1. Speaker Hank Straub, Principal
2017 PAMIC Financial Management Seminar Statutory Accounting and Annual Statement Update
Speaker
Hank Straub, Principal

2. Agenda Statutory Accounting Update
Annual Statement Update – 2017 Annual and 2018 Quarters

3. Statutory Accounting Update

4. Adopted Statutory Accounting Guidance

5. 2017 Statutory Accounting Update
Investment Classification Review
Substantial re-write of SSAP 26 – Bonds to clarify scope of guidance
Also contains a new measurement alternative for Bond ETFs, “systematic value”
Systematic value is similar to amortized cost and may be used as an accounting policy election subject to certain conditions
Alternative measurement is fair value
Previously, SSAP didn’t specify measurement for ETFs
Definitions of security and certain non-bond fixed income instruments such as Bank Loans and Hybrid Securities
Bank loans now defined are to include bank loans acquired through participation, syndication or assignment
Guidance effective December 31, 2017

6. 2017 Statutory Accounting Update
Short Duration Contract Disclosures
Significant new disclosures effective for US GAAP 12/31/2017.
Most information already found in statutory schedules – Schedule P.
Ten year table disclosures rejected for statutory accounting, however, the following is now required for annual statements and audited financials: New Disclosure: “Information about significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements for the most recent reporting period presented.”

7. 2017 Statutory Accounting Update
Money Market Mutual Funds
SSAP-2R – Cash, Cash Equivalents, Drafts and Short-term Investment, Money Market Mutual Funds will be reclassified as cash equivalents effective December 31, 2017.
All Money Market Funds to be reported at fair value or net asset value (NAV), as a practical expedient.
A previous exposure was adopted to classify them as short-term investments for 2017.
Prior to 2017, funds on an NAIC approved list were classified as bonds, while all others classified as equity.
SEC regulatory reforms for money market funds caused the NAIC to no longer maintain the list.

8. 2017 Statutory Accounting Update
, Mortgage Loans with Multiple Lenders
Adopted changes to SSAP No. 37, Mortgage Loans to clarify that participations or other interests in a mortgage loan are within the scope of the guidance
This change results from items noted in the Investment Clarification Project, which is reviewing investment SSAPs Existing Authoritative Literature (underlining added for emphasis): SSAP No. 37 – Mortgage Loans 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 in property or in an enterprise of the issuer or an obligation of the issuer that (a) either is represented by an instrument issued in bearer or registered form, or it not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer, (b) is a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment, and (c) either is on of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations).

9. 2017 Statutory Accounting Update
Accounting for Inflation Indexed Securities
Revisions to SSAP 26 to clarify that only US Inflation Indexed Securities (TIPS) are eligible for recording the inflation adjustment as an unrealized gain; all other inflation indexed securities must be carried at amortized cost without adjustment.
Issue arose when a company purchased a foreign inflation indexed security; INT provides guidance for TIPS only.
Effective April 8, 2017.

10. 2017 Statutory Accounting Update
Classification of Certain Cash Receipts and Payments
Statutory accounting adopted GAAP guidance related to cash flow presentation effective April 8, 2017.
Guidance clarifies presentation in the statement of cash flows for certain items.
Items included are insurance claim proceeds, contingent consideration in business combinations, maturities of zero coupon debt, debt-related costs and COLI/BOLI proceeds.
Companies should evaluate impact on their cash flow worksheets for the 2017 Statement of Cash Flows.

11. 2017 Statutory Accounting Update
Simplifying the Equity Method of Accounting
Statutory accounting adopted GAAP guidance effective 4/8/2017.
Intended to reduce complexity in equity method accounting.
Previously when transitioning from fair value to equity method due to an increase in ownership, a full retrospective accounting was required.
Changes allow investors to apply the equity method prospectively and record the transition impact as an unrealized gain or loss.
Also required to add the cost of acquiring the investment to the basis of the previously held interest.

