a. SAP Working Group Exposes Revisions to SSAPs in Connection With Bond Project
In furtherance of the SAP Working Group’s bond project, the SAP Working Group exposed an updated principle-based bond definition and related issue paper as well as new proposed amendments to SSAP No. 26R and SSAP No. 43R, which incorporate the principle-based bond definition as part of the authoritative statutory accounting guidance. In addition to such items, on a July 18, 2022, conference call held prior to the Summer Meeting, the SAP Working Group exposed proposed reporting changes to Schedule D-1: Long-Term Bonds (Schedule D-1) as part of the bond project, which would require identification of bonds as either “issuer credit obligations” or “asset-backed securities.” Comments to all of the items exposed during the Summer Meeting and the July 18, 2022, meeting are due by October 7, 2022.
The proposed revisions to SSAP No. 26R and SSAP No. 43R and proposed revisions to the reporting guidance are the most recent revisions exposed as part of the continuing work by the SAP Working Group to establish principle-based guidance for determining which securities qualify as a bond. Such guidance is intended to address regulator concerns regarding expanding investment structures that were being reported on Schedule D-1. The principle-based bond definition, initially exposed in May 2021, will be used for all securities in determining whether they qualify for reporting on Schedule D-1. Within the bond definition, bonds are classified as an “issuer credit obligation” or an “asset backed security.” An “issuer credit obligation” is defined as a bond where repayment is supported by the general creditworthiness of an operating entity, and an “asset backed security” is defined as a bond issued by an entity created for the primary purpose of raising debt capital backed by financial assets. The exposed revisions to SSAP No. 26R and SSAP No. 43R would incorporate these concepts into the SSAPs.
At its July 18, 2022, meeting, the SAP Working Group also exposed revisions to the annual statement general instructions to clarify that only those investments that meet the bond definition or are otherwise in scope of SSAP No. 26R or SSAP No. 43R may be reported on Schedule D-1. The proposal would require that Schedule D-1, Section 1 detail issuer credit obligations (within scope of SSAP No. 26R) while Schedule D-2, Section 2 would detail asset-backed securities (within scope of SSAP No. 43R). It is expected that in addition to these proposed changes, additional revisions to other standards and reporting schedules affected by the bond project will be forthcoming and likely exposed during the Fall 2022 Meeting. At this time, no referral for the reporting changes has been made to the Blanks (E) Working Group, as the SAP Working Group intends to gather initial feedback regarding the proposed changes prior to making a referral.
While the SAP Working Group still hopes to finalize its work on the bond project by January 1, 2024, given the timing requirements needed to implement any blanks reporting changes, it is possible that revisions to the SSAPs and any reporting changes made in connection with the bond project may not become effective until January 1, 2025. The SAP Working Group has emphasized that investments that do not qualify as bonds after such revisions are adopted will not be permitted to be reported as bonds on Schedule D-1 thereafter as there will be no grandfathering for existing investments that do not qualify under the revised SSAPs. However, it is expected that certain accommodations will be made to prevent undue hardship for reporting entities complying with the new guidance.
b. NAIC Adopts Revised Definition of “Asset” But Re-Exposes Revisions to Definition of “Liability”
The SAP Working Group has been considering revisions to SSAP No. 4 and SSAP No. 5R that would revise the definition of an “asset” and a “liability.” At the Summer Meeting, the SAP Working Group adopted revisions to SSAP No. 4 to incorporate the revised definition of an “asset” but re-exposed draft revisions to SSAP No. 5R that would incorporate a new definition of “liability” with no changes from the prior exposure in order to provide additional time for interested parties to undertake a review of the potential consequences of the new definition. Comments on the re-exposed revisions to SSAP No. 5R are due by October 7, 2022.
In December 2021, FASB issued two new chapters of its conceptual framework, which FASB uses to set standards and concepts to consider with respect to proposed accounting and reporting guidance. One such chapter of the new FASB concepts included revisions to the definition of an “asset” and a “liability.” Under the FASB concepts, an “asset” is defined as “a present right of an entity to an economic benefit, and a “liability” is defined as “a present obligation of an entity to transfer an economic benefit.”
