the security for a period of time to recover the amortized cost, is the entity permitted to make a cumulative effect adjustment to reflect a reversal of the previously recognized loss? Drafting Note: Delete Related to Initial Application. 12 If a reporting entity had previously adopted SSAP No. 98, or had a company policy in accordance with SSAP No. 98, and had previously recognized an other-than-temporary impairment in accordance with SSAP No. 98, if an additional other-than-temporary impairment is necessary under SSAP No. 43R, should the additional other-than-temporary impairment be recognized as part of the cumulative effect adjustment permitted under SSAP No. 43R? Drafting Note: Delete Related to Initial Application. 13 With respect to the calculation of the cumulative effect adjustment, paragraph 58 states the following: The cumulative effect adjustment shall include related tax effects. Because of the interrelated nature of realized gains and losses, AVR and IMR and taxes to AVR and IMR, should the cumulative effect adjustment also be net of AVR and IMR effects? Drafting Note: Delete Related to Initial Application. 14 Are the disclosure requirements within paragraphs 50.f. and 50.g. of SSAP No. 43R required to be completed for the current reporting quarter only, or as a year-to-date cumulative disclosures? 15 If an impairment loss is recognized based on the "present value of projected cash flows" in one period is the entity required to get new cash flows every reporting period subsequent or just in the periods where there has been a significant change in the actual cash flows from projected cash flows? Attachment K Ref # National Association of Insurance Commissioners 7

94 No. Question 16 What disclosure information is required for securities recognized as OTTI on the basis of "present value of projected cash flows," in years subsequent to the OTTI? Drafting Note: Delete The guidance to require disclosure for as long as the security is held was removed in The language in paragraph 50g only requires disclosure for impairments recognized in the current reporting period. 17 Do RMBS LBSS purchased in different lots result in a different NAIC designation for the same CUSIP? Can reporting entities use a weighted average method determined on a legal entity basis? Drafting Note: The designation guidance added in 2009 was originally focused on RMBS only. With the changes added in 2011, which expanded the designation guidance to all securities within scope of SSAP No. 43R, reference to only RMBS is no longer accurate. 18 The NAIC Designation process for RMBS LBSS may incorporate loss expectations that differ from the reporting entity s expectations related to OTTI conclusions. Should the reporting entities be required to incorporate recovery values obtained from data provided by the service provider used for the NAIC Designation process for impairment analysis as required by SSAP No. 43R? Drafting Note: The designation guidance added in 2009 was originally focused on RMBS only. With the changes added in 2011, which expanded the designation guidance to all securities within scope of SSAP No. 43R, reference to only RMBS is no longer accurate. 19 For companies that have separate accounts, can the NAIC designation be assigned based upon the total legal entity or whether it needs to be calculated separately for the general account and the total separate account? 20 Should the initial or final rating be used to determine the AVR/IMR classification on sold securities? 21 Why is the final designation used for the AVR/IMR classification of realized gains and losses on sales? If the initial rating results in a NAIC 6 designation, and the final designation is higher, how does this impact reporting for AVR/IMR? Attachment K Ref # Question - Are reporting entities permitted to establish an accounting policy to write down a SSAP No. 43R other-than-temporarily impaired security, for which a non-interest related decline exists, to fair-value regardless of whether the reporting entity intends to sell, or has the intent and ability to hold? 1.1 Pursuant to the guidance in SSAP No. 43R, optionality is not permitted. As such, an accounting policy that differs from SSAP No. 43R would be considered a departure from statutory accounting principles as prescribed by the NAIC Accounting Practices and Procedures Manual. 2. Question Can a reporting entity avoid completing a cash-flow assessment or testing for a specific other-than-temporarily impaired security when the entity believes there is a clear cash-flow shortage (i.e., non-interest related impairment) and elect to recognize a full impairment for the SSAP No. 43R security (no impairment bifurcation), with fair value becoming the new amortized cost basis, and recognition of the full other-than-temporary impairment as a realized loss? 2.1 Under the basis of SSAP No. 43R, an entity is not permitted to elect a write-down to fair value in lieu of assessing cash flows and bifurcating interest and non-interest impairment components. As noted in paragraph 33, if the entity does not have the intent to sell, and has the intent and ability to hold, but does not expect to recover the entire amortized cost basis of the security, the entity shall compare the present value of cash flows expected to be collected with the amortized cost basis of the security. If present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered (a non-interest decline exists) and an other-than-temporary impairment shall be considered to have occurred. Pursuant to paragraph 36, when 2017 National Association of Insurance Commissioners 8

95 Attachment K Ref # an other-than-temporary impairment has occurred because the entity does not expect to recover the entire amortized cost basis of the security even if the entity has no intent to sell and the entity has the intent and ability to hold, the amount of the other-than-temporary impairment recognized as a realized loss shall equal the difference between the investment s amortized cost basis and the present value of cash flows expected to be collected, discounted at the loan-backed or structured security s effective interest rate. 2.2 If the entity does not want to assess cash flows of an impaired security (fair value is less than amortized cost), the entity can designate the security as one the entity intends to sell, or one that the entity does not have the intent and ability to hold, providing it is reflective of the true intent and assessment of the ability of the entity. Once an impaired security has this designation, pursuant to paragraphs 31 or 32, an other-than-temporary impairment shall be considered to have occurred. As detailed in paragraph 35, the amount of the other-than-temporary impairment recognized in earnings as a realized loss shall equal the entire difference between the investment s amortized cost basis and its fair value at the balance sheet date. 2.3 As addressed in question 3 of this Question and Answer Guide, reporting entities are not permitted to change assertions regarding their intent to sell or their lack of intent and ability to hold. Once the security has been identified as one the entity intends to sell, or as a security that the entity does not have the intent and ability to hold, that assertion shall not change as long as the entity continues to hold the security. 3. Question - Can reporting entities change their intend to sell or unable to hold assertions and recover previously recognized other-than-temporary impairments? 3.1 No, a reporting entity is not permitted to change assertions and reverse previously recognized SSAP No. 43R other-than-temporary impairments. Although an entity may elect to hold a security due to a favorable change in the security s fair value, once the security has been identified as one the entity intends to sell, or as a security that the entity does not have the intent and ability to hold for purposes of initially recognizing an other-than-temporary impairment, that assertion shall not change as long as the entity continues to hold the security. 3.2 Reporting entities that have recognized an other-than-temporary impairment on a SSAP No. 43R security in a manner corresponding with an assertion on the intent to sell or the lack of the intent and ability to hold, for which a subsequent other-than-temporary impairment has been identified, shall recognize a realized loss for the difference between the current amortized cost (reflecting the previously recognized SSAP No. 43R other-than-temporary impairment) and the fair value at the balance sheet date of the subsequent impairment. Thus, bifurcation of impairment between interest and non-interest related declines is not permitted for securities in which an other-than-temporary impairment was previously recognized on the basis that the reporting entity had the intent to sell, or lacked the intent and ability to hold, regardless if the entity has subsequently decided to hold the security. 3.3 Reporting entities shall reclassify a security as one for which there is an intent to sell, or for which there is not an intent or ability to hold, regardless if a bifurcated other-than-temporary impairment had previously been recognized, as soon as the entity realizes that they can no longer support a previous assertion to hold the security. In making such reclassifications, if the security is impaired, the difference between the amortized cost (reflecting the initial non-interest other-than-temporary impairment recognized) and fair value at the balance sheet date of the reclassification shall be recognized as a realized loss, with fair value reflecting the new amortized cost basis. Once such a reclassification occurs, and the security is classified as one for which there is an intent to sell, or for which there is not an intent and ability to hold, the security must continue to carry that assertion until it is no longer held by the reporting entity. 4. Question Under SSAP No. 43R, in accordance with the cumulative adjustment provisions, is it possible for a previously other-then-temporarily impaired security to be completely unimpaired (not recognized as OTTI)? 2017 National Association of Insurance Commissioners 9

96 Attachment K Ref # Yes, a security that was previously determined to be other-than-temporarily impaired may be completely unimpaired under SSAP No. 43R if the other-than-temporary impairment is determined to be 100% interest related upon adoption. If there is any aspect of non-interest impairment (present value of cash flows expected to be collected is less than amortized cost) then the security would continue to be considered other-than-temporarily impaired under SSAP No. 43R. The amount recognized as a realized loss, if applicable, has changed. (Please refer to the cumulative effect adjustment guidance.) 4.2 Although INT 06-07: Definition of Phrase Other Than Temporary (INT 06-07) did not require a security to be considered other-than-temporarily impaired if the impairment was 100% caused by interest related declines, it has been identified that reporting entities may have been compelled to write-down such securities as other-than-temporarily impaired due to the time and/or extent to which the security had been impaired. Thus, in these instances, if there is no non-interest related decline, and the reporting entity does not have the intent to sell and has the intent and ability to hold until recovery of the amortized cost basis, then under the SSAP No. 43R cumulative effect transition provisions, such securities will be completely unimpaired (not recognized as OTTI). 5. Question How do the regulators intend the phrase intent and ability to hold as used within SSAP No. 43R to be interpreted? 5.1 SSAP No. 43R paragraph 32 states in part the entity shall assess whether it has the intent and ability to retain the investment in the security for a period of time sufficient to recover the amortized cost basis. If the entity does not have the intent and ability to retain the investment for the time sufficient to recover the amortized cost basis, an other-than-temporary impairment shall be considered to have occurred. 5.2 The intent of this language within SSAP No. 43R is focused on ensuring that, as of the balance sheet date, after considering the entity s own cash or working capital requirements and contractual or regulatory obligations and all known facts and circumstances related to the impaired security, the entity does not have the intention of selling the impaired security and has the current intent and ability to hold the security to recovery. Due to impairment bifurcation provisions provided within SSAP No. 43R, and the amortized cost measurement method generally permitted for loan-backed and structured securities, the assessment of intent and ability is intended to be a high standard. Despite the intent of paragraph 32, it is identified that information not known to the entity may become known in subsequent periods and/or facts and circumstances related to an individual holding or group of holdings may change thereby influencing the entity s subsequent determination of intent and ability with respect to a security or securities. 5.3 If a reporting entity asserts that it has the intent and ability to hold a security, or group of securities, until recovery of the amortized cost, but sells or otherwise disposes the security or securities prior to such recovery, the reporting entity shall be prepared to justify this departure from their original assertion to examiners and auditors. SSAP No. 43R purposely does not identify specific circumstances in which a change in assertion would be justifiable, but requires judgment from management, examiners and auditors on whether future assertions warrant closer review. 5.4 Delaying recognition of other-than-temporary impairments is a cause of serious concern by the regulators, and entities that habitually delay such recognition through false assertions on the intent and ability to hold may face increased scrutiny and regulatory action by their domiciliary state. It is imperative that a reporting entity recognize the full other-than-temporary impairment as soon as the entity realizes that they will no longer be able to hold the security until recovery of the amortized cost basis. Greater scrutiny shall be placed on securities sold or otherwise disposed shortly after a financial statement reporting date if such securities had been excluded from the full other-than-temporary impairment recognition on the basis of the reporting entity s intent and ability to hold. 5.5 As noted in paragraph 3.3 of this question and answer guide, once a security is classified as one for which there is an intent to sell, or for which there is not an intent and ability to hold, the security must continue to carry that assertion until the security is no longer held by the reporting entity National Association of Insurance Commissioners 10

97 6. Question How do contractual prepayments affect the determination of credit losses? Attachment K Ref # Paragraph 33 of SSAP No. 43R states that "A decrease in cash flows expected to be collected on a loan-backed or structured security that results from an increase in prepayments on the underlying assets shall be considered in the estimate of present value of cash flows expected to be collected. Paragraph 15 states that "Loan-backed and structured securities shall be revalued using the currently estimated cash flows, including new prepayment assumptions, using either the prospective or retrospective adjustment methodologies consistently applied by type of securities." 6.2 The language in paragraph 33 is consistent with GAAP, and the GAAP guidance related to the treatment of prepayments in the consideration of credit losses was intended to provide clarification for determining the "cash flows expected to be collected" on interest-only securities and other similar securities that can be contractually prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment. These securities are generally accounted for in accordance with paragraphs of SSAP No. 43R, which requires that an entity estimate cash flows expected to be collected including both amount and timing. Therefore, for securities under SSAP No. 43R, excluding those accounted for under paragraphs 18-24, decreases in cash flows resulting in contractual prepayments should be considered yield adjustments rather than potential credit losses. 7. Question Paragraph 37 states that AVR and IMR should be accounted for in accordance with SSAP No. 7, however paragraph 37 also states that AVR and IMR should be separated into two components if the entity has the intent to sell or does not have the intent and ability to retain the investment for a time sufficient to recover the amortized cost basis. This guidance is different from the treatment when the gain or loss is due to an actual sale and also different from the treatment for SSAP No. 26 investments. When an impairment is recognized, should an entity follow SSAP No. 7 when an investment changes by two or more NAIC categories (i.e., reported entirely in AVR) or stay within the guidance of SSAP No. 43R? 7.1 SSAP No. 43R includes specific guidance on the treatment for AVR and IMR of other-thantemporary impairment losses which indicates that an entity should bifurcate the loss into AVR and IMR portions depending on whether it is an interest or a non-interest related decline. It was the Statutory Accounting Principles (E) Working Group s intention that for those securities subject to SSAP No. 43R, an entity should report the gain or loss in separate AVR and IMR components regardless of whether the NAIC designation of the security has changed by two or more NAIC designations. The Statutory Accounting Principles (E) Working Group acknowledges that the actual language of SSAP No. 43R is inconsistent and not explicit on this point. In addition, the Statutory Accounting Principles (E) Working Group also notes that due to the rapid adoption of SSAP No. 43R, the annual statement instructions were not fully updated. As a result, a Form A and updates to the annual statement instructions are being prepared for 2010 review. The Form A and updates will address the issue of bifurcation of gains or losses on sales between AVR and IMR for those securities subject to SSAP No. 43R. Appropriate disclosures will also be included in the Form A. In June 2010, nonsubstantive revisions were adopted to paragraphs 28 and 37 to clarify the bifurcation of gains and losses between AVR and IMR. Guidance on the effective date for these nonsubstantive revisions is included within paragraph Question If a security is sold and no previous other-than-temporary impairment was recognized, how should the entity record the loss within AVR and IMR? 8.1 As noted in paragraph 7.1, it was intended that reporting entities shall follow the guidance in SSAP No. 43R that indicates an entity shall bifurcate the loss into AVR and IMR portions depending on interest and non-interest related declines. As such, an entity should report the loss in separate AVR and IMR components as appropriate. The AVR/IMR analysis performed, and resulting AVR/IMR allocation, for SSAP No. 43R securities should be same regardless whether the security is written down as a result of an impairment analysis or whether the security was sold without any impairment. A Form A is being prepared to more directly address this issue in SSAP No. 43R. In June 2010, nonsubstantive revisions were adopted to paragraphs 28 and 37 to clarify the bifurcation of gains and losses between AVR and IMR. Guidance on the effective date for these nonsubstantive revisions is included within paragraph National Association of Insurance Commissioners 11

98 Attachment K Ref # Question If a security with a recognized other-than-temporary impairment is subsequently sold for a gain, how should the gain be recognized within AVR and IMR? 9.1 As noted in paragraph 7.1, it was intended that reporting entities that recognize an other-thantemporary impairment for securities within SSAP No. 43R that subsequently sell such securities for a gain, shall recognize the gain proportionately through AVR and IMR relative to analysis performed of the gain at the date of the sale. A Form A is being prepared to more directly address this issue in SSAP No. 43R. In June 2010, nonsubstantive revisions were adopted to paragraphs 28 and 37 to clarify the bifurcation of gains and losses between AVR and IMR. Guidance on the effective date for these nonsubstantive revisions is included within paragraph Question Shall a cumulative effect adjustment be recorded to reflect other-than-temporary impairments for securities for which an other-than-temporary impairment was not previously recorded under SSAP No. 43 or for securities for which an other-than-temporary impairment was previously recorded under SSAP No. 43, but not to the extent required under SSAP No. 43R? 10.1 Paragraph 58 of SSAP No. 43R states that the cumulative effect applies to securities for which an other-than-temporary impairment was previously recognized under SSAP No. 43. Does this imply that no cumulative effect should be recorded for securities for which an impairment was not previously recorded, and therefore any credit related impairment prior to July 1, 2009 is recorded in 3Q 2009 earnings? The following facts are provided to illustrate this scenario: At 6/30 the insurer owns a security whose fair value is less than cost and has undiscounted cash flows of $97. A $3 impairment is recorded. At 7/1 discounted cash flows (under SSAP No. 43R) are calculated as $90. The difference of $7 ($97-90) is recorded as a cumulative adjustment as required by SSAP No. 43R. At 6/30 the insurer owns a security whose fair value is less than cost but has undiscounted expected cash flows of $101. Therefore, no impairment is recorded. At 7/1 discounted cash flows (under SSAP No. 43R) are calculated as $90. Is the difference of $10 ($100-$90) recorded as a cumulative adjustment or does it get recorded as an impairment through earnings for the quarter ended 9/30/09? 10.2 The Statutory Accounting Principles (E) Working Group has concluded that in both cases a cumulative adjustment shall be recorded. If not, in the first example, a company that recognized a small impairment under SSAP No. 43 would not have to recognize any additional pre-7/1/09 credit-related impairment in their income statement, while in the second case, a company that did not happen to trigger an impairment under SSAP No. 43 would be required to recognize the entire pre-7/1/09 credit-related impairment in their 2009 income statement Recording cumulative adjustments for both scenarios is consistent with SSAP No. 3 Accounting Changes and Corrections of Errors (SSAP No. 3). SSAP No. 3 states that a change in accounting principle results from an adoption of an accepted accounting principle, or method of applying the principle The cumulative effect of changes in accounting principles shall be reported as adjustments to unassigned funds (surplus) in the period of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at that date if the new accounting principle had been applied retroactively for all prior periods. As a result of this Q&A item, the following nonsubstantive revisions have been made to paragraphs 57 and 58 of SSAP No. 43R as follows: 56. This revised statement supersedes SSAP No. 98 and paragraph 13 of SSAP No. 99 effective September 30, For reporting entities that either early adopted the requirements of SSAP No. 98 or previously adopted a statutory accounting policy that was in accordance with the prescriptions of SSAP No. 98, and if such reporting entities do not intend to sell the security, and have the intent and ability to retain the investment in the security for a period of time sufficient to 2017 National Association of Insurance Commissioners 12

99 Attachment K Ref # recover the amortized cost basis, those reporting entities shall recognize the cumulative effect of reversing the impact of the adoption of SSAP No. 98, or an equivalent statutory accounting policy, and paragraph 13 of SSAP No. 99 as an adjustment to the opening balance of unassigned funds (surplus) as of July 1, 2009, with a corresponding adjustment to applicable financial statement elements. 57. The accounting and reporting requirements of this revised statement shall be applied to existing and new investments held by a reporting entity on or after September 30, For loanbacked and structured securities held at the beginning of the interim period of adoption (July 1, 2009) and continue to be held as of September 30, 2009, if a reporting entity does not intend to sell the security, and has the intent and ability to retain the investment in the security for a period of time sufficient to recover the amortized cost basis, the reporting entity shall recognize the cumulative effect of initially applying this revised statement as an adjustment to the opening balance of unassigned funds (surplus) as of July 1, 2009, with a corresponding adjustment to applicable financial statement elements. The cumulative effect on unassigned funds (surplus) shall be calculated by comparing the present value of the cash flows expected to be collected determined in accordance with the methodology in paragraph 34, as applicable, with the amortized cost basis of the loan-backed and structured security as of the beginning of the interim period in which this revised statement is adopted (July 1, 2009). The cumulative-effect adjustment shall include related tax effects. The discount rate used to calculate the present value of the cash flows expected to be collected shall be the rate in effect before recognizing any other-thantemporary impairments and not a rate that has been adjusted to reflect those impairments. 11. Question If a reporting entity had previously adopted SSAP No. 98, or had a company policy in accordance with SSAP No. 98, and had previously recognized an other-than-temporary impairment to fair value, if at September 30, 2009, the entity has the intent and ability to retain the security for a period of time to recover the amortized cost, is the entity permitted to make a cumulative effect adjustment to reflect a reversal of the previously recognized loss? 11.1 Yes, under the cumulative effect guidance within SSAP No. 43R the entity shall reflect a reversal of the previously recognized loss so that only any non-interest other-than-temporary impairment, determined by comparing the present value of cash flows expected to be collected with the amortized cost of the security, is reflected within the financial statements. (See question 4 regarding whether a previously recognized other-than-temporary impairment can be completely unimpaired.) 12. Question If a reporting entity had previously adopted SSAP No. 98, or had a company policy in accordance with SSAP No. 98, and had previously recognized an other-than-temporary impairment in accordance with SSAP No. 98, if an additional other-than-temporary impairment is necessary under SSAP No. 43R, should the additional other-than-temporary impairment be recognized as part of the cumulative effect adjustment permitted under SSAP No. 43R? 12.1 To further elaborate on this question, assume that an entity early adopted SSAP No. 98 or had an accounting policy similar to SSAP No. 98, and, for a particular security, the entity had previously recognized an other-than-temporary impairment. Assume, at September 30, 2009, the entity has the intent and ability to retain the security for a period of time sufficient to recover the amortized cost. Under SSAP No. 43R, should the cumulative catch-up adjustment recorded to unassigned funds (surplus) as of July 1, 2009 be only the amount required to reverse the previously recognized loss, or does the entity make the adjustment for the amount necessary to recognize the impairment in accordance with the requirements of SSAP No. 43R? The following facts are provided to illustrate this scenario: o Fair Value at 7/1/09 $75 o PV of Expected Cash Flows at 7/1/09 $90 o Amortized Cost at 7/1/09 $100 o Impairment Under SSAP No. 98 Previously Recognized $25 o Cumulative Catch Adjustment if Apply Only Paragraph 57 $25 o Cumulative Catch Adjustment if Apply Paragraphs 57 and 58 $ National Association of Insurance Commissioners 13

