2017 Summer National Meeting Philadelphia, Pennsylvania

Transcription

1 Date: 7/21/ Summer National Meeting Philadelphia, Pennsylvania STATUTORY ACCOUNTING PRINCIPLES (E) WORKING GROUP Sunday, August 6, :00 11:30 a.m. Marriott Level 5 Grand Ballroom G, K & L OVERVIEW AGENDA Attachment 1. SAPWG Hearing Adoption of Minutes Dale Bruggeman (OH) 1 & 2 2. SAPWG Hearing Review of Exposed Items Dale Bruggeman (OH) Ref # : AVR and IMR in SSAP No Ref # : ASU , Statement of Cash Flows: Restricted Cash 4 Ref # : ASU : Purchased Amortization on Purchased Callable Debt Securities 5 Model 280: Investments of Insurers Model Act 6 & 7 Ref # : Definition of LBSS 8 & 9 Ref # : Policy Statement on Coordination with P&P Manual, SVO and VOSTF 10 Ref # : Impact of Future Settled Premiums on Option Valuations 11 Ref # : Settlement of Variation Margin 12 Ref # : ASU , Improvements to Employee Share-Based Payment Accounting 13 Ref # : Extension of SCA Filing Deadlines 14 Ref # : Bank Loans 15 Comment letters for Hearing SAPWG Hearing Review of Comments on Variable Annuity Derivatives Dale Bruggeman (OH) Ref # : Special Accounting Treatment for Limited Derivatives (This agenda item will be discussed as time allows after Any Other Matters) SAPWG Meeting Maintenance Agenda Active List Dale Bruggeman (OH) Ref # : ASU , Leases A & Handout Ref # : Amortization and Accretion of Surplus Notes B 5. SAPWG Meeting Maintenance Agenda Pending List Dale Bruggeman (OH) Ref # : ASU , Improving the Presentation of Net Periodic Pension Cost and Net Periodic C Postretirement Benefit Cost Ref # : ASU , Financial Services Investment Companies Amendments to the Scope, D Measurement, and Disclosure Requirements Ref # : ASU , Stock Compensation Scope of Modification Accounting E Ref # : ASU , Determining the Customer of the Operation Services F Ref # : Goodwill Limitation in SSAP Nos. 68 and 97 G Ref # : Intangibles ASUs H Ref # : SSAP No. 97 Foreign Entity Clarification I Ref # : Double-Counting of Surplus Notes J Ref # : Remove 2009 SSAP No. 43R Implementation Guidance K Ref # : Wash Sales Involving Money Market Mutual Funds L Ref # : Use of Net Asset Value instead of Fair Value M Ref # : Wholly-Owned Ultra-short Bond Portfolio in an LLC Series N Ref # : High-Cost Risk Pooling in ACA Risk Adjustment O Ref # : Updates to Issue Paper No. 143 for Long Term Care Assessments P & Handout Ref # : Reinsurance Risk Transfer for Short Duration Contracts Q & Handout EP: Editorial Process Memo R 6. SAPWG Meeting Any Other Matters Brought Before the Working Group Dale Bruggeman (OH) Referral Response to Valuation of Securities (E) Task Force Affiliated Transactions S Revisions to the AICPA Audit and Accounting Guides T Update From Industry on ASU : Credit Losses None Restricted Asset Subgroup None Review of GAAP Exposures U Valuation Method Updates V 2017 National Association of Insurance Commissioners 1

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3 2017 Summer National Meeting Philadelphia, Pennsylvania Hearing Agenda Statutory Accounting Principles (E) Working Group Hearing Agenda Sunday, August 6, :00 a.m. 1:00 p.m. Philadelphia Marriott Grand Ballroom A-D Level 5 ROLL CALL Dale Bruggeman, Chair Ohio Judy Weaver Michigan Jim Armstrong, Vice Chair Iowa Patricia Gosselin New Hampshire Richard Ford Alabama Stephen Wiest New York Kim Hudson California Joe Dimemmo Pennsylvania Kathy Belfi Connecticut Doug Slape / Jamie Walker Texas Holly Conley / Dave Lonchar Delaware Doug Stolte / David Smith Virginia Eric Moser Illinois Elena Vetrina Wisconsin Stewart Guerin Louisiana NAIC Support Staff: Julie Gann, Robin Marcotte, Fatima Sediqzad and Jake Stultz REVIEW AND ADOPTION OF MINUTES 1. Statutory Accounting Principles (E) Working Group June 8, 2017 Conference Call and April 8, 2017 Spring National Meeting (Attachments 1 & 2) REVIEW of COMMENTS on EXPOSED ITEMS The Working Group will consider each of the following items separately. 1. Ref # : AVR and IMR in SSAP No Ref # : ASU , Statement of Cash Flows: Restricted Cash 3. Ref # : ASU : Purchased Amortization on Purchased Callable Debt Securities 4. Model 280: Investments of Insurers Model Act 5. Ref # : Definition of LBSS 6. Ref # : Policy Statement on Coordination with P&P Manual, SVO and VOSTF 7. Ref # : Impact of Future Settled Premiums on Option Valuations 8. Ref # : Settlement of Variation Margin 9. Ref # : ASU , Improvements to Employee Share-Based Payment Accounting 10. Ref # : Extension of SCA Filing Deadlines 11. Ref # : Bank Loans Note: Agenda item Special Accounting for Limited Derivatives will be discussed as time allows. This item is included as a separate Hearing agenda. Ref # Title Attachment # SSAP No. 26 (Julie) 2017 National Association of Insurance Commissioners 1 Agreement with Exposed Document? Comment Letter Page Number AVR and IMR in SSAP No Yes IP - 36 Summary: This agenda item was drafted to consider consistency issues in the allocation of gains and losses between the asset valuation reserve (AVR) and interest maintenance reserve (IMR), as well as information on the recognition of

