NAIC Spring 2017 National Meeting Update Market Insight Paper Pg. 2 Pg. 4 Pg. 5 Pg. 6 Statutory Accounting Principles Working Group (SAPWG) Dedicated to maintaining accounting principles and providing periodic updates to guidance as it develops. The SAPWG focuses on discussions that result in changes to the Accounting Practices and Procedures (AP&P) Manual and related SSAPs. Blanks Working Group (BWG) Addresses changes made to the annual statement blanks and instructions, including technical changes and clarifications. Primarily dedicated to the development of new corporate bond factors for life insurance companies. Investment Risk-Based Capital Working Group (IRBCWG) Primarily dedicated to the development of new corporate bond factors for life insurance companies. Valuation of Securities Task Force (VOSTF) Dedicated to designations, valuations, and the Securities Valuations Office (SVO) filing process as outlined in the Purposes and Procedures (P&P) Manual of the NAIC Investment Analysis Office.
The NAIC held their Spring 2017 National Meeting from April 8 11 in Denver, Colorado. Clearwater Analytics is dedicated to keeping insurers updated on the latest regulatory guidance changes as they pertain to investment accounting and reporting. Our insurance experts attend each NAIC national meeting to monitor regulatory updates and provide proactive education on adopted and proposed items. Statutory Accounting Principles Working Group At the NAIC Spring 2017 National Meeting, the SAPWG discussed substantive changes to SSAP No. 26, AVR/IMR items, extended deadlines for Subsidiary, Controlled, and Affiliated Entities (SC&As) filings, and more. Changes to SSAP No. 26R After months of industry debate, the SAPWG passed Ref #2013-26, which included substantive changes to SSAP No. 26R as part of the Investment Classification Project, effective December 31, 2017. Changes to Bond ETFs This item has been open since 2015 and was finally approved. The NAIC originally suggested that all mutual funds be reported on a different schedule at fair value since the current method (usually original cost) was not a defensive measurement method. Bond ETF-approved providers and insurers objected to this suggestion, saying they felt moving the book-adjusted carrying value to market value would impact the marketability of the instrument. They argued that because a bond ETF is nothing more than a series of bonds, it should remain on the Schedule D Part 1 and be reported in a manner similar to Schedule D Part 1 bonds. ETF providers recommended an alternative to cost or fair value, which they referred to as systematic value. The systematic value calculation takes the aggregated cash flows of each investment owned by the fund and uses the effective yield of those cash flows compared to the actual distributions to increase or decrease the carrying value of the investment. ETF providers argued that smaller insurance companies use ETFs to access the bond market at a cheaper cost than buying instruments directly, and fair value introduces too much volatility into a small insurer s surplus. Some regulators and interested parties were skeptical of this method for several reasons: 1. The calculation method is new, unique, and has never been used before. 2. Industry was concerned about the risk of insurance companies implementing this method inconsistently or incorrectly, defeating the Investment Classification Project s key objective of establishing consistent reporting of investments across Industry. 3. The Investment Analysis Office had concerns about how impairment would work. While NAIC staff originally wanted a fair value approach, they recognize the merits of these investments and did not want to leave the smaller companies at a disadvantage. They developed transition and impairment guidance to address the major concerns. This item was passed. It allows insurance companies to choose to report (proxy) each investment using either systematic value or fair value. Effective December 31, 2017, each insurance company must make a one time, irrevocable election on how they will report each SVO-approved ETF. If an insurer chooses fair value, they will immediately report the security at market value. If an insurer elects systematic value, they will use their current method for 2017 reporting and use the systematic value calculation for 2018. This election will be made using a new Code Code on the Schedule D Part 1. Revisions to SSAP No. 97 Extended Deadlines for Subsidiary, Controlled, and Affiliated Entities As part of the ongoing effort to improve compliance with filing requirements for SC&As, the SAPWG exposed revisions to SSAP No. 97 to extend deadlines for submitting SC&As. The SAPWG received comments from Industry stating it was not possible to meet the current deadlines due to documentation, audit support requirements, and time delays on foreign SC&As. Staff noted that over 95% of Sub 1 filings are submitted after the required deadline. Each insurance company must make a one time, irrevocable election on how they will report each SVO-approved ETF. NAIC Spring 2017 Market Insight Paper clearwateranalytics.com 2 >