As the FASB concepts are not automatically authoritative, the SAP Working Group undertook a review of the newly issued chapters and proposed updates to incorporate those concepts into the statutory accounting guidance. In April 2022, the SAP Working Group exposed revisions to SSAP No. 4 and SSAP No. 5R to incorporate the new definitions of an “asset” and a “liability” into the statutory accounting guidance. The exposure also included two issue papers, each articulating the changes for SSAP No. 4 and SSAP No. 5R and FASB’s rationale for the changes. Both SSAP No. 4 and SSAP No. 5R are regarded as foundational statements for statutory accounting as many other statements reference them.
Interested parties raised concerned with respect to the change of the definition of a “liability” as proposed in SSAP No. 5R, noting that FASB itself recognized that the revised definition “potentially expands the population of liabilities to include certain obligations to issue or potentially issue an entity’s own shares rather than settle an obligation exclusively with assets,” which could result in instruments with characteristics of both liabilities and equity being in fact classified as liabilities in certain situations. At the Summer Meeting, interested parties asked the SAP Working Group to undertake a SSAP-by-SSAP analysis to identify potential effects of the new definition prior to adoption to avoid unintended consequences and to determine whether the adoption of the exposed liabilities guidance would have an expansive impact. The SAP Working Group, however, sent this request back to interested parties, who will complete the in-depth review during the additional exposure period.
As there were no further comments on the adoption of the definition of an “asset,” the SAP Working Group adopted the proposed revisions to SSAP No. 4 (and the related issue paper).
c. NAIC Adopts Revisions to SSAP No. 25 and Proposal Regarding Related Party Reporting
At the Summer Meeting, the Accounting Task Force and the (E) Committee adopted changes to SSAP No. 25 and SSAP No. 43R regarding the identification of related party involvement with investments, as well as new reporting requirements, which were recently adopted in May 2022 by the SAP Working Group and Blanks (E) Working Group, respectively. The adopted changes incorporate new reporting requirements for investment transactions with related parties in order to provide more transparency into the nature of the involvement of related parties. While not standard for all changes adopted by the SAP Working Group and Blanks (E) Working Group, the revisions to SSAP No. 25 and SSAP No. 43R and the related reporting changes were separated for individual consideration by the (E) Committee and the Accounting Task Force because of the impact of such changes on all insurance reporting entities, and the discussion included affiliate identification. Both the revisions to the SSAPs as well as the reporting changes have a December 31, 2022, effective date.
The revisions to SSAP No. 25 clarify that the reporting of affiliate transactions within existing reporting lines in the investment schedules must be consistent with the definition of an “affiliate” pursuant to the Insurance Holding Company System Regulatory Act (#440) (Holding Company Model Act) and add a new paragraph clarifying that if direct or indirect control exists, whether through voting securities, contracts, common management, or otherwise, the arrangement will be considered “affiliated” under SSAP No. 25. For entities not controlled by voting interests, such as limited partnerships, trusts, and other special purpose entities, control may be held by a general partner, servicer, or by other arrangements. The ability to direct the management and policies of an entity through such arrangements constitutes control, and indirect control may exist through such arrangements. For example, consistent with the definition of “affiliate” in the Holding Company Model Act, if a limited partnership were to be controlled by an affiliated general partner, and that limited partnership held greater than 10% of the voting interests of another company, indirect control by the affiliated general partner must be presumed to exist unless the presumption of control can be rebutted.
In addition, the revisions to SSAP No. 43R clarify the requirement to identify related party investments in the investment schedules, regardless of whether the related party is “affiliated” pursuant to the Holding Company Model Act. Such revisions also clarify that although a loan-backed or structured security may be acquired from a nonrelated issuer, if the assets held in the trust predominantly reflect assets issued by affiliates of the insurance reporting entity, and the insurance reporting entity has only direct recourse to the assets held in trust, the transaction must be considered an affiliated investment. For example, if a related party sponsors or originates the loan-backed or structured security or any type of underlying servicing arrangement, the security is a related party investment.
The changes to the reporting requirements adopted by the Blanks (E) Working Group add new reporting codes to several investment schedules (including Schedules D – Long-Term Bonds, DB – Derivatives, BA – Other Long-Term Invested Assets, E2 – Cash Equivalents, and DL – Securities Lending Collateral Assets). The reporting changes require the identification of related party involvement for every investment using certain codes. The related party identification field is mandatory, meaning that a “blank or null” field will not be allowed on these investment schedules.