1. Statutory Accounting and Reporting Update
November 16, 2017
Mystic, CT

2. Agenda Learning Objectives
Overview of Statutory Accounting Principles Working Group (SAPWG), the Blanks Working Group (BWG), and the standard setting process
Summary of key items for 2017 reporting
Other NAIC Initiatives which may impact statutory reporting

3. Learning Objectives
Overview of the SAPWG, BWG, and the understand the accounting standard setting process at the NAIC
Summary of key items for 2017 reporting and other NAIC initiatives

4. NAIC Working Group Structure
Executive Committee & Plenary
Financial Condition (E) Committee
Capital Adequacy Task Force
Life Risk Based Capital Working Group
Health Risk Based Capital Working Group
P&C Risk Based Capital Working Group
Investment Risk Based Capital Working Group
Operational Risk Subgroup
Valuation of Securities Task Force
Accounting Practices & Procedures Task Force
Statutory Accounting Principles Working Group (SAPWG)
Restricted Assets Subgroup
Blanks Working Group
Investment Reporting Subgroup
Only SAPWG is Authorized
to Modify the AP&P Manual

5. Overview of SAPWG
The SAPWG is responsible for developing and adopting substantive, non nonsubstantive and interpretation revisions to the NAIC Accounting Practices and Procedures Manual
Substantive statutory accounting revisions introduce original or modified accounting principles. Substantive revisions can be reflected in an existing Statement of Statutory Accounting Principles (SSAP) or a new SSAP
Nonsubstantive statutory accounting revisions are characterized as language clarifications that do not modify the original intent of a SSAP
SSAPs are the highest level (i.e., level 1) in the statutory accounting hierarchy

6. Overview of SAPWG
An interpretation to an existing SSAP may be developed to provide timely application, interpretation or clarification guidance. Revisions classified as an interpretation shall not amend, supersede or conflict with existing, effective SSAPs
Interpretations are considered the second highest authority (i.e., Level 2) in the statutory accounting hierarchy

7. Overview of BWG
The BWG is responsible for the consideration of improvements and revisions to the various annual/quarterly statement blanks to:
conform these blanks to changes made in other areas of the NAIC to promote uniformity in reporting of financial information by insurers;
develop reporting formats for other entities subject to the jurisdiction of state insurance departments;
conform the various NAIC blanks and instructions to adopted NAIC policy;
oversee the development of additional reporting formats within the existing annual financial statements as needs are identified; and
monitor and improve the quality of financial data filed by insurance companies by recommending improved or additional language for the Annual Statement Instructions.
The NAIC Annual Statement Instructions are Level 3 in the statutory accounting hierarchy

8. NAIC Accounting Change Process
Substantive Changes
Form A exposed in SAPWG for new or revised SSAPs
Comments received, issue paper exposed, first public hearing
Comments received SSAP exposed w/effective date, second public hearing
Vote for adoption (simple majority)
Up the chain: SAPWG -> AP&P TF -> FCC
Nonsubstantive Changes
Form A exposed in SAPWG
Comments received, issue paper exposed/re-exposed,
At least one public hearing
Vote for adoption (multiple items sometimes adopted together)
Usually effective upon adoption (but can have effective date)
Interpretations
Questions related to application, interpretation of existing SSAPs
Effective 1/1/2016, handled in SAPWG. Used to be separate working group (EAIWG)
Two public hearings required
Supermajority vote to adopt (2/3)
Interpretations eventually incorporated into SSAPs
Coordination w/other NAIC Groups
New disclosures often followed by referral to BWG, sometimes concurrent exposures
Not uncommon for SAPWG and BWG exposures to be effective in different years. Disclosures often free-formed initially then data captured once BWG exposure adopted
Issues can cross multiple groups (VOSTF for investments, CATF for RBC most common)

9. Sources for SAPWG Updates
under the Committees section

10. Sources for BWG Updates
under the Committees section

11. Adopted Statutory Accounting Guidance

12. 2013-36, Investment Classification Review
Substantial re-write of SSAP 26 – Bonds, to clarify scope of guidance and to remove Securities Valuation Office (SVO)-identified instruments from the definition of a bond and provide separate accounting guidance for these instruments
Also contains 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 (i.e., changes incorporate the definition of a “security” within the definition of a bond, as well as definitions for non-bond, fixed-income instruments).
Guidance effective December 31, 2017

13. 2016-18, Money Market Mutual Funds
Money Market Mutual Funds will be reclassified as cash equivalents effective December 31, 2017
A previous exposure was adopted to classify them as short-term investments for 2016
Prior to 2016, 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

14. 2016-43, Accounting for Inflation Indexed Securities
Revisions to SSAP 26 to clarify that only U.S. 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

15. 2016-46, 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

16. 2016-47, Simplifying the Equity Method of Accounting
Statutory accounting adopted GAAP effective April 8, 2017; this guidance is 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

17. 2016-39, Mortgage Loans with Multiple Lenders
Adopted change 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

18. 2017-08, Extension of SCA Filing Deadlines
Adopted item to extend the filing deadline for the SUB 1 Form from 30 to 60 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 July 31

19. , 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. 26
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, and those acquired, and whether different accounting is needed
Comments were made to consider whether the bank loans should be reported as bonds (Schedule D) or as other invested assets (Schedule BA)

20. 2016-44, Appendix A-791 Life and Health Reinsurance Agreements Model Regulation
Appendix A-791 modified effective April 8, 2017 to add language that is in the model regulation but was omitted from the AP&P Manual
Written Agreement
Par. 6: The reinsurance agreement shall contain provisions which provide that:
The agreement shall constitute the entire agreement between the parties with respect to the business being reinsured thereunder and that there are no understandings between the parties other than as expressed in the agreement; and
Any change or modification to the agreement shall be null and void unless made by amendment to the agreement and signed by both parties.

