hearing agenda may 29, 2019 roll call€¦ · naic support staff: julie gann, robin marcotte,...

Hearing Agenda

© 2019 National Association of Insurance Commissioners 1

Statutory Accounting Principles (E) Working Group Hearing Agenda

May 29, 2019

ROLL CALL

Dale Bruggeman, Chair Ohio Judy Weaver Michigan Jim Armstrong/Carrie Mears, Vice Chairs Iowa Doug Bartlett New Hampshire Richard Ford Alabama Stephen Wiest/Christine Gralton New York Kim Hudson California Joe DiMemmo Pennsylvania Kathy Belfi/William Arfanis Connecticut Jamie Walker Texas Dave Lonchar Delaware Doug Stolte/David Smith Virginia Eric Moser Illinois Amy Malm Wisconsin Caroline Fletcher/Stewart Guerin Louisiana NAIC Support Staff: Julie Gann, Robin Marcotte, Fatima Sediqzad, Jake Stultz

REVIEW AND ADOPTION of EXPOSED POSITIONS 1. Ref #2018-32: SSAP No. 26R - Prepayment Penalties 2. Ref #2019-05: Repurchase Disclosures 3. Ref #2019-07: Bonds Received as Property Dividends or Capital Contributions

Ref # Title Attachment # Agreement

with Exposed Document?

Comment Letter Page

Number Ref #2018-32

(Julie) SSAP No. 26R – Prepayment

Penalties 1 Support Revisions IPs – 1

Summary: During the 2018 Fall National Meeting, the Working Group exposed nonsubstantive revisions to SSAP No. 26R—Bonds to provide guidance for determining the prepayment penalty for called bonds when consideration received is less than par. The guidance was revised and exposed during the 2019 Spring National Meeting in accordance with interested party comments. The most recent exposure would require separate recognition of investment income when the reporting entity has a process in place to identify prepayment penalties. Otherwise, the entire difference between the consideration received and BACV is a realized gain. The guidance also specifies that if the consideration received was less then BACV, the difference would be recognized through investment income as this is how it would have been recognized under the yield-to-worst concept. Interested Parties’ Comments: Interested parties have no additional comments and support the revisions recommended by staff. Recommended Action: NAIC staff recommends that the Working Group adopt the exposed revisions to SSAP No. 26R as final.

Hearing Agenda




Comment Letter Page

Number Ref #2019-05

(Julie) Repurchase Disclosures 2 Support Revisions IPs – 1

Summary: During the 2019 Spring National Meeting, the Working Group exposed nonsubstantive revisions to SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to reduce the disclosure requirements for repurchase and reverse repurchase transactions. The revisions eliminate the “minimum” and “average daily balance” disclosures as well as information regarding counterparties and defaults from the data-captured templates. A concurrent blanks proposal was exposed by the Blanks (E) Working Group to incorporate the proposed revisions, as well as the Annual Statement instructions listed in the agenda item. Interested Parties’ Comments: Interested parties appreciate the reductions in disclosure. Recommended Action: NAIC staff recommends that the Working Group adopt the exposed revisions to SSAP No. 103R as final.



Comment Letter Page

Number

Ref #2019-07 (Julie)

Bonds Received as Property Dividends or Capital

Contributions 3 Support

Revisions IPs – 2

Summary: During the 2019 Spring National Meeting, the Working Group exposed revisions to SSAP No. 26R—Bonds and SSAP No. 72—Surplus and Quasi-Reorganization to direct the initial reported value for a bond received as a property dividend or as a capital contribution. With exposure, the Working Group directed a concurrent blanks proposal to the Blanks (E) Working Group to incorporate Annual Statement instructions to clarify that the “actual cost” column in Schedule D, Part 1 shall reflect the initial reported value of a bond received as a dividend or capital contribution. Interested Parties’ Comments: Interested parties support the proposed revisions. Recommended Action: NAIC staff recommends that the Working Group adopt the exposed revisions to SSAP No. 26R and SSAP No. 72 as final.

Hearing Agenda


CONSIDERATION OF MAINTENANCE AGENDA – PENDING LIST

1. Ref #2019-07: Accounting for “Other” Derivatives

Ref # Title Attachment #

Ref #2019-07 (Julie) Accounting for “Other” Derivatives 4

Summary: This agenda item has been drafted to consider statutory accounting guidance for derivatives that are not used in hedging transactions, income generation transactions or replication (synthetic asset) transactions. This agenda item was directed with the adoption of agenda item 2018-08, Structured Notes, as it was noted that structured notes captured within scope of SSAP No. 86—Derivatives, would be unlikely to be used in the transactions with existing recognition and measurement guidance in SSAP No. 86. Although the guidance of SSAP No. 86 is limited to the derivatives captured in the noted transactions (hedging, income generation or replication), the reporting schedule for derivatives (Schedule DB) currently includes an “other” derivative reporting category. Although this agenda item clarifies the accounting (measurement) value for these derivatives, as detailed within the proposed revisions, “other” derivatives do not qualify as admitted assets under the SSAP. Derivatives classified as “other” shall only be admitted in accordance with state investment laws that provide prescribed practices that permit admittance. These prescribed practices shall be detailed in Note 1. Derivatives reported in the “hedging-other” are derivatives subject to the “hedging” guidance in SSAP No. 86 and are not intended to be captured by this agenda item. This agenda item is strictly for the derivatives reported as “other” derivatives. Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and expose revisions to SSAP No. 86—Derivatives to include recognition and measurement guidance for derivatives that do not qualify as hedging, income generation or replication transactions. In addition to the proposed revisions specific for “other” derivatives, revisions are reflected in the headers to separate the application of existing guidance. As detailed within the revisions, derivatives that are not used in hedging, income generation or replication transactions shall be considered “other” derivatives, reported at fair value, and nonadmitted. The 2 pages of comment letters are included in Attachment 5.

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Attachment 1 Ref #2018-32


Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form

Form A

Issue: SSAP No. 26R – Prepayment Penalties Check (applicable entity): P/C Life Health

Modification of existing SSAP New Issue or SSAP Interpretation

Description of Issue: In 2016, guidance was adopted to SSAP No. 26R to clarify the calculation of investment income for prepayment penalty and/or acceleration fees for bonds liquidated prior to scheduled termination. Since the adoption of that guidance, comments have been received on how the calculations should be applied when the call price is below par.

Adopted calculation: Realized Gain / Loss = Difference between Par and BACV Investment Income = Consideration Received Less Par

Comparing the calculation for when the call price is above par, and for when the call price is less than par:

Call Price Above Par Premium

Call Price Above Par Discount

Call Price Less Than Par

Par 100 Par 100 Par 100 BACV 102 BACV 98 BACV 25 Consideration 103 Consideration 103 Consideration 26 Loss (100-102) (2) Gain (100-98) 2 Gain (100-25) 75 Income (103-100) 3 Income (103-100) 3 Income (26-100) (74)

In the first two examples, when the consideration received is greater than par, the allocation accurately reflects the realized gain and the investment income for the prepayment penalty. The examples adopted in 2017 were focused on situations where amounts received were greater than par. In the third example, in which the consideration is less than par, the allocation to investment income for the prepayment penalty misrepresents that there has been a large realized gain and a large realized loss. Although the net impact in the financial statements correctly reflects $1 in net gain, the calculation in SSAP No. 26 would require the reporting entity to show a $75 realized gain (which could impact AVR and IMR) and a $74 net investment income loss (which impacts the income statement and dividend calculation). Although NAIC staff agrees that prepayment penalties reported as investment income shall be separately reported from realized gains / losses, NAIC staff notes that the resulting impact of the gross calculation, when the call price is less than par, may result with unintended consequences to AVR / IMR and net income. The intent of this agenda item is to propose clarifications to the guidance to clarify that the calculation to determine realized gains / loss and investment income shall be followed in situations in which the consideration receives exceeds par. In situations in which consideration received is less than par, the reporting entity shall separately allocate the consideration received between investment income and realized gain / loss in accordance with the terms of the callable bond. The portion of consideration received that represents prepayment penalties and/or acceleration fees shall be reported as investment income.