4 Hearing Agenda other-than-temporary impairment (OTTI) (and division between AVR/IMR) if the security is sold in the same reporting period in which the OTTI is first identified. On June 8, 2017, after considering comments received from the initial exposure, the Working Group exposed proposed revisions to SSAP No. 26R to clarify that recognized losses from other than temporary impairments (OTTI) shall be recorded entirely to AVR and IMR in accordance with the annual statement instructions. Staff also noted if the revisions are adopted, a blanks proposal will be recommended to clarify the annual statement instructions for bifurcating between AVR and IMR. Interested Parties Comments Interested parties agree with and support the proposed revisions. Recommended Action: Staff recommends that the Working Group adopt the exposed revisions to SSAP No. 26R and direct staff to sponsor a blanks proposal recommending revisions to clarify the annual statement instructions. Ref # Title Attachment # SSAP No. 69 (Jake) ASU : Restricted Cash 4 Agreement with Exposed Document? Comments Received Comment Letter Page Number IP - 6 Summary: The FASB Emerging Issues Task Force issued ASU Statement of Cash Flows: Restricted Cash in November ASU , which is effective first quarter 2018 for public business entities and December 31, 2019 for all other entities, with early adoption permitted, requires that restricted cash (or restricted cash equivalents) be included in the same cash flow statement line as cash and cash equivalents. The ASU also clarifies that transfers between cash, cash equivalents, and restricted cash (or restricted cash equivalents) are not part of the entity s operating, investing, and financing activities, and details of those transfers are not reported in the statement of cash flows. On April 8, 2017, the Working Group exposed proposed revisions to SSAP No. 69 Statement of Cash Flow (SSAP No. 69) to adopt ASU : Restricted Cash. The proposed ASU adoption would incorporate slight changes to the cash flow statement, as well as incorporate new disclosures on restricted cash. With the exposure, the Working Group requested information on whether a definition for restricted cash and cash equivalents shall be considered for statutory accounting to ensure consistency in reporting (this term was not defined in the ASU), and on the proposed retrospective application (which is consistent with the ASU). Staff also recommends that the revisions to SSAP No. 69 have an effective date that corresponds with the U.S. GAAP revisions for non-public entities with a year-end 2019 effective date. However, comments were specifically requested on this approach. Comments: Interested parties are not opposed to the proposed changes to adopt the statement of cash flows presentation guidance of ASU in SSAP No. 69. With regard to the proposed effective date, we note that the ASU requires an effective date for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. In order for public business entities to align the effective dates for both GAAP and statutory reporting, we recommend that the proposed effective date of year-end 2019 be amended to allow for early adoption. We do not agree with adding the proposed disclosure about the nature of restrictions to SSAP No. 69. In this agenda item, it is noted that Staff believes it would be beneficial to identify restricted cash and cash equivalents in a disclosure, as these investment schedules (E-1 and E-2) do not identify restrictions. We would point out that the current restricted asset disclosure requirements, which were recently added to SSAP No. 1, Accounting Policies, Risks & Uncertainties and Other Disclosures (SSAP No. 1), provide significant detail about restricted assets above and beyond the new GAAP requirements. We believe the current SSAP No. 1 requirements, which 2017 National Association of Insurance Commissioners 2

