Investment Classification Updates & Review Session # 603
Julie Gann NAIC Senior Manager Accounting & Reporting Supports SAPWG and EAIWG Supports Restricted Asset (E) Subgroup Supports Separate Account Risk Working Group Provides technical & advisory services in the areas of SAP, GAAP & IFRS Joined NAIC in February 2001. Prior Positions Include: Financial Examination Manager International Insurance Accountant Public accountant and insurance examiner consultant CPA, FLMI, ARA and AIRC; Member of AICPA & MSCPA
Investment Classification 1. Overview of Investment Classification Project 2. Key SSAPs Subject to Discussion Discussion Topics Possible Actions for Consideration 3. What s Happened So Far Recent Exposures / Comments Findings from ETF Analysis 4. Upcoming Discussions
Why Review Investment SSAPs? Definitions vary from market definitions Inconsistent interpretations of definitions Look-through allowed for some investments Reporting inconsistencies (measurement / schedules) Different treatment for similar investments
Investment Project Summary Project to review the investment SSAPs with suggestions to clarify definitions, scope, and the accounting method / related reporting. This project suggests possible revisions to existing SSAPs, or the development of new SSAPs to capture investments that are outside of SSAP definitions, to consider the elimination of exceptions within specific SSAPs and address specific characteristics of those investments to ensure consistent and appropriate valuation and reporting.
Key SSAPs to Discuss SSAP No. 21 Other Admitted Assets - (collateral loans) SSAP No. 26 Bonds SSAP No. 30 Investments in Common Stock SSAP No. 32 Investments in Preferred Stock SSAP No. 37 Mortgage Loans (participations) SSAP No. 43R Loan-backed and Structured Securities SSAP No. 48 Joint Ventures, Partnerships and LLCs
SSAP No. 26 Discussion Topics 1. Incorporate a security definition 2. Require contractual amount due 3. Clarification for items that are not bonds Does a loan represent a creditor relationship with a fixed schedule for one or more future payments?? Maybe a loan is a bond? How is security defined?
SSAP No. 30 & SSAP No. 32 1. Definitions Common & Preferred Redeemable / Perpetual / Mandatory-Sinking / Payment In-Kind 2. Classification and Reporting of Funds 3. Consider Measurement Changes What is the appropriate measurement for ETFs? 4. Reporting Revisions (e.g., NAIC designation) 5. Impact of Entity Type in Measurement Different Breakdowns by NAIC Designation
SSAP No. 43R & SSAP No. 48 A. Definitions / Scope Inclusion of Single-Payer Investments Exclusion of Structured Notes B. Accounting / Guidance for Beneficial Interests Equity-Interest Residual (Bottom-Tier) C. Consideration of Look-Through approach Underlying Characteristics of investments D. Should similar investments have different RBC? Life & Fraternal Companies
What s Happened So Far? 2013 Winter National Meeting Original Agenda Item Discussed & Exposed Substantive 2014 Spring National Meeting Comments Received April 2014 E-vote Exposure of Investment Matrix Agree - But be CAUTIOUS! Identify Issues to Discuss June 2014 Comments Received Exposure of Prioritization Document.
What s Happened So Far 2014 Fall National Meeting Direction Proceed with Top Two items on Prioritization Memo 2015 Spring National Meeting Memo Exposures Definition of Security Contractual Amount of Principal Due ETF Analysis Definitions for Non-Bond Items
Definition of Security Exposure Overview of Exposure Document: Proposed revisions to include a definition to the term security within the bond definition in SSAP No. 26 Bonds Incorporate the GAAP definition of a security, as it is used in FASB Codification Topic 320: Investments Debt and Equity Securities, and Topic 860: Transfers and Servicing. Definition is already in SSAP No. 37 Mortgage Loans
GAAP Definition of Security Security: A share, participation, or other interest in property or in an entity of the issuer or an obligation of the issuer that has all of the following characteristics: It is either represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer. It is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment. It either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.
Definition of Security - Comments Comment deadline = May 21, 2015 Preliminary Comments:
Contractual Amount of Principal Due Overview of Exposure Document: Proposes guidance to require all SSAP No. 26 investments to have a contractual amount of principal due, with concurrent consideration of new guidance for funds. Would eliminate all ETF s and mutual funds from the scope of SSAP No. 26. Would prevent future inclusion of other fund investments from being classified as bonds. Specifically Asks What Else Will Be Removed from SSAP No. 26?