Existing Authoritative Literature: SSAP No. 26R—Bonds:

16. A bond may provide for a prepayment penalty or acceleration fee in the event the bond is liquidated prior to its scheduled termination date. Such fees shall be reported as investment income when received.

17. The amount of prepayment penalty and/or acceleration fees to be reported as investment income shall be calculated as follows:

a. The amount of investment income reported is equal to the total proceeds (consideration) received less the par value of the investment; and

b. Any difference between the book adjusted carrying value (BACV) and the par value at the time of disposal shall be reported as realized capital gains and losses, subject to the authoritative literature in SSAP No. 7.

Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda Item 2015-23: Prepayment Penalties and Presentation of Callable Bonds – Bifurcation of Agenda Item 2015-04 amended existing paragraph 16 in SSAP No. 26R regarding prepayment penalties. It specifically noted make whole call provisions when the guidance was developed. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): Not applicable. Staff Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and expose proposed revisions to SSAP No. 26R to provide guidance for situations in which the consideration received from a callable bond is less than par. In these situations, the reporting entity shall separately allocate the consideration received between investment income and realized gain / loss in accordance with the terms of the callable bond. The portion of consideration received that represents prepayment penalties and/or acceleration fees shall be reported as investment income. As part of the exposure, comments are requested on whether the following illustration should be added to the appendix and/or if all of the appendix for prepayment penalties should be eliminated / condensed Proposed Edits to SSAP No. 26R:


17. The amount of prepayment penalty and/or acceleration fees to be reported as investment income or loss shall be calculated as follows:

a. For called bonds in which the consideration received exceeds par:

i. The amount of investment income reported is equal to the total proceeds (consideration) received less the par value of the investment; and



ii. Any difference between the book adjusted carrying value (BACV) and the par value at the time of disposal shall be reported as realized capital gains and losses, subject to the authoritative literature in SSAP No. 7.

b. Called bonds in which the consideration received is less than par:

i. Each bond shall be reviewed individually, in accordance with the terms of the bond and call provisions, to determine the extent a prepayment penalty or acceleration fee, which should be reported as investment income, was received. After determining any prepayment penalty or acceleration fee, the reporting entity shall calculate the resulting realized gain or loss. The following are examples to determine the acceleration fee / prepayment penalty when call price is less than par:

a. If the call price is less than par, and the call terms specify prepayment amounts in excess of current fair value, the amount in excess of fair value shall be considered the prepayment penalty / acceleration fee.

b. Prepayments specifically identified in the contract terms as prepayment penalties or acceleration fees shall also be reported in investment income.

Regulator and industry comments are requested on whether the following illustration should be added to the appendix and/or if all of the appendix for prepayment penalties should be eliminated / condensed.

Call Price Less than Par Entity 1 Entity 2 Entity 3

Par 100 Par 100 Par 100 BACV 24 BACV 28 BACV 25 Consideration 26 Consideration 26 Consideration 26 Fair Value 25 Fair Value 25 Fair Value 25 Gain (Loss) 1 Gain (Loss) (3) Gain (Loss) 0 Income 1 Income 1 Income 1

Staff Review Completed by: Julie Gann, NAIC Staff – October 2018 Status: On November 15, 2018, the Statutory Accounting Principles (E) Working Group moved this item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 26R—Bonds, as shown above, to provide guidance for determining the prepayment penalty for called bonds when consideration received is less than par. Comments are requested on whether additional illustrations should be added to the SSAP, or if the existing illustrations should be eliminated or condensed. On April 6, 2019, the Statutory Accounting Principles (E) Working Group exposed revisions to SSAP No. 26R—Bonds, as shown below, to provide guidance when bonds are called with consideration received less than par. These revisions have been changed from the prior exposure with revised guidance on when a prepayment penalty should be identified and reported as investment income. The revisions also clarify that in instances where consideration received is less than BACV, the entire difference should be reported through investment income. This treatment is consistent with how the reporting would have occurred if the bond had been amortized under the yield-to-worst concept. This item was exposed with a shortened May 10, 2019 comment deadline.



Spring 2019 National Meeting Exposure:

SSAP No. 26R—Bonds


17. The amount of prepayment penalty and/or acceleration fees to be reported as investment income or loss shall be calculated as follows:

a. For called bonds in which the total proceeds (consideration) received exceeds par:

i. The amount of investment income reported is equal to the total proceeds (consideration) received less the par value of the investment; and

ii. Any difference between the book adjusted carrying value (BACV) and the par value at the time of disposal shall be reported as realized capital gains and losses, subject to the authoritative literature in SSAP No. 7.

b. For cCalled bonds in which the consideration received is less than parFN:

i. To the extent an entity has in place a process to identify explicit Each bond shall be reviewed individually, in accordance with the terms of the bond and call provisions, to determine the extent a prepayment penalty or acceleration fees, thesewhich should be reported as investment income, was received. (An entity shall consistently apply their process. Once a process is in place, an entity is required to maintain a process to identify prepayment penalties for called bonds in which consideration received is less than par.)

ii. After determining any explicit prepayment penalty or acceleration fees, the reporting entity shall calculate the resulting realized gain or loss. The following are examples to determine the acceleration fee / prepayment penalty when call price is less than par:as the difference between the remaining consideration and the BACV which shall be reported as realized capital gains and losses, subject to the authoritative literature in SSAP No. 7.

If the call price is less than par, and the call terms specify prepayment amounts in excess of current fair value, the amount in excess of fair value shall be considered the prepayment penalty / acceleration fee.

Prepayments specifically identified in the contract terms as prepayment penalties or acceleration fees shall also be reported in investment income.

___________________ New FN: This guidance applies to situations in which consideration received is less than par, but greater than the book adjusted carrying value (BACV). Pursuant to the yield-to-worst concept, bonds shall be amortized to the call or maturity date that produces the lowest asset value. In the event a bond has not been amortized to the lowest value prior to the call (BACV is greater than the consideration received), the entire difference between consideration received and the BACV shall be reported to investment income.

Staff Note: Based on prior comments received, industry supports retention of the existing examples in Exhibit C – Amortization Treatment for Callable Bonds and the inclusion of an additional illustration for showing application of the prepayment penalty guidance when consideration received is less than par. The following Exhibit is proposed to be added to Exhibit C, as a new Example 5.



Exhibit C: Amortization Treatment for Callable Bonds Example 5: Determination of Prepayment Penalty When Call Price is Less Than Par

Call Price Less than Par

Entity 1 Entity 2 Entity 23 Par 100 Par 100 Par 100 BACV 24 BACV 28 BACV 25 Consideration 26 Consideration 26 Consideration 26 Fair ValueExplicit fee

215 Fair Value 215 Fair ValueExplicit fee

125

Remaining consideration

25 Remaining consideration

25 Remaining consideration

25

Gain (Loss) 1 Gain (Loss) (3) Gain (Loss) 0 Income 1 Income 1 Income* 1

*Entity has in place a process to identify explicit prepayment penalty or acceleration fees.