5 Hearing Agenda were the result of dedicated work on the issue of restricted assets, is more than sufficient for purposes of statutory financial statement disclosure. Interested parties agree with the FASB s rationale for not defining restricted cash in the ASU, namely that the issue resulting in diversity in practice is the presentation of restricted cash on the statement of cash flows. Furthermore, interested parties would prefer not to maintain a difference between statutory and GAAP reporting due to a specific definition of restricted cash in statutory accounting. Recommended Action: NAIC staff recommends that the Working Group adopt the exposed revisions to SSAP No. 69, modified to allow for early adoption, as well as to delete the proposed disclosure for restrictions on cash, cash equivalents and short-term investments from SSAP No. 69 as recommended by interested parties. Staff also recommends the adoption of a minor edit to footnote 3 of SSAP No. 1 to clarify that the restricted asset disclosure shall include information on restrictions involving cash, cash equivalents and short-term investments. Upon adoption, a blanks proposal will be sponsored to incorporate blanks revisions. (This revision should not impact application, but will provide better clarity to what is captured as cash. ) Staff agrees that the restricted asset disclosure should be used as the source for information on restricted cash, cash equivalents and short-term investments, however, the current guidance in that SSAP indicates that the information included should reflect the coding of investments included in the investment schedules. The proposed edit modifies this instruction to also include restrictions on cash, cash equivalents and short-term investments to clarify that those restrictions should also be included in the SSAP No. 1 restricted asset disclosure. Proposed Revisions to SSAP No. 69: (Shading shows revisions from exposure.) 2. For purposes of the Statement of Cash Flow, cash shall include cash, cash equivalents 1 and short-term investments. The Statement of Cash Flow shall be prepared using the direct method and shall only include transactions involving cash. Cash from operations shall be reported consistent with the Statement of Income, excluding the effect of current and prior year accruals. Worksheets to facilitate completion of the cash flow statement, which necessitate adjustments for reporting entity-specific insurance operations and for non-cash transactions, are provided in the Annual Statement Instructions. New Footnote 1: Amounts generally described as restricted cash or restricted cash equivalents shall be included in the beginning and ending balance in the cash flow statement. Transfers between cash, cash equivalents, amounts generally described as restricted cash or restricted cash equivalents, and short-term investments are not part of the entity s operating, investing and financing activities, and details of those transfers are not reported as cash flow activities in the statement of cash flows. 3.c Disclose information about the nature of restrictions on cash, cash equivalents and short-term investments. (This proposed disclosure will be deleted.) 5. This statement adopts FASB Emerging Issues Task Force Issue No , Classification of Debt Issue Costs in the Statement of Cash Flows which requires that cash payments for debt issue costs shall be classified as a financing activity in the Statement of Cash Flow. This statement adopts with modification ASU , Not-For-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows for all reporting entities. Donated assets with donorrestrictions as to the sale or use of the contributed financial assets, or cash receipts from the sale of donated assets that are restricted as to use are not considered available to meet policyholder obligations and are nonadmitted in accordance with SSAP No. 4 Assets and Nonadmitted Assets. This statement adopts ASU , Statement of Cash Flows: Restricted Cash and requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. 7. 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. Revisions incorporated to clarify that only 2017 National Association of Insurance Commissioners 3

6 Hearing Agenda transactions involving cash shall be included in the cash flow statement and to expand the disclosure to include non-cash operating transactions are effective December 31, Revisions to adopt ASU and include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows are effective December 31, 2019, with early adoption permitted. This revision shall be shown retrospectively, allowing for comparative cash flow statements. New Proposed Revisions to SSAP No. 1: 23.b The total combined (admitted and nonadmitted) amount of restricted assets by category, with separate identification of the admitted and nonadmitted restricted assets by category, and nature of any assets pledged to others as collateral or otherwise restricted (e.g., not under the exclusive control, assets subject to a put option contract, etc.) 2 in the general and separate accounts by the reporting entity in comparison to total assets and total admitted assets. (Pursuant to SSAP No. 4, paragraph 6, all assets pledged as collateral or otherwise restricted shall be reported in this disclosure regardless if the asset is considered an admitted asset.) This disclosure shall include the following restricted asset categories: Footnote 2: The aggregate information captured within this disclosure is intended to reflect the information reported in the Annual Statement Investment Schedules in accordance with the coding of investments that are not under the exclusive control of the reporting entity, including assets loaned to others and the information reported in the General Interrogatories, as well as information on restricted cash, cash equivalents and short-term investments. Ref # Title Attachment # SSAP No. 26R (Julie) ASU : Premium Amortization on Purchased Callable Debt Securities Agreement with Exposed Document? Comment Letter Page Number 5 Yes IP - 37 Summary: In March 2017, the FASB issued ASU : Premium Amortization on Purchased Callable Debt Securities to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. For these securities, the discount would continue to be amortized to maturity. The provisions in the ASU are a change from existing U.S. GAAP, which generally amortizes premiums and discounts on callable debt securities to the maturity date. On June 8, 2017, the Statutory Accounting Principles (E) Working Group moved this item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 26 to reject ASU Premium Amortization on Purchased Callable Debt Securities and retain the statutory accounting provisions of yield-toworst for callable debt securities. The concept of yield-to-worst amortization methodology provides further precision, and as it is already established for statutory accounting, staff does not recommend revising the historical approach. Comments: Interested parties agree with and support the staff s recommendation to incorporate the comments on the callable debt/amortization guidance from agenda items and Staff also noted that they were aware of possible consistency and implementation questions and requests for further detail for possible further clarification. Interested parties believe the approach that has been applied historically is well understood and consistently applied and do not believe further clarification is needed National Association of Insurance Commissioners 4