100 Attachment K Ref # The cumulative effect recorded by the entity relative to this previously impaired security would be the amount necessary to adjust surplus as of July 1 to what it would have been had the requirements of SSAP No. 43R been applied as of that date. Therefore, in this example the cumulative effect adjustment (prior to the impact of related taxes and AVR and IMR, if any) is $15. Please note the emphasis as of July 1. If an additional other-than-temporary impairment is recognized during the third-quarter, this additional other-than-temporary impairment would not be included in the cumulative effect, but would be reflected as a recognized loss within the third-quarter financials. 13. Question With respect to the calculation of the cumulative effect adjustment, paragraph 58 states the following: The cumulative effect adjustment shall include related tax effects. Because of the interrelated nature of realized gains and losses, AVR and IMR and taxes to AVR and IMR, should the cumulative effect adjustment also be net of AVR and IMR effects? 13.1 Yes. The impact of a cumulative effect adjustment of a new accounting standard typically reflects the net impact of adoption. Accordingly, the cumulative effect adjustment from adopting SSAP No. 43R should be presented net of taxes, AVR and IMR. Alternatively, the cumulative effect may exclude AVR and IMR impact if the AVR and IMR impact is reflected in applicable financial statement elements and the impact is reflected in capital and surplus. 14. Question Are the disclosure requirements within paragraphs 50.f. and 50.g. of SSAP No. 43R required to be completed for the current reporting quarter only, or as a year-to-date cumulative disclosures? 14.1 The disclosures should reflect the year-to-date other-than-temporary impairments. The fair value reported within the disclosure is intended to reflect the fair value at the date of the other-thantemporary impairment, and shall not be updated due to the fluctuations identified at subsequent reporting dates. If a security has more than one other-than-temporary impairment identified during a fiscal reporting year, the security shall be included on the disclosure listing separately for each identified other-thantemporary impairment. Notation shall be included on the disclosure identifying the other-than-temporary impairments that were recognized for each respective reporting period. (Please note that question 16 addresses subsequent year disclosure for OTTI securities that continue to be held.) 15. Question If an impairment loss is recognized based on the "present value of projected cash flows" in one period is the entity required to get new cash flows every reporting period subsequent or just in the periods where there has been a significant change in the actual cash flows from projected cash flows? 15.1 The guidance in paragraph 39 of SSAP No. 43R indicates that a reporting entity shall continue to estimate the present value of cash flows expected to be collected over the life of the loan-backed or structured security. This guidance is explicit that the reporting entity shall continue to estimate the present value of cash flows expected to be collected over the life of the loan-backed or structured security As provided in paragraph 2.2 of this Q&A, if the entity does not want to assess cash flows of an impaired security (fair value is less than amortized cost), the entity can designate the security as one the entity intends to sell, or one that the entity does not have the intent and ability to hold, providing it is reflective of the true intent and assessment of the ability of the entity. Reporting entities subject to the requirements of AVR and IMR should allocate the impairment loss between AVR and IMR accordingly. 16. Question What disclosure information is required for securities recognized as OTTI on the basis of "present value of projected cash flows," in years subsequent to the OTTI? 16.1 Paragraph 50.g. is explicit that disclosure shall continue to occur for securities with other-thantemporary impairments that continue to be held by the reporting entity. As such, disclosure must continue in all future reporting periods, even over subsequent years, for which the security continues to be held National Association of Insurance Commissioners 14

101 Attachment K Ref # Question Do RMBS LBSS purchased in different lots result in a different NAIC designation for the same CUSIP? Can reporting entities use a weighted average method determined on a legal entity basis? 17.1 SSAP No. 43R and several other statements of statutory accounting principle require use of the scientific (constant yield) method of amortization. In addition to purchase price, the purchase date is an inherent part of this method and will typically result in different amortization values for different lots. Therefore, RMBS LBSS in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. Specific to the RMBS proposal only, for year-end 2009 and until an alternative long-term solution is developed, if companies' accounting and reporting systems do not accommodate this approach, a weighted-average method on a legal entity basis can be used. To the extent that a different accounting method applies to a legal entity's general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account. 18. Question The NAIC Designation process for RMBS LBSS may incorporate loss expectations that differ from the reporting entity s expectations related to OTTI conclusions. Should the reporting entities be required to incorporate recovery values obtained from data provided by the service provider used for the NAIC Designation process for impairment analysis as required by SSAP No. 43R? 18.1 In accordance with INT 06-07: Definition of Phrase Other Than Temporary, reporting entities are expected to consider all available evidence at their disposal, including the information that can be derived from the NAIC designation. 19. Question - For companies that have separate accounts, can the NAIC designation be assigned based upon the total legal entity or whether it needs to be calculated separately for the general account and the total separate account? 19.1 The answer to this question is identical to the answer for question 17. SSAP No. 43R and several other statements of statutory accounting principle require use of the scientific (constant yield) method of amortization. In addition to purchase price, the purchase date is an inherent part of this method and will typically result in different amortization values for different lots. Therefore, RMBS LBSS in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. Specific to the RMBS proposal only, for year-end 2009 and until an alternative long-term solution is developed, if companies' accounting and reporting systems do not accommodate this approach, a weighted-average method on a legal entity basis can be used. To the extent that a different accounting method applies to a legal entity's general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account. 20. Question - Should the initial or final designation be used to determine the AVR/IMR classification on sold securities? 20.1 The final designation should be utilized to determine the AVR/IMR classification on sold securities. 21. Question - Why is the final designation used for the AVR/IMR classification of realized gains and losses on sales? If the initial designation results in a NAIC 6 designation and the final designation is higher, how does this impact reporting for AVR/IMR? 21.1 With regards for AVR/IMR determination and other reporting purposes, the FINAL designation, after application of the multi-step method described in paragraph 26, shall be used. The initial designation, which is not used for any reporting purposes except for determining the carrying value method as described in paragraph 25, is only an interim step in determining the (final) NAIC designation. However, as noted in paragraph 26, securities assigned an NAIC 6 designation are not modified by the 2017 National Association of Insurance Commissioners 15

102 Attachment K Ref # carrying value; therefore the final designation is also an NAIC 6. The same is true for securities assigned an NAIC 1 designation by the SVO. As NAIC 1 securities are assumed to have zero expected loss, the initial designation is not modified by the carrying value; therefore the final designation is also an NAIC 1. (Please see paragraph 26 and related subparagraphs for additional information related to the multi-step method.) G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\K R Clean Up.docx 2017 National Association of Insurance Commissioners 16

103 Attachment L Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: Wash Sales Involving Money Market Mutual Funds Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: In accordance with the 2014 SEC adopted final rules governing the structure and operation of money market mutual funds, IRS revisions were also adopted to exempt the redemption of shares in a MMMF as part of a wash sale for purposes of Section 1091 of the Internal Revenue Code. Section 1091 disallows a loss realized by a taxpayer on a sale or other disposition of shares of stock or securities, if, within a period beginning 30 days before and ending 30 days after the date of such sale or disposition, the taxpayer acquires, or enters into a contract or option to acquire, substantially identical stock or securities. The taxpayer generally retains its old basis in the acquired stock or securities in order to preserve the loss. Because MMMF have historically maintained a stable ($1.00) NAV, redemptions of MMMF have not been subject to wash sale rules, because with a constant price, redeeming shareholders could not recognize a loss. Under the SEC rules, effective October 14, 2016, institutional prime money market funds are required to report a floating net asset value (NAV) instead of a stable net asset value (NAV). A redemption of shares in a MMMF that has a floating NAV could produce a loss and potentially implicate the IRS wash sale rules. The IRS exemption (Revenue Procedure ), effective July 8, 2016, was determined appropriate as the perceived safety and simplicity of MMMFs has led to widespread use for cash management purposes, and it is common for investors to purchase and redeem MMMF shares frequently. A MMMF is often used as an account into which, or from which, cash is automatically deposited, or withdrawn, on a daily basis (commonly referred to as a sweep account). MMMFs generally declare dividends daily and distribute them monthly, with MMMF shareholders typically reinvesting the distributions automatically into the MMMF. The IRS also noted that the share-prices of floating NAV MMMFs will be relatively stable and that monitoring floating-nav MMMF transactions for wash sales would be unreasonably burdensome. To qualify for the exception, the share issuer must be a regulated as a MMMF under Rule 2a-7 under the Investment Company Act of 1940, hold itself out to investors as a MMMF, and be a floating-nav MMMF. Definition of a Wash Sale from SEC website: A wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale you: Buy substantially identical securities, Acquire substantially identical securities in a fully taxable trade, or Acquire a contract or option to buy substantially identical securities. Staff Note: There is no definition for a wash sale and there are limited references to wash sales in the FASB Codification. Staff believes the concept of a wash sale is more relevant to the SEC and IRS guidance, and revisions to clarify whether acquisition/dispositions of MMMF as wash sales is not expected in U.S. GAAP National Association of Insurance Commissioners 1

104 Attachment L Ref # Existing Authoritative Literature: Guidance in SSAP No. 2R was adopted to provide revised guidance for the accounting and reporting of MMMFs in response to the SEC adopted final rules. This guidance indicates that effective Dec. 31, 2017, all MMMFs regulated by Section 2a-7 of the Investment Company Act of 1940 are considered cash equivalents and reported at fair value, allowing net asset value (NAV) as a practical expedient: SSAP No. 2R Cash, Cash Equivalents Drafts and Short-Term Investments: Cash Equivalents 6. Cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Only investments with original maturities of three months or less qualify under this definition, with the exception of money market mutual funds, as detailed in paragraph 7. Securities with terms that are reset at predefined dates (e.g., an auction-rate security that has a long-term maturity and an interest rate that is regularly reset through a Dutch auction) or have other features an investor may believe results in a different term than the related contractual maturity shall be accounted for based on the contractual maturity at the date of acquisition, except where other specific rules within the statutory accounting framework currently exist. 7. Money market mutual funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7 of the Act shall be accounted for and reported as cash equivalents for statutory accounting. Investments in money market mutual funds shall be valued at fair value or net asset value (NAV) as a practical expedient. For reporting entities required to maintain an asset valuation reserve (AVR), the accounting for unrealized capital gains and losses shall be in accordance with SSAP No. 7 Asset Valuation Reserve and Interest Maintenance Reserve (SSAP No. 7). For reporting entities not required to maintain an AVR, unrealized capital gains and losses shall be recorded as a direct credit or charge to surplus. Guidance in SSAP No. 103R provides the definition for wash sales as well as disclosure requirements. SSAP No. 103R Transfers and Servicing of Financial Assets and Extinguishments of Liabilities 12. Repurchase agreements, reverse repurchase agreements, repurchase financing, collateral requirements and dollar repurchase agreements are described in paragraphs When an asset is sold and the proceeds are reinvested within 30 days in the same or substantially the same security, such transfers shall be considered to be wash sales and shall be accounted for as sales as discussed in paragraphs and disclosed as required by paragraph 28. Unless there is a concurrent contract to repurchase or redeem the transferred financial assets from the transferee, the transferor does not maintain effective control over the transferred financial assets. 28.l. A reporting entity shall disclose the following information for wash sales, as defined in paragraph 12, involving transactions for securities with a NAIC designation of 3 or below, or that do not have an NAIC designation: i. A description of the reporting entity s objectives regarding these transactions; ii. iii. iv. An aggregation of transactions by NAIC designation 3 or below, or that do not have an NAIC designation; The number of transactions involved during the reporting period; The book value of securities sold; v. The cost of securities repurchased; and 2017 National Association of Insurance Commissioners 2

105 Attachment L Ref # vi. The realized gains/losses associated with the securities involved. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda Item Adopted substantive revisions (reflected in SSAP No. 2R) reclassifying money market mutual funds as cash equivalents. Agenda Item Adopted revisions (reflected in SSAP No. 2R) to require fair value, or net asset value as a practical expedient, for all money market mutual funds. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None. Staff Recommendation: It is recommended that the Working Group move this agenda item to the active listing, categorized as nonsubstantive, and expose draft revisions to clarify that acquisitions / disposals of shares in money market mutual funds are not subject to the SSAP No. 103R wash sale disclosure. Similar to the rationale provided for the IRS exemption, redemption of shares in MMMFs are expected to have relatively stable values even when share prices float, and with the expected volume of transactions in floating-nav MMMF, tracking wash sales of MMMF will present significant practical challenges. Although this agenda item was drafted to specifically consider MMMF, NAIC staff requests comments on whether all short-term investments and cash equivalents should be excluded from the wash sale disclosure. As detailed in SSAP No. 103R, paragraph 28.l. the disclosure involving wash sales is only required for investments with NAIC designations of 3 or below or if the investment does not have an NAIC designation. As short-term investments and cash equivalents are not reported with NAIC designations, investments within these categories would always be captured if a company was to sell / reacquire within 30-days. NAIC staff also requests comments on whether wash sale disclosures would be beneficial for investments with an NAIC 1-2 designation (as those are not currently captured in the disclosure), and whether information on all wash sales involving securities reported on Schedule D-2-2 is beneficial to the regulators. (Common stock / mutual funds reported on D-2-2 do not have NAIC designations, therefore these would always be captured in the disclosure.) Proposed Revisions to SSAP No. 2R: 6. Money market mutual funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7 of the Act shall be accounted for and reported as cash equivalents for statutory accounting. Investments in money market mutual funds shall be valued at fair value or net asset value (NAV) as a practical expedient. For reporting entities required to maintain an asset valuation reserve (AVR), the accounting for unrealized capital gains and losses shall be in accordance with SSAP No. 7 Asset Valuation Reserve and Interest Maintenance Reserve (SSAP No. 7). For reporting entities not required to maintain an AVR, unrealized capital gains and losses shall be recorded as a direct credit or charge to surplus. Sales / reinvestments in money market mutual funds are excluded from the wash sale disclosure in SSAP No. 103R. Proposed Revisions to SSAP No. 103R: 12. Repurchase agreements, reverse repurchase agreements, repurchase financing, collateral requirements and dollar repurchase agreements are described in paragraphs When an asset is sold and the proceeds are reinvested within 30 days in the same or substantially the same security, such transfers shall be considered to be wash sales and shall be accounted for as sales as discussed in paragraphs and disclosed as required by paragraph Unless 1 Money market mutual funds are excluded from the wash sale disclosure National Association of Insurance Commissioners 3

106 Attachment L Ref # there is a concurrent contract to repurchase or redeem the transferred financial assets from the transferee, the transferor does not maintain effective control over the transferred financial assets. 28.l. A reporting entity shall disclose the following information for wash sales, as defined in paragraph 12, involving transactions for securities with a NAIC designation of 3 or below, or that do not have an NAIC designation (excluding money market mutual funds): i. A description of the reporting entity s objectives regarding these transactions; ii. iii. iv. An aggregation of transactions by NAIC designation 3 or below, or that do not have an NAIC designation; The number of transactions involved during the reporting period; The book value of securities sold; v. The cost of securities repurchased; and vi. The realized gains/losses associated with the securities involved. G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\L MMMF Wash Sales.docx 2017 National Association of Insurance Commissioners 4

107 Attachment M Ref # Issue: Use of Net Asset Value instead of Fair Value Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: In 2009 and 2015 the FASB issued guidance regarding a practical expedient to measure the fair value of an investment on the basis of net asset value (NAV) per share of the investment (or its equivalent). This agenda item considers the following two ASUs for statutory accounting, and proposes specific guidance and reporting revision to clarify when NAV is permitted to be used, and how NAV shall be reported in the investment schedules / related disclosures. ASU Investments in Certain Entities that Calculate Net Asset Value Per Share (or Its Equivalent) ASU Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or Its Equivalent) ASU : This ASU amended FASB Subtopic , Fair Value Measurement and Disclosures Overall, to permit, as a practical expedient, a reporting entity to measure the fair value of an investment, if certain conditions were met, on the basis of NAV per share of the investment (or its equivalent) if the NAV of the investment is calculated in a manner consistent with the measurement principles of FASB Topic 946: Financial Services Investment Companies. The ASU specified that the investments captured within the revisions (reported at NAV) would be classified as either Level 2 or Level 3 of the fair value hierarchy, depending on whether the reporting entity had the ability to redeem the investment at NAV. (If the reporting entity could redeem at NAV, the investment was considered Level 2. If the reporting entity would not be able to redeem the investment at NAV, then the investment was considered Level 3.) The ASU required disclosures on the investments in scope of the amendments (permitted to be reported at NAV), regardless of whether the practical expedients were applied. As detailed in ASU , reporting entities would be permitted to utilize NAV if both of the following conditions were met: 1. The investment does not have a readily determinable fair value. 2. The investment is in an entity that met the conditions to be considered an Investment Company within FASB Codification Topic 946. (The conditions were previously included in ) ASU : This ASU removed the guidance from ASU requiring investments held at NAV to be included within the fair value hierarchy as either Level 2 or Level 3 investments. Rather, the guidance in ASU added a reference for investments measured at NAV in the fair value reconciliation. This ASU also removed the requirement to include disclosures for all investments eligible for the NAV practical expedient, and limited the disclosures to investments the entity elected to measure the fair value using that practical expedient National Association of Insurance Commissioners 1

108 Attachment M Ref # Current FASB Guidance: Since the issuance of the above ASU s, the FASB has also revised the guidance for determining an investment company within Topic 946 (ASU ). Pursuant to the current FASB guidance, an investment must not have a readily determinable fair value, and be an investment in an investment company (defined under ( through 15-8) in order for a reporting entity to utilize NAV as a practical expedient to fair value. The definition of Net Asset Value per Share from the FASB Codification Master Glossary is as follows: Net Asset Value per Share - See Topic(s) 820, 946: Net asset value per share is the amount of net assets attributable to each share of capital stock (other than senior equity securities, that is, preferred stock) outstanding at the close of the period. It excludes the effects of assuming conversion of outstanding convertible securities, whether or not their conversion would have a diluting effect. Agenda Item Summary This agenda item considers whether insurance reporting entities shall be permitted to utilize NAV in lieu of fair value in a manner consistent with U.S. GAAP, and/or when specifically identifiable within an SSAP. Furthermore, if NAV is used, it considers disclosure or reporting changes to identify use of NAV in the statutory financial statements. Although NAV is often considered an estimate of fair value, it should be noted that NAV may not represent the fair value of the investment in all instances. The FASB identifies that certain attributes of the investments (such as restrictions on redemption at the measurement date) and transaction prices from principal-to-principal or brokered transactions may indicate that it is necessary to make adjustment to the NAV to estimate the fair value of the investment. Existing Authoritative Literature: Existing statutory guidance in SSAP No. 2R and SSAP No. 26R permit the use of NAV in specific situations. It is noted that these situations may not qualify under the FASB provisions as fair value may be readily available: SSAP No. 2R Cash, Cash Equivalents Drafts and Short-Term Investments: 7. Money market mutual funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7 of the Act shall be accounted for and reported as cash equivalents for statutory accounting. Investments in money market mutual funds shall be valued at fair value or net asset value (NAV) as a practical expedient. For reporting entities required to maintain an asset valuation reserve (AVR), the accounting for unrealized capital gains and losses shall be in accordance with SSAP No. 7 Asset Valuation Reserve and Interest Maintenance Reserve (SSAP No. 7). For reporting entities not required to maintain an AVR, unrealized capital gains and losses shall be recorded as a direct credit or charge to surplus. SSAP No. 26R Bonds: 24. SVO-identified investments shall be initially reported at cost, including brokerage and other related fees. Subsequently, SVO-identified investments shall be reported at fair value, 1 with changes in fair value recorded as unrealized gains or losses) unless the reporting entity has elected use of a documented systematic approach to amortize or accrete the investment in a manner that represents the expected cash flows from the underlying bond holdings. This special measurement approach is referred to as the systematic value measurement method and shall only be used for the SVO-identified investments within scope of this statement. Footnote 1: For these investments, net asset value (NAV) is allowed as a practical expedient to fair value. SSAP No. 100 Fair Value: This statement defines fair value, establishes a framework for measuring fair value and establishes disclosure requirements about fair value National Association of Insurance Commissioners 2

109 2017 National Association of Insurance Commissioners 3 Attachment M Ref # Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SSAP No. 100 also incorporates the U.S. GAAP Fair Value Hierarchy: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. (See paragraph of SSAP No. 100). Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. (See paragraph of SSAP No. 100). Level 3: Unobservable inputs for the asset or liability. (See paragraph 37 of SSAP No. 100). Consideration of the following U.S. GAAP guidance is reflected in SSAP No. 100: 48. This standard adopts with modification FAS 157, Fair Value Measurements; (FAS 157) FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, (FSP FAS 157-1) and FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). a. See revision to paragraph 3.b. from adoption of SSAP No. 104R Share-Based Payments (SSAP No. 104R). b. This standard does not adopt the scope exclusions within paragraph 3 of FAS 157 for accounting pronouncements that require or permit measurements that are similar to fair value but that are not intended to measure fair value, including (a) accounting pronouncements that permit measurements that are based on, or otherwise use, vendorspecific objective evidence of fair value and (b) inventory pricing. These items are excluded as they are not prevalent within statutory accounting. c. This standard does not adopt guidance from FAS 157 regarding the consideration of nonperformance risk (own credit risk) in determining the fair value measurement of liabilities. The consideration of own credit-risk in the measurement of fair value liabilities is inconsistent with the statutory accounting concept of conservatism and the assessment of financial solvency for insurers. The fair value determination for liabilities should follow the guidance adopted from FAS 157, with the exception of the consideration of ownperformance risk. d. This standard includes revisions to reference statutory standards or terms instead of GAAP standards or terms. e. This standard incorporates the guidance from SSAP No. 27 regarding disclosures about fair value of financial instruments. This incorporated SSAP No. 27 guidance was adopted from FAS 107, Disclosures about Fair Value of Financial Instruments (FAS 107) and was revised to adopt FSP FAS and APB-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS and APB-1). For statutory purposes, the incorporation of this guidance within one standard results in having one comprehensive standard addressing fair value measurements and disclosures. 49. In August 2010, this statement adopted with modification the new and revised disclosure requirements within ASU , Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements (ASU ). GAAP revisions within ASU that modify the FASB Codification on aspects originally added by ASU , Fair Value Measurements and Disclosures, Measuring Liabilities at Fair Value (ASU )