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Form A

Issue: Update Repurchase Disclosures Check (applicable entity): P/C Life Health


Description of Issue: This agenda item has been drafted to consider revisions to the repurchase and reverse repurchase disclosures reflected in SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The disclosures reflected in SSAP No. 103R were adopted in December 2016 to incorporate enhanced disclosures on repo activity and were effective initially for year-end 2017 reporting. After reviewing the completed 2017 disclosures, this agenda item proposes modifications to reduce and clarify the disclosure requirements. In addition to proposing disclosure modifications, this agenda item proposes additional Annual Statement Instructions. Proposed Revisions to SSAP No. 103R: 1. Remove the counterparty information from disclosure. From the year-end 2017 filing, only a few companies

completed the “counterparty” information. This agenda item proposes to remove the disclosure element, identifying that state regulators can request this information directly from insurance reporting entities if information on counterparties is desired.

2. Remove the default disclosure from the data-captured disclosure. From the year-end 2017 filing, no insurance company was identified as reporting repo defaults. (Defaults are expected to be rare.) This agenda item recommends removing this information from the data-captured disclosure, and instead included in a narrative disclosure if an actual repo default has occurred.

3. The existing disclosure captures information on the minimum, maximum, average daily balance and ending

balance for repo activity. In reviewing the information, NAIC staff believes the maximum level of activity and ending balances are the key pieces of information. This agenda item recommends removing “minimum” balances and “average daily balance.” This would result with only the maximum activity over the quarter and the ending balance being reported at each financial statement reporting date.

Proposed Revisions to the Annual / Quarterly Statement Instructions: 4. Guidance that all aspects of the disclosure should be completed throughout the year, with the disclosure

“building” throughout the year (e.g., information for all four quarters should be presented at year-end.)

5. A response of “yes” indicating that a reporting entity engages in repo activity requires details on the repo activity to be included. (Information is captured on activity and ending balances, so assessments can occur on the extent of activity that occurred throughout the year. If all of the repo activity has ended at year-end, the activity for the year should still be included.)

Existing Authoritative Literature: SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities



28. A reporting entity shall disclose the following1:

a. For Repurchase and Reverse Repurchase Agreements:

i. If the entity has entered into repurchase or reverse repurchase agreements, information regarding the company policy or strategies for engaging in repo programs, policy for requiring collateral, as well as whether transactions have been accounted for as secured borrowings or as sale transactions. This disclosure shall include the terms of reverse repurchase agreements whose amounts are included in borrowing money. The following information shall be disclosed by type of agreement:

(a) Whether repo agreements are bilateral and/or tri-party trades;

(b) Maturity time frame divided by the following categories: open or continuous term contracts for which no maturity date is specified, overnight, 2 days to 1 week, from 1 week to 1 month, greater than 1 month to 3 months, greater than 3 months to 1 year, and greater than 1 year2;

(c) Allocation of the fair value of securities sold and/or acquired by counterparty and identification of the counterparty jurisdiction, and

(d) Aggregate fair value of securities sold and/or acquired that resulted in default. (This disclosure is not intended to capture “failed trades”, which are defined as instances in which the trade did not occur as a result of an error and was timely corrected. Rather, this shall capture situations in which the non-defaulting party exercised their right to terminate after the defaulting party failed to execute.)

ii. For repurchase transactions accounted for as secured borrowings3, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual) for the following:

(a) Fair value of securities sold. (Book adjusted carrying value shall be provided as an end balance only.) This information is required in the aggregate, and by type of security categorized by NAIC designation, with identification of nonadmitted assets. Although legally sold as a secured borrowing, these assets are still reported by the insurer and shall be coded as restricted pursuant to the annual statement instructions, disclosed in accordance with SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures (SSAP No. 1), reported in the general interrogatories, and included in any other statutory schedules or disclosure requirements requesting information for restricted assets.

(b) Cash collateral and the fair value of security collateral (if any) received. This information is required in the aggregate and by type of security categorized by NAIC designation with identification of collateral securities received that do not qualify as admitted assets.

1 All repurchase and reverse repurchase transactions (collectively referred to as “repos”), and securities borrowing and securities lending transactions shall be reported gross for disclosure purposes and when detailed on the respective investment schedules. However, repurchase and reverse repurchase transactions, and securities borrowing and securities lending transactions may be reported net in the financial statements (pages 2 and 3 of the statutory financial statements) in accordance with SSAP No. 64—Offsetting and Netting of Assets and Liabilities (SSAP No. 64) when a valid right to offset exists. When these transactions are offset in accordance with SSAP No. 64 and reported net in the financial statements, the disclosure requirements in SSAP No. 64, paragraph 6, shall be followed.

2 Only short-term repo agreements (with a stated short-term maturity date) are allowed as admitted assets. Long-term repo agreements (agreements with maturity dates in excess of 365 days) are nonadmitted.

3 For secured borrowing repurchase transactions, the insurance reporting entity is selling a security, and receiving collateral (generally cash) in an exchange that does not qualify as a sale.



(1) For collateral received, aggregate allocation of the collateral by the remaining contractual maturity of the repurchase agreements (gross): overnight and continuous, up to 30 days, 30-90 days, greater than 90 days. This disclosure shall also include a discussion of the potential risks associated with the agreements and related collateral received, including the impact arising changes in the fair value of the collateral received and/or the provided security and how those risks are managed.

(2) For cash collateral received that has been reinvested, the total reinvested cash and the aggregate amortized cost and fair value of the invested asset acquired with the cash collateral. This disclosure shall be reported by the maturity date of the invested asset: under 30 days, 60 days, 90 days, 120 days, 180 days, less than 1 year, 1-2 years, 2-3 years and greater than 3 years. To the extent that the maturity dates of the liability (collateral to be returned) does not match the invested assets, the reporting entity shall explain the additional sources of liquidity to manage those mismatches.

(c) Liability recognized to return cash collateral, and the liability recognized to return securities received as collateral as required pursuant to the terms of the secured borrowing transaction.

iii. For reverse repurchase transactions accounted for as secured borrowings4, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual) for the following:

(a) Fair value of securities acquired. This information shall be reported in the aggregate, and by type of security categorized by NAIC designation, with identification of whether acquired assets would not qualify as admitted assets.

(b) Cash collateral and the fair value of security collateral (if any) provided. (If security collateral was provided, book adjusted carrying value shall be provided as an end balance only.) Disclosure shall identify the book adjusted carrying value of any nonadmitted securities provided as collateral. For collateral pledged, the aggregate allocation of the collateral by the remaining contractual maturity of the reverse-repurchase agreements (gross): overnight and continuous, up to 30 days, 30-90 days, greater than 90 days. This disclosure shall also include a discussion of the potential risks associated with the agreements and related collateral pledged, including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed.

(c) Recognized receivable for the return of collateral. (Generally cash collateral, but including securities provided as collateral as applicable under the terms of the secured borrowing transaction. Receivables are not recognized for securities provided as collateral if those securities are still reported as assets of the reporting entity.)

