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Statutory Accounting and Reporting Update

Statutory Accounting and Reporting Update. November 15, 2018 Newport, RI. Agenda. Learning Objectives Adopted Statutory Accounting Guidance Exposed Statutory Accounting Guidance Blanks items to Consider for 2018 Annual Reporting and Beyond

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Statutory Accounting and Reporting Update

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  1. Statutory Accounting and Reporting Update November 15, 2018 Newport, RI

  2. Agenda • Learning Objectives • Adopted Statutory Accounting Guidance • Exposed Statutory Accounting Guidance • Blanks items to Consider for 2018 Annual Reporting and Beyond • Appendix: Overview of Statutory Accounting Principles Working Group (SAPWG), the Blanks Working Group (BWG), and the standard setting process

  3. Learning Objectives • Key SAPWG changes effective for 2018 financial statement reporting • SAPWG exposures currently under consideration • Key BWG changes effective for 2018 financial statement reporting • Overview of the SAPWG, BWG, and the NAIC accounting standard setting process

  4. Adopted Statutory Accounting Guidance

  5. 2017-23, Wash Sales Involving Money Market Mutual Funds • New disclosures were adopted to SSAP No. 2R and SSAP No. 103R to exclude the acquisitions and the disposals of shares in money market funds from the scope of the wash sale disclosure

  6. 2017-31, Wash Sale Disclosure • New disclosures were adopted to SSAP No. 103R to exclude all cash equivalents, derivative instruments as well as short-term investments with credit assessments equivalent to an NAIC 1 – 2 rating from the wash sale disclosure • The adopted revisions also clarify that wash-sales should be disclosed in the financial statement for the period in which the investment was sold

  7. 2017-02, ASU 2016-18, Restricted Cash • Adopted ASU 2016-18 which requires that restricted cash (or cash equivalents) be included in the same cash flow statement line as cash and cash equivalents for GAAP reporting, and was effective 1Q 2018 • ASU 2016-18 also clarifies that transfers between cash, cash equivalents, and restricted cash (or restricted cash equivalents) are not part of the entity’s operating, investment and financing activities, and details of these transfers are not included in the statement of cash flows. This item is effective for year end 2019 reporting, with early adoption permitted

  8. 2017-10, Bank Loans • Adopted change to clarify that bank loans directly issued by the insurer as well as bank loans acquired through a participation, syndication, or assignment are within scope of SSAP No. 26R • Prior to the adopted change, SAPWG directed a referral to the Valuation of Securities Task Force requesting details on the variations between bank loans directly issued or those acquired, and whether different accounting is needed • This clarification is not intended to change the reporting for investments that are reported on specific schedules (e.g., Schedule BA)

  9. 2017-35, Policy Loans • Adopted revisions to SSAP No. 49 and SSAP No. 56 to clarify the accounting and reporting for policy loans related to separate account business • The clarified guidance is in response to questions regarding the admissibility of policy loans. The revised guidance to SSAP No. 49 clarifies that policy loans related to a separate account are reported in the general account. These loans are recorded as expense transfers to the general account in the Summary of Operations • Policy loans related to a separate account must be settled with the general account in order for the policy loan to be an admitted asset, and require a transfer of assets (such as cash) from the separate account to the general account to fund the policy loan • Policy loans that are not settled with a transfer of assets are nonadmitted • A BWG proposal requests removal of “contract loans” from the separate account blank

  10. 2018-05, VOSTF/BWG Symbol Changes • Adopted revisions to SSAP No. 32 and to SSAP No. 1 to incorporate new administrative symbols • The new 5GI symbol (only used for self-designated 5 designations) replaces the former 5* symbol, and identifies that the insurer has certified in the general interrogatory that the security has been making interest and principal payments

  11. 2018-16, Summary Investment Schedule Updates • Adopted revisions to the Appendix A-001, Investments of Reporting Entities, Section 3 Summary Investment Schedule as a result of BWG agenda item BWG 2018-02, with different breakouts for common stock and mortgage loan property types • Appendix A-001 is referenced in SSAP No. 1, which is also updated • The revisions align the reporting schedule lines to the investment schedules, which will allow for cross-checks and less manual allocations • The new disclosures are effective January 1, 2019 to permit time for coordination with the needed BWG updates