21. 2015-37, Short Duration Contract Disclosures
Significant new disclosures effective for US GAAP December 31, 2017; most information found in statutory schedules
Disclosures rejected for statutory accounting, however, one was adopted effective April 8, 2017 and will apply to 2016 audited financial statements and the 2017 annual statement
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.”

22. 2017-11, 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
This adopted item is in response to findings from the 2016 Workers’ Compensation Large Deductible Study completed by the NAIC and International Association of Industrial Accident Boards and Commissions Joint Working Group

23. , 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
This item is effective for year end 2019 reporting, with early adoption permitted

24. Exposed Statutory Accounting Guidance

25. 2017-12, Amortization and Accretion of Surplus Notes
Exposes revisions to SSAP No. 41R to 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 issuer’s state of domicile retains strict control of form, terms and repayment by the issuing entity, which gives surplus notes equity-like characteristics. Under statutory accounting, surplus notes are reported in the equity section of the issuer’s balance sheet. For U.S. GAAP, surplus notes are reported as debt
This item continues to be exposed, and SAPWG has requested further discussion and evaluation of the proposed revisions. A request for additional comments and illustrations detailing the different suggestions for the accounting of surplus notes issued at a discount or with a zero coupon has been made

26. 2017-21, Double Counting of Surplus Notes
Exposes revisions to SSAP No. 41R and to SSAP No. 97 to provide guidance to adjust for instances where a parent insurer has issued a surplus note to its insurance subsidiary
SSAP No. 41R proposed revision:
SSAP No. 97 proposed 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.”.
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.

27. 2017-18, Goodwill Limitation in SSAP No. 68 and SSAP No. 97
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
Exposes revisions to SSAP No. 68 related to the accounting and the disclosure for goodwill information in Footnote 10 - Information Concerning Parent, Subsidiaries, Affiliates and Other Related Parties
The proposed information in the additional columns would enable regulators to review goodwill admission for each SCA and add transparency to the value claimed for an SCA for year-end 2018

28. Some BWG Items to Consider for 2017 Annual Reporting and Beyond

29. New General Interrogatory: 2017 Annual Reporting
The BWG adopted a new General Interrogatory Required to designate whether the reporting entity has any Self-Rated Securities (i.e., 5*) This interrogatory is the request of recent changes to NAIC filing requirements which eliminate need to make (and pay for) filings of securities where information is unavailable for NAIC to make a credit assessment Insurers are permitted to self-designate NAIC 5 securities if they are current on principle and interest (and avoid an NAIC 6 designation and a higher RBC charge)

30. SAPWG Memo to BWG Re: 2017 High Deductible Disclosures Clarifications
The SAPWG clarified that disclosures related to the high deductible business are to be made net of reinsurance, if applicable:

31. SAPWG Memo to BWG Re: 2017 High Deductible Disclosures Clarifications

32. SAPWG Memo to BWG Re: 2017 Disclosures
As a result of SAPWG calls on October 12 and November 6, the following disclosures are required for year-end 2017:

33. New Disclosure Requirements Related to Repurchase Agreements Accounting for as a Secured Borrowing and/or Sale for 2017
Significant new disclosures required for repurchase agreements and reverse repurchase agreements
The disclosures were adopted by SAPWG in 2016 to collect transaction level and aggregated data in accordance with changes made to SSAP No. 103R, Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
BWG proposal was adopted in June 2017 effective for year end reporting
Disclosures designed to be consistent with data that will be collected by global banking regulators as well as existing U.S. GAAP disclosures

34. Cybersecurity and Identity Theft Insurance Coverage Supplement Changes for 2017
There is a new requirement ( BWG) to split the cybersecurity and Identity Theft Insurance Coverage Supplement Blank into three parts: interrogatories, stand-alone policies, and package policies The adopted proposal does not require the allocation of Adjusting and Other Loss Adjustment Expenses

35. New General Interrogatory: 2018 Quarterly and Annual Reporting
The BWG adopted a new General Interrogatory Required effective January 1, 2018 (by vote on September 14, 2017) effective for 1Q 2018 reporting The interrogatory requires insurers that are part of a publicly traded holding company system to include the ultimate publicly traded holding company’s Central Index Key (“CIK”) as issued by the SEC

36. New General Interrogatory: 2018 Quarterly and Annual Reporting
The BWG adopted a new General Interrogatory Required effective January 1, 2018 effective for 1Q 2018 reporting The adopted item adds a question to the General Interrogatories, Part 2 to help identify insurers that assume reinsurance business covering risks in at least two states

37. BWG 2016-35: Schedule F Changes for 2018 Annual Reporting
The BWG adopted a proposal Combines the current Schedule F, Parts 3, 4, 5, 6, 7 and 8 into a single new Schedule F-Part 3-Ceded Reinsurance, modify the crosscheck references for Lines 13 and 16 of the Liability Page to reflect the changes to Schedule F and make changes to 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

38. Mid-Year Data Collection Referral
The Financial Condition Committee continues to discuss the requirement for expanded investment schedule reporting

39. Other NAIC Initiative: Group Capital Calculation Working Group
Reports directly to Financial Condition (E) Committee
2017 Charge is to construct a U.S. group capital calculation using an RBC aggregation methodology
The Working Group’s charge is also to liaise as necessary with the ComFrame Development and Analysis (G) Working Group on international capital developments and consider group capital developments by the Federal Reserve Board