(d) Recognized liability to return securities acquired under the reverse-repurchase agreement as required pursuant to the secured borrowing transaction. (Generally, a liability is required if the acquired securities are sold.)

iv. For repurchase transactions accounted for as a sale5, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual) for the following:

4 For secured borrowing reverse repurchase transactions, the insurance reporting entity is buying a security and providing collateral (generally cash) in an exchange that does not qualify as a sale.



(a) Fair value of securities sold (derecognized from the financial statements). (Book adjusted carrying value shall be provided as an end balance only, reflecting the amount derecognized from the sale transaction.) This information is required in the aggregate, and by type of security categorized by NAIC designation, with information on the book adjusted carrying value of nonadmitted assets sold.

(b) Cash and the fair value of securities (if any) received as proceeds and recognized in the financial statements. This information is required in the aggregate and by type of security categorized by NAIC designation, with identification of received assets nonadmitted in the financial statements. All securities received shall be coded as restricted pursuant to the annual statement instructions, disclosed in accordance with SSAP No. 1, reported in the general interrogatories, and included in any other statutory schedules or disclosure requirements requesting information for restricted assets.

(c) The forward repurchase commitment recognized to return the cash or securities received. Amount reported shall reflect the stated repurchase price under the repurchase transaction.

v. For reverse repurchase transactions accounted for as sale6, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual):

(a) Fair value of securities acquired and recognized on the financial statements. (Book adjusted carrying value shall be provided as an end balance only.) This information shall be reported in the aggregate, and by type of security categorized by NAIC designation. The disclosure also requires the book adjusted carrying value of nonadmitted assets acquired.

(b) Cash collateral and the fair value of security collateral (if any) provided. (If security collateral was provided, book adjusted carrying value shall be provided as an end balance only.) Disclosure shall also identify whether any nonadmitted assets were provided as collateral (derecognized from the financial statements).

(c) The forward resale commitment recognized (stated repurchase price) to sell the acquired securities.

Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda item 2016-16 incorporated enhanced disclosures for repurchase and reverse repurchase agreements. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): Not applicable.

5 For sale repurchase transactions, the insurance reporting entity sold a security and received “proceeds” in exchange. With a sale transaction, the insurer removes the asset from their financial statements and recognizes the proceeds from the sale. This transaction requires recognition of a forward repurchase commitment.

6 For sale reverse repurchase transactions, the insurance reporting entity has purchased a security and provided “proceeds” in exchange. With a sale transaction, the insurer reports the acquired asset in their financial statements and removes the proceeds provided. This transaction requires recognition of a forward resale commitment.



Staff Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as an nonsubstantive, and propose revisions to reduce the disclosure requirements for repurchase and reverse repurchase transactions as presented in this agenda item. These revisions would:

1. Remove the counterparty information from disclosure.

2. Remove the default disclosure from the data-captured disclosure.

3. Remove “minimum” balances and “average daily balance” from the disclosure. This would result with only the maximum activity and the ending balance being reported at each financial statement reporting date.

With exposure of the proposed revisions, NAIC staff suggests that the Working Group sponsor a blanks proposal to incorporate the proposed revisions from SSAP No. 103R, as well as the following elements to the Annual / Quarterly Statement Instructions:

1. Guidance that all aspects of the disclosure should be completed throughout the year, with the disclosure “building” throughout the year (e.g., information for all four quarters should be presented at year-end.)

2. A response of “yes” indicating that a reporting entity engages in repo activity requires details on

the repo activity to be included. (Information is captured on activity and ending balances, so assessments can occur on the extent of activity that occurred throughout the year. If all of the repo activity has ended at year-end, the activity for the year should still be included.)

Proposed Revisions to SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: (The proposed edits are shown in paragraphs 28.a.i.(c), 28.a.i.(d), 28.a.ii, 28.a.iii, 28.a.iv, and 28.a.v.) 28. A reporting entity shall disclose the following7:

a. For Repurchase and Reverse Repurchase Agreements:

i. If the entity has entered into repurchase or reverse repurchase agreements, information regarding the company policy or strategies for engaging in repo programs, policy for requiring collateral, as well as whether transactions have been accounted for as secured borrowings or as sale transactions. This disclosure shall include the terms of reverse repurchase agreements whose amounts are included in borrowing money. The following information shall be disclosed by type of agreement:

(a) Whether repo agreements are bilateral and/or tri-party trades;

(b) Maturity time frame divided by the following categories: open or continuous term contracts for which no maturity date is specified, overnight, 2 days to 1 week,

7 All repurchase and reverse repurchase transactions (collectively referred to as “repos”), and securities borrowing and securities lending transactions shall be reported gross for disclosure purposes and when detailed on the respective investment schedules. However, repurchase and reverse repurchase transactions, and securities borrowing and securities lending transactions may be reported net in the financial statements (pages 2 and 3 of the statutory financial statements) in accordance with SSAP No. 64—Offsetting and Netting of Assets and Liabilities (SSAP No. 64) when a valid right to offset exists. When these transactions are offset in accordance with SSAP No. 64 and reported net in the financial statements, the disclosure requirements in SSAP No. 64, paragraph 6, shall be followed.



from 1 week to 1 month, greater than 1 month to 3 months, greater than 3 months to 1 year, and greater than 1 year8;

(c) Allocation of the fair value of securities sold and/or acquired by counterparty and identification of the counterparty jurisdiction, and

(d)(c) Aggregate narrative disclosure of the fair value of securities sold and/or acquired that resulted in default. (This disclosure is not intended to capture “failed trades”, which are defined as instances in which the trade did not occur as a result of an error and was timely corrected. Rather, this shall capture situations in which the non-defaulting party exercised their right to terminate after the defaulting party failed to execute.)

ii. For repurchase transactions accounted for as secured borrowings9, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual) for the following:

(a) Fair value of securities sold. (Book adjusted carrying value shall be provided as an end balance only.) This information is required in the aggregate, and by type of security categorized by NAIC designation, with identification of nonadmitted assets. Although legally sold as a secured borrowing, these assets are still reported by the insurer and shall be coded as restricted pursuant to the annual statement instructions, disclosed in accordance with SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures (SSAP No. 1), reported in the general interrogatories, and included in any other statutory schedules or disclosure requirements requesting information for restricted assets.

(b) Cash collateral and the fair value of security collateral (if any) received. This information is required in the aggregate and by type of security categorized by NAIC designation with identification of collateral securities received that do not qualify as admitted assets.

(3) For collateral received, aggregate allocation of the collateral by the remaining contractual maturity of the repurchase agreements (gross): overnight and continuous, up to 30 days, 30-90 days, greater than 90 days. This disclosure shall also include a discussion of the potential risks associated with the agreements and related collateral received, including the impact arising changes in the fair value of the collateral received and/or the provided security and how those risks are managed.

(4) For cash collateral received that has been reinvested, the total reinvested cash and the aggregate amortized cost and fair value of the invested asset acquired with the cash collateral. This disclosure shall be reported by the maturity date of the invested asset: under 30 days, 60 days, 90 days, 120 days, 180 days, less than 1 year, 1-2 years, 2-3 years and greater than 3 years. To the extent that the maturity dates of the liability (collateral to be returned) does not match the invested assets, the reporting entity shall explain the additional sources of liquidity to manage those mismatches.

8 Only short-term repo agreements (with a stated short-term maturity date) are allowed as admitted assets. Long-term repo agreements (agreements with maturity dates in excess of 365 days) are nonadmitted.

9 For secured borrowing repurchase transactions, the insurance reporting entity is selling a security, and receiving collateral (generally cash) in an exchange that does not qualify as a sale.