12. 2017 Statutory Accounting Update
, ASU , Restricted Cash
ASU 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 is effective 1Q 2018.
ASU 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.
In August 2017, ASU was adopted for SAP and is effective December 31, 2019, with early adoption permitted.

13. 2017 Statutory Accounting Update
, Expand High Deductible Disclosures
Adopted revisions to SSAP No. 65 to add the following disclosures regarding high deductible policies by line of business:
Deductible amounts for the largest ten high deductible policies gross of collateral, and the name of the obligor.
The total amount of unsecured high deductible amounts for unpaid claims and the amount for paid recoverables.
Paid recoverable amounts over 90 days past due & the nonadmitted amount.
The amount of collateral on and off balance sheet.

14. 2017 Statutory Accounting Update
, Premium Amortization on Callable Debt Securities
ASU was rejected and the “yield-to-worse” provisions of current statutory accounting was retained.

15. Exposed Statutory Accounting Guidance

16. 2017 Statutory Accounting Update
Issue Paper 156 Treatment for Limited Derivatives
SAPWG was charged to change SSAP No. 86, Derivatives to allow hedge accounting for certain limited derivative contracts (e.g., interest rate hedges with counterintuitive effects) that do not meet hedge effectiveness requirements.
This exposure is intended to reduce accounting mismatches between variable annuity reserves and the related hedges, resulting in the reduced need for affiliated captive reinsurers.
This proposal is part of a broader initiative by the NAIC to update variable annuity reserve RBC and the related accounting.

17. 2017 Statutory Accounting Update
, Definition of Loan-Backed and Structured Securities (LBSS)
This item was originally exposed as a proposal to revise the definition of an LBSS as part of the Investment Classification Project.
At the Spring 2017 Meeting, SAPWG exposed this item noting its intent to dispose without incorporating statutory revisions, and directed staff to notify the Valuation of Securities Task Force of the intent to dispose this item.
Subsequent proposals to SSAP No. 43R, including which securities are captured within scope of that guidance, may still occur under the Investment Classification Project.

18. 2017 Statutory Accounting Update
, ASU , Intra-Entity Transfers of Assets Other Than Inventory
ASU requires that income tax consequences of an economic intra-entity transfer of an asset to be recognized at the time of the transfer rather than at the time of an external sale.
Based upon comments received from interested parties, the SAPWG exposed this item for comment with the recommendation that ASU be rejected for statutory accounting.
The re-exposure requests comment whether the rejection of ASU for statutory accounting would create timing differences with GAAP.
In August 2017, the SAPWG rejected ASU since SSAP 101 provides guidance on intra-equity transactions.

19. 2017 Statutory Accounting Update
, Extension of SCA Filing Deadlines
Adopted revisions to SSAP 97 to incorporate a 90 day time period to file a SUB 1 Form with the NAIC Securities Valuation Office (SVO),
The SUB 1 Form is required when a reporting entity acquires or forms a new subsidiary.
The proposal also changes to due date for the subsequent annual filings (SUB 2) from June 30 to August 31.
For companies that’s receive SCA audited financials after August 31, the deadline would be one month after receipt of the audited financials.

20. 2017 Statutory Accounting Update
, Bank Loans
Continued discussion focuses on bank loans issued by an insurer rather than from a bank and acquired via participation, syndication, or assignment.
Currently bank loans are accounted for under SSAP No. 26R and reported on Schedule D.
This item considers including bank loans issued by insurers to be within the scope of another SSAP with separate guidance and reported on Schedule BA.
Interested parties object to this proposal.
The working group referred the item to the Valuation of Securities (E) Task Force requesting comments regarding risk and exposed several questions requesting regulator input illustrating a preference to update reporting in accordance with the substance of the investment and address risk-based capital treatment separately.