110 2017 National Association of Insurance Commissioners 4 Attachment M Ref # and ASU , Fair Value Measurements and Disclosures, Investment in Certain Entities that Calculate Net Asset Value per Share (or its equivalent) (ASU ) are not adopted, as the underlying GAAP guidance within ASU and ASU has not been considered for statutory accounting. When ASU and ASU are reviewed for statutory accounting, the GAAP guidance considered will reflect the revisions from ASU Subsequent nonsubstantive revisions to the guidance adopted from ASU were incorporated within this Statement in November 2010 to clarify the disclosure requirements for statutory accounting. These revisions removed the distinction between recurring and nonrecurring fair value measurements and clarified disclosure requirements for assets and liabilities measured and reported at fair value in the statement of financial position. 50. Paragraphs adopt FAS 107 as amended by FASB Statement No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments (FAS 119), except that paragraph 15(c) of FAS 119 relating to disclosure of financial instruments held or issued for trading is rejected and FASB Emerging Issues Task Force No , Recognition of Fees for Guaranteeing a Loan. Financial instruments named within paragraph 8 of FAS 107 that are exempt from disclosure are adopted to the extent applicable for statutory accounting and are reflected in paragraph This standard also adopts revisions to FAS 107 reflected in FSP FAS and APB-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS and APB-1), and thus requires disclosure in both annual and quarterly financial statements. In addition, this standard rejects FASB Statement No. 126, Exemptions from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities, an amendment of FAS 107. FAS 119 is addressed in SSAP No This standard rejects ASU , Financial Instruments - Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities (ASU ), ASU , Financial Instruments - Overall (ASU ), FSP FAS 157-2: Effective Date of FASB Statement No. 157 (FSP FAS 157-2) and FSP FAS 157-3: Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS 157-3). Current FASB Guidance: The following guidance reflects the U.S. GAAP guidance related to use of NAV, as incorporated by ASU and modified by ASU : Net Asset Value per Share: See Topic(s) 820, 946 Net asset value per share is the amount of net assets attributable to each share of capital stock (other than senior equity securities, that is, preferred stock) outstanding at the close of the period. It excludes the effects of assuming conversion of outstanding convertible securities, whether or not their conversion would have a diluting effect Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) Paragraphs through and A shall apply only to an investment that meets both of the following criteria as of the reporting entity s measurement date: a. The investment does not have a readily determinable fair value b. The investment is in an investment company within the scope of Topic 946 or is an investment in a real estate fund for which it is industry practice to measure investment assets at fair value on a recurring basis and to issue financial statements that are consistent with the measurement principles in Topic The definition of readily determinable fair value indicates that an equity security would have a readily determinable fair value if any one of three conditions is met. One of those conditions is that sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National

111 2017 National Association of Insurance Commissioners 5 Attachment M Ref # Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc. The definition notes that restricted stock meets that definition if the restriction expires within one year. If an investment otherwise would have a readily determinable fair value, except that the investment has a restriction expiring in more than one year, the reporting entity shall not apply paragraphs through and A to the investment. Categorizing Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) within the Fair Value Hierarchy B An investment within the scope of paragraphs through 15-5 for which fair value is measured using net asset value per share (or its equivalent, for example member units or an ownership interest in partners capital to which a proportionate share of net assets is attributed) as a practical expedient, as described in paragraph , shall not be categorized within the fair value hierarchy. In addition, the disclosure requirements in paragraph do not apply to that investment. Disclosures required for an investment for which fair value is measured using net asset value per share (or its equivalent) as a practical expedient are described in paragraph A. Although the investment is not categorized within the fair value hierarchy, a reporting entity shall provide the amount measured using the net asset value per share (or its equivalent) practical expedient to permit reconciliation of the fair value of investments included in the fair value hierarchy to the line items presented in the statement of financial position in accordance with paragraph B. Measuring the Fair Value of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) A reporting entity is permitted, as a practical expedient, to estimate the fair value of an investment within the scope of paragraphs through 15-5 using the net asset value per share (or its equivalent, such as member units or an ownership interest in partners capital to which a proportionate share of net assets is attributed) of the investment, if the net asset value per share of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity s measurement date If the net asset value per share of the investment obtained from the investee is not as of the reporting entity s measurement date or is not calculated in a manner consistent with the measurement principles of Topic 946, the reporting entity shall consider whether an adjustment to the most recent net asset value per share is necessary. The objective of any adjustment is to estimate a net asset value per share for the investment that is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity s measurement date A reporting entity shall decide on an investment-by-investment basis whether to apply the practical expedient in paragraph and shall apply that practical expedient consistently to the fair value measurement of the reporting entity s entire position in a particular investment, unless it is probable at the measurement date that the reporting entity will sell a portion of an investment at an amount different from net asset value per share (or its equivalent) as described in the following paragraph. In those situations, the reporting entity shall account for the portion of the investment that is being sold in accordance with this Topic (that is, the reporting entity shall not apply the guidance in paragraph ) A reporting entity is not permitted to estimate the fair value of an investment (or a portion of the investment) within the scope of paragraphs through 15-5 using the net asset value per share of the investment (or its equivalent) as a practical expedient if, as of the reporting entity s measurement date, it is probable that the reporting entity will sell the investment for an amount different from the net asset value per share (or its equivalent). A sale is considered probable only if all of the following criteria have been met as of the reporting entity s measurement date: a. Management, having the authority to approve the action, commits to a plan to sell the investment. b. An active program to locate a buyer and other actions required to complete the plan to sell the investment have been initiated.

112 Attachment M Ref # c. The investment is available for immediate sale subject only to terms that are usual and customary for sales of such investments (for example, a requirement to obtain approval of the sale from the investee or a buyer s due diligence procedures). d. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) A For investments that are within the scope of paragraphs through 15-5 and that are measured using the practical expedient in paragraph on a recurring or nonrecurring basis during the period, a reporting entity shall disclose information that helps users of its financial statements to understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value per share (or its equivalent, such as member units or an ownership interest in partners capital to which a proportionate share of net assets is attributed). To meet that objective, to the extent applicable, a reporting entity shall disclose, at a minimum, the following information for each class of investment: a. The fair value measurement (as determined by applying paragraphs through 35-62) of the investments in the class at the reporting date and a description of the significant investment strategies of the investee(s) in the class. b. For each class of investment that includes investments that can never be redeemed with the investees, but the reporting entity receives distributions through the liquidation of the underlying assets of the investees, the reporting entity s estimate of the period of time over which the underlying assets are expected to be liquidated by the investees. c. The amount of the reporting entity s unfunded commitments related to investments in the class. d. A general description of the terms and conditions upon which the investor may redeem investments in the class (for example, quarterly redemption with 60 days notice). e. The circumstances in which an otherwise redeemable investment in the class (or a portion thereof) might not be redeemable (for example, investments subject to a lockup or gate). Also, for those otherwise redeemable investments that are restricted from redemption as of the reporting entity s measurement date, the reporting entity shall disclose its estimate of when the restriction from redemption might lapse. If an estimate cannot be made, the reporting entity shall disclose that fact and how long the restriction has been in effect. f. Any other significant restriction on the ability to sell investments in the class at the measurement date. g. If a group of investments would otherwise meet the criteria in paragraph but the individual investments to be sold have not been identified (for example, if a reporting entity decides to sell 20 percent of its investments in private equity funds but the individual investments to be sold have not been identified), so the investments continue to qualify for the practical expedient in paragraph , the reporting entity shall disclose its plans to sell and any remaining actions required to complete the sale(s). Guidance on whether a reporting entity is an Investment Company is captured in FASB Topic 946: Assessment of Investment Company Status An entity regulated under the Investment Company Act of 1940 is an investment company under this Topic National Association of Insurance Commissioners 6

113 Attachment M Ref # An entity that is not regulated under the Investment Company Act of 1940 shall assess all the characteristics of an investment company in paragraphs through 15-7 to determine whether it is an investment company. The entity shall consider its purpose and design when making that assessment An investment company has the following fundamental characteristics: a. It is an entity that does both of the following: 1. Obtains funds from one or more investors and provides the investor(s) with investment management services 2. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income, or both. b. The entity or its affiliates do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income An investment company also has the following typical characteristics: a. It has more than one investment. b. It has more than one investor. c. It has investors that are not related parties of the parent (if there is a parent) or the investment manager. d. It has ownership interests in the form of equity or partnership interests. e. It manages substantially all of its investments on a fair value basis To be an investment company, an entity shall possess the fundamental characteristics in paragraph Typically, an investment company also has all of the characteristics in the preceding paragraph. However, the absence of one or more of those typical characteristics does not necessarily preclude an entity from being an investment company. If an entity does not possess one or more of the typical characteristics, it shall apply judgment and determine, considering all facts and circumstances, how its activities continue to be consistent (or are not consistent) with those of an investment company The implementation guidance in Section is an integral part of assessing investment company status and provides additional guidance for that assessment. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): The Statutory Accounting Principles (E) Working Group has previously adopted guidance allowing NAV as a practical expedient for money market mutual funds in SSAP No. 2R (agenda item ) and for SVO-Identified Bond ETFs in SSAP No. 26R (agenda item ). The Statutory Accounting Principles (E) Working Group also has an outstanding agenda item (Ref # ) to consider ASU , Fair Value Measurement. The revisions in this ASU were predominantly wording changes to converge with identical terms/phrases with IFRS. However, the amendments did clarify some application elements and disclosure guidance. As the adoption of this ASU 2017 National Association of Insurance Commissioners 7

114 Attachment M Ref # will essentially result in a re-write of SSAP No. 100, with minimal application revisions, the review of this item for statutory accounting was moved to a lower priority. As identified in ASU : The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The concept of NAV being included in FASB Codification Topic 820 (Fair Value) did not exist with the original review of FAS 157. This concept was originally captured through ASU Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None. Convergence with International Financial Reporting Standards (IFRS): IFRS does not provide a practical expedient to measure the fair value of certain investments at net asset value per share. As such, the GAAP guidance reflected in ASU (which introduced the concept of NAV), and the amendments in ASU differ from IFRS. Staff Recommendation: It is recommended that the Working Group move this agenda item to the active listing, categorized as substantive, and initially expose draft revisions to illustrate the proposed guidance to allow net asset value per share as a practical expedient to fair value either when specifically named in a SSAP, or when specific conditions exist. With the classification as a substantive change (as a new concept is being proposed for SSAP No. 100), an issue paper and substantively revised SSAP would be drafted. However, NAIC staff recommends exposing this agenda item, with initial draft revisions, to get preliminary feedback from regulators and industry on the overall proposal, and whether additional concepts should be considered for inclusion. As detailed in the preliminary revisions, NAIC staff has initially drafted guidance to allow NAV as a practical expedient when specifically identified in a SSAP or when specific conditions are met. The proposed conditions intend to mirror the concepts of the FASB guidance, therefore allowing insurance reporting entities the ability to reflect the same measurement method / valuation for investments reported at fair value in both U.S. GAAP and SAP financial statements. If these concepts are adopted, the revisions would reflect the adoption, with modification, of ASU and ASU If the revisions are adopted, corresponding blanks revisions would be necessary to incorporate changes to the fair value disclosure illustrations to separately capture investments reported at NAV. Additionally, a new code would be proposed to the Fair Value Hierarchy (captured in the investment schedule electronic columns) to identify when an investment is reported at NAV. In addition to the revisions proposed through consideration of ASU and ASU , this Form A proposes to remove the illustrations previously included in SSAP No. 100, paragraph 44 (for the disclosure of fair value by financial instrument), as well as the SSAP No. 100 Exhibit A Implementation Guide and Disclosure Illustration. NAIC staff notes that example illustrations for the completion of the required disclosures are captured in the Blanks Annual Statement Illustrations and recommends removing these duplicative illustrations from the SSAP National Association of Insurance Commissioners 8

115 Initial Draft - Proposed Revisions to SSAP No. 100: (References to the related FASB guidance, as well as notes from NAIC staff are included below.) Utilizing Net Asset Value Per Share as a Practical Expedient to Fair Value (New Section) Attachment M Ref # A reporting entity may utilize net asset value per share (NAV) 1 as a practical expedient to fair value in either of the following situations, unless, as prescribed in paragraph 44, it is probable that the reporting entity will sell the investment for an amount different from the net asset value per share (or its equivalent): a. When a SSAP specifically identifies NAV as a permitted practical expedient. b. When the conditions specified in paragraph 40 are met. 40. Pursuant to paragraph 39, a reporting entity is permitted to utilize NAV as a practical expedient to fair value when the investment meets both of the following criteria: a. The investment does not have a readily determinable fair value as defined in paragraph 41. a.b. The investment is in an investment company or is an investment in a real estate fund for which it is industry practice to measure investment assets at fair value on a recurring basis and to issue financial statements consistent with the measurement principles of an investment company. (Paragraph 40 reflects current guidance in FASB Codification ) 41 An equity security has a readily determinable fair value if it meets any of the following conditions: a. The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc. Restricted stock meets that definition if the restriction terminates within one year 2. b. The fair value of an equity security traded only in a foreign market is readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets identified in paragraph 39.a. c. The fair value of an equity security that is an investment in a mutual fund or in a structure similar to a mutual fund (that is, a limited partnership or a venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions. (Paragraph 41 reflects current guidance in FASB Codification and the definition for Readily Determinable Fair Value in the Codification Master Glossary.) 42 An entity is considered an investment company if it qualifies under the following assessments: a. An entity regulated under the Investment Company Act of Net asset value per share is the amount of net assets attributable to each share of capital stock (other than senior equity securities, that is, preferred stock) outstanding at the close of the period. It excludes the effects of assuming conversion of outstanding convertible securities, whether or not their conversion would have a diluting effect. (This footnote reflects the definition of Net Asset Value Per Share from the FASB Codification Master Glossary.) 2 If an investment would otherwise have a readily determinable fair value, except that the investment has a restriction expiring in more than one year, the reporting entity is not permitted to use NAV for that investment National Association of Insurance Commissioners 9

116 Attachment M Ref # b. An entity that is not regulated under the Investment Company Act of 1940, but that possesses all of the following fundamental characteristics: i. The entity 1) obtains funds from one or more investors and provides the investors with investment management services and 2) commits to its investors that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income, or both. ii. The entity or its affiliates do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income. c. The following characteristics are not required, but are typically found in an investment company. If the entity does not possess one or more of these typical characteristics, the reporting entity shall conduct further assessments to determine whether the entity s activities are consistent with those of an investment company: i. The entity has more than one investment ii. The entity has more than one investor iii. The entity has investors that are not related parties of the parent or the investment manager. iv. The entity has ownership interests in the form of equity or partnership interests i.v. The entity managers substantially all of its investments on a fair value basis. (Paragraph 42 reflects current guidance in FASB Codification through 15-8 for assessing whether an entity is an Investment Company. ) 43 If a reporting entity is permitted under paragraph 39 to utilize NAV as a practical expedient, the reporting entity shall identify whether the holdings of the investment company, in determining NAV, are measured at fair value as of the reporting entity s measurement date. If the NAV of the investment obtained from the entity is not as of the reporting entity s measurement date, or is not based on a fair value measurement of the underlying investments, the reporting entity shall consider whether an adjustment to the most recent NAV is necessary. The objective of any adjustment is to estimate a net asset value per share for the investment that is calculated on the basis of underlying investments held at fair value. (Paragraph 43 intends to reflect the guidance in FASB Codification and The FASB guidance reference to the Measurement Principles of Topic 946 in lieu of fair value, but NAIC staff believes the intent of the FASB guidance is to reflect an NAV that is calculated when the underlying investments are reported at fair value. NAIC staff requests input from industry on whether this assessment is correct.) 43. A reporting entity shall decide on an investment-by-investment basis whether to apply the practical expedient in paragraph 39 and shall apply that practical expedient consistently to the fair value measurement of the reporting entity s entire position in a particular investment, unless it is probable at the measurement date that the reporting entity will sell a portion of an investment at an amount different from NAV. In those situations, the reporting entity shall account for the portion of the investment that is being sold at fair value, as defined in paragraph 4, without use of the NAV practical expedient. (Paragraph 44 reflects current guidance in FASB Codification ) 44. A reporting entity is not permitted to estimate the fair value of an investment (or a portion of the investment) using the NAV of the investment (or its equivalent) as a practical expedient if, as of the reporting entity s measurement date, it is probable that the reporting entity will sell the investment for an amount different from the net asset value per share (or its equivalent). A sale is considered probable only if all of the following criteria have been met as of the reporting entity s measurement date: 2017 National Association of Insurance Commissioners 10

117 Attachment M Ref # a. Management, having the authority to approve the action, commits to a plan to sell the investment. b. An active program to locate a buyer and other actions required to complete the plan to sell the investment have been initiated. c. The investment is available for immediate sale subject only to terms that are usual and customary for sales of such investments (for example, a requirement to obtain approval of the sale from the investee or a buyer s due diligence procedures). d. Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. (Paragraph 45 reflects current guidance in FASB Codification ) 45. An investment reported at NAV as a practical expedient pursuant to paragraph 39, shall not be categorized within the fair value hierarchy. Although the investment is not categorized within the fair value hierarchy, a reporting entity shall separately identify NAV (or its equivalent) as required under paragraph 46.a. and 46.b. to permit reconciliations. (Paragraph 45 intends to reflect current guidance in FASB Codification B.) Disclosures A reporting entity shall disclose information that helps users of the financial statements to assess both of the following: (1) For assets and liabilities that are measured and reported 3 at fair value or NAV in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements; (2) For fair value measurements in the statement of financial position determined using significant unobservable inputs (Level 3), the effect of the measurements on earnings (or changes in net assets) for the period. To meet these objectives, the reporting entity shall disclose the information in paragraphs 3946.a. through 3946.f. for each class of assets and liabilities measured and reported 4 at fair value or NAV in the statement of financial position after initial recognition. The reporting entity shall determine appropriate classes of assets and liabilities in accordance with the annual statement instructions. a. The fair value / NAV measurements at the reporting date. b. The level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2 or 3). (Investments reported at NAV shall not be captured within the fair value hierarchy, but shall be separately identified.) c. For assets and liabilities held at the reporting date, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for the transfers, and the reporting entity s policy for determining when transfers between levels are recognized. Transfers into each level shall be disclosed and discussed separately from transfers out of each level. d. For fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement. If there has been a change in the valuation technique (for example, changing from a market 3 The term reported is intended to reflect the measurement basis for which the asset or liability is classified within its underlying SSAP. For example, a bond with an NAIC designation of 2 is considered an amortized cost measurement and is not included within this disclosure even if the amortized cost and fair value measurement are the same. An example of when such a situation may occur includes a bond that is written down as other-then-temporarily impaired as of the date of financial position. The amortized cost of the bond after the recognition of the other-than-temporary impairment may agree to fair value, but under SSAP No. 26 this security is considered to still be reported at amortized cost. 4 See footnote National Association of Insurance Commissioners 11

118 Attachment M Ref # approach to an income approach or the use of an additional valuation technique), the reporting entity shall disclose that change and the reason(s) for making it. e. For fair value measurements categorized within Level 3 of the fair value hierarchy a reconciliation from the opening balances to the closing balances disclosing separately changes during the period attributable to the following: i. Total gains or losses for the period recognized in income or surplus. ii. Purchases, sales, issues, and settlements (each type disclosed separately) iii. The amounts of any transfers into or out of Level 3, the reasons for those transfers, and the reporting entity s policy for determining when transfers between levels are recognized. Transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3. f. A reporting entity shall disclose and consistently follow its policy for determining when transfers between levels are recognized. The policy about the timing of recognizing transfers shall be the same for transfers into Level 3 as that for transfers out of Level 3. Examples of policies for when to recognize the transfers are as follows: i. The actual date of the event or change in circumstances that caused the transfer ii. iii. The beginning of the reporting period The end of the reporting period For derivative assets and liabilities, the reporting entity shall present both of the following: a. The fair value disclosures required by paragraph 3946.a., 3946.b. and 3946.c. on a gross basis b. The reconciliation disclosures required by paragraph 3946.d., 3946.e. and 3946.f. on either a gross or net basis The quantitative disclosures required in paragraphs of this standard shall be presented using a tabular format. (See Exhibit A.) The reporting entity shall disclose the fair value hierarchy and the method used to obtain the fair value measurement, or the use of NAV, for all items in which fair value is disclosed within the annual statement investment schedules. This disclosure is satisfied by the completion of the investment schedules in the Annual statement and is not required quarterly For investments measured using the NAV practical expedient pursuant to paragraph 39, a reporting entity shall disclose information that helps users of its financial statements to understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value per share. To meet that objective, a reporting entity shall disclose, at a minimum, the following information for instances in which the investment may be sold below NAV, or if there are significant restrictions in the liquidation of an investment held at NAV: a. The NAV along with a description of the investment / investment strategy of the investee. b. If the investment that can never be redeemed with the investees, but the reporting entity receives distributions through the liquidation of the underlying assets of the investees, the reporting entity s estimate of the period of time over which the underlying assets are expected to be liquidated by the investees. c. The amount of the reporting entity s unfunded commitments related to investments in the class National Association of Insurance Commissioners 12