(c) Liability recognized to return cash collateral, and the liability recognized to return securities received as collateral as required pursuant to the terms of the secured borrowing transaction.

iii. For reverse repurchase transactions accounted for as secured borrowings10, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual) for the following:

(a) Fair value of securities acquired. This information shall be reported in the aggregate, and by type of security categorized by NAIC designation, with identification of whether acquired assets would not qualify as admitted assets.

(b) Cash collateral and the fair value of security collateral (if any) provided. (If security collateral was provided, book adjusted carrying value shall be provided as an end balance only.) Disclosure shall identify the book adjusted carrying value of any nonadmitted securities provided as collateral. For collateral pledged, the aggregate allocation of the collateral by the remaining contractual maturity of the reverse-repurchase agreements (gross): overnight and continuous, up to 30 days, 30-90 days, greater than 90 days. This disclosure shall also include a discussion of the potential risks associated with the agreements and related collateral pledged, including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed.

(c) Recognized receivable for the return of collateral. (Generally, cash collateral, but including securities provided as collateral as applicable under the terms of the secured borrowing transaction. Receivables are not recognized for securities provided as collateral if those securities are still reported as assets of the reporting entity.)

(d) Recognized liability to return securities acquired under the reverse-repurchase agreement as required pursuant to the secured borrowing transaction. (Generally, a liability is required if the acquired securities are sold.)

iv. For repurchase transactions accounted for as a sale11, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual) for the following:

(a) Fair value of securities sold (derecognized from the financial statements). (Book adjusted carrying value shall be provided as an end balance only, reflecting the amount derecognized from the sale transaction.) This information is required in the aggregate, and by type of security categorized by NAIC designation, with information on the book adjusted carrying value of nonadmitted assets sold.

(b) Cash and the fair value of securities (if any) received as proceeds and recognized in the financial statements. This information is required in the aggregate and by type of security categorized by NAIC designation, with identification of received assets nonadmitted in the financial statements. All securities received shall be coded as restricted pursuant to the annual statement instructions, disclosed in accordance with SSAP No. 1, reported in the general

10 For secured borrowing reverse repurchase transactions, the insurance reporting entity is buying a security and providing collateral (generally cash) in an exchange that does not qualify as a sale.

11 For sale repurchase transactions, the insurance reporting entity sold a security and received “proceeds” in exchange. With a sale transaction, the insurer removes the asset from their financial statements and recognizes the proceeds from the sale. This transaction requires recognition of a forward repurchase commitment.



interrogatories, and included in any other statutory schedules or disclosure requirements requesting information for restricted assets.

(c) The forward repurchase commitment recognized to return the cash or securities received. Amount reported shall reflect the stated repurchase price under the repurchase transaction.

v. For reverse repurchase transactions accounted for as sale12, the average daily balance (along with minimum and maximum amounts), and the end balance as of each reporting period (quarterly and annual):

(a) Fair value of securities acquired and recognized on the financial statements. (Book adjusted carrying value shall be provided as an end balance only.) This information shall be reported in the aggregate, and by type of security categorized by NAIC designation. The disclosure also requires the book adjusted carrying value of nonadmitted assets acquired.

(b) Cash collateral and the fair value of security collateral (if any) provided. (If security collateral was provided, book adjusted carrying value shall be provided as an end balance only.) Disclosure shall also identify whether any nonadmitted assets were provided as collateral (derecognized from the financial statements).

(c) The forward resale commitment recognized (stated repurchase price) to sell the acquired securities.

Staff Review Completed by: Julie Gann, NAIC Staff – December 2018 Status: On April 6, 2019, the Statutory Accounting Principles (E) Working Group moved this item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as shown above, to reduce the disclosure requirements for repurchase and reverse repurchase transactions. A concurrent blanks proposal was exposed by the Blanks (E) Working Group to incorporate the proposed revisions, as well as the Annual Statement instructions listed in the agenda item. This item was exposed with a shortened comment deadline of May 10, 2019. G:\FRS\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2019\05.29.19\Materials -2\2 - 19-05 - Repurchase Disclosures.docx

12 For sale reverse repurchase transactions, the insurance reporting entity has purchased a security and provided “proceeds” in exchange. With a sale transaction, the insurer reports the acquired asset in their financial statements and removes the proceeds provided. This transaction requires recognition of a forward resale commitment.




Form A

Issue: Bonds Received as Property Dividends or Capital Contributions Check (applicable entity): P/C Life Health


Description of Issue: This agenda item has been drafted to clarify and/or revise statutory accounting and investment schedule reporting guidance for bonds received as property dividends or capital contributions. Specifically, this agenda item intends to explicitly direct the initial reported value by the recipient insurance reporting entity and the calculation of gain/loss upon disposal. Existing guidance in SSAP No. 72—Surplus and Quasi-Reorganizations is explicit that the amount of a property dividend provided is the fair value of the assets distributed. Additional guidance is reflected in SSAP No. 25—Affiliates and Related Parties for measurement of economic and non-economic transfers and SSAP No. 95—Nonmonetary Transactions. However, in response to questions received, it has been identified that the existing reporting guidance does not explicitly address the reporting of “cost” for bonds received without remitting consideration. Bonds Received as Dividends or Capital Contributions

Although SSAP No. 72 indicates that a bond provided as a property dividend shall be transferred at fair value, the guidance in SSAP No. 26R—Bonds or SSAP No. 72 does not address situations in which a reporting entity receives a bond as a property dividend or as a capital contribution.

SSAP No. 26R indicates that bonds shall be initially reported at “cost,” and the annual statement instructions indicate that the “actual cost” column should reflect the actual consideration paid to purchase the security. There is no guidance for different reporting on Schedule D for bonds received as a property dividend or as a capital contribution to a reporting entity.

SSAP No. 95 provides guidance for nonreciprocal transfers, with direction to use the fair value of assets transferred or received, however, SSAP No. 95 is specific to nonmonetary transactions.

SSAP No. 25 provides guidance directing either fair value or the lower of existing book values or fair value based on whether the transfer is considered economic or noneconomic. Additionally, under SSAP No. 25, if the transaction is a noneconomic, and the reporting entity is the parent entity, the net effects of any gain or increase in surplus shall be deferred by recording a deferred gain and an unrealized loss.

The annual statement instructions identify that the “actual cost” reported in column 7 of Schedule D, Part 1, “should contain the actual consideration paid to purchase the security.” However, when bonds are received as property dividends or capital contributions, the initial reported value of the bond received shall be reported as the “actual cost.” If the initial reported value of the bond is not reported as the “actual cost,” upon disposal, the calculation of the realized gain will reflect the entire ending BACV value of the bond. (Per the A/S instructions, the realized gain/loss on disposal is the difference between the consideration column and the BACV at the disposal date.) This calculation would result in incorrect reporting, as the initial receipt of the bond was already reflected through the summary of operations as



either a capital contribution or as dividend income. As such, upon disposal, any gain or loss should be calculated based on the difference between BACV and the initial recorded value.