Elements Supporting Proposal Current reporting process has a lack of transparency and makes it difficult to assess the amount of funds held. SSAP No. 26 uses an amortized cost measurement. Without a contractual amount of principal due, there is no actual amortized cost for fund investments. Proposal identifies that lower RBC charges, if appropriate, are feasible even if reported on a separate schedule. Having similar investments reported together will assist regulators in identifying extent of investments. Recognition in accounting and reporting does not necessarily impact state investment law limitation requirements.
ETF Filing Inaccuracies Review of 2013 and 2014 F/S support need for separate reporting and a specific measurement method for ETFs: 1. Inconsistencies in Measurement Method / Reporting For Measurement: Some companies report at actual cost, which was greater than fair value, when guidance requires a lower of measurement. Some companies report at fair value, which was greater than actual cost, when guidance requires use of amortized cost. For Reporting: Companies report on Bond or Preferred Stock Schedule Companies report as Common Stock (fair value / unrealized ) Approved ETF Reporting is NOT an Election.
ETF Filing Inaccuracies 2. Inconsistencies in the Reporting of NAIC Designations In 2014 37% of the 395 Approved ETFs on D-1 (148) Incorrectly Reported. 110 Insurers Reported NAIC Designations when an NAIC designation did not exist for the ETF in 2014. 65 of those 110 insurers reported an NAIC designation for ETFs that have NEVER been filed with the NAIC. 38 Insurers reported NAIC designations that did not agree with the NAIC designation in the database. Several reported FE designations. (FE is not allowed for ETFs.) Some reported designations that allowed a higher measurement. Is confusion causing these inconsistencies?
Other Info on ETF Reporting 3. SSAP No. 26 Highest in Hierarchy Requires Amortized Cost Only 3 insurers appear to reflect amortized cost However, uncertain how amortized cost was calculated. (These insurers had amounts that varied from actual cost and fair value and reported an amortization in Schedule D-1.) Two insurers reported an amount different from actual cost and fair value, but did not show any amortization or unrealized change 4. Few Insurers / Few States with Bond-Reported ETFs 15 ETFs represent 68% of the bond-reported ETFs 48% of Companies with bond-approved ETFS only held 1 75% of Companies with bond-approved ETFs held 3 or less. 79% of ETFs on D-1 are held within 16 states. (45% in 5 states.)
Contractual Amount of Principal Due * Comment deadline = May 21, 2015 * Preliminary Comments:
Definitions for Non-Bond Items Discussion of Exposure: Provides definitions for debt-like investments that are outside of the bond definition proposed in SSAP No. 26. Loan Participations Based on U.S. GAAP Loan Syndication Based on U.S. GAAP To Be Announced (TBA) Securities Hybrids - Trust-Preferred Securities, Yankee Bond, American Depository Receipts, Zero Coupon Bond, Convertible Securities
Definitions for Non-Bond Items Loan Participations: Transaction in which a single lender makes a large loan to a borrower and subsequently transfers (sells) undivided interests in the loan to other entities. Transfers by the originating lender may take the legal form of assignments or participations. Transfers are usually on a nonrecourse basis, and the originating lender continues to service the loan. Participating entity may or may not have the right to sell or transfer its participation during the term of the loan, depending on the terms of the participation agreement.
Definitions for Non-Bond Items Loan Syndication: Transaction in which several lenders share in lending to a single borrower. Each lender loans a specific amount to the borrower and has the right to repayment from the borrower. Separate debt instruments exist between the debtor and the individual creditors participating in the syndication. Each lender shall account for the amounts owed by the borrower. Repayments by the borrower may be made to a lead lender that then distributes the collections to the other lenders of the syndicate. In those circumstances, the lead lender is simply functioning as a servicer and shall not recognize the aggregate loan as an asset.
Definitions for Non-Bond Items Should Loan Participations & Syndications be accounted for differently? * Comment deadline = May 21, 2015 * Preliminary Comments:
Upcoming Discussions Expected Conference Call Discussions Recommended Actions / Next Discussion Documents
Julie Gann, NAIC Senior Manager Accounting & Reporting jgann@naic.org / 816-783-8966 Please Complete the Session Evaluation Form on the Conference App