7 Hearing Agenda Recommended Action: Adopt the proposed revisions to reject ASU as exposed. NAIC staff highlights that the inquiry included in the agenda item focused on the callable debt / amortization guidance incorporated from agenda items and However, no comments were received; therefore no discussion is considered necessary. Ref # Title Attachment # Model 280 (Julie) Agreement with Exposed Document? Comment Letter Page Number Investments of Insurers Model Act 6 & 7 No Comment IP - 19 Summary: With the elimination of the Class 1 concept for money market mutual funds, NAIC staff inquired with NAIC legal on possible updates to remove this term from Model 280: Investments of Insurers Model Act. Per the response from NAIC legal, technical edits to remove the Class 1 reference to the Model would fall within an exception to the normal Model Law update process. These changes are necessitated as the concept of Class 1 MMMFs no longer exist. NAIC staff has proposed revisions to the Model to remove the references to Class 1. In addition to the Class 1 edits, revisions are proposed to correct the definitions for repurchase and reverse repurchase transactions. Comments: Interested parties have no comment on this item. Recommended Action: Adopt the proposed revisions to Model 280 and direct NAIC staff to present the revisions to the Accounting Practices and Procedures (E) Task Force. Although the revisions to this Model have been drafted as an exception to the Model Law update process, it is anticipated that the revisions, and adoption consideration, will follow standard Model Law review procedure and be separately presented at all parent groups. Along with the Model Law revisions, the attachments also include a memorandum that will be presented to the parent groups recommending the technical changes. Ref # Title Attachment # SSAP No. 43R (Julie) Definition of LBSS 8 & 9 Agreement with Exposed Document? Agree With Comments Comment Letter Page Number IP - 3 Summary: The Investment Classification Project (detailed in agenda item # ) supported a review of the investment SSAPs to address a variety of application questions, mostly focusing on definitions and scope limitations of each of the noted SSAPs. SSAP No. 43R Loan-backed and Structured Securities (SSAP No. 43R) was originally identified as a SSAP to review within the Investment Classification Project. Pursuant to the original project focus, the assessment of SSAP No. 43R is intended to include a review of definitions for the investments within scope, and to verify whether investments are being appropriately included (or excluded) from that standard. This agenda item has previously been exposed to consider the inclusion of a revised definition suggested by the Valuation of Securities (E) Task Force. After considering comments from the proposed definition, as well as other suggested revisions from NAIC staff, on April 8, 2017, the Working Group exposed this agenda item with the intent to dispose. It was identified that subsequent proposals could be submitted, but the proposed revisions could result with unintended consequences National Association of Insurance Commissioners 5

8 Hearing Agenda Interested Parties Comments Interested parties agree with the recommendation to dispose of the proposal , SSAP No. 43R, Definition of LBSS, for all the reasons provided in our prior comment letter ( the IP letter ); however, after reviewing the Hearing Agenda documents for the Spring NAIC meeting, the IPs noted that there were certain comments inserted into the paper for which we thought it important to either clarify or provide additional information. The purpose of this letter is to address those comments. On April 8 th, the Working Group exposed this agenda item with the intent to dispose of it; however, the exposure document noted that subsequent proposals related to SSAP No. 43R, including those investments in the scope of SSAP No. 43R, may be exposed in conjunction with the on-going Investment Classification Project. As was noted in the IP letter, we strongly recommend the scope of SSAP No. 43R not be revisited. Any modifications to the scope of SSAP No. 43R could result in unintended consequences given the complexities associated with the instruments currently in scope and the complexities associated with instruments offered in the marketplace. Should the Working Group consider re-opening any aspect of SSAP No. 43R, we would appreciate an opportunity to discuss this topic with the Working Group beforehand. With regard to the hearing agenda and the various comments inserted into the paper, the IPs offer the following additional comments: 1) Staff made the following comments in the Hearing Agenda for paragraph 6a related to Underlying Assets in the Pool Need to Meet the Definition of an Asset : Staff has also received information that it is expected that companies investing in SSAP No. 43R securities should know the underlying nature of the assets/collateral securing the cash flow streams. Even in securities where the underlying pool is revolving (e.g., CLO, Master Trusts), the company should know the type of asset). Additionally, Staff notes that Unless the Working Group direct otherwise, NAIC staff plans to continue referencing the existing guidance which provides that investments in scope of SSAP No. 43R should reflect a securitization of assets pledged to a trustee, in which the investor has direct recourse. Excerpts from SSAP No. 4 have also been included). In the Hearing Agenda, Staff quotes several 43R excerpts that imply that the collateral in the securitization must meet the definition of an asset in SSAP No. 4. Additional IP comments: Although the Staff statement above is accurate in that investors certainly know the type of underlying collateral in special purpose entities (SPEs) in which they invest, investors do not monitor on an on-going basis all assets and liabilities in the SPEs. As mentioned in the IP letter, this would be operationally burdensome and not possible in many situations. IPs interpreted the language in the proposal to require all cash flows expected from the underlying collateral pool to relate to an asset as defined in SSAP No. 4, Assets and Nonadmitted Assets (SSAP No. 4). The securitization market is very complex in that varied contracts, expected to generate future cash flows, are securitized and sold in the marketplace. Insurance Companies are very sophisticated investors in such instruments. As mentioned in the IP letter, securitized instruments that trade in today s market meet the definition of an asset in SSAP No. 4 (e.g., they have probable future economic benefits). To add some clarification to what we stated in our previous letter, we note that the securitization vehicle (i.e., Special Purpose Entity) does, in fact, hold/report assets in all cases even in situations where the underlying collateral may relate to contractual agreements where the expected cash flows may not yet meet the definition of an asset in SSAP No. 4 (e.g., future royalties or future asset management fees). The right to receive those cash flows by the entity that originated the contracts, which will eventually give rise to those cash flows, may not yet be an asset on that entity s books. However, when such entity sells those rights to an SPE, those rights become an asset on the SPE s books. In essence, the SPE owns a 2017 National Association of Insurance Commissioners 6