Existing Authoritative Literature: SSAP No. 25—Affiliates and Other Related Parties

Transactions Involving the Exchange of Assets or Liabilities

12. An arm’s-length transaction is defined as a transaction in which willing parties, each being reasonably aware of all relevant facts and neither under compulsion to buy, sell, or loan, would be willing to participate. A transaction between related parties involving the exchange of assets or liabilities shall be designated as either an economic transaction or non-economic transaction. An economic transaction is defined as an arm’s-length transaction which results in the transfer of the risks and rewards of ownership and represents a consummated act thereof, i.e., “permanence.” The appearance of permanence is also an important criterion in assessing the economic substance of a transaction. In order for a transaction to have economic substance and thus warrant revenue (loss) recognition, it must appear unlikely to be reversed. If subsequent events or transactions reverse the effect of an earlier transaction prior to the issuance of the financial statements, the reversal shall be considered in determining whether economic substance existed in the case of the original transaction. Subsequent events are addressed in SSAP No. 9—Subsequent Events. An economic transaction must represent a bonafide business purpose demonstrable in measurable terms. A transaction which results in the mere inflation of surplus without any other demonstrable and measurable betterment is not an economic transaction. The statutory accounting shall follow the substance, not the form of the transaction.

13. In determining whether there has been a transfer of the risks and rewards of ownership in the transfer of assets or liabilities between related parties, the following—and any other relevant facts and circumstances related to the transaction—shall be considered:

a. Whether the seller has a continuing involvement in the transaction or in the financial interest transferred, such as through the exercise of managerial authority to a degree usually associated with ownership;

b. Whether there is an absence of significant financial investment by the buyer in the financial interest transferred, as evidenced, for example, by a token down payment or by a concurrent loan to the buyer;

c. Whether repayment of debt that constitutes the principal consideration in the transaction is dependent on the generation of sufficient funds from the asset transferred;

d. Whether limitations or restrictions exist on the buyer’s use of the financial interest transferred or on the profits arising from it;

e. Whether there is retention of effective control of the financial interest by the seller.

14. A transaction between related parties may meet the criteria for treatment as an economic transaction at one level of financial reporting, but may not meet such criteria at another level of financial reporting. An example of such a transaction is a reporting entity purchasing securities at fair value from an affiliated reporting entity that carried the securities at amortized cost. This transaction meets the criteria of an economic transaction at this level of financial reporting, and therefore, the selling reporting entity would record a gain and the acquiring reporting entity would record the securities at their cost (fair value on the transaction date). At the common parent level of reporting, this transaction has resulted in the mere inflation of surplus, and therefore, is a non-economic transaction. The parent reporting entity shall defer the net effects of any gain or increase in surplus resulting from such transactions by recording a deferred gain and an unrealized loss. The deferred gain shall not be recognized by the parent reporting entity unless and until arms-length transaction(s) with independent third parties give rise to appropriate recognition of the gain.



15. A non-economic transaction is defined as any transaction that does not meet the criteria of an economic transaction. Similar to the situation described in paragraph 14, transfers of assets from a parent reporting entity to a subsidiary, controlled or affiliated entity shall be treated as non-economic transactions at the parent reporting level because the parent has continuing indirect involvement in the assets.

16. When accounting for a specific transaction, reporting entities shall use the following valuation methods:

a. Economic transactions between related parties shall be recorded at fair value at the date of the transaction. To the extent that the related parties are affiliates under common control, the controlling reporting entity shall defer the effects of such transactions that result in gains or increases in surplus (see paragraph 14);

b. Non-economic transactions between reporting entities, which meet the definition of related parties above, shall be recorded at the lower of existing book values or fair values at the date of the transaction;

c. Non-economic transactions between a reporting entity and an entity that has no significant ongoing operations other than to hold assets that are primarily for the direct or indirect benefit or use of the reporting entity or it’s affiliates, shall be recorded at the fair value at the date of the transaction; however, to the extent that the transaction results in a gain, that gain shall be deferred until such time as permanence can be verified;

d. Transactions which are designed to avoid statutory accounting practices shall be reported as if the reporting entity continued to own the assets or to be obligated for a liability directly instead of through a subsidiary.

Examples of transactions deemed to be non-economic include security swaps of similar issues between or among affiliated companies, and swaps of dissimilar issues accompanied by exchanges of liabilities between or among affiliates.

SSAP No. 26R—Bonds

6. A bond acquisition or disposal shall be recorded on the trade date (not the settlement date) except for the acquisition of private placement bonds which shall be recorded on the funding date. At acquisition, bonds shall be reported at their cost, including brokerage and other related fees.

SSAP No. 72—Surplus and Quasi-Reorganizations

Gross Paid-in and Contributed Surplus

7. Gross paid-in and contributed surplus is the amount of capital received in excess of the par value of the stock issued. Changes in the par value of a reporting entity’s capital stock shall be reflected as a reclassification between the capital stock account and gross paid-in and contributed surplus. Forgiveness of a reporting entity’s obligations to its parent or other stockholders shall be accounted for as contributed surplus. 8. Notes or other receivables received as additional capital contributions satisfied by receipt of cash or readily marketable securities prior to the filing of the statutory financial statement shall be treated as a Type I subsequent event in accordance with SSAP No. 9 and as such shall be considered an admitted asset based on the evidence of collection and approval of the domiciliary commissioner. To the extent that the notes or other receivables are not satisfied, they shall be nonadmitted. 9. Real estate or other assets received as additional capital contributions are nonreciprocal transfers as defined in SSAP No. 95—Nonmonetary Transactions (SSAP No. 95). 10. Stock purchase warrants issued in return for cash shall be credited to gross paid-in and



contributed surplus. When debt instruments are issued with conversion features, no value shall be assigned to the conversion features unless the conversion feature is clearly separable from the debt obligation in the form of a detachable stock purchase warrant. In such instances the relative fair value of the detachable stock purchase warrant at time of issue shall be credited to gross paid-in and contributed surplus. For instances in which a reporting entity has issued puttable warrants or mandatorily redeemable warrants, such items shall be reflected as liabilities as the warrants obligate the reporting entity to ultimately transfer cash or other assets to the holder in order to repurchase the shares. Unassigned Funds (Surplus)

12. Unassigned funds (surplus) represents the undistributed and unappropriated amount of surplus at the balance sheet date. Certain components of unassigned funds (surplus) are addressed in more detail in other issue papers. Unassigned funds (surplus) is comprised of the cumulative effect of:

i. Dividends to Stockholders Dividends declared are charged directly to unassigned funds (surplus) on the declaration date and are carried as a liability until paid. The amount of the dividend is the cash paid if it is a cash dividend, the fair value of the assets distributed if it is property dividend, or the par value of the company’s stock if it is a stock dividend. A stock dividend is recorded as a transfer from unassigned funds (surplus) to capital stock. Stock dividends have no effect on total capital and surplus while other forms of dividends reduce surplus. Forgiveness by a reporting entity of any debt, surplus note or other obligation of its parent or other stockholders shall be accounted for as a dividend. Dividends paid to related parties are subject to the requirements of SSAP No. 25—Affiliates and Other Related Parties;

SSAP No. 95—Nonmonetary Transactions

1. The statement establishes statutory accounting principles for nonmonetary transactions. Specific statutory requirements for certain types of nonmonetary transactions are addressed in other statements.

4. Nonmonetary transactions shall be accounted for in accordance with this statement, except as addressed by other statements or interpretations including but not limited to SSAP No. 12—Employee Stock Ownership Plans (SSAP No. 12), SSAP No. 25—Affiliates and Other Related Parties (SSAP No. 25), SSAP No. 68—Business Combinations and Goodwill (SSAP No. 68), SSAP No. 72—Surplus and Quasi-Reorganizations (SSAP No. 72), SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP No. 103R), SSAP No. 104R—Share-Based Payments (SSAP No. 104R), and INT 00-26: EITF 98-3: Determining Whether a Nonmonetary Transactions Involves Receipt of Productive Assets or of a Business (INT 00-26).