The revisions seek to extend the deadline for Sub 1 filings to 60 days after acquisition or formation (currently 30 days) and to July 31 for the Sub 2 filing (currently June 30) so Industry can better comply with the filing deadlines. The SAPWG is open to feedback on the suggested timelines from interested parties. Ref #2017-04 Settlement of Variation Margin The Chicago Mercantile Exchange recently changed variation margin payments for over the counter (OTC) derivatives to be categorized as settlement payments rather than collateral. The SEC staff agreed with these changes and the SAPWG requested comments on what impact this would have on statutory reporting. Two areas of impact have been identified so far: 1. Current SSAP No. 86 guidance dictates that the daily change in variation margin is an unrealized gain or loss until termination of the futures contract. If legal settlement is reflected for statutory accounting, the daily change in variation margin would be a realized gain or loss. However, since most clients report these items together on the income statement, this change would have no effect on the presentation. For those clients who do report unrealized and realized gross amounts for margin payments on the income statement, this change would reclassify those gains. 2. There are fields in the Schedule DB and RBC reporting that reference margin as collateral, and those references may need to be changed. The SAPWG has exposed this item for comment. Since it is uncertain if a formal position will be adopted by the SEC or if further assessments or revisions of US GAAP will be made, the SAPWG disposed of the agenda item without statutory revisions and requested further input on the impact of the changes. Treatment of AVR/IMR in SSAP No.26 This agenda item was originally discussed in tandem with the proposed revisions to SSAP No. 26 (26R) but was instead addressed as a separate revision. It was noted that there are potential interpretation differences with how Other Than Temporary Impairment (OTTI) should be applied between the AVR and IMR. More specifically, the SSAPs advise that OTTI should be bifurcated between the AVR and IMR while the statement instructions advise to take the entirety of the OTTI loss and allocate through AVR in the situation that either: 1. There has been more than one designation change 2. The investment has an NAIC designation 6 Additionally, the SAPWG questioned the portion of SSAP No. 26 that states, a decline in fair value which is other-thantemporary includes situations where a reporting entity has made a decision to sell a security prior to its maturity at an amount below its carrying value to potentially mean that all securities sold before maturity at an amount lower than the carrying value should recognize OTTI and be bifurcated between the AVR/IMR. Staff recommended that the SAPWG move this item to the substantive active listing and expose it, requesting that regulators and Industry provide feedback on their current OTTI and AVR/ IMR treatment of these securities. The SAPWG directed staff to draft revisions to SSAP No. 26R and the AVR/IMR annual statement instructions to ensure consistency in language and treatment. Bank Loans Issued by Reporting Entities On a March 16, 2017 conference call, the SAPWG noted that bank participations are included in the definition of SSAP No. 26 without definition. A definition was proposed that included bank loans in the scope of SSAP No. 26 and provided a definition which included language specifying that a bank loan had to be acquired through participation, syndication or assignment. Industry agrees that bank loans are within the scope of SSAP No. 26, noting that bank loans possess the same characteristics of a bond or security reported on the Schedule D Part 1. However, Industry requested revisions which ignore the manner in which bank loans are acquired, indicating that the manner in which the loan was originated is irrelevant to the definition and would cause arbitrary and unnecessary confusion. There has been additional discussion on whether bank loan instruments should have specific accounting guidance or instructions, whether they should be considered admissible, or whether they should be reported on the Schedule BA. The SAPWG requested input from Industry on statutory accounting guidance for bank loans, specifically focused on loans that were issued directly by the reporting entity. In addition, they sent a proposal to the VOSTF on whether the variations between bank loans issued by the reporting entity and those issued by outside parties would necessitate specific treatment, guidance, or classifications. Definition of Loan-Backed and Structured Securities On June 10, 2016, the VOSTF submitted a referral to the SAPWG that proposed changes to the definition of SSAP No. 43R Loan- Backed and Structured Securities. The proposed changes recognize that the dynamic cash flow patterns characteristic of structured finance securities should include the following four features: Legal isolation and pooling of a finite number of cash-generating assets Each cash-generating asset should be derived from a different obligor Cash generating-assets are held in a trust Cash flows from the cash-generating assets are used to pay the security holders NAIC Spring 2017 Market Insight Paper clearwateranalytics.com 3 >
