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a. SAP Working Group Outlines Further Revisions to SSAPs, Reporting Schedules and Background Document Related to Project Bond
The SAP Working Group continues to make progress on proposed revisions to SSAPs as well as reporting requirements as part of its Obligations Project. The SAP Working Group has outlined, through February 10, 2023, revisions to (i) SSAP No. 26R and SSAP No. 43R as well as certain other identified SSAPs and guidance that will be affected by revisions to be made under the Bond project, (ii) report changes to Appendix D-1 along with other identified appendices and instructions relating to bond reporting, and (iii) revised Discussion Paper, which details discussions and decisions on the bond project to date. The SAP Task Force is currently targeting an effective date of January 1, 2025 for adoption of the proposed changes under Project Bond.
The SAP working group began its work on the bond project in October 2020 by developing a principles-based definition of bonds to be used for all securities to determine if they are eligible for Schedule D-1 reporting. . In the definition of bonds, bonds are classified as an “issuer credit obligation” or an “asset-backed security”. An “issuer credit obligation” is defined as an obligation whose repayment is supported by the general creditworthiness of an operating entity, and an “asset-backed security” is defined as an obligation issued by an entity created in the primary purpose of raising debt capital backed by financial assets. The exposed revisions of SSAP #26R and SSAP #43R incorporate these concepts into the SSAPs. The most recent exposed revisions to these SSAPs incorporate comments received from industry representatives as well as structural changes to include the full definition of obligations in SSAP No. 26R and the description of securities that qualify as asset-backed securities. assets under the definition of obligations in SSAP 26R. 43R.
With respect to the proposed reporting changes, in addition to revisions to the General Instructions and Appendices D-1-1 and D-1-2 in response to industry feedback from the previous exposure, the NAIC staff also reviewed the complete Schedule and Instructions for Annual Statements and identified any areas that might need revision to reflect the more detailed reporting under Project Bond. The exhibit includes a list of all such annexes and additional instructions for which additional modifications may be required. The SAP WG will sponsor a proposal to the Blanks (E) WG to incorporate the proposed reporting changes.
As previously noted by the SAP Working Group, investments that do not qualify as bonds after the adoption of these revisions will no longer be reportable as Schedule D-1 bonds thereafter. as there will be no grandfathering of existing investments that do not qualify under the revised SSAPs. However, certain accommodations can be made to prevent reporting entities from experiencing undue hardship in complying with the new guidance.
b. SAP Task Force Seeks Industry Comments on Interest Relief Reserve Guidelines
The SAP Task Force set out a request for industry comment on potential safeguards and considerations related to existing statutory accounting guidance on the Interest Maintenance Reserve (IMR), with particular emphasis on the treatment of the Negative IMR in response to the recent interest rate hike. environment and the resulting decreases in insurers’ IMR balances.
This agenda item was brought to the attention of the SAP Working Group through a letter received from the American Council of Life Insurers (ACLI) raising concerns about a negative IMR. ACLI’s letter was sent as part of discussions within the Life Actuarial (A) Task Force on recommended year-end 2022 guidance on IMR allocation for asset adequacy testing and principles-based provisioning purposes in response to concern that, given the rise in interest rates over the past year, insurers selling income-earning assets at a loss see their IMR balances decrease or become negative. A negative IMR occurs when net realized interest losses are greater than net realized interest gains, both of which are amortized in the IMR calculation.
Current legal accounting guidelines regarding IMR are limited but generally provide that negative IMR is a disallowed asset. The ACLI letter stated that with the inclusion of a negative IMR balance in asset adequacy testing, rejection of a negative IMR may result in double counting of losses (i.e., through the rejection in the balance sheet and the possible test of sufficiency of the assets related to the insufficiency of reserve). ACLI argues that such treatment is contrary to the original intent of IMR, which recognized that interest gains and losses are both transitory without real economic substance, as the proceeds would be reinvested to offset lower or higher interest rates, respectively, and therefore proposed the inclusion of a negative IMR balance in statutory accounting in order to fulfill its original purpose.
In response to these concerns, as well as discussions by the Life Actuarial Task Force, the SAP Task Force undertook this review to assess existing statutory guidance and determine whether changes proposed by ACLI should be implemented. As such, the PAS Working Group has asked industry to provide comments on potential guardrails and other considerations regarding this proposal. Comments on this exhibit are expected by February 10, 2023. In addition, the SAP Working Group has directed NAIC staff to coordinate with the Life Actuarial Working Group and request regulator-only sessions. with industry to receive company specific information on the current treatment of IMR. In the meantime, the SAP Task Force has encouraged companies to discuss the matter with their home regulators regarding any permitted practices that should be implemented with respect to 2022 year-end reporting.
vs. NAIC Sets Out Additional Clarifications to SSAP No. 25 Regarding Affiliate Investment Reporting
The SAP Working Group has outlined for comment revisions to SSAP No. 25 to clarify that any invested asset held by a reporting entity, that is issued by an affiliated entity, or that includes the obligations of an affiliated entity, must be treated as an affiliate investment. .
At its May 24, 2022 meeting, the SAP Working Group adopted revisions to SSAP No. 25 to clarify the reporting of affiliated transactions and to incorporate new disclosure requirements for investments acquired through or in related parties, whether or not they meet “affiliate” under the Insurance Holding Company Model Act (No. 440). As part of this adoption, the SAP working group identified the need to further clarify when an investment is considered an affiliated investment and reported on the “parent, subsidiaries and affiliates” reporting lines (referred to as lines “affiliates”) in the investment report. schedules.
As such, NAIC staff proposed that further revisions to SSAP No. 25 are needed to clarify that any invested asset held by a reporting entity that is (i) issued by an affiliated entity or (ii) includes obligations of an affiliated entity should be classified as an “affiliated investment” for the purposes of SSAP No. 25. Specifically, SSAP No. 25 would be revised to add language specifically stating that “[a]any invested asset held by a reporting entity that is issued by an affiliated entity or includes the obligations of an affiliated entity is an investment in an affiliated company. The SAP WG will also ask the Blanks (E) WG to modify the instructions for annual statements where the header “Parent, Subsidiaries and Affiliates” appears to include the same clarifying language.
Comments on these additional revisions should be provided to the SAP working group by February 10, 2023.
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