9 Hearing Agenda receivable (i.e., asset), which is supported by the legal agreements to sell such rights between the originator and the SPE, and thus the entity reports such receivable. Therefore, a reported asset does support the securitization. We do not agree that such securitizations should be non-admitted as they have economic value (i.e., may be monetized to pay policyholder liabilities) and are monitored for impairment on an on-going basis. We analogize all securitizations to any other fixed income instrument (e.g. bonds) where it is a contractual agreement to pay certain amounts when due (e.g., principal and interest) and the payments are dependent upon the credit risk associated with the underlying source of cash flows. For a bond, the credit risk is associated with the ability of the borrower to generate adequate cash flows to make future payments when due. For a securitization, the credit risk is associated with the underlying collateral s cash flow generating ability to make future payments when due. IPs do not view the two instruments to be different from one another as each relates to the ability of the issuer of the instrument to generate future cash flows. 2) Staff made the following comments in the Hearing Agenda for paragraph 6b related to Nonadmittance of Structured Securities Involving Insurance Products or Premiums: Having the same products valued differently if they are asset-backed than the existing explicit guidance for the directly owned assets would produce inconsistent valuation and reporting. We note that: SSAP No. 21, Other Admitted Assets (SSAP No. 21), requires life insurance to be valued at cash value (less any fees) and structured settlement annuities to be reported at net present realizable value, and requires reporting for both items on the other than invested assets lines. SSAP No. 42, Sale of Premiums Receivables, has guidance on the sale of premium receivables that is primarily focused on ensuring that the sale is without recourse. Additional IP comments: Many of the additional comments noted in item #1 above are also relevant to securitizations involving future premiums and/or structured settlements. That is, such securitizations have real economic value, supported by the fact that they trade in the marketplace and may be monetized to pay policyholder liabilities. Such instruments ability to pay contractual principal and interest are monitored on-going for impairment and are dependent upon the cash flow generating ability of the underlying contracts in the securitization. IPs do not agree that a look through to the underlying collateral is relevant to how the investment (i.e., the securitization) should be reported or accounted for on a statutory basis. IPs strongly recommend the focus continues to be on the type of investment purchased in the marketplace, which is a fixed income instrument, similar to a bond, where credit risk is based on the cash flow generating ability of the underlying structured settlements or other insurance contracts. To view an individual premium receivable or a structured settlement the same as a pool of securitized premiums receivable or structured securities is not appropriate and does not consider the relevant economics of each. They are two very different assets where one is viewed by the marketplace as an investment (i.e., the securitization) and the other is an insurance related contract (i.e., the one receivable or structured settlement). 3) Staff made the following comments in the Hearing Agenda for paragraph 6c related to Related Party Transactions: Staff notes that With the comments received from interested parties on the related party transactions that have been occurring within SSAP No. 43R, staff requests regulatory comments on whether there is adequate identification of these transactions, and whether there are concerns regarding the use of securitizations to transfer risk to related parties. (Regardless, SSAP No. 43R securities should 2017 National Association of Insurance Commissioners 7

10 Hearing Agenda not be used as a means to unload assets from one company to a related insurance reporting entity that do not reflect arm-length terms.) Additional IP comments: IPs would like to re-iterate that we very strongly agree with Staff that SSAP No. 43R securitizations with related parties must reflect arms-length terms. Related party transactions must not result in a mere inflation of surplus in the related party group and should not be allowed if they are not arms-length. IPs clearly understand this from SSAP No. 25 guidance and are not aware of companies abusing the guidance. What we would like to also re-iterate is that related party transactions must continue to be allowed to provide insures the ability to efficiently manage capital when the insurer has multiple insurance and non-insurance companies and to provide insurers the ability to continue to share risks among those companies, as long as SSAP No. 25 is followed. To disallow efficient capital management would be detrimental to insurers. Recommended Action: NAIC staff recommends that the Working Group dispose agenda item without statutory revisions. A response received from the staff of the Valuation of Securities (E) Task Force identified that the Task Force will not further pursue their proposed definition. With regards to the comments provided by the interested parties, the following responses are provided: 1) Review of Future Revisions to SSAP No. 43R: Agenda item was drafted in response to a referral from the Valuation of Securities (E) Task Force, which had received support from the ACLI in the proposed definition change. Although interested parties have requested that they first be consulted before considering definition revisions to SSAP No. 43R, recommendations to consider revisions, whether communicated / sponsored from a submission of the an agenda submission form, or received via a referral by another NAIC group, will be presented to the Working Group for consideration. The interested parties will be invited to comment on those submissions in accordance with the exposure process. 2) Paragraph 6 Revisions: NAIC staff appreciates the additional comments from interested parties on the paragraph 6 provisions. As directed during the 2017 Spring National Meeting, NAIC staff will further research the elements and subsequently report findings to the Working Group. After that research is evaluated, the Working Group will consider whether additional agenda items to clarify SSAP No. 43R are necessary. The information received from interested parties will be further considered as staff conducts that additional research. As an additional note, agenda item has been drafted to update the SSAP No. 43R effective date guidance (removing explicit transition guidance from the 2009 substantive revisions) and to update the SSAP No. 43R Q&A to remove outdated guidance. This item is planned for presentation (and possible exposure) during the Summer National Meeting National Association of Insurance Commissioners 8