On December 10, 2016, the SAPWG exposed proposed revisions to SSAP No. 43R, moved the agenda item to the substantive active listing, and requested comments from the VOSTF on the exposures potential impacts to financial modeling. SAPWG staff exposed the agenda item. Originally, the SAPWG proposed a definition change for securities with the intent to dispose without incorporating the proposed definition change, and they directed notification to the VOSTF of the intent to dispose. Non-Substantive Changes to Mortgage Loan Investments SSAP No. 37 states, A mortgage loan is defined as a debt obligation that is not a security, which is secured by a mortgage on real estate. (A security is a share, participation, or other interest). This language has led some insurers to believe that a participant in a mortgage loan agreement was not considered a mortgage loan. The SAPWG exposed non-substantive revisions to the definition of mortgage loans, including examples of mortgage loan investments. Clarification on Inflation-Indexed Securities Questions have been received on whether INT 01-25 Accounting for US Treasury Inflation-Indexed Securities applies only to US Treasury Inflation-Protected Securities (TIPS) or also to foreign government inflation-indexed securities. The SAPWG took up this agenda item to clarify this matter and also decide if specific guidance should be created for foreign inflation-indexed securities. Upon review, the SAPWG determined that the guidance only applies to TIPS. Additionally, they noted that these types of securities were relatively rare in the industry, so new guidance would not be drafted. Treatment of Certain Items on the Statement of Cash Flow The SAPWG reviewed comments on an exposed non-substantive item which adopted ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments. The ASU was issued to eliminate the diversity in Industry s treatment of these transactions. Industry commenters agreed with the adoption of the ASU, but asked that the effective date of transaction be clarified to ensure it is consistent with the effective date of the ASU. The SAPWG also reviewed a pending item which relates to ASU 2016-18. The item is a FASB update which clarifies that restricted cash and cash equivalents should be included in the Statement of Cash Flow. The SAPWG moved the item to the non-substantive active listing and proposed changes which would make SSAP No. 69 Statement of Cash Flow consistent with the new guidance. Blanks Working Group The BWG discussed several items, including seven adopted items two of which pertain directly to investments and several new exposed items that could affect insurers. Adopted Items Item 2016-31BWG Item 2016-31BWG reduces the number of collateral types on the Schedule D Part 1 from 21 to 10. Residential Mortgage-Backed Securities (RMBS), Commercial Mortgaged-Backed Securities (CMBS), and other Loan-Backed and Structured Securities (LBaSS) reported in the Industrial and Miscellaneous (Unaffiliated) categories now have the following new collateral types: 1. Residential Mortgage Loans/RMBS 2. Commercial Mortgage Loans/CMBS 3. Home Equity 4. Individual Obligations - Credit Card, Auto, Student Loans, and Recreational Vehicles 5. Corporate/Industrial Obligations Tax Receivables, Utility Receivables, Trade Receivables, Small Business Loans, Commercial Paper 6. Lease Transactions Aircraft & Equipment Leases and Equipment Trust Certifications 7. CLO/CBO/CDO 8. Manufactured Housing and Mobile Home Loans 9. Credit Tenant Loans 10. Other The adopted proposal contains examples of what to include under each category. Item 2016-33BWG Item 2016-33BWG, which modifies the annual instructions to reflect the movement of money market funds (MMFs) to Schedule E Part 2, was adopted with an effective date of January 1, 2018. This item was referred to the BWG by the SAPWG based on adopted changes to SSAP No. 2 Cash, Drafts, and Shorter-Term Investments. The adopted SSAP moves MMFs to cash equivalents as requested by both Industry and regulators. The number of collateral types on the Schedule D Part 1 has been reduced from 21 to 10. NAIC Spring 2017 Market Insight Paper clearwateranalytics.com 4 >
Exposed Items Exposed items will be voted on during the June conference call to ensure they will be effective for 2017 annual reporting. Item 2017-02BWG This item modifies the Capital Structure Code on the Schedule D Part 1, with a minor change that replaces the code 4 from Other to Non-Applicable. This change is requested, as not all securities on the Schedule D have a Capital Structure Code. A Not Applicable code is more appropriate. Item 2017-03BWG This item modifies the instructions for the CUSIP column on Schedules BA and DL and adds a column for ISIN on Schedule DL. These changes ensure consistency with previously adopted changes to CUSIP in 2016 on the Schedule D. Item 2017-07BWG This item adds new designations to Schedules D and BA for bonds and preferred stock rated by the Private Letter (PL) and Reporting Exception (RE) offices. This item establishes the framework for the designations as work continues on the ratings project currently adopted by the VOSTF. Proposal 2017-10BWG This proposal changes the definition of the notional amount (as adopted by the SAPWG) from SSAP No. 86 Derivatives. Proposal 2017-12BWG This item is the first of future changes related to the SAPWG SSAP No. 2013-36 Bond ETF Changes. This item updates the Code Code column of the Schedule D for SVO-identified funds. Insurance companies will need to make an election on 2017 reporting specifying whether they will use fair value or systematic value for bond ETFs for 2018 reporting. By placing the new symbol * in the Code Code column, insurance companies elect to use the systematic value