  12. 2016-48, Impact of Future Settled Premiums on the Option Valuations • Revisions to SSAP No. 86 were adopted requiring disclosures of aggregate information on financing premiums in derivative contracts. The information was required in narrative format for the 2017 year-end financial statements. Requires disclosure of (i) the non-discounted total premium cost; (ii) premium due in each of the following four years and thereafter; and (iii) fair value of derivatives, excluding the impact of financing premiums. This information will be data captured in electronic format in Schedule DB in 2018 • Revisions were also adopted during 2018 requiring individual disclosures in an electronic format in Schedule DB

  13. 2017-04, Settlement of Variation Margin • Adopted revisions to SSAP No. 86 to recognize the change in variation margin as unrealized gains/losses until the derivative contract is no longer in effect (i.e., matures, expires or terminates) • This change is effective for 1Q 2018

  14. 2018-08, Private Placement Variable Annuities • Adopted new accounting guidance and disclosures to SSAP No. 21 to clarify the accounting for products that are included within the scope of contracts (i.e., insurer owned life insurance contacts) that qualify as “life insurance” in compliance with the Internal Revenue Code §7702. These products shall be reported as an admitted asset in the amount that could be realized through the date the premium has been paid (i.e., the surrender value) • For life contracts not in compliance with the Internal Revenue Code §7702, the reporting entity shall report the amount that could be realized as a non-admitted asset • Disclosures for year-end 2018 are required in “other disclosures”, as the Blanks Working Group will not have addressed this item in time for the 2018 year-end reporting

  15. 2017-08, Extension of SCA Filing Deadlines • Adopted revisions to SSAP No. 97 to extend the filing deadline for the SUB 1 Form from 30 to 90 days with the NAIC Securities Valuation Office (SVO) • The SUB 1 Form is required when a reporting entity acquires or forms a new subsidiary • The change also extends the subsequent annual filings (SUB 2) from June 1 to August 31. If the audited financial statements are routinely received after August 31, the filing is due within 30 days after the audited report is received

  16. 2017-18, Goodwill Limitation • The current capital and surplus limit for goodwill is calculated as 10% of the previous quarter’s capital and surplus after first deducting: EDP equipment, operating system software, goodwill and net deferred tax assets • Adopted new disclosures for SSAP No. 68 related to the accounting for and the disclosure of goodwill information to enable regulators to review goodwill admission for each subsidiary, controlled or affiliated (SCA) entity and add transparency to the value claimed for an SCA for year-end 2018 • A referral was made to the BWG to include this disclosure in Note 3, rather than Note 10 • These disclosures are related to the goodwill recognized in the carrying value of an SCA, and include the original amount of goodwill, the admitted goodwill as of the reporting date, and the admitted goodwill as a percentage of the investment’s carrying value

  17. 2017-20, Foreign Entity Clarifications • Adopted revisions to SSAP No. 97 clarifying that the “statutory adjustments” apply to all foreign insurance SCA entities • The SCA entities, which are subject to the provisions of par. 8.b.iv, may be valued based on the underlying audited U.S. GAAP equity, or audited foreign statutory basis equity • This clarification emphasizes that the underlying equity is adjusted to a limited statutory basis in accordance with SSAP No. 97, par. 9

  18. 2017-21, Double Counting of Surplus Notes Adopted revisions to SSAP No. 41R and to SSAP No. 97 to provide clarifying guidance to adjust for instances where a parent insurer has issued a surplus note to its insurance subsidiary • SSAP No. 41R revision: • 17. For surplus notes issued and held between insurance reporting entities and subsidiary, controlled and affiliated entities, the guidance in SSAP No. 97 requires adjustment to prevent double-counting of surplus notes. For example, an insurance reporting entity is not permitted to issue a surplus note, acquired by an SCA, and report both the issuance as an increase in surplus, and an asset representing the investment in the SCA. Pursuant to SSAP No. 97, the “investment in the SCA” shall be adjusted to eliminate the surplus note issued by the insurance reporting entity. • SSAP No. 97 clarification: • 20. Any parent reporting entity that has issued a surplus note, which has been acquired by SCA, shall adjust the investment in SCA to eliminate the issued surplus note to prevent double counting of the surplus note at the parent reporting entity. Without adjustment, the issued surplus note would be reported both as increase in surplus by the parent reporting entity, as well as an admitted asset of the parent through the “investment in an SCA.”.