Basic Principle

5. Accounting for nonmonetary transactions shall generally be based on the fair values of the assets (or services) involved, as defined in paragraph 13, which is the same basis as that used in monetary transactions. Thus, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset (reciprocal transactions) is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchange. The fair value of the asset received should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered. Similarly, a nonmonetary asset received in a nonreciprocal transfer should be recorded at the fair value of the asset received as defined in paragraph 6. A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset. The fair value of a reporting entity's own stock reacquired may be a more clearly evident measure of the fair value of the asset distributed in a nonreciprocal transfer if the transaction involves distribution of a nonmonetary asset to eliminate a disproportionate part of owners' interests (that is, to acquire stock for the treasury or for retirement).



6. Fair value of assets received or transferred in a nonreciprocal transfer shall be measured based on statutory accounting principles for the type of asset transferred. Accordingly, the value shall be determined in accordance with SSAP No. 26R—Bonds (SSAP No. 26R), SSAP No. 30—Unaffiliated Common Stock (SSAP No. 30), SSAP No. 32—Preferred Stock (SSAP No. 32), SSAP No. 37—Mortgage Loans (SSAP No. 37), SSAP No. 39—Reverse Mortgages (SSAP No. 39), SSAP No. 40R—Real Estate Investments (SSAP No. 40R), SSAP No. 43R—Loan-Backed and Structured Securities (SSAP No. 43R), SSAP No. 90—Impairment or Disposal of Real Estate Investments (SSAP No. 90) or other applicable statements. The guidance provided in SSAP No. 25 shall be followed in accounting for nonreciprocal transactions with affiliates and other related parties as defined in that statement.

Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): None

Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): Not applicable. Staff Recommendation: NAIC staff recommends that the Statutory Accounting Principles (E) Working Group move this item to the active listing, categorized as nonsubstantive, and expose revisions to SSAP No. 26R—Bonds and SSAP No. 72—Surplus and Quasi-Reorganization to clarify the reporting when an insurance reporting entity receives a bond as a property dividend or as a capital contribution. With exposure, NAIC staff recommends a concurrent blanks proposal to incorporate annual statement instructions to clarify that the “actual cost” column in Schedule D, Part 1 shall reflect the initial reported value of a bond received as a dividend or capital contribution. Proposed revisions: SSAP No. 26R—Bonds

6. A bond acquisition or disposal shall be recorded on the trade date (not the settlement date) except for the acquisition of private placement bonds which shall be recorded on the funding date. At acquisition, bonds shall be reported at their cost, including brokerage and other related fees. The reported cost of a bond received as a property dividend or capital contribution shall be the initial recognized value. SSAP No. 25 shall be used to determine whether a transfer is economic or noneconomic for initial recognition.

SSAP No. 72—Surplus and Quasi-Reorganizations

Gross Paid-in and Contributed Surplus

7. Gross paid-in and contributed surplus is the amount of capital received in excess of the par value of the stock issued. Changes in the par value of a reporting entity’s capital stock shall be reflected as a reclassification between the capital stock account and gross paid-in and contributed surplus. Forgiveness of a reporting entity’s obligations to its parent or other stockholders shall be accounted for as contributed surplus.

8. Notes or other receivables received as additional capital contributions satisfied by receipt of cash or readily marketable securities prior to the filing of the statutory financial statement shall be treated as a Type I subsequent event in accordance with SSAP No. 9 and as such shall be considered an admitted asset based on the evidence of collection and approval of the domiciliary commissioner. To the extent that the notes or other receivables are not satisfied, they shall be nonadmitted.



9. Bonds received as capital contributions, reflecting economic transactions, shall be recognized at fair value in accordance with SSAP No. 25. Real estate or other assets received as additional capital contributions shall be recognized in accordance with SSAP No. 25 or as are nonreciprocal transfers as defined in SSAP No. 95—Nonmonetary Transactions (SSAP No. 95), in accordance with the details of the transaction.

10. Stock purchase warrants issued in return for cash shall be credited to gross paid-in and contributed surplus. When debt instruments are issued with conversion features, no value shall be assigned to the conversion features unless the conversion feature is clearly separable from the debt obligation in the form of a detachable stock purchase warrant. In such instances the relative fair value of the detachable stock purchase warrant at time of issue shall be credited to gross paid-in and contributed surplus. For instances in which a reporting entity has issued puttable warrants or mandatorily redeemable warrants, such items shall be reflected as liabilities as the warrants obligate the reporting entity to ultimately transfer cash or other assets to the holder in order to repurchase the shares.

Staff Review Completed by: Julie Gann, NAIC Staff – March 2019 Status: On April 6, 2019, the Statutory Accounting Principles (E) Working Group moved this item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 26R—Bonds and SSAP No. 72—Surplus and Quasi-Reorganization, as shown above, to direct the initial reported value for a bond received as a property dividend or as a capital contribution. With exposure, the Working Group directed a concurrent blanks proposal to the Blanks (E) Working Group to incorporate Annual Statement instructions to clarify that the “actual cost” column in Schedule D, Part 1 shall reflect the initial reported value of a bond received as a dividend or capital contribution. This item was exposed with a shortened comment deadline ending May 10, 2019. G:\FRS\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2019\05.29.19\Materials -2\3 - 19-07 - Bond Dividends.docx




Form A

Issue: Accounting for “Other” Derivatives Check (applicable entity): P/C Life Health


Description of Issue: This agenda item has been drafted to consider statutory accounting guidance for derivatives that are not used in hedging transactions, income generation transactions or replication (synthetic asset) transactions. This agenda item was directed with the adoption of agenda item 2018-08, Structured Notes, as it was noted that structured notes captured within scope of SSAP No. 86—Derivatives, would be unlikely to be used in the transactions with existing recognition and measurement guidance in SSAP No. 86. Although the guidance of SSAP No. 86 is limited to the derivatives captured in the noted transactions (hedging, income generation or replication), the reporting schedule for derivatives (Schedule DB) currently includes an “other” derivative reporting category. Although this agenda item clarifies the accounting (measurement) value for these derivatives, as detailed within the proposed revisions, “other” derivatives do not qualify as admitted assets under the SSAP. Derivatives classified as “other” shall only be admitted in accordance with state investment laws that provide prescribed practices that permit admittance. These prescribed practices shall be detailed in Note 1. Derivatives reported in the “hedging-other” are derivatives subject to the “hedging” guidance in SSAP No. 86 and are not intended to be captured by this agenda item. This agenda item is strictly for the derivatives reported as “other” derivatives. Existing Authoritative Literature: SSAP No. 86—Derivatives establishes statutory accounting principles for derivative instruments and hedging, income generation and replication (synthetic asset) transactions using selected concepts outlined in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Although the scope of SSAP No. 86 references “all derivative instruments” recognition and measurement provisions are only provided for specific transactions identified in paragraph 3:

3. This statement addresses the recognition of derivatives and measurement of derivatives used in:

a. Hedging transactions;

b. Income generation transactions; and

c. Replication (synthetic asset) transactions.

4. “Derivative instrument” means an agreement, option, instrument or a series or combination thereof:

a. To make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests, or to make a cash settlement in lieu thereof; or

b. That has a price, performance, value or cash flow based primarily upon the actual or expected price, level, performance, value or cash flow of one or more underlying interests.