11 Ref # Title Attachment # SSAP No. 26 (Julie/ Robin) Policy Statement on Coordination with P&P Manual, SVO and VOSTF Agreement with Exposed Document? Hearing Agenda Comment Letter Page Number 10 No Comment IP - 2 Summary: This agenda item proposes a new policy statement in Appendix F of the AP&P Manual to detail the coordination and collaboration between the VOSTF and the SAPWG (and related NAIC staff). On April 8, 2017, the Working Group exposed a proposed new policy statement, with revisions from the prior exposure draft in the Updated Recommendation for Spring 2017 National Meeting Discussion. Additionally, the Working Group provided a referral to the Valuation of Securities (E) Task Force informing them of the updated policy statement, with a request for comment on the noted changes. Comments: Interested parties have no comment on this item. Recommended Action: NAIC staff recommends re-exposure of the policy statement (without revisions from the prior exposure) as the referral response from the Valuation of Securities (E) Task Force is still pending. A response from the Task Force is expected shortly after the National Meeting. Ref # Title Attachment # SSAP No. 86 (Julie) Impact of Future Settled Premiums on Option Valuations 11 Agreement with Exposed Document? Comments Received Comment Letter Page Number IP - 20 Summary: This agenda item considered revisions to SSAP No. 86 to address the accounting and reporting of derivative contracts with deferred or financing premiums. On April 8, 2017, after considering the comments received from the Jan. 24, 2017 exposure, the Working Group requested industry to provide an illustrated Schedule DB to identify their suggested changes to capture information on these derivative structures. Additionally, the Working Group directed re-exposure of the proposed revisions to SSAP No. 86 detailed in the agenda item (mirroring the Jan. 24 exposure) as well as directed a referral to the Financial Analysis Research and Development (E) Working Group to provide notice of current limitation of financial analysis tools for derivatives with deferred or financial premiums. This referral identifies that upon adoption of changes, subsequent notice would be provided so changes to the analytical tools / calculations can be considered. Interested Parties Comments: Interested parties appreciate this opportunity to provide a pro forma illustrated Schedule DB which captures these derivative transactions in enhanced financial reporting disclosure as requested in this re-exposure and we will also provide a discussion of the RBC impacts in addition to our comments on the proposed revisions to SSAP 86, even though neither was specifically requested in this re-exposure. Enhancements to Financial Reporting Disclosures Interested parties are pleased to present the attached pro forma illustrated Schedule DB which, from column H through AJ, represents Schedule DB - Part A, Section 1. We have presented this pro forma Schedule DB with three different trade examples in order to demonstrate the impact of different premium payment terms within option contracts. The pro forma reflects two added columns (T and Y) through which we believe the following analytical tools/regulator review procedures from the Financial Analysis Handbook would be facilitated: 2017 National Association of Insurance Commissioners 9

12 Hearing Agenda Total derivatives greater than 1% of total net admitted assets Counterparty exposure or potential exposure greater than 1% of total net admitted assets Significant derivative activity is determined from a comparison of BACV to capital and surplus Whether initial cost of derivatives acquired or opened is greater than 150% of the initial cost of derivatives owned or open at year-end. Whether current statement value of futures is greater than 150% of BACV at prior year-end In addition, to further enhance the transparency around the financial reporting/disclosure of future settled premiums on option valuations, interested parties suggest the following disclosure as an addition to Footnote 8 Derivative Instruments, of the Annual and Quarterly financial statements. At March 31, 2017 and December 31, 2016, the Company had future premium commitments related to its option products of $XXXXX and $XXXXX, respectively, that are contractually due at various times through the year The present value of these deferred premium obligations is reflected in the option products book/adjusted carrying value. RBC Impacts In the Hearing Agenda for the NAIC Spring National Meeting in Denver, two discussion points related to the impact of the future settled premiums on RBC were provided. Those discussion points followed by responses from interested parties are set forth below. NAIC Staff Discussion Point #1: For life insurers, the RBC charge is determined based on the exposure net of collateral based on designation (4% - 30%). The net exposure is determined from taking the book adjusted carrying value ( BACV ) reported on Schedule DB D (which should tie to the asset page, line 7 after any offsetting) less the fair value ( FV ) of acceptable collateral. So, if the BACV is reduced as a result of deferred premiums, the company would receive a favorable impact to RBC. Interested Parties Comments Point #1: Although having a future settled premium lowers the BACV of the derivative contract, the impacts of the reduced BACV are offset by other portions of the RBC calculation. For example, if the premium was paid up front, it would drive up the BACV amount to be charged with RBC, but it would also increase the market value of the contract requiring the counterparty to send more collateral. Therefore, in the formula of BACV less the FV of acceptable collateral, both the BACV and the FV of acceptable collateral would increase causing no net change to RBC. Based on these factors, we do not believe RBC should be adjusted outside of adjusting the economics of the actual contract. Further, we do not believe the future settled premium feature provides a RBC advantage as currently constructed and believe adjusting the RBC while the underlying economics of the contract remain the same, would cause a punitive effect on the RBC calculation. NAIC Staff Discussion Point #2: RBC impact is driven by actual derivative instruments. The process to net the derivative asset and deferred premiums, reduces (and possibly eliminates) the derivative asset, reducing the RBC impact to the reporting entity. It is Staff s view that the inclusion of a deferred premium (as it allows the insurer to delay cash outflows and impacts the ability to transfer or terminate the contract) implies higher risk activity. Interested Parties Comments Point #2: We do not believe that future settled premium features in derivative contracts impact the ability of a company to transfer or terminate the derivative contract. Deferring a premium past inception simply ensures the premium that would have been due up front, is paid throughout the life of the trade or paid at termination whether through exercise, sale or maturity. The future settled premium feature is a favorable characteristic to the financial institution counterparties in long-dated deals. If the premium is not deferred on a 20-year option, then the premium would be large enough to require a company to pay the premium up front, and the very next day an equal amount of collateral would be required to be posted on the part of the financial institution counterparty. To avoid the back and forth wire transfer and the unnecessary posting of collateral by the financial institution, a future 2017 National Association of Insurance Commissioners 10