  19. 2018-09, SCA Loss Tracking • Adopted revisions to SSAP No. 97 to add disclosures related to investments in SCA entities when a company’s share of the SCA’s losses exceeds the carrying value of the investment • The new disclosures are effective for 2018 statutory reporting

  20. 2018-01, Federal Income Tax Reform • Adopted revisions to SSAP No. 101 as a result of the Tax Cuts and Jobs Act of 2017 (TCJA) • The new corporate tax rate (i.e., 21%) was to be used as of December 31, 2017 to determine the insurer’s deferred income tax for December 31, 2017 • The various items under consideration have been addressed by INT 18-01 and INT 18-03

  21. 2018-02, INT 18-01 • Adopted InterpretationINT 18-01: Updated Tax Estimates Under the Tax Cuts and Jobs Act to provide a limited-time, limited-scope exception to Statement of Statutory Accounting Principles (SSAP) No. 9 – Subsequent Events, which does not require recognition of changes in reasonable estimates as Type 1 subsequent events after the issuance of statutory financial statements • The INT will be nullified on December 31, 2018

  22. 2018-15, INT 18-03 Additional Elements Under The TCJA • Adopted INT 18-03 to address the Repatriation Transition Tax (RTT), the Alternative Minimum Tax (AMT) Credit, and the Global Intangible Low-Taxed Income Tax from the TCJA (GILTI) • This Interpretation provides limited-time guidance for these items, with subsequent revisions to SSAP No. 101 once the FASB addresses GILTI for U.S. GAAP. The RTT and AMT are limited-time issues, and are not expected to impact SSAP No. 101 • RTT • The RTT is a one-time transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. entities. Under new section 965 of the Internal Revenue Code, these items are deemed repatriated (foreign earnings in cash and cash equivalents are taxed at 15.5%, the remaining amounts are taxed at 8.0%) • RTT is a current year item recognized as a “current federal and foreign income tax”, regardless of whether the full amount is currently paid or paid over eight years. Companies subject to RTT shall include disclosures in note 9

  23. 2018-15, INT 18-03 Additional Elements Under The TCJA • AMT Credit • The corporate AMT has been repealed. If a reporting entity has an AMT credit carry forward, it can claim a recovery of up to 50% of the remaining credits – once the amount of the AMT credit is known, it does not subsequently change with future taxable income. The amount recoverable is realized through an offset to regular taxes, or as a refund • Reporting entities that expect to receive the AMT credit as a refund vs. a reduction of taxes, shall disclose the gross amount due, with recognition of a statutory valuation allowance (regardless if recognized as a current recoverable or DTA) for the amount of the refund not expected to be received as a result of U.S. federal sequestration. The statutory valuation allowance shall be adjusted yearly based on updated sequestration estimates • Disclosures are required in note 9

  24. 2018-15, INT 18-03 Additional Elements Under The TCJA • GILTI • The GILTI tax is a new tax under the TCJA, calculated each year on a portion of the controlled foreign corporations active income. GILTI tax from the current-year tax return is a current-year tax item captured in SSAP No. 101. The amount payable shall be recognized as a current year expense with a liability recognized as a “current federal and foreign income tax” and not as a DTL • INT 18-01 • This interpretation provides a limited-time, limited-scope exception to SSAP No. 9 to not require recognition of changes in reasonable estimates from the Act as Type I subsequent events after the issuance of the statutory financial statements. Additionally, the INT provides instructions for reporting changes in deferred income taxes in the financial statements. This interpretation will be automatically nullified on December 31, 2018

  25. 2017-26, High-Cost Risk Pooling in ACA Risk Adjustment • Adopted revisions to SSAP No. 107 to incorporate accounting guidance for the high-cost risk pools as part of the ACA risk adjustment program starting in 2018. The high-cost risk pool functions as a “reinsurance like element” to the risk adjustment program • There are two new high-cost risk pools, a threshold and a co-insurance rate. For 2018, the threshold is $1 million, and the co-insurance rate is 60% of specific incurred claims that are more than $1 million • The adopted guidance (i.e., Option 2) requires the reimbursed amounts to be reported as adjustments to premiums with disclosures. The alternative Option 1 would have reduced the claims incurred amount for the high-cost risk pool reimbursement • Option 2 was deemed to preserve premium tax treatment on a national level, and to be more pragmatic to apply