for 2018 reporting. This agenda item further modifies the instructions so if an insurance company elects to use fair value, that fair value option should be used for 2017. However, if a reporting entity elects systematic value, they will continue to use the current method (original cost) until 2018. The election is a one-time irrevocable election. Combination of Fraternal and Life Blanks The BWG received a request from Industry to combine Fraternal and Life Blanks and eliminate the need for a separate Fraternal statement. This item, which is jointly led by Industry and regulators, is in the discovery phase and will most likely require a two-year process to evolve the project. The NAIC will release a survey to both companies and regulators to study the potential impact. Investment Risk-Based Capital Working Group The IRBCWG met to hear updates on the American Academy of Actuaries (AAA) work on the corporate bond factors for life insurance companies and consider similar changes to the corporate bond factors for P&C companies. In addition, the American Council on Life Insurance (ACLI) discussed the treatment of real estate in the Life RBC formula and recommended a decrease to the RBC factors on real estate, including certain assets backed by real estate held on the Schedule B Part A. Update to Corporate Bond RBC Factors for Life Insurance Companies from the AAA In a February 2016 conference call, the AAA indicated they were considering the comments made about their August 2015 proposal that recommended new bond factors and assumptions used in the modeling process. The AAA is also considering other comment letters received from Industry to determine the ways the model can be refined. The ACLI has recommended a proposal for bond factors that differs from the original report presented by the AAA at the NAIC Fall 2016 National Meeting. The AAA is considering two primary changes: Updates to recovery rates Updates to the composition of the representative portfolio used in its model If implemented, these updates would be expected to decrease the RBC charges for investment grade bonds with no effect to the proposed factors for below-investment grade bonds. The AAA announced their continued work on the appropriate updates to the model and should be able to report their findings to the IRBCWG around June 1. The anticipated effective date for the changes to corporate bond factors is currently year-end 2018. The AAA is considering two primary changes to their August 2015 proposal that could decrease RBC factors for investment grade bonds. NAIC Spring 2017 Market Insight Paper clearwateranalytics.com 5 >
RBC Structure Consistency Across Statement Types The IRBCWG discussed the application of the Life RBC structure to other statement types. Industry seems to agree that the granularity in bond factors should stay consistent across statement types, which would increase the six designation system to 20 designations for RBC purposes only. Industry has also reached the consensus that the model needs to be rerun to consider tax differences, risk premium offset, and the differences in carrying value treatment for various insurers. AVR filers hold the lower of cost or market value for six designation bonds, while non-avr filers hold at the lower of cost or market for three to six designation bonds. The IRBCWG exposed the bond granularity for P&C and Health RBC for a 45-day public comment period ending May 29. The exposure includes an increase in the six to 20 designation system, but the factor recommendations will come at a later date. The anticipated effective date for the changes to corporate bond factors is currently year-end 2018. Presentation from the ACLI on Real Estate Factors for Life RBC The ACLI presented a proposal that would allow a decrease in the RBC charge for certain real estate investments, including some investments found on Schedule BA. This issue was previously put on hold to allow the IRBCWG to focus on the development of the Life factors for RBC but will now be reviewed again by the working group. The ACLI recommended decreasing the factor on real estate from the current 15% to 8.5% due to a study which provides rationale based on the NCREIF Property index. The index reflects the industry s actual experience and reported real estate losses. The recommendation also reflects the following changes: A revision of RBC factors for real estate encumbrances so that they are consistent with the commercial mortgage RBC framework adopted in 2013 Implementation of an adjustment within RBC to reflect the impact of unrealized gains/losses on the potential for loss of statutory surplus Proposal to retain the relationship between factors for Schedules A and BA for real estate where the BA is 50% higher than that for the Schedule A The IRBCWG agreed to expose the ACLI proposal for a 90-day comment period ending July 14. Valuation of Securities Task Force The VOSTF discussed proposed amendments to the P&P Manual regarding transferring the responsibility of filing exempt and private letter rating processes to the SVO. The VOSTF also heard an Investment Analysis Office (IAO) report referred by the IRBCWG pertaining to the increased granularity of RBC factors. Discussed: P&P Manual Updates Amendment to Filing Exempt and Private Letter Rating Processes The VOSTF discussed an amendment to the P&P Manual that modifies the current filing exempt process, adds a