Activity to Date (issues previously addressed by the Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): Revisions have recently adopted to SSAP No. 86 and additional revisions are expected to consider ASU 2017-12, Derivatives and Hedging. Recent revisions include:

• Ref # 2016-48 – Incorporated disclosures for financing derivatives. • Ref# 2018-08 – Incorporate guidance to include structured notes in scope. • Ref #2018-30 – Incorporated hedge documentation and assessment efficiencies from ASU 2017-12.

Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None Convergence with International Financial Reporting Standards (IFRS): U.S. GAAP and IFRS are consistent that all derivatives are reported at fair value, with changes recognized through income unless there is an election to apply hedge accounting. With hedge accounting, under IFRS and U.S. GAAP, derivatives are still reported at fair value, but the gain/loss may be recognized through other comprehensive income (instead of income). Staff Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and expose revisions to SSAP No. 86—Derivatives to include recognition and measurement guidance for derivatives that do not qualify as hedging, income generation or replication transactions. In addition to the proposed revisions specific for “other” derivatives, revisions are reflected in the headers to separate the application of existing guidance. Working Group Question – With the language proposed, admittance of “other” derivatives under state investment laws will require a prescribed practice disclosure in Note 1. Working Group comments are requested on whether the language in the SSAP should permit admittance under state investment law. If this language was included, then a prescribed practice detailed in Note 1 would not be required. Proposed Revisions to SSAP No. 86—Derivatives:

3. This statement addresses the recognition of derivatives and measurement of derivatives used in:

a. Hedging transactions;

b. Income generation transactions; and

c. Replication (synthetic asset) transactions.

d. Other Derivatives – (Derivatives that are not used in hedging, income generation or replication transactions.)

Impairment

17. This statement adopts the impairment guidelines established by SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R) for the underlying financial assets or liabilities.

Recognition of Derivatives Recognition and Measurement of Derivatives Used in Hedging Transactions

18. Derivative instruments represent rights or obligations that meet the definitions of assets (SSAP No. 4—Assets and Nonadmitted Assets) or liabilities (SSAP No. 5R) and shall be reported in financial statements. In addition, derivative instruments also meet the definition of financial instruments as defined



in SSAP No. 27—Off-Balance-Sheet and Credit Risk Disclosures (SSAP No. 27). Should the cost basis of the derivative instrument be undefined (i.e., no premium is paid), the instrument shall be disclosed in accordance with paragraphs 44-48 of SSAP No. 100R—Fair Value (SSAP No. 100R). Derivative instruments used in hedging, income generation or replication (synthetic asset) transactions shall be recognized and measured in accordance with the specific provisions within this statement and are admitted assets to the extent they conform to the requirements of this statement.

19. Derivative instruments that are not used in hedging, income generation or replication (synthetic asset) transactions shall be considered “Other” derivatives. These derivatives shall be accounted for at fair value and the changes in fair value shall be recorded as unrealized gains or losses. These derivatives do not qualify as admitted assets. Derivatives Used in Hedging Transactions

19.20. Derivative instruments used in hedging transactions that meet the criteria of a highly effective hedge shall be considered an effective hedge and are permitted to be valued and reported in a manner that is consistent with the hedged asset or liability (referred to as hedge accounting). For instance, assume an entity has a financial instrument on which it is currently receiving income at a variable rate but wishes to receive income at a fixed rate and thus enters into a swap agreement to exchange the cash flows. If the transaction qualifies as an effective hedge and a financial instrument on a statutory basis is valued and reported at amortized cost, then the swap would also be valued and reported at amortized cost. Derivative instruments used in hedging transactions that do not meet or no longer meet the criteria of an effective hedge, or that meet the required criteria but the entity has chosen not to apply hedge accounting, shall be accounted for at fair value and the changes in the fair value shall be recorded as unrealized gains or unrealized losses (referred to as fair value accounting).

Recognition and Measurement of Derivatives Used in Income Generation Transactions General

43.44. Income generation transactions are defined as derivatives written or sold to generate additional income or return to the reporting entity. They include covered options, caps, and floors (e.g., a reporting entity writes an equity call option on stock that it already owns).

Recognition and Measurement of Derivatives Used in Replication (Synthetic Asset) Transactions

53.54. Replication (Synthetic Asset) transaction means a derivative transaction entered into in conjunction with other investments in order to reproduce the investment characteristics of otherwise permissible investments. A derivative transaction entered into by an insurer as a hedging or income generation transaction shall not be considered a replication (synthetic asset) transaction.

Staff Review Completed by: Julie Gann – April 2019 G:\FRS\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2019\05.29.19\4 - 19-18 - SSAP No. 86 - Other Derivatives.docx

Attachment 5

D. Keith Bell, CPA Senior Vice President Accounting Policy Corporate Finance The Travelers Companies, Inc. 860-277-0537; FAX 860-954-3708 Email: [email protected]

Rose Albrizio, CPA Vice President Accounting Practices AXA Equitable. 201-743-7221 Email: [email protected]

May 10, 2019 Mr. Dale Bruggeman, Chairman Statutory Accounting Principles Working Group National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO 64106-2197 RE: Interested Parties Comments on Items Exposed for Comment by the Statutory

Accounting Principles (E) Working Group with Comments due May 10 Dear Mr. Bruggeman: Interested parties appreciate the opportunity to provide comments on the items that were exposed by the Statutory Accounting Principles (E) Working Group (the “Working Group”) during the NAIC National Meeting in Orlando with a comment deadline of May 10th. We offer the following comments: Ref #2018-32: SSAP No. 26R – Prepayment Penalties The Working Group exposed revisions to SSAP No. 26R—Bonds, to provide guidance when bonds are called with consideration received less than par. These revisions have been changed from the prior exposure with revised guidance on when a prepayment penalty should be identified and reported as investment income. The revisions also clarify that in instances where consideration received is less than BACV, the entire difference should be reported through investment income. This treatment is consistent with how the reporting would have occurred if the bond had been amortized under the yield-to-worst concept. Interested parties have no additional comments and support the revisions recommended by staff. Ref #2019-05: Repurchase Disclosures The Working Group moved this item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to reduce the disclosure requirements for repurchase and reverse

mailto:[email protected]



Attachment 5 Statutory Accounting Principles Working Group March 5, 2019 Page 2

repurchase transactions. A concurrent blanks proposal was exposed by the Blanks (E) Working Group to incorporate the proposed revisions, as well as the Annual Statement instructions listed in the agenda item. Interested parties appreciate the reductions in disclosure. Ref #2019-07: Bonds Received as Property Dividends or Capital Contributions The Working Group moved this item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 26R—Bonds and SSAP No. 72—Surplus and Quasi-Reorganization, to direct the initial reported value for a bond received as a property dividend or as a capital contribution. With exposure, the Working Group directed a concurrent blanks proposal to the Blanks (E) Working Group to incorporate Annual Statement instructions to clarify that the “actual cost” column in Schedule D, Part 1 shall reflect the initial reported value of a bond received as a dividend or capital contribution. Interested parties support the proposed revisions. Thank you for considering interested parties’ comments. If you have any questions in the interim, please do not hesitate to contact either one of us. Sincerely, D. Keith Bell Rose Albrizio G:\FRS\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2019\05.29.19\Materials -2\5 - dkb2262.docx

hearing agenda may 29, 2019 roll call€¦ · naic support staff: julie gann, robin marcotte,...

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