119 Attachment M Ref # d. A general description of the terms and conditions upon which the investor may redeem the investment. e. The circumstances in which an otherwise redeemable investment in the class (or a portion thereof) might not be redeemable (for example, investments subject to a lockup or gate). Also, for those otherwise redeemable investments that are restricted from redemption as of the reporting entity s measurement date, the reporting entity shall disclose its estimate of when the restriction from redemption might lapse. If an estimate cannot be made, the reporting entity shall disclose that fact and how long the restriction has been in effect. f. Any other significant restriction on the ability to sell investments in the class at the measurement date. g. If a group of investments would otherwise meet the criteria in paragraph 44 but the individual investments to be sold have not been identified (for example, if a reporting entity decides to sell 20 percent of its investments in private equity funds but the individual investments to be sold have not been identified), so the investments continue to qualify for the practical expedient in paragraph 39, the reporting entity shall disclose its plans to sell and any remaining actions required to complete the sale(s). (Paragraph 50 reflects guidance in FASB Codification A. Although this disclosure would be consistent with the U.S. GAAP requirements, NAIC staff is uncertain whether this disclosure information would be beneficial to regulators. NAIC staff requests input from regulators and industry on whether this disclosure would be beneficial for statutory accounting review and/or whether it is preferred to simply match the disclosures required under U.S. GAAP.) The reporting entity is encouraged, but not required, to combine the fair value information disclosed under this standard with the fair value information disclosed under other accounting pronouncements (for example, disclosures about fair value of financial instruments) in the periods in which those disclosures are required, if practicable. The reporting entity also is encouraged, but not required, to disclose information about other similar measurements, if practicable. Disclosures about Fair Value of Financial Instruments A reporting entity shall disclose in the notes to the financial statements, as of each date for which a statement of financial position is presented in the quarterly or annual financial statements, the aggregate fair value or NAV for all financial instruments and the level within the fair value hierarchy in which the fair value measurements in their entirety fall. This disclosure shall be summarized by type of financial instrument, for which it is practicable to estimate fair value, except for certain financial instruments identified in paragraph 45. Fair value disclosed in the notes shall be presented together with the related admitted values in a form that makes it clear whether the fair values and admitted values represent assets or liabilities and to which line items in the Statement of Assets, Liabilities, Surplus and Other Funds they relate. Unless specified otherwise in another SSAP, the disclosures may be made net of encumbrances, if the asset or liability is so reported. A reporting entity shall also disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. If it is not practicable for an entity to estimate the fair value of the financial instrument or a class of financial instruments, and the investment does not qualify for the NAV practical expedient, the aggregate carrying amount for those items shall be reported in the not practicable column with additional disclosure as required in paragraph 46 of SSAP No National Association of Insurance Commissioners 13

120 Aggregate Fair Value Admitted Assets Level 1 Level 2 Level 3 Not Practicable (Carrying Value) Attachment M Ref # Type of Financial Instrument: Bonds Common Stock Perpetual Preferred Stock Mortgage Loans Etc. If it is not practicable for an entity to estimate the fair value of the financial instrument or a class of financial instruments, the aggregate carrying amount for those items shall be reported in the not practicable column with additional disclosure as required in paragraph 46 of SSAP No Not Practicable to Estimate FV Individual Security Reporting by Type or Class of Financial Instrument: Mortgage Loans: Description 1 Description 2 Etc. Carrying Value Effective Interest Rate Maturity Explanation A A A It was not practicable to determine the fair value of these financial instruments as a quoted market price was not available and the cost of obtaining an independent appraisal appears excessive considering the materiality of the instruments to the reporting entity The disclosures about fair value prescribed in paragraph are not required for the following: a. Employers' and plans' obligations for pension benefits, other postretirement benefits including health care and life insurance benefits, postemployment benefits, employee stock option and stock purchase plans, and other forms of deferred compensation arrangements, as defined in SSAP No. 12 Employee Stock Ownership Plans (SSAP No. 12), SSAP No. 92 Postretirement Benefits Other Than Pensions (SSAP No. 92), SSAP No. 102 Pensions (SSAP No. 102) and SSAP No. 104R Share-Based Payments (SSAP No. 104R). b. Substantively extinguished debt subject to the disclosure requirements of SSAP No. 103R Transfer and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP No. 103R) c. Insurance contracts, other than financial guarantees and deposit-type contracts d. Lease contracts as defined in SSAP No. 22 Leases (SSAP No. 22) e. Warranty obligations and rights f. Investments accounted for under the equity method g. Equity instruments issued by the entity h. Deposit liabilities with no defined or contractual maturities If it is not practicable for an entity to estimate the fair value of a financial instrument or a class of financial instruments, and the investment does not qualify for the NAV practical expedient, the following shall be disclosed: 2017 National Association of Insurance Commissioners 14

121 2017 National Association of Insurance Commissioners 15 Attachment M Ref # a. Information pertinent to estimating the fair value of that financial instrument or class of financial instruments, such as the carrying amount, effective interest rate, and maturity; and b. The reasons why it is not practicable to estimate fair value In the context of this standard, practicable means that an estimate of fair value can be made without incurring excessive costs. It is a dynamic concept: what is practicable for one entity might not be for another; what is not practicable in one year might be in another. For example, it might not be practicable for an entity to estimate the fair value of a class of financial instruments for which a quoted market price is not available because it has not yet obtained or developed the valuation model necessary to make the estimate, and the cost of obtaining an independent valuation appears excessive considering the materiality of the instruments to the entity. Practicability, that is, cost considerations, also may affect the required precision of the estimate; for example, while in many cases it might seem impracticable to estimate fair value on an individual instrument basis, it may be practicable for a class of financial instruments in a portfolio or on a portfolio basis. In those cases, the fair value of that class or of the portfolio should be disclosed. Finally, it might be practicable for an entity to estimate the fair value only of a subset of a class of financial instruments; the fair value of that subset should be disclosed. Relevant Literature This standard adopts with modification FAS 157, Fair Value Measurements; (FAS 157) FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, (FSP FAS 157-1) and FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). Modifications from FAS 157, FSP FAS and FSP FAS include: a. See revision to paragraph 3.b. from adoption of SSAP No. 104R Share-Based Payments (SSAP No. 104R). b. This standard does not adopt the scope exclusions within paragraph 3 of FAS 157 for accounting pronouncements that require or permit measurements that are similar to fair value but that are not intended to measure fair value, including (a) accounting pronouncements that permit measurements that are based on, or otherwise use, vendor-specific objective evidence of fair value and (b) inventory pricing. These items are excluded as they are not prevalent within statutory accounting. c. This standard does not adopt guidance from FAS 157 regarding the consideration of nonperformance risk (own credit risk) in determining the fair value measurement of liabilities. The consideration of own credit-risk in the measurement of fair value liabilities is inconsistent with the statutory accounting concept of conservatism and the assessment of financial solvency for insurers. The fair value determination for liabilities should follow the guidance adopted from FAS 157, with the exception of the consideration of own-performance risk. d. This standard includes revisions to reference statutory standards or terms instead of GAAP standards or terms. e. This standard incorporates the guidance from SSAP No. 27 regarding disclosures about fair value of financial instruments. This incorporated SSAP No. 27 guidance was adopted from FAS 107, Disclosures about Fair Value of Financial Instruments (FAS 107) and was revised to adopt FSP FAS and APB-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS and APB-1). For statutory purposes, the incorporation of this guidance within one standard results in having one comprehensive standard addressing fair value measurements and disclosures In August 2010, this statement adopted with modification the new and revised disclosure requirements within ASU , Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements (ASU ). GAAP revisions within ASU that modify the FASB Codification on aspects originally added by ASU , Fair Value Measurements and Disclosures, Measuring Liabilities at

122 Attachment M Ref # Fair Value (ASU ) and ASU , Fair Value Measurements and Disclosures, Investment in Certain Entities that Calculate Net Asset Value per Share (or its equivalent) (ASU ) are not adopted, as the underlying GAAP guidance within ASU and ASU has not been considered for statutory accounting. When ASU and ASU are reviewed for statutory accounting, the GAAP guidance considered will reflect the revisions from ASU Subsequent nonsubstantive revisions to the guidance adopted from ASU were incorporated within this Statement in November 2010 to clarify the disclosure requirements for statutory accounting. These revisions removed the distinction between recurring and nonrecurring fair value measurements and clarified disclosure requirements for assets and liabilities measured and reported at fair value in the statement of financial position. 58. In Month/Year, substantive revisions, as detailed in Issue Paper, were incorporated to this statement to adopt with modification ASU , Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) and ASU , Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). These substantive revisions incorporated new guidance allowing reporting entities to utilize net asset value per share as a practical expedient to fair value when certain conditions are met. The adopted modifications to statutory accounting include: (NAIC staff Note This will be updated based on actual Working Group consideration and action of this proposal.) Paragraphs adopt FAS 107 as amended by FASB Statement No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments (FAS 119), except that paragraph 15(c) of FAS 119 relating to disclosure of financial instruments held or issued for trading is rejected and FASB Emerging Issues Task Force No , Recognition of Fees for Guaranteeing a Loan. Financial instruments named within paragraph 8 of FAS 107 that are exempt from disclosure are adopted to the extent applicable for statutory accounting and are reflected in paragraph 45. This standard also adopts revisions to FAS 107 reflected in FSP FAS and APB-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS and APB- 1), and thus requires disclosure in both annual and quarterly financial statements. In addition, this standard rejects FASB Statement No. 126, Exemptions from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities, an amendment of FAS 107. FAS 119 is addressed in SSAP No This standard rejects ASU , Financial Instruments Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities (ASU ), ASU , Financial Instruments Overall (ASU ), FSP FAS 157-2: Effective Date of FASB Statement No. 157 (FSP FAS 157-2) and FSP FAS 157-3: Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP FAS 157-3). Effective Date and Transition This standard shall be effective for December 31, 2010, annual financial statements, with interim and annual financial statement reporting thereafter. Early adoption is permitted for December 31, 2009, annual financial statements, with interim and annual reporting thereafter. Nonsubstantive disclosure revisions adopted in August and November 2010 to paragraphs and the corresponding disclosure illustrations are initially effective for year-end 2010 financial statements, with interim and annual reporting thereafter. Nonsubstantive revisions adopted March 2011 to paragraphs 3946.a., 3946.e.ii., and are effective January 1, 2012, with interim and annual reporting thereafter as required in the SSAP. (Paragraph is satisfied by the annual statement investment schedules and is not required quarterly.) Exhibit A - implementation guidance and disclosure illustrations 53. For fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, this Standard requires a reporting entity to disclose a description of the valuation techniques(s) and the inputs used in the fair value measurement. A reporting entity might disclose the following to comply with the input disclosure requirement of paragraph 39.d.: a. Quantitative information about the input, for example, for certain debt securities or derivatives, information such as, but not limited to, prepayment rates, rates of estimated credit losses, interest rates (for example the LIBOR swap rate) or discount rates and volatilities National Association of Insurance Commissioners 16

123 Attachment M Ref # b. The nature of the item being measured at fair value, including the characteristics of the item being measured that are considered in the determination of relevant inputs. For example, for residential mortgage-backed securities, a reporting entity might disclose the following: i. The types of underlying loans (for example, prime loans or subprime loans) ii. Collateral iii. Guarantees or other credit enhancements iv. Seniority level of the tranches of securities v. The year of issue vi. The weighted-average coupon rate of the underlying loans and the securities vii. The weighted-average maturity of the underlying loans and the securities viii. The geographical concentration of the underlying loans ix. Information about the credit ratings of the securities c. How third-party information such as broker quotes, pricing services, net asset values and relevant market data was considered in measuring fair value. 54. In addition, a reporting entity should provide any other information that will help users of its financial statements to evaluate the qualitative information disclosed. For example, a reporting entity might disclose the following with respect to its investment in a class of residential-mortgage backed securities: As of December 31, 20X1, the reported fair value of the reporting entity s investments in Level 3, NAIC rated 6, residential mortgage-backed securities was $XXXX. These securities are senior tranches in a securitization trust and have a weighted-average coupon rate of XX percent and a weighted-average maturity of XX years. The underlying loans for these securities are residential subprime mortgages that originated in California in The underlying loans have a weighted-average coupon rate of XX percent and a weighted-average maturity of XX years. These securities are currently rated below investment grade. To measure their fair value, the reporting entity used an industry standard pricing model, which uses an income approach. The significant inputs for the pricing model include the following weighted averages: a. Yield: XX percent b. Probability of default; XX percent constant default rate c. Loss severity; XX percent d. Prepayment: XX percent constant prepayment rate 55. Fair Value Measurements at Reporting Date: For assets and liabilities measured and reported 5 at fair value at the reporting date, this Statement requires quantitative disclosures about the fair value measurements for each class of assets and liabilities. For assets, that information might be presented as follows. (This chart is an example, and the categories utilized by a reporting entity shall reflect the investments held by the reporting entity.) (Paragraph 39.c. also requires that the reporting entity also disclose any significant transfers to or from Levels 1 and 2 and the reasons for those transfers. This disclosure requirement is not satisfied by the disclosure below and shall be reflected separately within the notes to financial statements.) (In millions) Level 1 Level 2 Level 3 Total Description for each class of asset or liability: Perpetual Preferred Stock Industrial and Misc. Parent, Subsidiaries and Affiliates Total Perpetual Preferred $ $ $ $ 5 See footnote National Association of Insurance Commissioners 17

124 (In millions) Level 1 Level 2 Level 3 Total Redeemable Preferred Stock Industrial and Misc. Parent, Subsidiaries and Affiliates Total Redeemable Preferred $ $ $ $ Attachment M Ref # Bonds U.S. Governments Industrial and Misc. Hybrid Securities Parent, Subsidiaries and Affiliates Total Bonds $ $ $ $ Common Stock Industrial and Misc. Parent, Subsidiaries and Affiliates Total Common Stock $ $ $ $ Derivatives Interest Rate Contracts Foreign Exchange Contracts Credit Contracts Commodity Futures Contracts Commodity Forward Contracts Total Derivatives $ $ $ $ Separate Account Assets Total $ $ $ $ 56. Fair Value Measurements in Level 3 of the Fair Value Hierarchy: For assets and liabilities measured and reported 6 at fair value categorized within Level 3 of the fair value hierarchy, this Statement requires a reconciliation from the opening balances to the closing balances for each class of assets and liabilities, except for derivative assets and liabilities, which may be presented net. For assets, the reconciliation may be presented as follows: (This chart is an example, and the categories provided will be revised in accordance with the investments held by the reporting entity.) (Paragraph 39.e.iii. requires disclosures on the transfers in and/or out of Level 3. This disclosure requirement is satisfied by the following table.) (1) Balance 01/01/20XX (2) Transfers into Level 3 RMBS (a) CMBS (b) (c) (3) Transfers out of Level 3 (4) Total gains and (losses) included in Net Income (5) Total gains and (losses) included in Surplus (6) (7) (8) (9) Purchases Issues Sales Settlements (10) Balance at 12/31/20XX 6 See footnote National Association of Insurance Commissioners 18

125 Attachment M Ref # Derivative Assets Derivatives Liabilities... Total Example Footnotes: (a) (b) (c) Transferred from Level 2 to Level 3 because of lack of observable market data due to decrease in market activity for these securities. The reporting entity s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer. Transferred from Level 3 to Level 2 because of observable market data became available for these securities. Staff Review Completed by: Julie Gann April 2017 g:\data\stat acctg\3. national meetings\a. national meeting materials\2017\summer\meeting\k nav asus.docx Proposed Blanks Revisions: Although the extent of revisions to the A/S instructions would be considered by the NAIC staff of the Blanks (E) Working Group, it is anticipated that the inclusion of NAV (in lieu of the fair value hierarchy) would be accomplished through a new column in the relevant Note 20 disclosures. For example: (1) Fair Value Measurements at Reporting Date Description for each class of asset or liability (Level 1) (Level 2) (Level 3) NAV Total a. Assets at fair value Perpetual Preferred stock Industrial and Misc $ (a) $ $ $ $ Parent, Subsidiaries and Affiliates Total Perpetual Preferred Stocks $ $ $ $ $ Bonds U.S. Governments $ $ $ $ $ Industrial and Misc Hybrid Securities Parent, Subsidiaries and Affiliates Total Bonds $ $ $ $ $ Common Stock Industrial and Misc $ $ $ $ $ Parent, Subsidiaries and Affiliates Total Common Stocks $ $ $ $ $ Derivative assets Interest rate contracts $ $ $ $ $ Foreign exchange contracts Credit contracts Commodity futures contracts Commodity forward contracts Total Derivatives $ $ $ $ $ Separate account assets $ $ $ $ $ Total assets at fair value $ $ $ $ $ b. Liabilities at fair value Derivative liabilities $ $ $ $ $ Total liabilities at fair value $ $ $ $ $ Example Footnote: 2017 National Association of Insurance Commissioners 19

126 Attachment M Ref # C. (a) $X,XXX transferred from Level 1 to Level 2 as an alternative method was utilized to determine fair value as active market price was not readily accessible. Type of Financial Instrument Aggregate Fair Value Admitted Assets (Level 1) (Level 2) (Level 3) NAV Not Practicable (Carrying Value) Bonds $... $... $... $... $... $ Common Stock Perpetual Preferred Stock Mortgage Loans NOTE: Type of Financial Instrument Column shows examples of types of financial instruments that can be disclosed. For the Annual Statement Investment Schedules, column 24, NAIC staff would likely propose the additional of a new number (e.g., 0 ) to reflect NAV so it is separately identifiable from the Level 1, 2 or 3 FV hierarchy. g:\data\stat acctg\3. national meetings\a. national meeting materials\2017\summer\meeting\m nav asus.docx 2017 National Association of Insurance Commissioners 20

127 Attachment N Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: Wholly-Owned Ultra-short Bond Portfolio in an LLC Series Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: A common tool for investing cash balances has recently lost its appeal for investors and the current treatment of LLC holdings is a barrier for a new opportunity. The adoption of new amendments by the Securities and Exchange Commission ( SEC ) to change rules governing money market mutual funds under the Investment Company Act of 1940 (commonly referred to as money market reform ) instituted mandatory gates and fees. Although corresponding statutory accounting revisions have resulted with all money market mutual funds being classified as cash equivalents, the SEC changes have resulted in increased usage of government money market funds and bank deposits for operating, frictional and strategic cash balances. In recognition of a desire to rely less upon banking relationships, while also not becoming beholden to the liquidity needs of other investors in a commingled fund, insurance companies are turning toward other strategies for management of their cash. One such solution is the Payden Active Cash Management, LLC. A hurdle to realizing the benefits of this structure is the current statutory accounting and regulatory treatment of LLC holdings. Investments in LLCs, regardless of the underlying holdings (with the exception of certain forms of real estate) are currently recorded on Schedule BA. This results in the assessment of a higher capital charge for P&C and Health companies. While Life companies can seek a Securities Valuation Office ( SVO ) rating based on the underlying bond characteristics of the LLC and resultant lower capital charge, the stigma of holding a BA asset remains. BA assets have often been associated with riskier, opaque, less liquid investments. Positions held in a commingled fixed income index exchange-traded fund ( ETF ), which have daily look through, that have been reviewed by the SVO can gain Schedule D treatment and follow the recently adopted systematic cost base or fair market value methods. This differentiation between an ETF and LLC is understandable when an LLC is presumed to be less transparent and inherently riskier than individual bond holdings, or an index-based fixed income ETF. However, the Payden Active Cash Management, LLC addresses these issues, and more, as follows: Each parent company ( Company ) invests in a proprietary Series ( Fund ) set up within a 3c(7) Delaware Statutory Series Trust ( LLC ), with only the Company and its affiliated entities invested. There is no commingling of interests with other companies, as happens with an approved ETF, allowing the Fund to address the specific liquidity needs of the single Company in a more efficient manner. The investment guidelines for each Fund, again unlike an ETF, are developed by the Company and the underlying assets of the Fund are invested by the investment manager to fully comply with the guidelines at all times. Compliance with the guidelines is confirmed by a third-party trust company, daily, which has a fiduciary duty to the LLC. In addition, individual CUSIP holdings can be reported on a daily basis. Transactions and holdings can be reported to the SVO as frequently as needed to prove full compliance with the stated guidelines. No securities lending or leverage is permitted, unlike what is possible in an ETF. Also of note, there is no borrowing permitted from one affiliated legal entity to another, only the pooling of their cash assets for 2017 National Association of Insurance Commissioners 1