21. 2017 Statutory Accounting Update
, Amortization and Accretion of Surplus Notes
Exposed revisions to SSAP No. 41R provide guidance for surplus notes issued at a discount or a premium, and incorporate illustrations into a new SSAP No. 41R Exhibit A.
The proposed guidance would result in the accretion being initially recorded as part of special surplus funds, and amortized into unassigned surplus over time.
The basic principle being that the net balance of a surplus note should never be more than the amount of cash or liquid assets received.

22. 2017 Statutory Accounting Update
and , Goodwill
NAIC staff looking at further limitations on admitted Goodwill.
Issue arose when regulators noted goodwill can be a significant portion of total SCA balance.
Six alternatives being looked at.
Proposes rejecting five ASUs issued by FASB over the past seven years.

23. 2017 Statutory Accounting Update
, Wash Sales Involving Money Market Funds
Exposed amendments to SSAP 103R clarifying that money market funds are not subject to wash sale rules.
All considering exempting cash and cash equivalents.

24. 2017 Statutory Accounting Update
, Use of Net Asset Value (NAV)
SAPWG agreed to consider use of NAV as a practical expedient in a manner consistent with GAAP.

25. 2017 Annual Statement Update

26. 2017 Annual Statement Update
Agenda
2017 Adopted Statement Revisions
Pending 2017 Statement Changes
Proposed 2018 Annual Statement Changes
2017 Risk-Based Capital Revisions
Other BWG Items

27. ADOPTED 2017 ANNUAL STATEMENT CHANGES

28. 2017 Annual Statement Update
Jurat
Some states now requiring signed Jurat as part of the PDF filed with the NAIC.
NAIC has posted instructions on how to accommodate in the General Electronic Filing Directive.
Not applicable to Pennsylvania.

29. 2017 Annual Statement Update
New Note #5 Disclosure
Prepayment penalties and acceleration fees for callable securities.
For securities sold, redeemed or otherwise disposed.
Result of callable feature (including make whole call provision).
More reporting changes coming in 2018.

30. 2017 Annual Statement Update
Notes to Financials #12A(3)
Defined Benefit Plan – Funded status
New format allows for reporting of overfunded with a prepaid cost benefit, overfunded with an accrued benefit cost, underfunded with an accrued benefit cost, underfunded with a prepaid benefit

31. 2017 Annual Statement Update
Short Sale Reporting
New disclosure in Note #5
Unsettled transactions
Settled transactions
New code – SS – added to code listing for investment schedules
Instructions for short sales added to instructions for Schedule D – Parts 1 and 2; Schedule DA – Part 1 and Schedule E – Part 2
Result of revisions to SSAP No. 103 – Transfers and Servicing of Financial Assets and Extinguishment of Liabilities

32. 2017 Annual Statement Update
General Interrogatories
Self-designated 5*GI securities
Serves as company self-certification
No longer files certification with SVO
Does not apply to all 5* securities
But may be expanded
5*GI codes added for use in investment schedules
New interrogatory to identify “multi-state insurer” ( BWG) explicitly identifies insurers that assume reinsurance covering risks in at least two states. Effective for 2018.

33. 2017 Annual Statement Update
Schedule D – Part 1 - Bonds
Collateral Type Column Reduction of codes from 21 to 10
6 – Lease transactions
Collateralized by leases; aircraft equipment, equipment trust certs
7 – CLO/CBO/CDO
8 – Manufactured housing
& mobile home loans
9 – Credit tenant loans
10 – Other
1 – RMBS
2 – CMBS
3 – Home equity
4 – Individual obligations
Collateralized by indiv oblig;
credit card, auto, student loans
5 – Corp/Industrial Oblig

34. 2017 Annual Statement Update
Money Market Mutual Funds (MMMFs)
Blank and instructional changes to report ALL MMMFs as cash equivalents on Schedule E –Part 2
Removal from Schedule DA and Schedule D –Part 2 CUSIP column also removed from Schedule DA
Reclassification on Summary Investment Schedule
Removal from Summary by Country
Exclusion from Schedule D –Part 1A

