Quarterly and Annual Filings

Updated Administrative Symbols, Market Indicators, and General Interrogatory (2018-07 BWG MOD)

• S -Additional or other non-payment risk

• FE -Filing Exempt

• FM -Financially Modeled RMBS/CMBS subject to SSAP 43R

• AM- Analytically Modeled subject to SSAP 43R

• YE -Year-end carry over

• IF –Initial Filing carry over

• PL -Private Letter Rating- (Securities issued on or after Jan. 1, 2018)

• PLGI -Private Letter Rating -reported on General Interrogatory – (Securities issued prior to Jan. 1, 2018)

• Z -Insurer  Self-designated because reporting status of security is in transition

• GI -General Interrogatory– (Only used for self-designated 5 designations)

• F -Sub-paragraph D Company – Insurer self-designated

• * – Limited to NAIC Designations 6

Please note the symbols P and RP for Perpetual and Redeemable Preferred stock have been eliminated and new reporting lines have been added to the Schedule D 2.1.  Effective date Annual 2019

SSAP 43 R – Loan Backed and Structured Securities  – Elimination of Modified Filing Exempt (MFE) (2018-19)

Since the adoption of Modified Filing Exempt(MFE), the impact that it has on securities has been evaluated.  It was noted by the Task Force that MFE would negatively impact the implementation of the more granular risk-based capital (RBC) framework.  After this evaluation, there are revisions to SSAP No. 43R—Loan-backed and Structured Securities to eliminate the modified filing exempt process in determining the final NAIC designation for CRP rated securities.  All securities subject to SSAP No. 43R that are not Financially Modeled (FM) and have a CRP rating will be required to use the “other” process.  This process uses the equivalent NAIC designation to the CRP rating without adjustment.

Effective date March 2019 with the option to early adopt for Year End 2018. Early adoption is an “all or nothing” approach.  As such, the MFE approach must be used for all applicable securities if early adopting. 

Summary Investment Schedule Updates (2018-16)

With the revisions to the summary investment schedule, the categories will more closely align to the underlying investment schedules, allowing for cross-checks and less manual allocations. The revisions will also incorporate public and non-public allocations for common stock and mortgage loans categories.

Effective date Annual 2019.

SSAP 43 R – Loan Backed and Structured Securities –  Clarification reporting NAIC Designations as Weighted Averages (2018-03)

This agenda item addresses whether securities acquired at different purchase prices, can report NAIC designations under a weighted average method under the “financial modeling” process.  The Statutory Accounting Principles Working Group adopted, as final, revisions that require securities with differing NAIC designations by lot to be reported in aggregate at the lowest NAIC designation or in groupings by differing NAIC designations.

SSAP 26 R – Bonds – Prepayment Penalties (2018-32)

The previous guidance that was adopted to clarify the calculation of investment income for prepayment penalty and/or acceleration fees for bonds liquidated prior to scheduled termination, only addressed situations when amounts received exceeded par.  This revision provides guidance for called bonds when the amount received is less than par. In the event the Book Adjusted Carrying Value (BACV) is greater than consideration received, the entire difference should be reported as income. If there is a process in place to identify prepayment penalty or acceleration fees, these should be reported as income.  After this determination, the difference between the remaining consideration and the BACV should be reported as realized gain.  

Structured Notes (2018-18)

During the 2019 Spring National Meeting, the Statutory Accounting Principles (E) Working Group adopted as final, to clarify the accounting and reporting guidance for Structured notes.

Pursuant to the adopted definition, a structured note is defined as an investment that is structured to resemble a debt instrument, where the contractual amount of the instrument to be paid at maturity is at risk for other than the failure of the borrower to pay the contractual amount due. Structured notes reflect derivative instruments (i.e. put option or forward contract) that are wrapped by a debt structure. The adopted revisions include the following:

1. SSAP No. 2R—Cash, Drafts, and Short-term Investments:  Derivative instruments shall not be reported as cash equivalents or short-term instruments regardless of their maturity date.

2. SSAP No. 26R—Bonds:  Structured notes are explicitly excluded from the scope of SSAP No. 26R.

Although these instruments are structured to resemble a debt instrument with a “debt wrapper” these instruments are not bonds.

