US NAIC Spring 2023 National Meeting Highlights: Statutory Accounting Principles (E) Working Group

At the Spring 2023 National Meeting of the US National Association of Insurance Commissioners (“NAIC”), the NAIC Statutory Accounting Principles (E) Working Group (the “SAP WG”) met on March 22. As is customary, the SAP WG had a full agenda, but this update focuses on the agenda items of greatest interest to the insurance and investment community. Meeting materials and exposure drafts are available at the SAP WG web page.

• Affiliated Investments

The SAP WG adopted an amendment to Statement of Statutory Accounting Principles (“SSAP”) No. 25 – Affiliates and Other Related Parties, clarifying the definition of an affiliated investment for statutory accounting purposes. The standard definition of an affiliate in SSAP No. 25 is “an entity that is within the holding company system or a party that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the reporting entity” (i.e., the insurance company). The SAP WG amendment added the following sentence to SSAP No. 25: “Any invested asset held by a reporting entity which is issued by an affiliated entity, or which includes the obligations of an affiliated entity is an affiliated investment” (emphasis added). This change has implications for securitizations where the issuer is not an affiliate of the insurance company because it is owned and controlled by an unaffiliated third party, but where the underlying credit exposures are those of an affiliate of the insurance company. The sentence added to SSAP No. 25 makes clear that those will be treated as affiliated investments.

• Principles-Based Bond Project

The SAP WG continued to advance its project of defining what types of debt securities are entitled to be treated as “bonds” for statutory accounting purposes. 

• • The SAP WG exposed revised drafts of SSAP No. 26R – Bonds, SSAP No. 43R – Asset-Backed Securities and certain other SSAPs in response to comments received on the drafts exposed at the Fall National Meeting in December 2022. Comments on these revised drafts are due on June 9, 2023. It is fair to say that work on these draft SSAPs is at the “fine tuning” stage.
  • The SAP WG exposed revisions to SSAP No. 21R – Other Admitted Assets to address the statutory accounting treatment of debt securities that will not qualify as bonds under the new principles-based definition. This includes the residual tranches of asset-backed securities and any interests that lack contractual payments along with substantive credit enhancement (collectively, “residuals”). The proposed added language requires residuals to be reported on Schedule BA: Other Long-Term Invested Assets (“Schedule BA”) and at the lower of amortized cost or fair value. In addition, residuals would only be permitted to be admitted assets if debt securities from the same securitization would qualify as admitted assets. Comments on the SSAP No. 21R revisions are due on June 9, 2023.
  • The SAP WG also proposed concepts for potential revisions to Schedule BA that would create three separate categories for those debt securities that do not qualify as bonds under the principles-based definition: (i) debt securities that do not reflect a creditor relationship in substance, (ii) debt securities that lack substantive credit enhancement, and (iii) debt securities that do not qualify as bonds due solely to a lack of meaningful cash flows. Within each category, there would be a further division into securities that have a credit quality designation from the NAIC Securities Valuation Office (“SVO”) and those that do not have such a designation. Comments on the proposed changes to Schedule BA are due on June 30, 2023.
  • The SAP WG also drew attention to the fact that on February 6, 2023, the NAIC Blanks (E) Working Group exposed for comment a 200-page proposal for additions and changes to the “blanks” (i.e., reporting forms) used for the investment schedules of insurance companies’ statutory financial statements. These revisions will require the disclosure of significant amounts of additional data, particularly relating to asset-backed securities and affiliated investments, and are designed to dovetail with the principles-based bond project and the increasing regulatory scrutiny of affiliated and related party investments. It was noted that the Blanks (E) Working Group has set a deadline of June 30, 2023, for comments on this exposure.

• Interest Income Due and Accrued

The SAP WG adopted an amendment to SSAP No. 34 – Investment Income Due and Accrued to capture additional data items, as an outgrowth of the ongoing principles-based bond project. The SAP WG amendment requires the following additional disclosures in the statutory financial statements of insurance companies, effective for the 2023 annual statements:

• • • The gross, nonadmitted amounts for interest income due and accrued; and
    • Aggregate deferred interest and cumulative amounts of paid-in-kind (“PIK”) interest included in the current principal balance.

• Collateral Loans

Included in the proposed revisions to SSAP No. 21 – Other Admitted Assets are added provisions to clarify that, in order for a collateral loan to be an admitted asset, the pledged collateral must itself qualify as an admitted asset. The proposed revisions would require audits and the use of net equity value for valuation assessments when the pledged collateral is in the form of partnerships, limited liability companies or joint ventures.

• Negative Interest Maintenance Reserve

The SAP WG continued the discussion of the issue of a life insurance company’s interest maintenance reserve (“IMR”) becoming negative that began at the Fall National Meeting in December 2022. SSAP No. 7 – Asset Valuation Reserve and Interest Maintenance Reserve requires realized fixed income gains or losses attributable to changes in interest rates (excluding gains/losses that are credit related) to be amortized into income over the remaining term to maturity of the fixed-income investments (and related hedging programs) sold rather than being reflected in income immediately. A negative IMR means that net realized interest rate-related losses which are amortized in the IMR calculation are greater than net realized interest rate-related gains which are amortized in the IMR calculation. A disallowed negative IMR is reported as a nonadmitted asset and amortized to income as a loss over time. At the Spring National Meeting, the SAP WG took a number of steps relating to this subject, including directing NAIC staff to draft new guidelines for future consideration by the SAP WG that would allow the admission of negative IMR up to 5 percent of surplus using the type of limitation calculation, similar to that used for goodwill admittance. The staff was also directed to prepare referrals to the NAIC’s Life Actuarial (A) Task Force and Capital Adequacy (E) Task Force.

To view additional updates from the US NAIC Spring 2023 National Meeting, visit our meeting highlights page.