35. 2017 Annual Statement Update
Money Market Mutual Funds (MMMFs)
Schedule E –Part 2 –Cash Equivalents

36. 2017 Annual Statement Update
Schedule DB Reporting
Schedule DB –Swaptions
Defined
Swaption is agreement granting owner the right, but not obligation, to enter into an underlying swap
Description column on Schedule DB now to include:
Hedge ID number
Tenor of option (time from effective date to maturity date of the option aspect)
Start and end dates of underlying swap
Swaptions, generally relate to interest date swaps. SSAP 86; 5(h) has a good definition.

37. 2017 Annual Statement Update
2017 Property/Casualty Schedule T
New code for Active Status Column
D –Domestic Surplus Lines Insurer
Reporting entities authorized to write surplus lines in their state of domicile
<
Total now total
of all L’s and D’s

38. 2017 Annual Statement Update
Additional Definitions for Lines of Business
New definitions for Cyber Liability, Vehicle Express Waiver and five new categories of Accidental and Health added to the appendix.

39. 2017 Annual Statement Update
Cybersecurity and Identity Theft Insurance Coverage Supplement
Reorganization
Part 1 –Interrogatories
Part 2 –Stand-alone policies
Part 3 –Part of package policy
New format
Addition of interrogatories to help indicate types of cybersecurity and identity theft business written
Clarifies who should complete supplement
Answers to questions indicate which companies should complete
Add information on claims open, closed w/payment and closed wo/payment

40. Proposed 2018 Annual Statement Changes

41. 2017 Annual Statement Update
2017 Statement Exposures
16 items were exposed during the April meeting and subsequently approved in August
Note 1 –additional disclosure for mandatory convertible securities and SVO-identified investments
Note 5 –additional mortgage loan disclosures
Note 5 –new repurchase and agreement and reverse-repurchase agreement disclosures (and remove current from Note 17). Report all 2017 quarterly data.

42. 2017 Annual Statement Update
2017 Statement Exposures
Note 14 –disclosures related to guaranty fund liabilities and assets (related to long-term care insolvencies)
Note 25 –revisions in incurred losses and loss adjustment expenses

43. 2017 Annual Statement Update
2017 Statement Exposures
Investment Schedules
Further revision of Capital Structure Codes on D-1
Modify CUSIP column on BA and DL; add ISIN column to DL
New designation suffixes in D and BA for private letter (PL) and reporting exception (RE)
Definition of “notional amount” in DB
Additional Code for systematic value of bond ETFs and bond funds on D and DA

44. COMING IN 2018 All new Schedule F for Property/Casualty companies
Combines Parts 3, 4, 5, 6, 7 and 8 into a single new Part 3.
Also eliminates the $100,000 aggregation option for Part 1
New Schedule F, Part 3 will be 78 columns!

45. COMING IN 2018 W. T.
H.!!

46. Other BWG Items Under consideration
An electronic only filing as of June 30 listed owned Schedule D investments
Only 4 columns
CUSIP, par value, book/adjusted carrying value, and fair value
1st filing as of June 30, 2019

47. NAIC Corporate Governance & Insurance Data Security

48. Corporate Governance NAIC Corporate Governance Annual Disclosure
The Pennsylvania Insurance Department has submitted an initial draft to the Legislature.
The first draft did not take into account any suggestions from industry.
PAMIC is working with the PID to incorporate suggestions.

49. NAIC Insurance Data Security Model Law
6th DRAFT Exposed for Comment – August 2017
Adoption is now expected in 2017

50. 2017 Risked-Based Capital

51. Risk-Based Capital
The Capital Adequacy Task Force surprisingly voted to delay implementation of operational risk charge.
Perhaps for more than one year.

52. Brown Schultz Sheridan & Fritz
Thank You!
Hank Straub, CPA
Principal
Brown Schultz Sheridan & Fritz