3. SSAP No. 43R—Loan-Backed and Structured Securities:  Structured notes that are mortgage-referenced securities are in scope of SSAP No. 43R.

4. SSAP No. 86—Derivatives:  Structured notes, excluding mortgage-referenced securities in scope of SSAP No. 43R, are considered derivative instruments and shall be captured in scope of SSAP No. 86.

The Structured Note Disclosure Note 5O, is no longer required.  Effective date December 31, 2019. 

Add Designation Column to Schedule D, Part 2, Section 2 (2019-3BWG MOD)

A NAIC designation column will be added to the Schedule D, Part 2, Section 2 for use with mutual funds.  This will identify fund investments that have been assigned an NAIC designation by the SVO under the instructions in the Purposes and Procedures Manual.  Effective date Annual 2019.

Clarification of the Wash Sale Disclosure (2019-22)

The Statutory Accounting Principles (E) Working Group adopted to clarify that only investments that meet the definition of a wash sale in accordance with SSAP No. 103R that cross reporting periods are subject to the wash sale disclosure.  This eliminates the need to report transactions that meet the wash sale criteria in SSAP No. 103R that are within the same reporting period.  Wash sales that cross either a quarterly or annual reporting period must be disclosed.

Freddie Mac Single Security Initiative (2019-02) – INT 19-02-Single Security Initiative

The Statutory Accounting Principles (E) Working Group adopted INT 19-02 Single Security Initiative to incorporate a limited-scope exception to SSAP No. 26R Bonds and SSAP No. 43R to require Freddie Mac securities exchanged in accordance with the Single Security Initiative to recognize the new security at amortized cost, rather than fair value.  Furthermore, consistent with Freddie Mac’s treatment, the float compensation received shall be recognized as an adjustment to the cost basis of the security.  The interpretation will be nullified when the exchange conversion process has been terminated.

43R Equity Investments (2019-21)

During the Summer National Meeting, the Working Group exposed revisions to SSAP No. 43R – Loan-backed and Structured Securities to exclude collateralized fund obligations, and similar structures that reflect underlying equity interest, from the scope of the statement, as well as prevent existing equity assets from being repackaged as securitizations and reported as long-term bonds.  It appears the Valuation of Securities Task Force is leaning towards making these securities ineligible for FE status, which means the  SVO would rate them on a case-by-case basis for 2020 year-end, but industry groups are voicing concerns. 

GAAP Updates

Credit Losses/Impairments

In June 2016, the FASB issued Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This standard includes the current expected credit loss (CECL) method, which requires reporting entities to establish an allowance for credit losses that are expected to be incurred over the lifetime of the assets. At each reporting period, the allowance should represent Management’s current estimate of the expected credit losses. The estimate should be calculated after grouping the financial assets into pools based on their risk characteristics. If a financial asset cannot be grouped into a pool, it can be evaluated individually. The movement in this allowance would be recognized in income. Therefore, this model allows for an immediate reversal of credit losses recognized on assets that have an improvement in expected cash flows.

Although this standard includes most debt instruments,  securities classified as available-for-sale (AFS) are not included in the CECL model.  However, the credit loss guidance for AFS securities will be moved from Topic 320 to Topic 326, along with some targeted changes:

• An allowance for credit losses would be calculated at the individual security level each reporting period.  The allowance would be equal to the amount that amortized cost exceeds the present value of expected future cash flows.  However, the  valuation allowance for credit losses shall not exceed the unrealized holding loss.

• This approach allows for impairment losses to be reversed as credit losses or the impaired status evaporates.

• The requirement to consider the length of time a security has been underwater to determine if a credit loss exists would be removed.

• The requirement to consider additional declines in fair value or recoveries subsequent to the balance sheet date would no longer be required when estimating if a credit loss exists.

• An allowance for credit losses roll-forward disclosure will be required each reporting period.

In addition to AFS securities, the FASB decided to remove the following financial assets from the proposal’s scope:

• Loans made to participants by defined contribution employee benefit plans

• Policy loan receivables of an insurance entity

• Pledge receivables of a not-for-profit entity

• Related party loans and receivables

ASU 2016-13 will be effective for public, SEC filing entities, excluding entities eligible to be Smaller Reporting Companies as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  For all other entities, it will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  

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