13 Hearing Agenda settled premium feature is deemed to be most efficient for both parties to the contract. From a risk perspective, there is actually less risk to an insurer when the premium is paid at the end of the contract because they are not exposed to the credit risk of the counterparty associated with that counterparty holding the premium for the life of the contract. Proposed Revisions to SSAP 86 Interested parties understand the concern about the transparency around the financial reporting/disclosure of the future settled premiums on option valuations, but we do not agree that revisions to the accounting guidance for derivatives are the appropriate solution. Instead, we believe the proposed changes present significant unintended consequences, as well as inconsistencies with other sections of the SSAP guidance and recommend that improvements in the transparency around these items instead be handled by the enhanced financial reporting disclosures described above. We would first like to provide context around the economic concept of future settled premiums and how they apply to insurers. Because some insurers have long-term variable annuity liabilities they use options to hedge those associated risks. Within this hedging strategy, options that are long-term are better economic hedges against the liabilities than entering into a series of short-term options and renewing each year while the terms of the liabilities remain constant. However, the economic issue with long-term options is that they have tremendous initial value which insurers are willing to pay, but financial institutions do not want to charge up-front because of the collateral ramifications. For example, if an insurer entered into a long-term option worth $50M today and did not future settle the premium, a $50M payment would be made to the counterparty up-front. However, the next day the insurer would possess an option worth close to $50M and the financial institution would be required to post collateral to the insurer. As such, the financial institutions prefer to have the premium paid over the life of the option or at maturity in order to avoid back to back exchanges of consideration each time one of these options is struck. Insurers are generally not deferring option premiums with financing as a significant objective. Instead based on these economic concepts and the current regulatory environment, these premium terms are necessary to an orderly longterm options market. In addition, the entire industry views the future payment of these premiums as a term within the derivatives contract and not a different contract to be valued separately. Lastly, it should be noted that in many European markets, future settled premiums have become standard practice with long-term options only being quoted on a deferred premium basis. The sections provide Interested Parties comments on each of the proposed April 2017 changes to SSAP 86: NAIC Staff Proposed Change #1: The initial cost to enter into a derivative contract (derivative premium) is not an underlying interest, regardless if the premium is paid at the beginning of the derivative contract, throughout the derivative contract (financing premium), or at the end of the derivative contract (deferred premium). If derivative premium is unpaid at inception, this cost shall not be combined with the expected cash flows or the fair value of the derivative instrument for reporting purposes. Interested Parties Comments Change #1: While we agree that the cost of a derivative is not an underlying interest of option contracts, we also believe that the premium cost is a cash flow within the singular derivative contract contributing to the contract s fair market value (as viewed by all market participants). In addition, non-qualifying derivatives should be held on the statutory balance sheet at fair market value and under SSAP No. 100 Fair Value ( SSAP 100 ), 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. Separating a flow within a derivative contract to be recorded outside of derivatives would cause these non-qualifying derivatives to be held on the statutory balance sheet at an amount different than fair market value. SSAP 100 guidance further states: The fair value of the asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability National Association of Insurance Commissioners 11