128 Attachment N Ref # more effective and efficient investment management. Each affiliated legal entity may only redeem what they invest in the Fund. No potential for liquidity gates or fees, as the Fund is entirely the Company s and not impacted by the liquidity needs of any other investors. Operationally the Fund acts as a replacement for existing bank sweep and money market fund relationships, not placing additional burdens on the Company. Fund may hold its transaction price at US$1.00 under the following conditions: o o Under normal circumstances and market conditions, the transaction price of the Fund will continue to equal US$1.00, with net interest income paid out monthly via issuance of new shares. In the event one or more assets held in the Fund s investment portfolio is impaired resulting in a net asset value (NAV) of the Fund of less than US$1.00, the third-party trust company (fiduciary) may offset the resulting impairment with accrued or to be accrued interest for the remainder of the month up to the full amount of the impairment for the purpose of maintaining a US$1.00 transaction price for the Fund. If, on any Business Day, the amount of the impairment has exceeded the aggregate accrued interest available for offset, either the Fund s transaction price per unit will fall below US$1.00 or shares equivalent to the shortfall will be redeemed at the end of the month, effectively equating the US$1.00 transaction price to the NAV. The NAV of the Fund (which will be the aggregate value of the assets belonging to such Fund less the liabilities of such Fund, determined in accordance with U.S. generally accepted accounting principles) shall be determined as of 4:00 p.m. Eastern time on each Business Day and under normal circumstances and market conditions the NAV of the Fund and the transaction price of the Fund will be the same. The following methodology is used to value the underlying securities: Fixed income securities are valued at the mean of the bid and asked prices as determined by an independent pricing service, taking into consideration recent transactions, yield, liquidity, risk, credit quality, coupon, maturity, type of issue and any other factors or market data the pricing service deems relevant. Fixedincome securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value. A Fund of Payden Active Cash Management, LLC, is an actively-managed vehicle with strong liquidity that offers a higher-yielding alternative to money market funds. It is a custom ultra-short bond strategy, bespoke to the insurer only, intended as an alternative to the money market funds currently being used both within managed portfolios and for operating activities. The Fund can act as a sweep vehicle and provides daily liquidity. The NAIC has previously approved certain single owner LLCs to be reported on Schedule A, acknowledging the LLC structure is not inherently riskier. In a similar vein, we would urge the NAIC to look beyond the structure alone to the underlying characteristics of the investment, and realize the benefits this structure brings to the complex insurance corporate structure. Existing Authoritative Literature: SSAP No. 40 Real Estate Investments Revised (SSAP No. 40R)- An entity that holds real estate investments through an LLC, which qualifies for inclusion in this Statement because all the criteria in paragraph 4 are met, shall separately report each investment on Schedule A, and code the real estate as wholly owned through an LLC. 4. A single real estate property investment that is wholly-owned by an LLC that is directly 1 and wholly-owned by the reporting entity shall be captured within this statement and reported on Schedule A 1 For example, qualifying LLCs that are owned by a downstream holding company are not within scope of this statement regardless if the downstream holding company is wholly-owned by the reporting entity National Association of Insurance Commissioners 2

129 Attachment N Ref # Real Estate if all of the following criteria are met. Real estate owned through an LLC that meets the stated criteria shall follow all statutory requirements within this statement 2. Real estate owned through an LLC that does not meet the criteria shall be reported on Schedule BA Other Long-Term Invested Assets. Regardless if reported on Schedule A or Schedule BA, all LLC s owned by the reporting entity shall be detailed in Schedule Y. a. The real estate LLC has no transactions of its own other than transactions associated with an ownership structure utilized only for the ownership and management of a single real estate investment exclusively for the reporting entity (e.g., real estate taxes). A reporting entity may have more than one LLC that wholly-owns a single real estate property investment, but each LLC must separately comply with the paragraph 4 conditions, and be separately reported on Schedule A. All transactions of the LLC shall be reported as transactions of the reporting entity pursuant to the guidance in paragraphs b. The LLC only owns a single real estate property supported by an appraisal pursuant to paragraphs A single real estate property can include multiple parcels of land and more than one structure; however, to be considered a single real estate property, the multiple of parcels of land and structure(s) must be contiguously located and managed together as a single asset (with reasonable allowances for public access routes). Criteria that may assist with determining a single real estate property would include the legal definition of the property, real estate tax assessments, postal address, the appraisal and the management and use of the property. c. The reporting entity solely controls the real estate property in a manner similar to directlyowned real estate. As such, the reporting entity controls others access to the real estate, and the real estate must be able to be sold exactly as, and as promptly as, directlyowned real estate. d. The reporting entity solely and distinctly possesses all risks (other than the limitation of potential liability afforded by the LLC structure itself) and rewards of ownership of the real estate investment, without any constraints imposed by the LLC. A standard mortgage or encumbrance by an unrelated party is not considered a sharing of risks or rewards and is permitted within this guidance. However, a participating mortgage loan (paragraph 22) with related or unrelated parties, or loans or other encumbrances from related parties, would result with the reporting entity not solely and distinctly possessing all risks and rewards of the real estate investment. e. The reporting entity is the only member of the LLC. The LLC is not comprised of any other members, including: groups, competing interests, mutual beneficial interests, or coventurers. The single-member ownership is required even if other members in the LLC are affiliates. An LLC comprised of affiliated parties is not within scope of this statement. f. There shall be no apportionment by the LLC or the reporting entity of the appraised value, expenses or income from the single real estate property to any other entity or between the general or separate account. SSAP No. 48 Joint Ventures, Partnerships and Limited Liability Companies - Investments in these Limited Liability Companies are generally reported using an equity method. The guidance in SSAP No. 48 specifies the equity method approach based on whether the investment has more than minor ownership interest. 2 The inclusion in this statement of real estate owned by a single member LLC is not an election by the reporting entity. All real estate owned in an LLC meeting the criteria in paragraph 4 are required to be captured within this statement, and are subject to this statement s requirements for valuation and admittance. Departures from the requirements within this SSAP, or continuing to follow SSAP No. 48 for these investments would be considered a departure from NAIC statutory accounting principles subject to permitted or prescribed practice disclosure requirements National Association of Insurance Commissioners 3

130 Attachment N Ref # Investments in these ventures, except for joint ventures, partnerships and limited liability companies with a minor ownership interest, shall be reported using an equity method as defined in SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities (SSAP No. 97), paragraphs 8.b.i. through 8.b.iv. 8. Joint ventures, partnerships and limited liability companies in which the entity has a minor ownership interest (i.e., less than 10%) or lacks control as stipulated in paragraphs 15 and 16, shall be recorded based on the underlying audited U.S. GAAP equity of the investee. The investment shall be nonadmitted if the audited financial statements include substantial doubt about the entity s ability to continue as a going concern. Additionally, the investment shall be nonadmitted on the basis/contents of the audit opinion as detailed in paragraph 20 of SSAP No. 97. SSAP No. 26R Bonds - The definition of a bond, per paragraph 3, does not include equity/fund investments, such as mutual funds or exchange-traded funds. However, specific types of SVO-identified investments are provided special statutory accounting treatment and are included within the scope SSAP No. 26R. These investments follow the guidance within SSAP No. 26R as if they were bonds, unless different treatment is specifically identified. 4. The definition of a bond, per paragraph 3, does not include equity/fund investments, such as mutual funds or exchange-traded funds. However, the following types of SVO-identified investments are provided special statutory accounting treatment and are included within the scope of this statement. These investments shall follow the guidance within this statement, as if they were bonds, unless different treatment is specifically identified in paragraphs a. Exchange traded funds (ETFs), which qualify for bond treatment, as identified in Part Six, Section 2 of the Purposes and Procedures Manual of the NAIC Investment Analysis Office. (SVO-identified ETFs are reported on Schedule D Part 1.) b. Bond mutual funds which qualify for the Bond List, as identified in Part Six, Section 2 of the Purposes and Procedures Manual of the NAIC Investment Analysis Office. (SVOidentified bond mutual funds are reported on Schedule D Part 1.) Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): In 2013, the Statutory Accounting Principles (E) Working Group established the Investment Classification Project (original agenda item ) to review the investment SSAPs with suggestions to clarify definitions, scope, and the accounting method / related reporting. SSAP No. 48 Joint Ventures, Partnerships, and Limited Liability Companies was identified as a SSAP to review under this project. Pursuant to the original agenda item, it was identified that Schedule BA has different RBC guidance based on type of insurer. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Sponsor s Recommended Conclusion or Future Action on Issue: Allow for investment in a wholly-owned LLC Series Fund (a Fund ) that solely holds fixed income securities and has been reviewed by the SVO and received an NAIC 1 or 2 rating to be reported as Bonds on Schedule D Part 1, reflecting the true nature of underlying risk exposures. This allowance would be subject to the following provisions: 1.) Fund guidelines restrict investment holdings to permissible Schedule D assets only, 2.) Third-party trust company acting as a fiduciary confirms the ongoing compliance with all investment guidelines, 3.) Guidelines may only be changed with notification to the SVO, 2017 National Association of Insurance Commissioners 4

131 Attachment N Ref # ) SVO can be provided with transparency of holdings and transactions on a daily basis to confirm guidelines are being met, 5.) The Fund should be recorded on Schedule D at the fair value NAV, 6.) And all entities investing in the Fund fall under a single parent, maintaining all risk and return (after fees). In summary, high quality (NAIC rated 1 or 2) money market instruments and short duration bonds held within a private, wholly-owned LLC Series have performed in a manner consistent with similar bonds held directly by an insurer. Based on the improved efficiencies and customization to an insurer s holistic liquidity profile, we propose that SVO-reviewed and rated LLC Series Funds, meeting the criteria outlined above, be reported as Bonds on Schedule D Part 1, consistent with the true nature of underlying risk exposures. Recommending Parties - May 22, Date Submitted Payden & Rygel Investment Management Erinn King, Principal 265 Franklin Street Boston, MA (617) eking@payden.com Everest Reinsurance Company Jack Nelson, Chief Investment Officer 477 Martinsville Road Liberty Corner, NJ (908) jack.nelson@everestre.com Anthem, Inc. Vince Scher, Staff VP, Investment Programs 120 Monument Circle Indianapolis, IN (317) Vince.Scher@anthem.com Selective Insurance Company of America Joseph Eppers, Chief Investment Officer 500 Winding Brook Dr Glastonbury, CT (860) joseph.eppers@selective.com Staff Recommendation: This sponsor-submitted agenda item ultimately requests consideration of a look-through approach for underlying bond investments in an LLC. NAIC staff would classify this agenda item as part of the Investment Classification Project as the items noted by the sponsor are consistent with investment reporting issues identified in the original agenda item ( ) for that project: a) Allowing look-through accounting for certain types of investments of insurers, with specific inclusion of items in the bond or equity SSAPs (e.g., certain Mutual Funds and ETFs) that do not meet the SSAP definition, and the reporting of such items in the investment schedules National Association of Insurance Commissioners 5

132 Attachment N Ref # b) Inconsistencies regarding the reporting of items within Schedule D and Schedule BA (e.g., bonds, ETFs, loans, debt obligations of partnerships/joint ventures and different forms of mutual funds). c) Different treatment for some investments by type of insurer (e.g., life and fraternal insurers have specific instructions for BA investments with underlying characteristics of bonds or preferred stock). As detailed in the sponsor s recommendation, the sponsor requests specific LLC investments (new proposed listing by the SVO) to be reported as bonds on Schedule D-1 and has recommended provisions that an LLC would need to meet to be included on the SVO listing. Although NAIC staff believes that the issues raised in the agenda item should be considered by the Working group as part of the investment classification project, NAIC staff does not recommend that the Working Group expose revisions as suggested by the sponsor. NAIC staff highlights that the sponsor recommendation would influence investment reporting (the applicable SSAP and reporting schedule) not just by the investment structure, but by the qualifying NAIC designation. This proposal would be inconsistent with existing statutory accounting guidance, as NAIC designations do not impact the SSAP an investment should be captured in, or the investment reporting schedule in which an investment is reported. Under statutory accounting principles, the structure of certain investments (e.g., SVO-Identified Bond ETFs) may impact the SSAP / schedule, but these allocations are not driven by NAIC designation, but are driven by the overall structure of the investment. In speaking with the sponsor, NAIC staff believes the key driver for this agenda item is the RBC charge for investments in certain LLCs for property/casualty entities reported on Schedule BA. Under existing reporting guidelines, life / fraternal companies are permitted to report certain Schedule BA investments with underlying fixed-income securities with an NAIC designation. By reporting with an NAIC designation, the investment is able to receive an improved risk-based capital charge. This capability is not allowed for property/casualty companies, and all Schedule BA investments reported for property/casualty entities receive a 20% RBC. Rather than the sponsor recommendation, NAIC staff provides the following suggestions for consideration: 1. Send referrals inquiring whether property/casualty companies should have ability to report NAIC designations on Schedule BA, as permitted by life insurance companies, to obtain improved RBC for certain investments. Any change would require support and ultimate action from the applicable groups. NAIC staff would recommend that these groups send a response regarding whether they will consider this issue in order to allow NAIC staff and the Working Group to appropriately consider future requests. (These referrals would be sent to the Valuation of Securities (E) Task Force, Capital Adequacy (E) Task Force, and the Blanks (E) Working Group, but would not likely require statutory accounting revisions.) This option would continue investment reporting based on the nature of the investment (e.g., LLCs would be captured in scope of SSAP No. 48 and reported on Schedule BA) and ensure that like investments are measurement / reported consistently. This option would prevent the need to established exception reporting for certain LLCs and prevent the need for revisions to SSAP No. 26R (and Schedule D-1) for these investments. For example, LLCs are reported using an equity method under SSAP No. 48. If certain LLCs were captured in scope of SSAP No. 26, the Working Group would need to consider revisions to clarify the measurement method for these investments, as they would not be able to apply the existing guidance in SSAP No. 26 (amortized cost). If captured in SSAP No. 26R as a non-bond item, revisions would also need to be considered to Schedule D-1 to separately identify these investments on that schedule National Association of Insurance Commissioners 6

133 2017 National Association of Insurance Commissioners 7 Attachment N Ref # Any change under this option would be subject to the decisions of the noted groups. NAIC staff believes this would be most appropriate as the ultimate issue is whether certain investments should be attributed a better RBC based on their underlying risk profile. Staff Note: NAIC staff prefers this option, as staff does not generally support statutory accounting revisions that are driven by RBC. Rather, NAIC staff believes that RBC changes (if appropriate) should be considered for the investments by the applicable groups. NAIC staff defers to the Working Group on whether classification changes are preferred. 2. Consider revisions to allow certain LLC investments that solely hold fixed-income securities to be in scope of SSAP No. 26R and reported on Schedule D-1. (This proposal is different from the sponsor s recommendation as it would allow all LLC investments whose structural analysis fits the fixed-income profile to be included, and this provision would not be based on NAIC designation. This proposal could require the LLC structure to maintain various structural requirements, including a retention of the highest credit rating given by an NAIC CRP (similar to the SVO-Identified Bond Mutual fund list), but it would not impact reporting based on NAIC SVO designations. With the existing SVO-Listings the assessment is a two-step process. The first step is whether the structural analysis is met. If the structural analysis if met, then the investment is permitted to be captured within the noted SSAP / reporting schedule. Once included on an SVO-Listing, the investment would then have to be acquired by an insurer, and then submitted to the NAIC SVO for an NAIC designation.) Staff Note: As previously noted, NAIC staff does not support creating more exceptions for SSAP No. 26 to achieve desired RBC, but this approach, would allow reporting based on a set structure if that was supported by the Working Group. This option would incorporate a new exception (non-bond investment) to SSAP No. 26R (and Schedule D-1) and would require revisions to capture the provisions / guidance for these LLCs in SSAP No. 26R. Although LLCs are reported under an equity method in SSAP No. 48, if this option is supported, NAIC staff would recommend that all LLCs reported in scope of SSAP No. 26R be reported at fair value. (An amortized cost measurement method would not be applicable.) The corresponding NAIC designation would not impact measurement of the investment, but would strictly be used for RBC purposes. Corresponding reporting changes (to identify the LLCs) would also be recommended to Schedule D-1. This option would require consideration on how to limit / regulate the LLC investments reported in scope of SSAP No. 26R. If this proposal is supported, NAIC staff would suggest (consistent with the sponsor recommendation), that the Valuation of Securities (E) Task Force be requested to establish a new listing for specific LLC investments permitted to be reported in scope of SSAP No. 26R. (This option would require an initial referral to the Task Force to assess whether they are open / able to complete such reviews and determinations.) 3. Dispose this agenda item without statutory accounting revisions. This option would continue the current process of reporting LLCs with fixed-income components in scope of SSAP No. 48, and the reporting of these items on Schedule BA, without sending referrals to other groups. (This action would not prevent the VOSTF, CATF or Blanks from considering changes that they thought were appropriate, but would remove the SAPWG from suggesting consideration of these changes.) NAIC staff recommends that the Working Group move this agenda item to the active listing, classified as nonsubstantive, and expose the agenda item with a request for comments on the three options proposed by NAIC staff, the initial proposal by the sponsor, as well as other options that could be considered.

134 Attachment N Ref # Staff Review Completed by: Julie Gann, NAIC July 11, 2017 g:\data\stat acctg\3. national meetings\a. national meeting materials\2017\summer\meeting\n payden active cash management llc - naic rec updated docx 2017 National Association of Insurance Commissioners 8

135 Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Attachment O Ref # Issue: High-Cost Risk Pooling in ACA Risk Adjustment Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: The Patient Protection and Affordable Care Act of 2010 (ACA) introduced a risk adjustment program impacting the individual and small group medical insurance markets, effective in In December 2016, the U.S. Department of Health and Human Services (HHS) adopted a new regulation that changed how ACA risk adjustment would function, starting in Specifically, as of 2018 the ACA risk adjustment program will now include a reinsurance-like element called high-cost risk pooling (HCRP). According to HHS, the new HCRP element of ACA risk adjustment will operate along the following lines: 1. HHS will establish two new HCRP parameters: a threshold and a coinsurance rate. For 2018, the threshold has been set at $1 million, and the coinsurance rate has been set at 60 percent. 2. In the calculation of each issuer s annual risk adjustment transfer amount, the issuer will be reimbursed for a portion (specifically, the coinsurance rate) of actual enrollee-level claims above the threshold. Conforming changes will be made to how each issuer s enrollee-level plan liability risk scores are calculated. 3. In order to maintain the zero-sum nature of risk adjustment across each market in light of the new payments in step 2, each issuer s risk adjustment transfer amount will include an assessment, calculated as a percentage of the issuer s total premiums in the applicable market. The sum of the assessments across all issuers is intended to equal the sum of the payments in step 2 across all issuers. Conceptually, HCRP can be thought of as a form of reinsurance: The amounts subtracted from an issuer s risk adjustment transfer amount in step 3 are akin to reinsurance premiums that the issuer pays in order to receive protection on claims above the threshold, and the amounts credited to an issuer s risk adjustment transfer amount in step 2 are akin to reinsurance reimbursement for the claims ceded via this reinsurance. In this vein, there are similarities between HCRP (starting in 2018) and the ACA s transitional reinsurance program (which ran from 2014 to 2016). However, there are several differences. First, the HCRP reinsurance premiums and reinsurance claims will be administered within the ACA risk adjustment mechanism, rather than being administered as a distinct mechanism as was true for ACA transitional reinsurance. Also, while ACA transitional reinsurance pertained only to the individual market, the HCRP pertains to both the individual and small group markets. Lastly, with HCRP there is intended to be a balance between the total amounts that issuers pay in reinsurance premiums and the total benefits they receive in reinsurance claims. This was not the case with ACA transitional reinsurance, where the presence of external sources of funding implied that the total benefits issuers in the individual market received were significantly in excess of the total amounts issuers in the individual market contributed toward the program. With this background, the question is whether the introduction of the HCRP element of ACA risk adjustment should have any implications for how issuers account for ACA risk adjustment National Association of Insurance Commissioners 1

136 Attachment O Ref # Existing Authoritative Literature: SSAP No. 107 Risk-Sharing Provisions of the Affordable Care Act discusses the accounting for ACA risk adjustment. It also discusses the accounting for the now-ended ACA transitional reinsurance program. Paragraphs 4 through 9 of SSAP No. 107 provide a description and overview of ACA risk adjustment. Some of the language in paragraphs 6, 7 and 9 probably should be modified in order to incorporate the introduction of the HCRP element of risk adjustment. Paragraphs 10 through 13 of SSAP No. 107 provide guidance on the accounting treatment of ACA risk adjustment. Specifically, paragraph 13 states that risk adjustment payables and receivables shall be accounted for as premium adjustments subject to redetermination. This is clarified further in paragraph 13c, which states that premium revenue adjustments for the risk adjustment program are estimated for the portion of the policy period that has expired and shall be reported as an immediate adjustment to premium. Paragraphs 14 through 21 of SSAP No. 107 provide a description and overview of ACA transitional reinsurance. In particular, paragraph 17 likens the ACA transitional reinsurance for the individual market to participation in an involuntary pool, as discussed further in SSAP No. 63 Underwriting Pools. Paragraphs 25 through 37 of SSAP No. 107 provide guidance on how issuers participating in the ACA individual market would account for ACA transitional reinsurance. In particular, paragraph 29 reads in part as follows: 29. The transitional reinsurance program differs from an involuntary pool, in that there is not a proportionate sharing of the entire results of a pool. However, the purpose is very similar: to address the additional costs associated with high-risk individuals. Therefore, SSAP No. 63, paragraph 8, provides additional relevant guidance. As the transitional reinsurance program is a mechanism for sharing the additional costs associated with high-risk individuals, it is accounted for as traditional reinsurance. As a consequence of this determination, paragraph 30 states that the assessments made by issuers of individual insurance to fund the ACA transitional reinsurance program are to be accounted for as reinsurance ceded premium, and paragraphs 33 through 35 state that the distributions received from the ACA transitional reinsurance program are to be accounted for as reinsurance ceded claim recoveries. Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None Information or issues (included in Description of Issue) not previously contemplated by the Working Group: The adoption by HHS of high-cost risk pooling within ACA risk adjustment effective in 2018 was published as a final rule in the Federal Register on Dec. 22, 2016, as part of the 2018 Notice of Benefit Payment Parameters (NBPP). Specifically, see Section II.B.6.c.(3).iii of the 2018 NBPP, at pages of the Federal Register, Vol. 81, No Recommended Conclusion or Future Action on Issue: We outline two potential conclusions. Alternative #1 The NAIC had previously concluded that, from the standpoint of issuers in the individual market, the ACA transitional reinsurance program should be treated for accounting purposes as if it were an involuntary pool. The same reasoning would appear to imply that the HCRP element of ACA risk adjustment should be treated for accounting purposes as if it were an involuntary pool National Association of Insurance Commissioners 2