  26. Exposed Statutory Accounting Guidance

  27. 2017-28, Reinsurance Credit • Exposed guidance to SSAP No. 61R and SSAP No. 62R to address some issues raised by regulators related to the application of risk transfer as provided within SSAP No. 61R and determine if the U.S. GAAP requirements for risk transfer are a higher threshold than for statutory accounting • Modifications to SSAP No. 61R propose disclosures and updates to Appendix A-791 Q&A. SSAP No. 62R incorporate U.S. GAAP guidance • The current exposure includes additional clarifying guidance to address instances where a cedent would report a reinsurance credit in excess of the amount ceded

  28. 2017-32, Investment Clarification Project • Exposed issued paper and substantive revisions to SSAP No. 30 • Revisions include a revised common stock definition to include non-publicly traded or restricted common stock, as well as closed-end funds and unit-investment trusts • The current exposure includes a January 1, 2019 effective date

  29. 2018-17, Structured Settlements • Exposed revisions to SSAP No. 21 to incorporate accounting guidance for structured settlement income streams acquired by insurers as investments • The exposed revision excludes securitizations within the scope of SSAP No. 43R, and provides for the classification of the structured settlement as either a period-certain or as a life contingent structured settlement • Period certain structured settlements would be classified as an admitted asset to the extent it has been legally acquired in accordance with all state and federal requirements • Life contingent structured settlements would be classified as a nonadmitted asset

  30. 2016-20, Credit Losses • The FASB issued ASU 2016-13, Financial Instruments—Credit Losses, to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments on June 16, 2016 • The SAPWG exposed a draft concept paper on the application of the new GAAP guidance to statutory accounting. The concept paper was unclear and resulted in industry drafting an interpretation of staff’s intent. Staff agreed with industry’s interpretation of the intent and industry submitted a comment letter on the intent in early November • Currently, NAIC staff is working on a draft issue paper for exposure

  31. Some BWG Items to Consider for 2018 Annual Reporting and Beyond

  32. 2017-21 BWG: Merger History Adopted new General Interrogatory merger questions (5.1 annual and 4.1 quarterly) to require the filing of merger history with the NAIC if the response is “YES” This change is effective with Annual 2018 reporting, and applies to L, P, H, F, and T companies for quarterly and annual reporting

  33. 2017-23 BWG: Life, Health & Guaranty Association • Adopted for all member companies of the life, health and annuity guaranty associations only to ensure the referenced exhibits are consistently filed for purposes of collecting guaranty association assessable premium data  • The changes include clarifications to include the amounts reported in the Exhibit of Premiums and Losses as well as Schedule T • There are two interrogatories for the Property and Casualty statement related to the April Supplemental Exhibit and Filing • This change is effective with Annual 2018 reporting, and applies to L, P, and H companies for annual reporting

  34. 2017-23 BWG: Life, Health & Guaranty Association

  35. 2017-24 BWG, Bank Loans Adopted a new line item for bank loans to Schedules D and E This change resulted from changes to SSAP No. 26R to reflect acquired bank loans This change is effective with Annual 2018 reporting, and applies to L, P, H, F and T companies for annual and quarterly reporting

  36. 2017-25 BWG, Restricted Cash or Cash Equivalents Adopted language to the instructions of the cash flow statement regarding the inclusion of restricted cash or restricted cash equivalents in the beginning and ending balance in the cash flow statement This change resulted from changes to SSAP No. 69 to clarify the inclusion of restricted cash or restricted cash equivalents in the cash flow statement This change is effective with Annual 2019 reporting, with early adoption permitted, and applies to L, P, H, F and T companies for annual and quarterly reporting

  37. BWG 2016-35: Schedule F Changes for 2018 Annual Reporting • Adopted a change to combine the current Schedule F, Parts 3, 4, 5, 6, 7 and 8 into a single new Schedule F-Part 3-Ceded Reinsurance • This change also modifies the crosscheck references for Lines 13 and 16 of the Liability Page to reflect the changes to Schedule F (Schedule F Part 1) to eliminate the under $100,000 aggregation for consistency with the changes to Schedule F, Part 3 • This change may require systems enhancements, and is effective for year end 2018 reporting for L, P and H companies for annual reporting