14 Hearing Agenda The concept of SSAP 100 is that fair value is an exit price and that fair value should be determined based on assumptions of market participants. We contend that market practice considers the fair value of derivatives with future settled premiums to be equal to the net present value of the future cash flows, which includes the cash flows associated with unpaid premiums. If an insurer sought to transfer one of these derivative contracts, the value paid to transfer the trade would include all contractual flows including the present value of the future contractual premiums. The derivative contract cannot be transferred without the premiums flows absent some modification. Based on these SSAP 100 principles, the fair value of derivatives with future settled premiums includes unsettled premium flows. NAIC Staff Proposed Change #2: Derivative Premium is the cost to acquire and/or enter into a derivative contract. The derivative premium is not an underlying in a derivative contract, and is not impacted by changes in an underlying interest of the derivative agreement. Furthermore, entering into contract terms that defer / finance the cost to enter into a derivative contract shall not be considered a contract with an embedded derivative and shall not be captured in paragraph 15. Deferred Premium: Payment to enter/acquire the derivative contract is deferred until the end of the derivative contract. Financed Premium: Payment to enter/acquire the derivative contract occurs throughout the derivative contract. Interested Parties Comments Change #2: Interested Parties agree that a derivative premium is not an embedded derivative. Premiums are a cash flow within a single derivative contract. Derivative instruments have many different cash flows including premiums, interest flows, notional exchanges, and termination cash. We do not believe any flow that impacts derivative fair value for a non-qualifying derivative should be separated from a singular derivative contract and accounted for separately outside of derivative assets and liabilities. Further, we would like clarity on Staff s definitions comparing deferred and financed premiums herein. It is our opinion that all deferred premiums are financed and any premiums that are financed are deferred. The number of payments within the payment schedule of premium flows within a derivative contract does not necessarily determine whether premiums are financed rather than deferred. NAIC Staff Proposed Change #3: Derivative premium (the cost to acquire and/or enter into a derivative contract) shall be recognized at the time a derivative contract is acquired and/or entered into, with any unpaid derivative premium recognized as a liability under SSAP No. 5R Liabilities, Contingencies and Impairments of Assets ( SSAP 5R ). The cost and liability recognition (if applicable) shall be recognized at the onset of the derivative contract, regardless if the derivative premium is paid at the beginning of the derivative contract (most common), or if the payment has been structured to occur throughout the derivative contract (financed premium) or if the cost is paid at the termination of the derivative contract (deferred premium). Unpaid derivative premium payable shall be recognized as a payable for securities on the liabilities page. If the reporting entity has sold derivatives and has a derivative premium receivable (a due to the reporting entity), this amount shall be recognized as an aggregate write-in for other than invested assets. Staff Note: Staff recommends blanks revisions clarifying that unpaid derivative premium shall be recognized as a payable for securities on the liabilities page. Staff also recommends that Schedule DB be revised to clarify what should be included in the following columns: 1) Cumulative Prior Year(s) Initial Cost of Premium (Received) Paid, and 2) Current Year Initial Cost of Premium (Received) Paid. Footnote (2): Entering into a contract to defer/finance derivative premium shall not be considered a contract with an embedded derivative subject to the guidance in paragraph 15. Unpaid derivative premium to acquire and/or enter into a derivative contract (regardless of the components of the contract) shall be recognized as a liability under SSAP 5R National Association of Insurance Commissioners 12

15 Hearing Agenda Interested Parties Comments Change #3: It appears this proposed guidance is suggesting a nonderivative payable be established for any future settled premiums. Interested Parties have concerns regarding the mechanics of this application from an accounting and financial reporting perspective. To illustrate, assume an option is worth $1M at trade execution and has a future settled premium to be paid at maturity of $1.2M. Also, assume that the derivative lost value of $1K before the end of the trading day. Under the proposed guidance, the entries would be to record the $1.2M credit for future settled premium payable, debit the derivative asset of $999K and debit unrealized gains/losses of $1K for the loss in derivative value. The accounting for the remaining $200K necessary to balance the entry is unclear. We do not believe that the future settled premium, as a non-derivative liability, should be discounted, nor that the $200K of discounting represents a derivative loss that should be recorded on Schedule DB in unrealized gains/losses. We are concerned about this accounting and seek further clarification on its application. NAIC Staff Proposed Change #4: At inception of the hedge, documentation must include: The derivative premium (cost to acquire and/or enter into the derivative contract) and information on when the reporting entity is required to remit the derivative premium. Interested Parties Comments Change #4: It appears that Staff has inserted the above guidance into paragraph 39 which relates to documentation necessary when an effective hedge is transacted. Interested Parties do not take exception with this addition, but would like to note that option contracts with future settled premiums have historically not received hedge accounting treatment and have been listed as hedging-other not hedging-effective. NAIC Staff Proposed Change #5: All derivative instruments (footnote 8) are required to be shown gross on Schedule DB. However, derivatives may be reported net in the financial statements (pages 2 and 3 of the statutory financial statements) in accordance with SSAP No Offsetting and Netting of Assets and Liabilities ( SSAP 64 ) when a valid right to offset exists. Derivatives offset in accordance with SSAP 64 and reported net in the financial statements shall follow the disclosure requirements in SSAP 64, paragraph 6. (Derivative Assets and Derivative Liabilities reported on the balance sheet shall agree to columns 5 and 6, respectively, after netting, on Schedule DB - Part D, Section 1.) Staff Note: Staff identifies that the current reporting requirements of Schedule DB support separate reporting by derivative instrument (as different reporting lines in Schedule DB are to be used based on the type of derivative instrument). Staff requests information from industry regarding how derivative contracts with more than one derivative instrument are currently being reported. If the derivative contract is being presented as a single item (even if multiple instruments are included in the contract), staff requests information on which reporting lines on Schedule DB should be used to report the contract. Derivative premium (cost to acquire and/or enter into the derivative contract), paid and unpaid, for derivative contracts acquired / entered into during the current year, as well as unpaid derivative premium from prior-year contracts, shall be disclosed. The disclosure shall identify the aggregate liability recognized for unpaid derivative premiums, and a schedule of expected future derivative premium payments from entered derivative contracts. The schedule shall disclose derivative premium payments expected for each of the subsequent four years, with an aggregate total for derivative premium payments expected for year five and thereafter. Footnote (8): In the event that a derivative contract has more than one derivative instrument, each derivative instrument shall be separately reported gross on Schedule DB. By reporting gross each derivative instrument shall reflect the terms of that particular instrument, as if it was the only derivative instrument in a derivative contract. For example, the fair value reported for a derivative instrument shall reflect the amount that would be received (or paid to transfer a liability) in an orderly transaction between market participants as if that derivative instrument was contracted in a stand-alone transaction National Association of Insurance Commissioners 13