137 Attachment O Ref # Based on this reasoning, starting in 2018, an issuer in the individual or small group markets would need to decompose its risk adjustment payables and receivables into three pieces: 1. The piece representing proportionate reimbursement for the issuer s claims above the HCRP threshold would be accounted for as a reinsurance ceded claim recovery, consistent with how paragraph 33 of SSAP No. 107 treated payments made to the issuer under ACA transitional reinsurance. 2. The piece representing the percent-of-premium charge to the issuer in order to fund reimbursements across all issuers of claims above the HCRP threshold would be accounted for as reinsurance ceded premium, consistent with how paragraph 30 of SSAP No. 107 treated payments made by the issuer to fund the ACA transitional reinsurance program. 3. The residual piece would be accounted for consistent with existing guidance in paragraph 13 of SSAP No. 107 (i.e., as a premium adjustment subject to redetermination). Changes to SSAP No. 107 would be warranted in order to implement this accounting approach. Alternative #2 One difference between HCRP and transitional reinsurance is that the HCRP is going to be embedded within risk adjustment, rather than being a separate calculation. As a result of this, it is somewhat unclear at this point in time whether issuers would have reliable information available to them in order to decompose the overall risk adjustment estimate into the three pieces that the proposed accounting approach above would require. An alternative view is that applying involuntary pool accounting to the HCRP element of ACA risk adjustment would introduce unnecessary complexity to issuers financial statements. If NAIC were to endorse this view, an interpretation of SSAP No. 107 would be beneficial, in order to clarify that the NAIC wants the existing accounting for ACA risk adjustment to remain unchanged notwithstanding the introduction of the HCRP element in Recommending Party: Laurel Kastrup, MAAA, FSA Chairperson, Health Financial Reporting and Solvency Committee American Academy of Actuaries 1850 M Street NW, Suite 300, Washington, D.C ; linn@actuary.org 07/07/17 Staff Recommendation: NAIC Staff recommends moving this items to the nonsubstantive active listing and exposing revisions, which implement the sponsor s Alternative #1 to report the high cost risk pool similar to an involuntary pool, for comment. This recommendation would report the percent-of-premium charge to the issuer that funds reimbursements as premium ceded thereby reducing premium written. Reimbursements for specific high cost claims would be reported consistent with for ceded claims benefits reinsurance recoveries and reduce claims. NAIC staff notes that reporting large claims net of reimbursements would also be less distorting to loss ratios. The remainder of the risk adjustment program would be continue to reported as it was previously, which is primarily as adjustments to premium. Staff has proposed high cost risk pool, disclosures and recommends deleting the 2018 disclosures for the transitional ACA reinsurance program, which has ended. Although the risk corridors program has also ended, staff has not proposed deleting the risk corridors disclosures because of ongoing federal lawsuits. However, comments are requested regarding any additional updates that are needed to the SSAP No National Association of Insurance Commissioners 3

138 Attachment O Ref # disclosures. Staff recommends that comments on this item be considered in an interim conference call to ensure adoption prior to year-end. HHS Notice of Benefit and Payment Parameters for 2018 final payment rule regulations indicates that the primary risk adjustment calculation will not be directly impacted by payments to or from the HCRP. However, the overall risk adjustment calculations should be more accurate because distorting high risk claims are being coinsured by the respective individual or small group HCRP are excluded. The timing of all cash flows has not yet been operationalized, but the pooling payment is expected to be billed based on filings in the year following the plan year (for example July 2019 for 2018 plan year). Receipts for HCRP reimbursements for claims over the threshold of $1 million (for 2018) will be distributed after pooling payments are received (for example August or September of 2019 for 2018 plan year). Any shortfalls in the receipts of payments will not be funded separately. However, as the premium payments will be billed based on claim submissions, the primary variable should be collections. Staff Review Completed by: Robin Marcotte July 2017 Proposed Revisions to SSAP No. 107 Risk Adjustment Program Description and Overview 4. The risk adjustment program based on Section 1343 of the ACA is effective beginning in the 2014 benefit year and continues as a permanent program. 5. The risk adjustment program includes health plans (except certain exempt and grandfathered plans) in the individual or small group markets both on and off the exchange. All covered risk adjustment plans are required to participate in the risk adjustment program. 6. The purpose of the risk adjustment program is to transfer funds from lower risk plans to higher risk plans within similar plans in the same state in order to adjust premiums for adverse selection among carriers caused by membership shifts due to guarantee issue and community rating mandates. States may set up their own risk adjustment programs, or they may permit Health and Human Services (HHS) to develop and manage the program in the state. In addition to the risk adjustment amount, HHS determines the user fee. In states operating their own risk adjustment program, the state will determine the fee. 7. Risk adjustment assessments and distributions will be computed based on the reporting entity s risk score versus the overall market risk score after applying adjustments. Effective for 2018 benefit plan years, the risk adjustments and distributions are calculated after excluding the percentage of costs above the threshold specified in the high cost risk pool aspect of this program (see High Cost Risk Pool in paragraphs and 16). Risk adjustment assessments will be made if the plan average actuarial risk of all of their enrollees in a market and state is lower than the plan average risk of all enrollees in fully insured plans in that market and state risk pool. Risk adjustment distributions will be made to health plan issuers whose plans have an average actuarial risk that is greater than the plan average actuarial risk scores in that market and state risk pool. The reinsurance program is not considered in the computation. 8. HHS will collect a user fee to support the administration of the HHS-operated risk adjustment program. This fee applies to issuers of risk adjustment covered plans in states in which HHS is operating the risk adjustment program. For example, HHS projects that the per capita risk adjustment user fee for 2014 is approximately $1 per enrollee per year. Similar terms will apply for the user fees of state operated programs. 9. All risk adjustment distributions made to issuers are completely funded through the amounts assessed to other issuers within the same market in the same state to ensure equality between program distributions and assessments. Consequently, risk adjustment assessments will be invoiced prior to processing program distributions to issuers. Once applicable risk adjustment assessments by issuers are received by HHS or the state, funds will be redistributed to the higher risk plans. Each issuer that offers a risk adjustment covered plan will be notified of risk adjustment distributions or assessments by June 30 of the year following the benefit year to align with the program distributions and assessment processing. Risk adjustment assessments owed by an issuer 2017 National Association of Insurance Commissioners 4

139 Attachment O Ref # to HHS or the state are required to be remitted within 30 days of notification of the assessment. Once applicable assessments are received by HHS or the state, funds will be redistributed to the higher risk plans. Risk Adjustment Program High Cost Risk Pool 10. In December 2016, the U.S. Department of Health and Human Services (HHS) adopted a new regulation that changed how the ACA risk adjustment program would function, beginning with the 2018 benefit year. Specifically, the ACA risk adjustment methodology will incorporate a high-cost risk pool calculation. This adds a reinsurance-like element to the risk adjustment program which is referred to as high-cost risk pooling. The operation of the high cost risk pools will exclude a percentage of costs above a threshold level in the calculation of enrollee-level plan liability risk scores so that risk adjustment factors in the risk adjustment program described in paragraphs 4-9 would be calculated for risk associated with hierarchical condition categories and prescription drug categories excluding these extreme costs. The program will operate two national high cost risk pools, one for individuals and one pool for small groups. An overview of the new high cost risk pool aspect of ACA risk adjustment, is as follows: a. HHS will establish two new high cost risk pool parameters: a threshold and a coinsurance rate. For 2018, the threshold has been set at $1 million, and the coinsurance rate has been set at 60 percent. For 2018, the high cost risk pools for high-cost enrollees would fund 60 percent of an issuer s costs for individual enrollees with claims above $1 million. b. In the calculation of each issuer s annual risk adjustment transfer amount, the issuer will be reimbursed for a portion (specifically, the coinsurance rate) of actual enrollee-level claims above the threshold. Conforming changes will be made to how each issuer s enrollee-level plan liability risk scores are calculated. For example, in 2018, claims in excess of $1 million per enrollee will be reimbursed from the respective high cost risk pool at a 60% coinsurance rate. This payment is referred to hereafter as the high cost risk pool claims reimbursement. c. In order to maintain the zero-sum nature of risk adjustment across each market in light of the new high cost risk pool claims reimbursements detailed in paragraph 10.b., each issuer s risk adjustment transfer amount payable to HHS will include an assessment to all risk adjustment entities, which will be calculated as a percentage of the issuer s total premiums in the applicable market. The sum of the assessments across all issuers is intended to equal the sum of the high cost risk pool claims reimbursements across all issuers. 11. Conceptually, high cost risk pool can be thought of as an involuntary reinsurance pool. The percentage of premium amounts used to fund the high cost risk pool, which are subtracted from an issuer s risk adjustment transfer amount in paragraph 10.c., are akin to reinsurance premiums that the issuer pays in order to receive reinsurance reimbursement on claims above the high cost risk pool threshold. The amounts credited to an issuer s risk adjustment transfer amount per paragraph 10.b. are akin to reinsurance reimbursement (60% coinsurance) for the claims over the threshold ($1 million) ceded via this involuntary reinsurance pool for high cost enrollees. Risk Adjustment Program Accounting Treatment The accounting elements of the ACA permanent risk adjustment program, which are considered separately, include the user fee and the risk adjustment assessments and distributions The user fee is paid to HHS in states where the risk adjustment program is being operated by HHS and to the state program if operated by the state. Risk adjustment user fees shall be treated as government assessments. These fees are treated the same as other non-income-based governmental taxes and fees in that they are recognized as an expense and liability when the premium subject to the assessment is written Premium adjustments pursuant to the risk adjustment program will be based upon the risk scores (health status) of enrollees, participating in risk adjustment covered plans rather than the actual loss experience of the 2017 National Association of Insurance Commissioners 5

140 Attachment O Ref # insured. This program bears some similarities to the Medicare Advantage risk adjustment program 1 under which the plan receives additional funding (or pays additional amounts) based on adjustments to risk scores of enrollees (see INT 05-05: Accounting for Revenues Under Medicare Part D Coverage) The risk adjustment payables and receivables shall be accounted for as premium adjustments subject to redetermination as specified in this statement. Effective for 2018 benefit plan years, the risk adjustments and distributions are calculated after excluding the percentage of costs above the threshold specified in the high cost risk pool aspect of this program. The accounting for the High Cost Risk Pool has separate accounting as an involuntary pool as described paragraph 16. The remaining aspect of the risk adjustment program will continue to be accounted for as premium adjustments subject to redetermination. a. Risk adjustment payables meet the definition of liabilities as set forth in SSAP No. 5R Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R). Risk adjustment receivables meet the definition of an asset and are admissible to the extent that they meet all of the criteria in this statement. b. Risk adjustment payables and receivables shall be estimated based on experience to date. The method used to estimate the payables and receivables shall be reasonable and consistent between reporting periods. Reporting entities shall be aware of the significant uncertainties involved in preparing estimates and be both diligent and conservative in their estimations. In exercising the judgment required to prepare reasonable estimates for the financial reporting of risk adjustment program payables and receivables, the statutory accounting concept of conservatism shall be followed. In addition, reporting entities are required to have sufficient data to determine a reasonable estimate. Ensuring sufficient data requires that the reporting entity s estimate is based on demonstrated knowledge of the marketplace and annual information which includes patient encounter and diagnosis code data to determine the differences in the actuarial risk profile of the reporting entity s insureds versus the market participants in the particular market and state risk pool. Sufficient data shall incorporate patient default scores, if applicable, under the terms of the risk adjustment program. In addition, the estimates shall be consistent with other financial statement assertions and the pricing scenarios used by the reporting entity. c. Premium revenue adjustments for the risk adjustment program are estimated for the portion of the policy period that has expired and shall be reported as an immediate adjustment to premium. Accrued risk adjustment receivables shall be recorded in premium and considerations receivable, with a corresponding entry to written premiums. Accrued risk adjustment payables shall be recorded as a liability 2 with a corresponding entry to written premiums. Reporting entities shall record additions or reductions to revenue resulting from the risk adjustment program in the period in which the changes in risk scores of enrollees result in reasonably estimable additions or reductions. The risk adjustment program receivables shall be reported gross of payables. d. The risk adjustment receivables are administered through a federal governmental program. Once amounts are collected by the governmental entity, there is an obligation to distribute the funds. Amounts over 90 days due shall not cause the receivable to be treated as a nonadmitted asset based solely on aging. e. Provided that the risk adjustment receivables due the reporting entity are determined in a manner that is consistent with the requirements of this statement, the receivables are admitted assets until determination of impairment or payment denial is received from the governmental entity or government-sponsored entity administering the program. Upon notification that payments to be paid to the reporting entity will be less than the recorded receivables, any amount in excess of the confirmed amount shall be written off and charged to income, except for amounts that are under 1 The ACA program also has significant differences from the Medicare Advantage risk adjustment program, which is retrospective, administered as a single national program, with most enrollees administered by the federal government. By contrast, the ACA risk adjustment is not retrospective, and is administered by each entity by state and by plan. 2 The annual statement liability lines will vary by the type of annual statement the reporting entity files. Managed care/accident and health reporting entities report as aggregate health policy reserves; life and accident and health reporting entities report as aggregate reserves for accident and health contracts; and property and casualty reporting entities report as aggregate write-ins for liabilities National Association of Insurance Commissioners 6

141 Attachment O Ref # appeal. Any receivable for risk adjustment amounts under appeal shall be reflected as a nonadmitted asset. f. Evaluation of the collectibility of all amounts receivable from the risk adjustment program shall be made for each reporting period. If, in accordance with SSAP No. 5R, it is probable that the risk adjustment receivables are uncollectible, any uncollectible receivable shall be written off and charged to income in the period the determination is made. If it is reasonably possible that a portion of the balance determined in accordance with this paragraph is not anticipated to be collected and is therefore not written off, the disclosure requirements outlined in SSAP No. 5R shall be followed. Risk Adjustment Program High Cost Risk Pool Accounting Treatment 16. The individual and small group high cost risk pools of the ACA risk adjustment program shall be accounted for consistent with an involuntary reinsurance pool. Reporting entity issuers in the individual or small group markets need to account for the following risk adjustment payables and receivables: a. The assessment payable by the reporting entity which is the percent-of-premium charge to the issuer in order to fund reimbursements across all issuers of claims above the high cost risk pool threshold shall be accounted for as reinsurance ceded premium. b. High risk cost pool distributions which represent proportionate reimbursement for the issuer s claims above the high cost risk pool threshold would be accounted for as reinsurance ceded claim benefit recoveries. c. As the risk adjustments and distributions described in paragraphs 4-9 are calculated after excluding the percentage of costs above the threshold specified in the high cost risk pool aspect of this program the payments described in paragraphs 4-9 will continue to be accounted for consistent with existing guidance in paragraph 15 (i.e., as a premium adjustment subject to redetermination). Drafting Note: 16 d-f are consistent with the existing guidance for the risk adjustment program. d. The risk adjustment high cost risk pool claim benefit receivables are administered through a federal governmental program. Once amounts are collected by the governmental entity, there is an obligation to distribute the funds. Amounts over 90 days due shall not cause the claim benefit receivable to be treated as a nonadmitted asset based solely on aging. e. Provided that the risk adjustment high cost risk pool claim benefit receivables due the reporting entity are determined in a manner that is consistent with the requirements of this statement, the receivables are admitted assets until determination of impairment or payment denial is received from the governmental entity or government-sponsored entity administering the program. Upon notification that payments to be paid to the reporting entity will be less than the recorded high cost risk pool claim benefit receivables, any amount in excess of the confirmed amount shall be written off and charged to income, except for amounts that are under appeal. Any receivable for high cost risk pool risk adjustment amounts under appeal shall be reflected as a nonadmitted asset. f. Evaluation of the collectibility of all amounts receivable from the high cost risk pool risk adjustment program shall be made for each reporting period. If, in accordance with SSAP No. 5R, it is probable that the high cost risk pool risk adjustment receivables are uncollectible, any uncollectible receivable shall be written off and charged to income in the period the determination is made. If it is reasonably possible that a portion of the balance determined in accordance with this paragraph is not anticipated to be collected and is therefore not written off, the disclosure requirements outlined in SSAP No. 5R shall be followed National Association of Insurance Commissioners 7

142 Disclosures Attachment O Ref # The financial statements shall disclose on an annual and quarterly basis beginning in the first quarter of 2014, the assets, liabilities and revenue elements by program regarding the risk-sharing provisions of the Affordable Care Act for the reporting periods which are impacted by the programs including the listing in paragraphs 57.a. through 57.c. Reporting entities shall also indicate if they wrote any accident and health insurance premium, which is subject to the Affordable Care Act risk-sharing provisions. In the event that the balances are zero, the reporting entity should provide context to explain the reasons for the zero balances, including insufficient data to make an estimate, no balances or premium was excluded from the program, etc. Asset balances shall reflect admitted asset balances. The disclosure shall include the following: a. ACA Permanent Risk Adjustment Program i. Premium adjustments receivable due to ACA Risk Adjustment ii. iii. iv. Risk adjustment user fees payable for ACA Risk Adjustment Premium adjustments payable due to ACA Risk Adjustment (excluding high cost risk pool ceded premium) Reported as revenue in premium for accident and health contracts (written/collected) due to ACA Risk Adjustment v. Reported in expenses as ACA risk adjustment user fees (incurred/paid) vi. vii. Premium ceded to High Cost Risk Pools Claim reimbursements receivable from High cost Risk Pools b. ACA Transitional Reinsurance Program i. Amounts recoverable for claims paid due to ACA Reinsurance ii. iii. Amounts recoverable for claims unpaid due to ACA Reinsurance (contra-liability) Amounts receivable relating to uninsured plans for contributions for ACA Reinsurance iv. Liabilities for contributions payable due to ACA Reinsurance - not reported as ceded premium v. Ceded reinsurance premiums payable due to ACA Reinsurance vi. vii. Liability for amounts held under uninsured plans contributions for ACA Reinsurance Ceded reinsurance premiums due to ACA Reinsurance viii. Reinsurance recoveries (income statement) due to ACA Reinsurance payments or expected payments ix. ACA Reinsurance Contributions not reported as ceded premium c. ACA Temporary Risk Corridors Program i. Accrued retrospective premium due from ACA Risk Corridors ii. Reserve for rate credits or policy experience rating refunds due to ACA Risk Corridors iii. Effect of ACA Risk Corridors on net premium income (paid/received) 2017 National Association of Insurance Commissioners 8

143 iv. Effect of ACA Risk Corridors on change in reserves for rate credits Attachment O Ref # In addition, beginning in annual 2014 and both quarterly and annual thereafter, a roll forward of prior year ACA risk-sharing provisions specified asset and liability balances shall be disclosed in the annual statutory Notes to Financial Statements, as illustrated in Exhibit B. Note for the roll forward illustration, assets shall be reflected gross of any nonadmission. The reasons for adjustments to prior year balances (i.e. federal audits, revised participant counts, information which impacted risk score projections, etc.) shall also be disclosed. For year-end 2014, all columns and rows are expected to be zero since 2014 is the first year that a receivable or liability will be recorded. For reporting periods on or after March 31, 2016, the risk corridors roll forward is amended to require disclosure of the risk corridors asset and liability balances and subsequent adjustments by program benefit year. The beginning receivable or payable in the roll forward will reflect the prior year-end balance for the specified benefit For reporting periods ending on or after March 31, 2016, for both quarterly and annual reporting, the following information is required for risk corridors balances by program benefit year: a. Estimated amount to be filed or final amounts filed with federal agency; b. Amounts impaired or amounts not accrued for other reasons (not withstanding collectability concerns); c. Amounts received from federal agency; d. Asset balance gross of nonadmission; e. Nonadmitted amounts; f. Net admitted assets. Effective Date and Transition This statement is effective for years ending on or after December 15, A change resulting from the adoption of this statement shall be accounted for as a change in accounting principle in accordance with SSAP No. 3 Accounting Changes and Corrections of Errors. Risk-sharing provisions guidance was previously reflected within INT 13-04: Accounting for the Risk-Sharing Provisions of the Affordable Care Act and was effective January 1, Upon adoption of this SSAP, INT was nullified. Disclosures in paragraphs 57 and 58 were adopted in SSAP No. 35R Guaranty Fund and Other Assessments, but were moved to this SSAP prior to publication. Statement revisions in paragraphs 10, 11 and 16 for risk adjustment high cost risk pools and related disclosure changes are effective for reporting periods beginning on or after January 1, National Association of Insurance Commissioners 9

144 EXHIBIT B ACA RISK-SHARING PROVISIONS ROLL-FORWARD ILLUSTRATION Attachment O Ref # Receivables are reflected gross of any nonadmission for this illustration. Accrued During the Prior Year on Business Written Before December 31 of the Prior Year Received or Paid as of the Current Year on Business Written Before December 31 of the Prior Year Prior Year Accrued Less Payments (Col 1 3) Differences Prior Year Accrued Less Payments (Col 2 4) To Prior Year Balances Adjustments To Prior Year Balances Unsettled Balances as of the Reporting Date Cumulative Cumulative Balance Balance from Prior from Prior Years (Col Years (Col ) ) Receivable (Payable) Receivable (Payable) Receivable (Payable) Receivable (Payable) Ref Receivable (Payable) a. Permanent ACA Risk Adjustment Program 1. Premium adjustments receivable (excluding high cost risk pool) 4,000,000 3,000,000 1,000, ,000 A 200, Premium adjustments (payable) (excluding high cost risk pool) 8,000,000 9,000,000-1,000,000 1,000,000 B 0 3. Subtotal ACA 4,000,000 8,000,000 3,000,000 9,000,000 1,000,000-1,000, ,000 1,000, ,000 0 Permanent Risk Adjustment Program b. Transitional ACA Reinsurance Program 1. Amounts recoverable 22,000,000 15,000,000 7,000,000-7,000,000 C 0 for claims paid 2. Amounts recoverable 8,000,000 9,000,000-1,000, ,000 D -10,000 for claims unpaid (contra liability) 3. Amounts receivable relating to uninsured plans 3,000,000 2,800, , ,000 E 100, Liabilities for 90,000 75,000 15,000-14,000 F 1,000 contributions payable due to ACA Reinsurance not reported as ceded premium 5. Ceded reinsurance G 0 premiums payable 6. Liability for amounts 125,000 15, ,000 90,000 H 200,000 held under uninsured plans 7. Subtotal ACA 33,000, ,100 26,800,000 90,200 6,200, ,900-6,110,000 76,100 90, ,000 Transitional Reinsurance Program c. Temporary ACA Risk Corridors Program 1. Accrued retrospective 12,000,000 14,000,000-2,000,000 1,750,000 I -250,000 premium 2. Reserve for rate credits or policy experience rating refunds 150, , , ,000 J 0 3. Subtotal ACA Risk Corridors Program 12,000, ,000 14,000, ,000-2,000, ,000 1,750, , ,000 0 d. Total for ACA Risk- Sharing Provisions 49,000,000 8,365,100 43,800,000 9,340,200 5,200, ,100-5,160,000 1,176,100 40, ,000 Explanation of adjustments: A. Adjusted due to federal audit. B. Adjusted because of revised participant count. C. Adjusted due to poor experience of other participants in the reinsurance pool. D. Revised risk score information in the state of substantially impacted risk scores. g:\data\stat acctg\3. national meetings\a. national meeting materials\2017\summer\meeting\o high cost_risk_adjustment.docx 2017 National Association of Insurance Commissioners 10