verification procedure for securities subject to private letter ratings, and transfers the responsibility of filing exempt and private letter rating processes from insurance companies to the SVO. The purpose of the proposal is to make the SVO the final source for filing exempt designations, reduce the amount of Jumpstart exceptions commonly seen with private letter rating securities, and limit insurers to using the AVS system rather than other sources for designations. Industry has objected to these recommendations, explaining that filing all of these securities through the SVO leaves insurers with minimal room to challenge information and would be expensive. The VOSTF exposed the revised proposal during its February 22 conference call for a 45-day comment period, which ended on April 8. The VOSTF received extensive feedback from Industry and interested parties who expressed concern about the amount of administrative changes proposed and expanding the SVO s authority to reject eligible NAIC CRP ratings under its own discretion. Comment letters pointed out three main issues with the proposal: 1. The current wording narrowly defines the SVO s ability to exclude eligible NAIC CRP private letter ratings. The proposed amendment provides the SVO with the authority to exclude ratings whenever they deem necessary without having to provide explanation as to why. 2. The proposed implementation date of July 1 was concerning, as Industry believes there should be more time for discussion on this issue. 3. The 45-day comment period left interested parties little time to react before at the NAIC Spring 2017 meeting, and they require more time to review a revised proposal. NAIC Spring 2017 Market Insight Paper clearwateranalytics.com 6 >
The VOSTF noted that the high volume of comment letters will require more time for review, and they will work with the SVO to create a list of issues submitted by interested parties before continuing discussion. Amendment to Delete References to 5* Certification Process On the February 22 conference call, the SVO proposed an amendment to the VOSTF to delete two references to the NAIC 5* certification procedure in the P&P Manual to reflect that the 5*/6* rule instructions will be moved into the general interrogatory. The SVO found additional instances during the certification process where using the 5* designation is permitted and has included these in the amendment. The VOSTF exposed the proposed amendment for a 60-day comment period, and the SVO will continue to review other instances where the 5* designation is used to make modifications as needed. IAO Report Requested by IRBCWG The VOSTF also heard an IAO report requested by the IRBCWG to evaluate the proposal expanding RBC factors from six to 20 and identifying impacts on the VOSTF. The IAO is able to produce the required 20 delineations of credit assessment that would maintain consistency between RBC factors and NAIC designations for the IRBCWG. The IAO also recommended renaming RBC Factor Categories to NAIC Designation Category so the traditional NAIC designations could coincide with the IRBCWG s proposed granularity. The report by the IAO was exposed for a 30-day comment period. The VOSTF exposed the SSG report for a 60-day comment period ending June 8. In addition, BlackRock will update their CMBS model to be slightly more conservative than the current model, which will mean lower price points for insurers. This change is expected to take effect this year. SVO Memorandum: Additional Guidance for Funds The SVO also exposed a memo for comment that proposes adding more guidance for funds. NAIC staff has noted confusion on which funds are eligible to receive NAIC designations and which can be considered filing exempt. In addition, there are only three classes of funds where guidance exists: ETFs qualifying for bond or preferred stock treatment Bond mutual funds Money market funds on the Full Faith and Credit list The NAIC believes there would be value in adding additional guidance clarifying the treatment of other fund types. The VOSTF exposed the SVO memo for a 30-day comment period ending May 9. The SVO proposed an amendment to the VOSTF to delete two references to the NAIC 5* certification procedure in the P&P Manual. SSG Reports for RMBS/CMBS Price Point Modeling The VOSTF also heard two reports on potential changes to the models used to generate RMBS/CMBS price points. After receiving requests from the ACLI and several Industry members, the Structured Securities Group (SSG) released a report for comment with proposed changes to the current model. Clearwater Analytics is the leading provider of web-based investment portfolio accounting, reporting, and reconciliation services for corporate treasuries, insurance companies, and investment managers. Clearwater aggregates, reconciles, and reports on more than $1.8 trillion in assets across thousands of accounts daily. For more than a decade, Clearwater has helped firms such as Knights of Columbus, CopperPoint Mutual Insurance Company, Group Health Companies, The Main Street America Group, SBLI, C.V. Starr & Co., Sagicor, Wilton Re., and WellCare streamline their investment and accounting operations. Clearwater remains committed to continuous improvement and encourages insurers to rethink how they approach their investment accounting and reporting challenges. NAIC Spring 2017 Market Insight Paper clearwateranalytics.com 7 >