  38. 2017-26 BWG, General Interrogatories, Part 2 Adopted language to address concerns regarding General Interrogatories, Part 2, Question 17 reference to old Schedule F, Part 5, and corrects some formulas and descriptions for some Schedule F, Part 3 columns The change also adds crosschecks to clarify what categories are included in certain total lines This change resulted from previous changes to Schedule F, which are effective for Annual 2018 reporting This change is effective with Annual 2018 reporting, and applies to L, and P companies for annual reporting

  39. 2018-01 BWG, Exchange Traded Derivatives Adopted language for different lines on Schedule DB, Part D, Section 1 related to exchange traded funds and centrally cleared derivatives The purpose of this change is to clarify what line “cleared derivatives” should be reported on in Schedule DB, Part D, Section 1 This change is effective with Annual 2018 reporting, and applies to L, P, H, F, and T companies for annual and quarterly reporting

  40. 2018-04 BWG, Life & Annuities Reinsurance Adopted language to remove the reference to LTC from the Type of Reinsurance Assumed and Type of Reinsurance Ceded columns for Schedule S, Part 1, Section 2 and Schedule S, Part 3, Section 2 The purpose of this change is to align the Life and Annuities types of reinsurance to be consistent between ceding and assuming schedules, and to be more meaningful to the regulator This change is effective with Annual 2018 reporting, and applies to L and F companies for annual reporting

  41. 2018-05 BWG, Property/Casualty Statement of Actuarial Opinion Adopted changes to the Property/Casualty Statement of Actuarial Opinion to incorporate the Actuarial Guideline LI, The Application of Asset Adequacy Testing to Long-Term Care Insurance Reserves (AG 51) requirements and to increase disclosures for accident and health (A&H) reported on a P/C blank The purpose of this change is for consistency between the blanks for reporting A&H business This change is effective with Annual 2018 reporting, and applies to P companies for annual reporting

  42. 2018-07 BWG, New “PL”, “PLGI” , “YE” and “IF” Symbols Adopted new “PL” and “PLGI” symbols to identify private letter rated securities with an Annual 2018 effective date. A new interrogatory for “PL” was also adopted A new “YE” and “IF” symbols were added to identify a new “carryover” administrative procedure of the NAIC SVO, and modified the definition of symbol “Z”, to indicate if a security is in transition from one reporting status to another The designation matrices were also removed and replaced with the NAIC Designation and Administrative Symbol for Schedules BA and D These changes are effective with Annual 2018 reporting, and apply to L, P, H, F and T companies for annual and quarterly reporting Additional changes will go into effect for Annual 2019 reporting to eliminate the use of P and RP, and to remove the “Market Indicator”, and apply to L, P, H, F and T companies for annual and quarterly reporting

  43. 2018-07 BWG, New “PL”, “PLGI” , “YE” and “IF” Symbols

  44. 2018-07 BWG, New “PL”, “PLGI” , “YE” and “IF” Symbols

  45. 2018-08 BWG, Admitted Goodwill for SCA Entities Adopted modifications to the instructions and illustration for Note 3A to reflect the disclosure changes adopted for SSAP No. 68 related to SCA investments, providing instruction and illustration Required disclosures include the acquisition date, the original amount of admitted goodwill, the admitted goodwill as of the reporting date, and the admitted goodwill as a % of the SCA’s book adjusted carrying value (gross of admitted goodwill) This change is effective with Annual 2018 reporting, and applies to L, P, H, F and T companies for annual reporting

  46. 2018-08 BWG, Admitted Goodwill for SCA Entities

  47. 2018-09 BWG, Fair Value Disclosures Adopted modifications to the instructions for Note 20A, 20C, and 20D to reflect changes to SSAP No. 100R related to fair value. A new disclosure is required for 20E, and the illustrations for Notes 20A and 20C are modified to include data capture for the net asset value per share (NAV) column Investments reported at NAV shall not be captured in the within the fair value hierarchy, but are separately identified This change is effective with Annual 2018 reporting, and applies to L, P, H, F and T companies for annual and quarterly reporting

  48. 2018-09 BWG, Fair Value Disclosures

  49. 2018-09 BWG, Fair Value Disclosures

  50. 2018-10 BWG, IMR and AVR Adopted modifications to the instructions for Line 2 of the Interest Maintenance Reserve (IMR) and Line 2 of the Asset Valuation Reserve (AVR) regarding the bifurcation of OTTI investments subject to SSAP No. 26R guidance, reporting OTTI losses entirely in AVR or IMR This change is effective with Annual 2018 reporting, and applies to L, and F companies for annual reporting

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