145 Attachment P Ref # Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Issue: Updates to Issue Paper No. 143 for Long Term Care Assessments Check (applicable entity): Modification of existing SSAP New Issue or SSAP Interpretation P/C Life Health Description of Issue: The Statutory Accounting Principles (E) Working Group adopted substantive changes to SSAP No. 35 Revised Guaranty Fund and Other Assessments (SSAP No. 35R) in two separate agenda items and directed NAIC staff to document the revisions in existing Issue Paper No. 143 Prospective-Based Guaranty Fund Assessments (IP No. 143). The first agenda item, adopted in December 2016, was : Guaranty Fund Credits for Short-Duration Contract. It was effective January 1, 2017, and allowed expected renewals of short-term health contracts to be considered in determining the assets recognized from accrued guaranty fund liability assessments from insolvencies of entities that wrote long-term care. The revisions resulted with more comparable accounting treatment between life insurers and health insurers subject to similar retrospective guaranty assessments for longterm care products. The second agenda item was : Discounting of Long-Term Care Guaranty Fund Assessments was adopted in March It was effective for first quarter 2017 reporting. This change was requested by the health insurance industry in December 2016 to address the large liabilities that some entities were expecting due to a 2017 insolvency of a large long term care writer. This change requires discounting of guaranty fund assessments and related tax credit recoverables from insolvencies of insurers that wrote long-term care (LTC) that are in excess of one year to payment or recovery. The discount rate applied is the whole life discount rate in effect as of the reporting date. Existing Authoritative Literature: SSAP No. 35-Revised Guaranty Fund and Other Assessments Issue Paper 143 Prospective-Based Guaranty Fund Assessments was adopted in March 2010 and provides documentation of substantive revisions to SSAP No. 35R, based on a review of AICPA Statement of Position 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments (SOP 97-3) and currently included within the Accounting Standards Codification , Insurance Related Assessments (ASC ). Ultimately, ASC was adopted modifications. (Staff Note: Issue Papers do not constitute an authoritative level of statutory accounting guidance as defined by the statutory hierarchy.) Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda items and as described in the issues section above. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): Not applicable 2017 National Association of Insurance Commissioners 1

146 Attachment P Ref # Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as substantive and expose revisions to Issue Paper No. 143 as shown in the additional handout to be provided at that National Meeting. In addition to documenting the changes to SSAP No. 35R, staff has recommended an update to the name from Issue Paper No. 143 Prospective-Based Guaranty Fund Assessments to Issue Paper No. 143R Guaranty Fund Assessments. This name changes is being recommended because the focus of the prior two agenda items was on retrospective based guaranty fund assessments. Staff Review Completed by: Robin Marcotte NAIC Staff G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\P IP 143 updates on LTC.docx 2017 National Association of Insurance Commissioners 2

147 -- Attachment Q TO: Dale Bruggeman, Chair, Statutory Accounting Principles (E) Working Group Kevin Fry, Chair, Risk-Limiting Contracts (E) Working Group FROM: Doug Slape, Chair, Financial Analysis (E) Working Group DATE: April 26, 2017 RE: Risk Limiting Features in Reinsurance Contracts As you may be aware, the Financial Analysis (E) Working Group (FAWG) meets annually in Kansas City to discuss among other things, potentially troubled insurers and insurance groups. During this same meeting, the FAWG discusses industry trends, including identifying any that are potentially adverse or might warrant communication and coordination with other NAIC groups. As a result of the issues and trends discussed, the FAWG would like to refer the following to the attention of your groups for their consideration. The FAWG has recently discussed a number of troubled and potentially troubled insurers that have participated in quota share/proportional reinsurance contracts with significant risk-limiting features. In many of these situations, the motivation for the contracts appears to be surplus relief, without a significant amount off insurance risk being transferred to the reinsurer. The contracts often utilize loss corridors, sliding scale commissions, or other risk-limiting features to significantly limit the risk transferred to the reinsurer. Often these limitations result in a quota share reinsurance agreement operating more like an excess of loss reinsurance agreement, but the ceding insurer is accounting for the contract as if full, proportional reinsurance were in place. In certain cases, the ceding insurers have lost millionss of dollars on certain blocks of businesss and even reached insolvency, while the reinsurers have continued to recognizee profits on the contracts. While P&C insurers are required to disclose some of these features in the interrogatories, health insurers are not, and FAWG continues to be surprised by the fact thatt GAAP seemss to prevent some of these contracts from being recordedd as meeting risk transfer requirements while SAP may not. Although the number of P&C companies reporting these features and differences in GAAP/SAP reporting may be limited, they appear to be more prevalent in troubled company situations and are being offered by otherwise well-regarded reinsurers. Therefore, FAWG suggests further changes too SAP to prevent these situations. Given the importance of thesee issues, we wanted to bring these concernss to your attention as you continue to review statutory accounting guidance and regulatory practices in this area. Without changes to our current regulatory approach, members of FAWG are concerned that reinsurance contracts with risk-limiting features will continue to mask the true financial performance and position of certain insurers, as well as the risks theyy are exposed to. Therefore, we urge your groups to investigate these issues and identify solutions that would allow statutory accounting treatment to more directly reflect the risks, or lack thereof, associated with these contracts and more closely align SAP guidance with that of GAAP. If there are any questions regarding this referral, please contact me or NAIC staff (Bruce Jenson at bjenson@naic.org) for further clarification. Thank you for your consideration. G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\Q FAWG Referral to SAPWG.docx

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149 NAIC Accounting Practices and Procedures Manual Editorial and Maintenance Update Released: August 6, 2017 Attachment R Ref # EP Maintenance updates provide revisions to the Accounting Practices and Procedures Manual, such as editorial corrections, reference changes and formatting. The following revisions reflect changes to the As of March 2017 version of the AP&P Manual. SSAP/Appendix Section Description Revision 1 SSAP No. 26R Bonds SSAP No. 30 Unaffiliated Common Stock Delete transition footnotes Delete footnotes detailing the application for the 2016 year-end and interim 2017 financial statements for money market mutual funds. These footnotes were added after adoption of SSAP No. 2R Cash, Cash Equivalents, Drafts and Short- Term Investments, which requires MMMF to be reported as cash equivalents for year-end With the inclusion of SSAP No. 2R in the 2017 AP&P Manual, the footnotes were added clarify the guidance prior to the SSAP No. 2R effective date. 1 SSAP No. 26 Footnote 1: For year-end 2016, and in the interim 2017 financial statements, money market mutual funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7 of the Act are short-term investments, whether they are accounted for under SSAP No. 26 or SSAP No. 30. Pursuant to SSAP No. 2R, effective December 31, 2017, money market mutual funds shall be reported as cash equivalents and valued at fair value (net asset value allowed as a practical expedient). 1 SSAP No. 30 Footnote 1: For year-end 2016, and in the interim 2017 financial statements, money market mutual funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7 of the Act are short-term investments, whether they are accounted for under SSAP No. 26 or SSAP No. 30. Pursuant to SSAP No. 2R, effective December 31, 2017, money market mutual funds shall be reported as cash equivalents and valued at fair value (net asset value allowed as a practical expedient). Appendix C Actuarial Guidelines Delete AG 34 from publication Delete Actuarial Guideline XXXIV Variable Annuity Minimum Guaranteed Death Benefit Reserves (AG-34) from Appendix C of the AP&P Manual publication. AG 34 was repealed 2 effective December 30, It was replaced by Actuarial Guideline XLIII CARVM for Variable Annuities (AG 43). Note: Proposed deletion of AG 34 from the publication would not be tracked. The chart at the front of Appendix C would note the Actuarial Guideline XXXIV Variable Annuity Minimum Guaranteed Death Benefit Reserves was repealed effective December 30, 2009 and replaced by AG 43 effective December 31, The full text of the repealed AG 34 is shown on the following pages. 1 Upon adoption by the Working Group, all revisions will be shown as tracked changes in the subsequent years AP&P Manual, unless stated otherwise in this memorandum. 2 Supported by the AG 43 project history National Association of Insurance Commissioners 1

150 SSAP/Appendix Section Description Revision 1 Appendix C Actuarial Guidelines Delete AG 39 from publication Delete Actuarial Guideline XXXIX Reserves For Variable Annuities With Guaranteed Living Benefits (AG 39). The AG 43 project history notes: Actuarial Guideline XXXIX was adopted as a temporary measure with a sunset date of January 1, Actuarial Guideline VACARVM [AG 43] will be effective as of December 31, AG 39 will sunset on December 30, Attachment R Ref # EP Note: Proposed deletion of AG 39 from the publication would not be tracked. The chart at the front of Appendix C would note the Actuarial Guideline XXXIX Reserves For Variable Annuities With Guaranteed Living Benefits sunset effective December 30, 2009 per AG 43. The full text of the sunset AG 39 is shown on the following pages. G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\R EP - APP Editorial Process - August 2017.docx 2017 National Association of Insurance Commissioners 2

151 Attachment R Ref # EP AG 34 Note: Proposed deletion of AG 34 from the publication would not be tracked. The chart at the front of Appendix C would note the Actuarial Guideline XXXIV Variable Annuity Minimum Guaranteed Death Benefit Reserves was repealed effective December 30, 2009 and replaced by AG 43. Actuarial Guideline XXXIV I. Background VARIABLE ANNUITY MINIMUM GUARANTEED DEATH BENEFIT RESERVES This Actuarial Guideline was repealed effective December 30, The purpose of this Actuarial Guideline is to interpret the standards for the valuation of reserves for Minimum Guaranteed Death Benefits (MGDBs) included in variable annuity contracts. This Guideline codifies the basic interpretation of the Commissioners Annuity Reserve Valuation Method (CARVM) by clarifying the assumptions and methodologies which will comply with the intent of the Standard Valuation Law (SVL). For many years the industry has struggled with the issue of applying a uniform reserve standard to variable annuities in general, and to MGDBs in particular. Three regulatory sources are often looked to for guidance. First, the SVL requires that CARVM be based on the greatest present value of future guaranteed benefits. Second, Actuarial Guideline XXXIII requires that each benefit stream available under the contract must be individually valued and the ultimate reserve established must be the greatest of the present values of these values. Third, the NAIC model Variable Annuity Regulation (VAR) states that the reserve liability for variable annuities shall be established pursuant to the requirements of the Standard Valuation Law in accordance with actuarial procedures that recognize the variable nature of the benefits provided and any mortality guarantees. This Guideline interprets the standards for applying CARVM to MGDBs in variable annuity contracts, employing methods that recognize the variable nature of the benefits. It clarifies standards for developing integrated benefit streams, where MGDBs are integrated with other benefits such as surrenders and annuitizations. It also clarifies standards for determining the level of reserve to be held in the General Account. This Guideline requires that MGDBs be projected by assuming an immediate drop in the values of the assets supporting the variable annuity contract, followed by a subsequent recovery at a net assumed return until the maturity of the contract. The projection should reflect the contractual definition of the MGDB and any contractual limitations, such as provisions that terminate the MGDB at a given age and those that restrict the MGDB to a given multiple of contract contributions. The immediate drops and assumed returns used in the projection vary by five asset classes in order to reflect the risk/return differentials inherent in each class. This Guideline also interprets the mortality standards to be applied to projected MGDBs in the reserve calculation. As part of the study of mortality experience under variable annuities during the deferral period, the Society of Actuaries Task Force on Mortality Guarantees in Variable Products will be validating the appropriateness of this mortality standard and, if necessary, recommend an alternative course of action. In addition, this Guideline clarifies standards for reserve methods for reinsurance transactions involving MGDBs. Unlike the annuity writer, the reinsurer may not be able to integrate the MGDB with other base contract benefits, since the reinsurer does not normally reinsure any aspects of the variable annuity other than the death benefit. The reinsurer and the direct writer do face identical fund performance risks, so it is appropriate that the reinsurer s reserve method incorporate the same immediate drops and recoveries as the direct writer. Similarly, the reinsurer s reserve method should include a future projection of MGDB levels, to appropriately assess future death benefit obligations. Furthermore, just as the direct writer s reserve calculation should recognize the underlying asset charges, the reinsurer s reserve calculation should recognize reinsurance premiums National Association of Insurance Commissioners 3

152 Attachment R Ref # EP AG 34 Finally, there are some companies that have not applied CARVM in calculating variable annuity reserves. For example, some companies have held a reserve equal to the account value. Such companies may be able to demonstrate that their reserves meet or exceed the levels set by applying this Guideline, and that no additional MGDB reserves are required. Alternatively, other companies which have held a reserve equal to the cash surrender value may need to hold an additional MGDB reserve such that their total reserve is at least equal to the levels set by applying this Guideline. In these situations, the company must determine an appropriate allocation of the total reported reserve between the General and Separate Accounts. II. Scope This Guideline applies to variable annuity contracts which provide a Minimum Guaranteed Death Benefit that has the potential to exceed the account value, whether or not the MGDB exceeds the account value on the valuation date. This Guideline does not apply to group variable annuity contracts which are not subject to CARVM. Currently offered MGDBs falling under the scope of this guideline include, but are not limited to, provisions commonly referred to as Return of Premium, Roll-ups, Ratchets and Resets. However, the actuary should also exercise judgment in determining the applicability of this Guideline. For example, it may be inappropriate to utilize this Guideline for a contract with an MGDB where the associated net amount at risk (NAR) decreases when the underlying funds experience a drop in market value or a period of underperformance. III. Definitions Reduced Account Value : The account value on the valuation date, reduced by the sum of the immediate drops for each asset class, as defined in Section IV.D. Projected Reduced Account Value : The Reduced Account Value, projected into the future using the Net Assumed Returns for each asset class, as defined in Section IV.D. The determination of the Projected Reduced Account Value need not reflect future partial withdrawals. Projected Net Amount at Risk : The projected death benefit resulting from the MGDB and the Projected Reduced Account Value, less the Projected Reduced Account Value. Projected Unreduced Account Value : The projected account value, without reduction for an immediate drop, projected using a return based on the valuation rate less appropriate asset based charges. Base Benefit Streams : The streams of projected benefits reflecting the Projected Unreduced Account Values and ignoring MGDBs. Integrated Benefit Stream : Streams which reflect the Base Benefit Streams discounted for survivorship and the MGDBs discounted for mortality. Calculation Period : The periods for which the Integrated Benefit Streams are projected in the Integrated Reserve calculation, consisting of successive periods, beginning with the remainder of the contract year following the valuation date and ending with the period from the valuation date to the maturity date of the contract. IV. Text A. General Methodology The valuation of reserves for MGDBs involves two CARVM reserve calculations: a Separate Account Reserve and an Integrated Reserve. The Integrated Reserve represents the total reserve held by the company in support of 2017 National Association of Insurance Commissioners 4

153 Attachment R Ref # EP AG 34 the entire variable annuity contract. The additional reserve held for the MGDB, which equals the excess of the Integrated Reserve over the Separate Account Reserve, but not less than zero, is held in the General Account. B. Separate Account Reserve Calculation The Separate Account Reserve represents the reserve that would be held in the absence of the MGDB. C. Integrated Reserve Calculation The Integrated Reserve is a CARVM reserve determined using all contract benefits, including the MGDB. It equals the greatest present value, as specified in the SVL and the VAR, of future Integrated Benefit Streams available under the terms of the contract. The integration of the MGDB with other contract benefits in the determination of future Integrated Benefit Streams is accomplished by combining three separate benefit streams A, B and C described below. These future Integrated Benefit Streams are determined over all Calculation Periods, and are discounted at the valuation interest rate (discussed further in Section IV.E.). A is the stream of Projected Net Amounts at Risk paid to those expected to die during the Calculation Period, based on valuation mortality (discussed further in Section IV.E.). B is the benefit stream of Projected Unreduced Account Values paid to those expected to die during the Calculation Period, based on valuation mortality. C is the Base Benefit Streams provided during the Calculation Period, and is discounted for survivorship based on valuation mortality. The greatest present value occurs in the Calculation Period in which the present value of the future Integrated Benefit Streams is maximized (as opposed to the present values of A, B and C being individually maximized). The Integrated Reserve is also subject to the asset adequacy analysis requirement in subsection G. D. Immediate Drops and Assumed Returns The Projected Net Amount at Risk described in Section IV.C. is determined by assuming an immediate drop in the supporting asset values, followed by a subsequent recovery based upon a net assumed return. For example, the Reduced Account Value after the immediate drop would equal the account value on the valuation date, multiplied by (1 - Immediate Drop Percentage). The Projected Reduced Account Value n years later would equal the Reduced Account Value multiplied by (1 + Net Assumed Return) n. The projection should continue until the maturity of the contract. To determine the immediate drop and net assumed return, the Separate Account funds supporting the variable annuity contracts on the valuation date should be allocated to the five asset classes as follows: Equity Class Bond Class Balanced Class 2017 National Association of Insurance Commissioners 5

154 Attachment R Ref # EP AG 34 Money Market Class Specialty Class Descriptions of these classes are contained in Appendix III. Since these descriptions are broad in nature, the ultimate determination of the appropriate fund classifications, for purposes of this Guideline, is the responsibility of the appointed actuary. The Immediate Drop Percentages and Gross Assumed Returns for each asset class are shown in Appendix I. The Gross Assumed Returns shown do not include deductions for asset based charges. Each company should deduct its own asset based charges from those shown to obtain the Net Assumed Returns to be used in determining the Projected Reduced Account Values. Many variable annuity contracts provide for various types of Fixed Account options, in which underlying guarantees, consistent with General Account annuities, are provided. The fixed account should be projected as a separate asset class, with an Immediate Drop Percentage equal to zero and a Net Assumed Return equal to the guaranteed rate(s). The Immediate Drop for each contract is determined by taking the sum of the immediate drops for each asset class. The Net Assumed Return for each contract is determined by taking the weighted average of the Net Assumed Returns for each asset class, based upon the allocation of the total account value between the asset classes. E. Valuation Mortality and Interest The mortality basis used to discount projected death benefits is the 1994 Group Annuity Mortality Basic Table (1994 GAMB), increased by 10% for margins and contingencies, without projection. This table, referred to as the 1994 Variable Annuity MGDB Mortality Table, is shown in Appendix II. The valuation interest rates used for both the Separate Account Reserve and the Integrated Reserve should be annuity valuation interest rates, consistent with those required in the SVL and the VAR. F. Reinsurance Reserve 1. Reinsurance Ceded For contracts which reinsure some or all of the MGDB, an Integrated Reserve net of reinsurance must be calculated. This reserve should be calculated as outlined in Section IV.C., with the Integrated Benefit Streams being modified to reflect both the payment of future reinsurance premiums and the recovery of future reinsured death benefits. This is accomplished by treating the future reinsurance premium as an additional benefit and reducing the MGDB in the benefit stream of the Integrated Reserve calculation by future reinsurance recoveries. Similar to the formula demonstrated in Section IV.C., the determination of future Integrated Benefit Streams including the impact of reinsurance is accomplished by combining four separate benefit streams: A r, B r, C and D, described below. These future Integrated Benefit Streams are determined over all Calculation Periods, and are discounted at the valuation interest rate. A r is the stream of Projected Net Amounts at Risk paid to those expected to die during the Calculation Period, based on valuation mortality. It is equal to benefit stream A defined in Section IV.C., reduced by future Projected Net Amounts at Risk reinsurance recoveries National Association of Insurance Commissioners 6

155 Attachment R Ref # EP AG 34 B r is the benefit stream of Projected Unreduced Account Values paid to those expected to die during the Calculation Period, based on valuation mortality. It is equal to benefit stream B defined in Section IV.C., reduced by future Projected Unreduced Account Values reinsurance recoveries. C is as defined in Section IV.C. D is the stream of future projected reinsurance gross premiums during the Calculation Period, determined using Projected Reduced Account Values and discounted for survivorship, using valuation mortality. The greatest present value occurs in the Calculation Period in which the present value of the future Integrated Benefit Streams, net of reinsurance, is maximized. This Calculation Period does not necessarily have to be the same as the Calculation Period which maximizes the Integrated Benefit Streams before consideration of reinsurance. The reinsurance reserve credit the ceding company is entitled to is equal to the difference between the Integrated Reserve before any consideration of reinsurance and the Integrated Reserve net of reinsurance. The Integrated Reserve net of reinsurance may be greater than the Integrated Reserve before any consideration of reinsurance (i.e., the reserve credit may be negative). 2. Reinsurance Assumed The reserve for reinsurers assuming MGDB risk is the maximum difference, at each Calculation Period, between the present value of the reinsured death benefits and the present value of reinsurance premiums. Referring to the formulas above, the reinsured death benefit is the difference between the combination of benefit streams A r and B r, and the combination of benefit streams A and B, while benefit stream D represents the stream of reinsurance premiums defined above (i.e., A-A r +B-B r -D). Each of these benefit streams is discounted using valuation mortality and interest assumptions consistent with those used by the ceding company. The greatest present value occurs in the Calculation Period in which the difference between the present value of the reinsured death benefits and the present value of reinsurance premiums is maximized. This Calculation Period does not necessarily have to be the same as the Calculation Period which maximizes the Integrated Reserve, either before or after consideration of reinsurance. G. Asset Adequacy Analysis Requirement The Projected Reduced Account Value, and consequently, the Projected Net Amount at Risk need not reflect future partial withdrawals. There is also the possibility that other risks may not be reflected in the reserve calculations described above. Therefore, the appointed actuary shall perform a standalone asset adequacy analysis of the total reserve held for all of the contracts falling within the scope of this Guideline. Such analysis shall be performed reflecting the assets supporting the total reserve held for the contracts and all benefits and guarantees associated with the variable annuity contracts, as well as all expenses and charges associated with the variable annuity contracts. The analysis shall be performed on an aggregate basis, consistent with the requirements of Section 6 of the NAIC Model Actuarial Opinion and Memorandum Regulation, including the requirement that the analysis conform to the Actuarial Standards of Practice as promulgated from time to time by the Actuarial Standards Board. However, no separate actuarial opinion is required by this Guideline. If such analysis reveals a reserve shortfall, the total reserves held for the contracts must be increased accordingly National Association of Insurance Commissioners 7

156 Attachment R Ref # EP AG 34 Where Minimum Guaranteed Death Benefits are reinsured, the asset adequacy analysis may reflect the reinsurance. However, if the inclusion of reinsurance would increase the Integrated Reserve, then reinsurance must be reflected in the asset adequacy analysis. H. Effective Date This Guideline affects all contracts issued on or after January 1, Where the application of this Guideline produces higher reserves than the company had otherwise established by their previously used interpretation, such company must comply with this Guideline effective December 31, However, such company may request a grade in period, of not to exceed three (3) years, from the domiciliary Commissioner upon satisfactory demonstration of the previous interpretation and that such delay of implementation will not cause a hazardous financial condition or potential harm to its policyholders National Association of Insurance Commissioners 8

157 Attachment R Ref # EP AG 34 APPENDIX I Immediate Drop Percentages and Gross Assumed Returns ASSET CLASS IMMEDIATE DROP PERCENTAGE GROSS ASSUMED RETURN Equity 14.00% 14.00% Bond 6.50% 9.50% Balanced 9.00% 11.50% Money Market 2.50% 6.50% Specialty 9.00% 9.50% 2017 National Association of Insurance Commissioners 9

158 Attachment R Ref # EP AG 34 APPENDIX II 1994 Variable Annuity MGDB Mortality Table FEMALE Age Last Birthday AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x National Association of Insurance Commissioners 10

159 Attachment R Ref # EP AG 34 APPENDIX II 1994 Variable Annuity MGDB Mortality Table MALE Age Last Birthday AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x National Association of Insurance Commissioners 11

160 Attachment R Ref # EP AG 34 APPENDIX II 1994 Variable Annuity MGDB Mortality Table FEMALE Age Nearest Birthday AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x National Association of Insurance Commissioners 12

161 Attachment R Ref # EP AG 34 APPENDIX II 1994 Variable Annuity MGDB Mortality Table MALE Age Nearest Birthday AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x AGE 1000q x National Association of Insurance Commissioners 13

162 Attachment R Ref # EP AG 34 APPENDIX III Equity Class Description of Asset Classes Although equity funds have a broad range of investment objectives, all invest primarily in publicly traded securities, such as common stocks, preferred stocks and convertible securities. The choice of securities purchased by the portfolio manager will be guided by the fund objective (such as Growth of Capital or Income, or Approximating an Index), the capitalization of the companies issuing the stock (e.g., small, medium or large) or the target region (domestic U.S., Pacific Rim, Latin America, etc.). Although some equity funds maintain a general strategy, allowing a portfolio manager great latitude in purchase, other equity funds have become quite specific in their investment objectives. All equity funds, however are somewhere on the high end of the risk/return scale. Bond Class Investment objective is usually to provide a high level of income consistent with moderate fluctuations in principal value. The objective is accomplished through investments in fixed income securities, such as U.S. government securities, foreign government securities, or publicly traded debt securities issued by U.S. or foreign corporations. Since most bonds are assigned ratings by private Rating Agencies, the specific objectives of the funds are often described by the funds tolerance for instruments at the various rating levels. Funds that focus predominantly on safety will tend to use more U.S. Government securities, while a fund that focuses predominantly on income may tend to use more lower investment grade instruments. All bond funds, however, are somewhere in the midrange of the risk/return scale. Balanced Class Investment objective is to seek a maximum total return over time, consistent with an emphasis on both capital appreciation and income. Typically, these funds will contain 50%-75% stocks, with the remaining assets invested in bonds and cash equivalents. However, balanced funds grant the portfolio manager the latitude to shift the asset allocation depending on a current analysis of market trends. Beside the term Balanced, common terms for this fund type include Total Return, Adviser s and Asset Allocation. Money Market Class Investment objective is to achieve maximum current income consistent with liquidity and preservation of capital. These funds typically aim to maintain a stable net asset value of $1 per share. The assets contained in this fund typically have a stated maturity of less than thirteen months with an average maturity of less than 90 days. Common assets held include U.S. Government obligations, certificates of deposit, time deposits and commercial paper. Specialty Class Investment objective is to seek a maximum total return with an emphasis on long term capital appreciation, and sometimes current income. Typically, this fund type will invest most of its assets in common stocks or debt instruments of companies that operate within a specified industry. Commonly, specialty funds invest in utilities, natural resources and real estate, although there is a broad range of possible industries to choose from. The key difference between a specialty fund and an equity or bond fund is the targeted approach to investing. In a specialty fund, no effort is made to diversify outside the target industry National Association of Insurance Commissioners 14

163 2017 National Association of Insurance Commissioners 15 Attachment R Ref # EP AG 39 Note: Proposed deletion of AG 39 from the publication would not be tracked. The chart at the front of Appendix C would note the Actuarial Guideline XXXIX Reserves For Variable Annuities With Guaranteed Living Benefits sunset effective December 30, 2009 per AG 43. I. Background Actuarial Guideline XXXIX RESERVES FOR VARIABLE ANNUITIES WITH GUARANTEED LIVING BENEFITS This Actuarial Guideline was effective until December 30, The purpose of this Actuarial Guideline (Guideline) is to interpret the standards for the valuation of reserves for guaranteed living benefits included in variable deferred and immediate annuity contracts (VAGLBs). This Guideline provides an interpretation of the National Association of Insurance Commissioners (NAIC) Model Standard Valuation Law (SVL) for VAGLBs and is intended to be temporary. The methodology does not specifically address how base variable annuity reserves (i.e., reserves for variable annuity contracts calculated by ignoring VAGLBs) should be calculated. Rather, it only addresses the calculation of reserves for VAGLBs to be held in the General Account. In addition, this Guideline interprets the standards for the valuation of reserves when the VAGLB risk is reinsured. II. Scope This Guideline applies to variable deferred and immediate annuity contracts that provide one or more guaranteed living benefits. This Guideline does not apply to those group annuity contracts that are not subject to the Commissioners Annuities Reserve Valuation Method (CARVM). VAGLB designs falling under the scope of this Guideline include, but are not limited to, currently offered provisions commonly referred to as Guaranteed Minimum Accumulation Benefits (GMABs), Guaranteed Minimum Income Benefits (GMIBs), Guaranteed Minimum Withdrawal Benefits (GMWBs), and Guaranteed Payout Annuity Floors (GPAFs). III. Text A. Aggregate Reserves for Contracts with VAGLBs The Aggregate Reserves for Contracts with VAGLBs are the total reserves held by the company in support of the variable annuity contracts with VAGLBs, and equals the sum of 1 and 2, where: 1. equals the aggregate reserves for the variable annuity contracts ignoring both the future revenues and benefits from the VAGLBs and after comparison to the cash value of the contracts. For the purpose of determining future revenues and benefits for VAGLBs, a charge should be imputed in the event that there are no explicit VAGLB charges. and 2. equals the VAGLB reserve, determined as the sum of the aggregate VAGLB charges from the date of issue to the valuation date for VAGLB benefits in-force (i.e., contracts still in-force and still eligible for the VAGLB), the sum reduced by 2.5% each calendar quarter beginning January 1, 2008 and subject to

164 2017 National Association of Insurance Commissioners 16 Attachment R Ref # EP AG 39 the asset adequacy analysis requirement in subsection C (i.e., each quarter the prior quarter VAGLB result is multiplied by then the VAGLB charges from the quarter are added to the product). In the event that there are no explicit VAGLB charges, a charge should be imputed. The VAGLB reserve must be held in the General Account. (This is in addition to any amounts in item 1 that are required to be held in the General Account). B. Reserve for Ceded and Assumed Reinsurance If all or a portion of the VAGLB risk is reinsured on a proportional basis, the ceding company is entitled to a corresponding proportional reinsurance reserve credit based on the VAGLB reserve held before consideration of reinsurance. Adjustments may need to be made to the reserve credit taken by ceding companies where the underlying reinsurance treaty contains non-proportional elements. For companies where VAGLB risk is assumed, the aggregate VAGLB reserves for contracts with VAGLBs will be the sum of a) the aggregate direct VAGLB charges in proportion to the amount of reinsurance from the issue date of the contract to the effective date of the reinsurance contract and b) gross reinsurance premiums from the effective date of the reinsurance contract to the valuation date for VAGLB benefits in force (i.e. contracts still in force and eligible for the VAGLB) and subject to the asset adequacy analysis requirement in subsection C. C. Asset Adequacy Analysis Requirement The appointed actuary must perform a standalone asset adequacy analysis of the VAGLB reserve. If such analysis reveals a reserve shortfall, VAGLB reserves must be increased. Such analysis shall be performed reflecting the following: 1. all VAGLB benefits and expenses, 2. all VAGLB charges, and 3. the assets supporting the VAGLB reserves. The analysis shall be performed on an aggregate basis for all contracts with VAGLBs, consistent with the requirements of the NAIC Model Actuarial Opinion and Memorandum Regulation, including the requirement that the analysis conform to the Actuarial Standards of Practice as promulgated from time to time by the Actuarial Standards Board. However, no separate actuarial opinion is required by this Actuarial Guideline. Where the VAGLB is reinsured, the asset adequacy analysis may reflect the reinsurance. However, if the inclusion of reinsurance in the asset adequacy analysis would increase the VAGLB reserve, then reinsurance must be reflected in the analysis. IV. Applicability This Guideline is effective December 31, 2002 and affects all contracts issued on or after January 1, Since the requirements of this Guideline are intended to be temporary, this Guideline is in effect until no later than December 30, G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\R EP - APP Editorial Process - August 2017.docx

165 Attachment S To: Draft Referral Response to the Valuation of Securities (E)) Task Force From: Dale Bruggeman, Chair of the Statutory Accounting Principles (E) Working Group Re: Referral Response Regulatory Issues in Debt / Preferredd Stock of SCAs for SVO Methodology Date: July 17, 2017 This memo responds to the Valuation of Securities (E) Task Force April 18, 2017 referral requesting assistance in formulating additional procedures / limitations for assignmentt of NAIC designations to investments in an insurance entity s subsidiary, controlled or affiliated (SCA) entity. The Task Force referral identifies that such assistance from the Statutory Accounting Principles (E) Working Group would enable the SVO to formulate a methodology that merges analytical and regulatory criteria for consideration by the Task Force. Furthermore, the referral requests differentiation between SCA investments that resemble unaffiliated investments and those that are unique transactions designed to accommodate intercompany issues. After reviewing the existing SVO additional special assessment procedures to review debt or preferred stock transactions nvolving SCAs shown in part three section 2 of thee Purposes and Procedures Manual of the NAIC Investment Analysis Office, the Working Group recommends revisions (detailed in Appendix A), to the SVO procedures in issuing NAIC designations for thesee securities. As part of these revisions, the Working Group recommends clarification that an NAIC designation, or a CRPP rating, only reflects a credit assessment, and does not consider collectibility based on independent payment ability, does not reflect whether a transaction was conducted as arms-length, and does not reflect whether a transaction is considered economic under SSAP No. 25. The Working Group highlights that the assessment of these affiliate components requires a detailed review of the transaction between the reporting entity and the SCA, and such assessments are beyond the scope of an SVO credit assessment and likely a required filing in a company s state of domicile Consistent with existing SVO filing procedures, if an NAIC designation is required for an investment, and the investment does not have a qualifying CRP rating, then it shall be submitted to the NAIC SVO for a credit assessment under the standard SVO credit-assessment process. As detailed in the proposed revisions, it is recommendedd that the NAIC SVO clarify that under their procedures, the SVO will review affiliated transactions that resemblee straightforward, unaffiliated investments in the same manner as unaffiliated transactions. Determinationn of NAIC designations on complicated, uniquee transactions will be subject to SVO filing procedures on whether a credit-assessm ment can be provided. Revisions to the proposed procedures also indicate that if the SVO becomes aware of any informationn that indicates further review is warranted, the SVO shall contact the reporting entity to discuss the transaction, with subsequent notification provided to the domiciliary state regulator, as needed. Pursuant to SSAP No. 25, affiliatee transactionss that are not arm s-length and/or economic are subject to additional accounting and reporting guidelines and each reporting entity is required to be knowledgeable about its domiciliary state regulator requirements for approval of these transactions. The Working Group reiterates that the issuance of any NAIC designation (including NAIC 1), or the non-issuance of an NAIC designation ( such as with complex, multiple affiliate transactions) does not provide indication on whether the investment qualifies for admittance under SSAP No. 25. Pursuant to SSAP No. 25, the admittance assessment would continue to be dependent on the review of the domiciliary state and/or management evaluations. With this referral to the Task Force, the Working Group will also be assessing whether enhanced guidance should be considered to strengthen the principles involving related-party transactions, and the requirements for management / auditors to review and assess related-party transactions, as well as whether additional disclosures or reporting information is needed. Please contact NAIC staff of the Statutory Accounting Principles (E) Working Group if you have any questions. Cc: Julie Gann/ /Robin Marcotte/ Fatima Sediqzad/Jake Stultz/Charles A. Therriault/Robert Carcano

166 Statutory Accounting Principles (E) Working Group Proposed Revisions to the Purposes and Procedures Manual of the NAIC Investment Analysis Office. Part Three Credit Assessment Section 2. Corporate Bonds and Preferred Stock Special Assessment Situations Attachment S Bonds and preferred stock that fit the description set out below shall be subject to the general procedures specified above as well as the specific or special procedures identified below. d) SCA Debt and Preferred Stock This section applies to credit assessment 1 of any SCA investment in the form of a debt instrument purchased (or otherwise acquired) from an insurance or non-insurance entity (SCA debt) and preferred stock issued by an insurance or non-insurance non-insurer entity (SCA preferred stock). This procedure is used to determine whether an SCA debt or SCA preferred transaction is eligible for reporting as an Investment Security pursuant to Part Two Section 2 (a) of this Manual. The determination of Investment Security and credit assessment (either obtained from the NAIC SVO or if the security is filing exempt with a credit rating from a CRP) shall not be construed to reflect assessments specific to affiliated transactions contained in SSAP No. 25 Affiliates and Other Related Parties. As such, a CRP rating or NAIC SVO designation for affiliated transactions: Does not reflect collectability based on independent payment ability of a parent reporting entity. Does not reflect whether the transaction was conducted at arm s-length. Does not reflect whether the transaction is considered economic under SSAP No. 25. (i) Procedure Prior to applying the procedures required by Part Five, Section 2 of this Manual, the SVO shall: (A) (B) Confirm that the SCA relationship has been reported to the NAIC Financial Reporting Services Division, if required. If the SCA common / preferred stock transaction was reported (or if not required to be reported), the SVO shall: (1) Inform the state insurance department of the reporting insurance company's state of domicile that the SCA debt or SCA preferred stock has been filed with the SVO. (32) Evaluate whether the SCA debt or SCA preferred stock is an arms-length and an economic transaction within the meaning of NAIC statutory accounting guidance on related party transactions. (43) Evaluate whether the SCA debt or SCA preferred stock transaction is circular within the meaning of Part One, Section 2(c)(ii) of this Manual. (54) In the case of SCA preferred stock, determine the SCA preferred stock issuer's senior unsecured debt designation and obtain the appropriate designation level for the preferred stock by applying the methodology specified in Section 1(b) of this Part above. 1 Consistent with guidance in Part One, Section Two, the result of an SVO credit analysis expresses an opinion of the credit quality of a specific liability in the issuer s capital structure. The ability to realize payment may be affected by factors not related to credit risk, or by the manner in which the repayment promise has been structured. NAIC designations do not measure other risks or factors that may affect repayment, including volatility/interest rate, prepayment, extension or liquidity, and for affiliated transactions addressed in this section, whether the transaction is considered arms-length and economic. 2

167 Attachment S Although an NAIC designation (or CRP rating) does not provide assurances regarding arms-length or economic, if the SVO becomes aware of any information that indicates further review is warranted, the SVO shall contact the reporting entity to discuss, with subsequent notification (by the reporting entity or SVO) to the domiciliary state regulator, as needed. Pursuant to SSAP No. 25, affiliate transactions that are not arm s-length and/or economic are subject to additional accounting and reporting guidelines and each reporting entity is required to be knowledgeable about its domiciliary state regulatory requirements for approval of these transactions. The following definitions / concepts are from SSAP No. 25: Arm s-length: An arm s-length transaction is defined as a transaction in which willing parties, each being reasonably aware of all relevant facts and neither under compulsion to buy, sell, or loan, would be willing to participate. Economic: An economic transaction is defined as an arm s-length transaction which results in the transfer of the risks and rewards of ownership and represents a consummated act thereof, i.e., permanence. The appearance of permanence is also an important criterion in assessing the economic substance of a transaction. In order for a transaction to have economic substance and thus warrant revenue (loss) recognition, it must appear unlikely to be reversed. An economic transaction must represent a bonafide business purpose demonstrable in measurable terms. A transaction which results in the mere inflation of surplus without any other demonstrable and measurable betterment is not an economic transaction. The statutory accounting shall follow the substance, not the form of the transaction. G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\S - SAPWG to VOSTF - Affiliated Clean.docx 3

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169 -- Attachment T To: Statutory Accounting Principles (E) Working Group From: Robin Marcotte, NAIC staff Date: July 17, 2017 Re: Revisions to Auditing Standards on Insurance Statutory Basis of Accounting NAIC staff received notice that the representatives of NAIC AICPA (E) Task Force have been working with the American Institute of Certified Public Accountants (AICPA) Auditing Standards Board (ASB), on revisions to the AICPAA insurance guides to address application of AU-C 800 to financial statements prepared in accordance with the insurance statutory basis of accounting. This is an issue that has been discussed with the ASB onn three prior submissions and denied, but on the most recent (fourth) submission it was approved. These revisions represent the completion of multiple significant efforts to have the process of developing the statutory basiss of accounting more formally acknowledged. Previously, the insurance auditing guides required an auditor to assess whether informative disclosures in the annual audited financial statements would be needed to achieve fair presentation whenn the entity is required to adopt the new standard for GAAP. This assessment was required whether or not the NAIC review of the accounting standard had been completed. The new revisions which are effective for 2016 financial statements,, acknowledgee that the insurance statutory basis of accounting is a regulatory basis of accounting, which is considered a special-purpose framework. The revisions note that the NAIC, throughh the Statutory Accounting Principles (E) Working Group, follows an established and transparent process nvolving deliberation and consideration of the views of relevant stakeholders. The Working Group follows a comprehensive process for considering new disclosures, including those required by GAAP. The new revisions in the insurance guides include the following: GAAP disclosure requirements that have been rejected by the NAICC in whole or in part would not need to be evaluated by the auditor in order to determine whether the annual audited statutory financial statements achieve fair presentation in accordance with the insurance statutory basis of accounting. However, if the NAIC has not finalized action on GAAP disclosure requirements, an auditor would need too assess whether informative disclosure in the annual audited statement financial statementss would be needed to achieve fair presentation in accordance with paragraph.17 of AU C section 800. This assessment would occur when the entity is required to adopt the new standard for GAAP. The concepts have been incorporated in both Chapter 1: Nature, Conduct, and Regulation of the Business, of the AICPA Audit and Accounting Guide Property and Liability Insurance Entities, and Chapter 3: Sources of Accounting Principles and Reporting Requirements, of the AICPA Audit and Accounting Guide Life and Health h Insurance Entities. Chapter 3 has been attached for reference. The revisions are on the AICPA Insurance Expertt Panel webpage: In summary, NAIC staff notes that this is a significant development as U.S. GAAP disclosures, which have been fully reviewed and rejected by the NAIC, will not have to be reviewed byy auditors for purposes of determining relevance in preparing statutory accounting audited statements for compliance with U.S. generally accepted auditing standards. Disclosures which have not been reviewed, or for which the review process is not yet complete, would be subject to the prior assessments. CC: Julie Gann, Robin Marcotte, Jake Stultz, Fatima Sediqzad, Bruce Jenson G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2017\Summer\Meeting\T1 - Stafff to SAPWG-AICPA changes.docx

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171 Attachment T Revisions to Chapter 3: Sources of Accounting Principles and Reporting Requirements, of the AICPA Audit and Accounting Guide Life and Health Insurance Entities. April 17, 2017 Copyright 2017 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC