draft pending adoption · 2016. 6. 2. · julie gann (naic) advised that during the 2015 fall...

Draft Pending Adoption Attachment 1

Draft: 4/12/16

Statutory Accounting Principles (E) Working Group

New Orleans, Louisiana

April 3, 2016

The Statutory Accounting Principles (E) Working Group of the Accounting Practices and Procedures (E) Task Force met in

New Orleans, LA, April 3, 2016. The following Working Group members participated: Dale Bruggeman, Chair (OH); Jim

Armstrong, Vice Chair (IA); Richard Ford (AL); Kim Hudson and Tomoko Stock (CA); Kathy Belfi and William Arfanis

(CT); Rylynn Brown (DE); Kevin Fry (IL); Caroline Brock and Stewart Guerin (LA); Judy Weaver (MI); Doug Bartlett

(NH); Steve Wiest (NY); Joe DiMemmo and Kimberly Rankin (PA); Jamie Walker (TX); David Smith and Doug Stolte

(VA); and Rebecca Easland and Tom Houston (WI).

1. Adopted its Feb. 22, 2016, and Dec. 10, 2015, Minutes

Ms. Weaver made a motion, seconded by Mr. Houston, to adopt the Working Group’s Feb. 22, 2016, (Attachment One-A)

and Dec. 10, 2015, minutes (Attachment One-B), which included adoption of 12 nonsubstantive agenda items, exposure of

two nonsubstantive agenda items and adoption of its 2015 Fall National Meeting minutes, as well as the Restricted Asset (E)

Subgroup’s Feb. 15 minutes (Attachment One-C), which included the exposure of proposed disclosure templates and related

revisions to SSAP No. 103—Transfers and Serving of Financial Assets and Extinguishments of Liabilities for repurchase and

reverse repurchase accounting transactions until April 29. The motion passed unanimously.

2. Adopted Substantive Revisions to Statutory Accounting in Agenda Item 2014-25

The Working Group reviewed comments (Attachment One-D) on previously exposed items.

Mr. Bruggeman directed the Working Group to agenda item 2014-25: Holders of Surplus Notes. Julie Gann (NAIC) advised

that during the 2015 Fall National Meeting, the Working Group had concurrently exposed a revised Issue Paper No. 151—

Valuation for Holders of Surplus Notes and a substantively revised SSAP No. 41R—Surplus Notes. She advised that the key

statutory accounting change reflected within the exposures is a change in the measurement method for surplus notes. With

the proposed revisions, surplus notes with either an NAIC 1 or NAIC 2 designation will be reported at amortized cost, with

all other surplus notes being reported at the lower of amortized cost or fair value. Ms. Gann stated that the Valuation of

Securities (E) Task Force had adopted revisions to the Purposes and Procedures Manual of the NAIC Investment Analysis

Office (P&P Manual) in response to the Working Group’s Jan. 22, 2016, referral to provide guidance on how to determine the

designation of surplus notes. With the inclusion of this guidance in the P&P Manual, modifications were proposed to the

exposed issue paper and SSAP to remove the duplicate guidance. She advised that the potential for these modifications was

already discussed in the exposed documents as the modifications are in line with the action recommended in the referral to

the Task Force. Ms. Gann identified that the meeting materials highlight the specific revisions that would be made. No

comments were received on the changes identified in the meeting materials, and Ms. Gann noted that no comments were

received during the exposure period on the proposed issue paper and revised SSAP. Mr. Hudson made a motion, seconded by

Ms. Walker, to adopt Issue Paper No. 151 (Attachment One-E) and the substantively revised SSAP No. 41R (Attachment

One-F), with an effective date of Jan. 1, 2017. With this motion, the Working Group also directed NAIC staff to send a new

referral to the Valuation of Securities (E) Task Force to update the P&P Manual guidance to reflect the adopted changes

regarding the measurement method of surplus notes. The motion passed unanimously.

3. Adopted Nonsubstantive Revisions to Statutory Accounting

The Working Group reviewed comments (Attachment One-D) on previously exposed items and adopted the following

nonsubstantive revisions:

a. Agenda Item 2015-19

Mr. Bruggeman directed the Working Group to agenda item 2015-19: Quarterly Disclosure of Restricted Assets. Ms. Gann

advised that during the 2015 Fall National Meeting, the Working Group had exposed revisions to clarify that the restricted

asset disclosure in SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures shall be included in the


interim financial statements, in its entirety, if there had been significant changes from the annual statement disclosure

pursuant to the Preamble. Ms. Gann identified that comments received from interested parties indicated that a significant

change in one or a few categories of restricted assets should not result with the entire restricted asset disclosure having to be

provided. In response to the comments, Ms. Gann identified that the “significant” language included in the Preamble

identifies when interim disclosure is required. However, the Preamble also states that the interim financial statements shall

include disclosures sufficient to make the information presented not misleading. She noted that only including limited pieces

of the restricted asset disclosure could result with misleading interim information as the aggregate amount of restricted assets

could be significantly greater than what was disclosed. Greg Hendler (MetLife), representing interested parties, stated that the

original comments were intended to get more clarity of the item, and after subsequent discussion, the interested parties are

supportive of the exposed language and agree with including the entire disclosure if there is a significant change. Mr. Hudson

made a motion, seconded by Mr. Houston, to adopt the exposed revisions to SSAP No. 1 for the quarterly reporting of

restricted assets (Attachment One-G). The motion passed unanimously.

b. Agenda Item 2015-45

Mr. Bruggeman directed the Working Group to agenda item 2015-45: ETF Reporting in Investment Schedules. Ms. Gann

advised that during the 2015 Fall National Meeting, the Working Group had exposed two options to improve the reporting of

SVO bond-approved exchange-traded funds (ETFs) and bond mutual funds. The first option was to keep these investments

on Schedule D-Part 1 with new subcategories to group these investments together. The second option was to create a new

schedule, which rolled into the total of Schedule D-Part 1, to separately present these investments. Ms. Gann noted that with

the second option, the columns could be tailored to fit these investments, whereas in the first option, these investments would

continue to be reported with columns that are not applicable, such as par value and maturity date. She noted that with either

option, it will be easier to review and assess these investments. She advised that interested parties had provided comments

supporting the first option, with the continued inclusion of these investments in Schedule D-Part 1 and subcategories to group

these investments together. Mr. Bruggeman highlighted that this agenda item will result in new blanks instructions with the

intent to improve the quality of data reported for these investments. Ms. Weaver made a motion, seconded by Mr. Fry, to

adopt the Option 1 approach, noting that the Working Group would sponsor a Blanks (E) Working Group proposal to retain

SVO bond-approved ETFs and bond mutual funds on Schedule D-Part 1, with the inclusion of new subcategories to group

these investments together within the reporting schedule (Attachment One-H). The motion passed unanimously.

c. Agenda Item 2015-52

Mr. Bruggeman directed the Working Group to agenda item 2015-52: Clarification of Permitted Practice Disclosure.

Ms. Gann advised that during the 2015 Fall National Meeting, the Working Group had exposed nonsubstantive revisions to

clarify when to disclose permitted and prescribed practices and to obtain more information in the reporting of permitted and

prescribed practices within the financial statements. Ms. Gann advised that comments received from interested parties noted

the need to reflect more than one SSAP and financial statement lines in the proposed reporting changes as permitted and that

prescribed practices could affect more than one SSAP and reporting line. Additionally, the interested parties’ comments

noted that the exposed revisions to SSAP No. 1 may be interpreted to require a listing of all prescribed practices adopted

through state law, and recommended that prescribed practices only be disclosed if they affect the statutory financial

statements. Ms. Rankin made a motion, seconded by Mr. Wiest, to adopt the exposed SSAP No. 1 footnote, and

recommended annual statement blanks changes for submission to the Blanks (E) Working Group, as modified during the

meeting to indicate that more than one SSAP and financial statement line could be referenced (Attachment One-I). With this

same motion, the Working Group exposed proposed language to SSAP No. 1 to clarify that permitted and prescribed

practices shall be reported if they report in different statutory accounting reporting (including gross or net reporting) from

what is set forth in the NAIC Accounting Practices and Procedures Manual (AP&P Manual). The motion passed

unanimously.

d. Agenda Item 2016-01

Mr. Bruggeman directed the Working Group to agenda item 2016-01: Section 9010 Assessment 2017 Moratorium. Robin

Marcotte (NAIC) advised that the Working Group exposed the INT 16-01: ACA Section 9010 Assessment 2017 Moratorium

on Feb. 22 as a tentative interpretation of SSAP No. 106—Affordable Care Act Section 9010 Assessment to promote

consistent application of the accounting guidance for reporting years 2016 through 2018 with regards to the 2017 Section


9010 fee Moratorium. Mr. Bruggeman noted that the interpretation clarifies the accounting in this situation. Max McGee

(America’s Health Insurance Plans—AHIP) stated that AHIP supports adoption of the interpretation. Mr. McGee noted that

the interpretation provides clear guidance on expected accounting for the 2017 fee moratorium. Mr. Hudson made a motion,

seconded by Ms. Weaver, to adopt INT 16-01: ACA Section 9010 Assessment 2017 Moratorium as an interpretation to SSAP

No. 106 (Attachment One-J). The motion passed unanimously.

4. Exposed Substantive Revisions to Statutory Accounting

The Working Group exposed the following substantive revisions:


Mr. Bruggeman directed the Working Group to agenda item 2015-02: Short Sales. Ms. Gann advised that during the 2015

Fall National Meeting, the Working Group exposed Issue Paper No. 152—Short Sales. She advised that interested parties had

provided comments on the exposure, and NAIC staff were recommending modifications to the exposed issue paper to reflect

a majority of the interested parties’ proposed revisions. Mr. Hudson made a motion, seconded by Mr. Houston, to direct

NAIC staff to incorporate the proposed revisions to Issue Paper No. 152, as shown in the meeting materials, and to

concurrently expose the revised issue paper and a substantively revised SSAP No. 103R—Accounting for Transfers and

Servicing of Financial Assets and Financial Liabilities. The motion passed unanimously.


Mr. Bruggeman directed the Working Group to agenda item 2015-47: Principle-Based Reserving SSAP. Ms. Marcotte

advised this is part of a broader project to incorporate substantive amendments to facilitate the implementation of principle-

based reserving (PBR). She added that NAIC staff worked with an informal drafting group composed of industry, regulators

and various stakeholders, and have prioritized the items that will affect the financial statements of life insurers. She noted that

during the development of the revisions, NAIC staff determined that it would be more efficient to expose the changes to the

SSAPs first before drafting the issue paper, because PBR will affect several SSAPs. Ms. Marcotte advised that the informal

drafting group identified a minor technical edit related to the dividend liability and that the American Council of Life Insurers

(ACLI) has submitted an amendment proposal form to the Life Actuarial (A) Task Force to be consistent with the dividend

liability concepts in SSAP No. 51—Life Contracts. She noted that a forthcoming separate agenda item will address change in

valuation basis, as the Working Group is charged with coordinating with the Life Actuarial (A) Task Force on this topic. The

outcome of the change in valuation basis agenda item will affect SSAP No. 51 and SSAP No. 54—Individual and Group

Accident and Health Contracts. Mr. Houston made a motion, seconded by Ms. Rankin, to expose substantive revisions to

SSAP No. 51. The motion passed unanimously.


Mr. Bruggeman directed the Working Group to agenda item 2016-02: ASU 2016-02 – Leases. Josh Arpin (NAIC) advised

that during February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02–Leases, which is

intended to increase transparency and comparability among organizations by recognizing all operating and financing leases

on the balance sheet and disclosing key information about leasing arrangements. He noted that the main difference between

previous generally accepted accounting principles (GAAP) (ASC Topic 840) and new GAAP (ASC Topic 842) is the

recognition of lease assets and lease liabilities by lessees for leases classified as operating leases under previous GAAP.

Under the accounting standards update (ASU), a company will now recognize, for all leases, in the statement of financial

position a liability to make leases payments (lease liability) and a right-of-use asset (lease asset) representing its right to use

the underlying asset throughout the lease term. He advised that currently under statutory accounting, SSAP No. 22—Leases,

paragraph 12 prescribes that all leases shall be considered operating leases, with rent being expensed in accordance with this

statement. Mr. Arpin advised that he envisions the various components of ASU 2016-02 being addressed in multiple

steps/agenda items, with this agenda item addressing the Working Group’s initial determination of whether to retain the

current guidance in SSAP No. 22 or if revisions should be made to incorporate elements of ASU 2016-02. He added that

subsequent to the Working Group’s determination, NAIC staff suggest that the Working Group direct them to further

evaluate ASU 2016-02 for potential revisions to statutory accounting to address other areas impacted.


Ms. Weaver made a motion, seconded by Mr. Hudson, to move this agenda item to the active listing, categorized as

substantive, and exposed the agenda item with a request for comments on the following three proposed staff options for the

accounting of operating and financing leases under SAP: 1) maintain existing statutory accounting guidance in SSAP No. 22

for the treatment of operating and financing leases, with potential new disclosures to capture information on the lease asset

and lease liability that would be required under GAAP; 2) recognize the lease asset and lease liability, but require

nonadmittance of the lease asset as the right-of-use asset is not available for policyholder obligations pursuant to SSAP No.

4—Assets and Nonadmitted Assets; and 3) recognize lease assets and lease liabilities for a lessee’s operating and financing

leases allowing the lease asset to be an admitted asset under SAP. The motion passed unanimously.


Mr. Bruggeman directed the Working Group to agenda item 2016-03: Variable Annuities. Ms. Gann advised that this agenda

item had been prepared in accordance with the following charge recommended from the Variable Annuities Issues (E)

Working Group and issued in 2016 by the Financial Condition (E) Committee:

Develop and adopt changes to SSAP No. 86—Derivatives, with an effective date of Jan. 1, 2017, or earlier, which

allow hedge accounting treatment under SSAP No. 86 for certain limited derivative contracts (e.g., interest rate

hedges with counterintuitive effects) that otherwise do not meet hedge effectiveness requirements. In adopting such

an allowance, consider if the requirement to meet hedge effectiveness can be replaced by some other information

that demonstrates strong risk management is in place over the identified hedges.

Ms. Gann advised that the agenda item has been drafted to allow the Working Group to begin considering the charge and

includes several components for review. She noted that in addition to providing guidance on the existing derivative guidance

in SSAP No. 86, the agenda item includes accounting guidance from U.S. GAAP, an industry proposal received for

consideration and an initial NAIC staff proposal. Ms. Gann highlighted the following key points of the NAIC staff proposal:

Notes support to pursue statutory accounting revisions to explicitly address derivative transactions hedging

Actuarial Guideline XLIII—CARVM for Variable Annuities (AG 43) guarantee reserve calculations as a “special

accounting treatment.” This support is consistent with the intent to encourage risk-management transactions by

insurers, and identification that the existing derivative accounting guidance may hinder insurers from engaging in

these transactions. Although there is support, the agenda item proposes that guidance be separate and distinct from

existing “effectiveness” guidance within SSAP No. 86 and included within a separate section or different SSAP with

specific accounting and reporting guidance. Ms. Gann noted concern if the special accounting treatment was inferred

in other non-AG 43 derivative transactions.

Discusses possibilities for the “hedged item” and “hedging instrument” that could allow a form of “macro-hedging”

as the hedged item could reflect a portfolio of “dissimilar” items. Although all items within the pool would be

related to variable annuity contracts, as the contracts could have different terms and components, the portfolio would

not be considered “similar” under U.S. GAAP. Ms. Gann specifically noted that macro-hedging is not currently

permitted to receive “hedge effectiveness” accounting treatment under SAP or U.S. GAAP.

Incorporates concepts in determining qualifying hedges/hedge effectiveness from existing guidance in SSAP No. 86,

as well as the “Clearly Defined Hedging Strategy” requirements of AG 43.

Includes possible new reporting requirements to document the hedges and related financial statement impacts.

Identifies that specific consideration should occur for the treatment of gains/losses upon the termination of a hedge

that qualifies under the special accounting provision. Ms. Gann noted that the derivative will likely not cover the

entire term of the reserve liability, so there is a mismatch of the terms, with the possibility for gains and losses to be

amortized into the financial statements.

Mr. Bruggeman noted that this is an important issue because under current guidance, companies may be acquiring additional

derivatives in order to hedge the volatility of derivatives acquired to address AG 43 reserves. He said he considers this to be

an unnecessary cost not benefiting policyholders, but only to mitigate the presentation of volatility in the financial statements.


Mr. Bruggeman requested comments on the closed portfolio concept presented in the agenda item, noting the ultimate goal is

to increase matching of the derivative to the liability, but to not allow indefinite deferral of the costs or losses of these

derivatives. Mr. Bruggeman also requested comments regarding derivatives that can be called when one of the parties is

downgraded by a selected rating agency, and the potential impact of those derivatives in the financial statements, noting the

need for guardrails to prevent situations in which the derivatives can result with a negative impact to the surplus in the

general account.

Due to the complex nature of the topic within the agenda item, as well as the detail of various items to be considered,

Mr. Hendler requested an extended comment period for this agenda item. He identified that there is a group of life companies

working with Oliver Wyman on this proposal, and having an extended comment time frame would allow the information

captured within that group to be collectively presented to the Working Group. Mr. Armstrong made a motion, seconded by

Mr. Hudson, to move this item to the active listing, categorized as substantive, and exposed the agenda item with an extended

comment period ending June 5. The exposure includes a request for comment on the initial NAIC staff proposal, as well as

other elements that should be considered in providing “special accounting provisions” for these limited derivative contracts.

The motion passed.

5. Exposed Nonsubstantive Revisions to Statutory Accounting

The Working Group exposed the following nonsubstantive revisions:


Mr. Bruggeman directed the Working Group to agenda item 2015-21: Clarification of Accounting for Fees Incurred for

Salvage and Subrogation Recoveries. Ms. Marcotte advised that this issue was re-exposed at the 2015 Fall National Meeting

to better describe the issue. The agenda item provided two ways of recognizing litigation and other subrogation expenses.

The choices were to net anticipated subrogation expenses out of expected subrogation recoveries and netting it against unpaid

loss reserves or to reflect them in adjusting expenses. Comments were received from interested parties and the American

Academy of Actuaries (Academy) Committee on Property and Liability Financial Reporting. In addition, the sponsor of the

agenda item offered informal comments.

Ms. Marcotte summarized the interested parties’ comments, noting that they support netting subrogation expenses out of

expected subrogation recoveries and netting it against unpaid loss reserves, as they indicate this is consistent with the annual

statement instructions. Interested parties provided language for SSAP No. 55—Unpaid Claims, Losses and Loss Adjustment

Expenses in response to the request for comments on the issue that the netting of expected subrogation recoveries (reduced by

the amount of subrogation expense) against unpaid losses, commingles losses and subrogation recovery expenses.

Ms. Marcotte stated interested parties note that subrogation expenses for most companies are not significant. They also noted

that material loss contingencies related to subrogation litigation, as with any material litigation, are subject to the accounting

and disclosure requirements of SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets – Revised.

Ms. Marcotte summarized that the Academy comment letter provided observations without commenting on specific items.

The Academy letter noted that the categorization of coding of salvage and subrogation expenses is not material to the

evaluation of the solvency of a particular insurer. The expense is likely to be immaterial related to total losses and, therefore,

unlikely to affect solvency. The Academy letter noted that the coding of salvage and subrogation expenses may be material to

the net financial results of an individual insurer. When individual companies are compared, the specific coding of the salvage

and subrogation expense may lead to different conclusions by external parties of the relative profitability of insurers for a

particular line of business.

Ms. Marcotte stated that the agenda item sponsor provided comments noting appreciation of the discussion, indicating that

they primarily want the reporting to be clear and consistent. She stated that the sponsor is not opposed to the interested

parties’ clarification, but they noted that additional instruction in the annual statement blank may be needed. Ms. Marcotte

noted that NAIC staff recommend exposing the interested parties’ language as it is consistent with the annual statement

instruction. She noted that SSAP No. 55 currently requires that amounts of estimated or anticipated salvage and subrogation

to be disclosed as one number. She inquired if the Working Group would like to consider more granular disclosure in a

separate agenda item. The Working Group did not indicate an interest for a more granular disclosure. Mr. Hudson made a


motion, seconded by Mr. Ford, to expose the nonsubstantive revisions proposed by interested parties to clarify the reporting

of salvage and subrogation expenses. In addition, NAIC staff were directed to submit an annual statement blanks proposal if

needed. The motion passed unanimously.


Mr. Bruggeman directed the Working Group to agenda item 2015-23: Prepayment Penalties and Presentation of Callable

Bonds. Mr. Arpin advised that at the 2015 Fall National Meeting, the Working Group exposed revisions to various SSAPs

and reporting tools to clarify the appropriate reporting of prepayment penalties within the investment schedules, and he

summarized the key comments submitted by interested parties. Mr. Arpin noted that after review of the comment letter from

interested parties and work being completed by other NAIC working groups, NAIC staff are recommending that the Working

Group expose proposed revisions to SSAP No. 26—Bonds, SSAP No. 43R—Loan-Backed and Structured Securities and the

Annual Statement Blank and Instructions, which include: 1) revisions to SSAP No. 26 and SSAP No. 43R to clarify the

amount of investment income and/or realized capital gains/losses to be reported upon disposal of an investment; 2) a new

disclosure, which would require the reporting entity to identify the amount of investment income generated as a result of a

prepayment penalty and/or acceleration fee; 3) an effective date of Jan. 1, 2017, for the proposed revisions; 4) revisions to

Schedule D Part 4 and Part 5 to clarify the amount of investment income and/or realized capital gains/losses to be reported

upon disposal of an investment; and 5) revisions to Note 5 to reflect the proposed disclosure within SSAP No. 26 and SSAP

43R. He added that the Investment Reporting (E) Subgroup has approved revisions to be exposed by the Blanks (E) Working

Group, which would revise the bond characteristics column on Schedule D Part 1 to assist regulators in identifying securities

with callable features. As a result of the Subgroup’s work, NAIC staff believe that the previously exposed additional columns

to Schedule D are not necessary at this time and, therefore, have been not included in the exposed revisions.

Steve Burroughs (Eagle Investment Systems) noted that the proposed revisions to include the full amount of consideration on

Schedule D – Part 4 causes a conflict on the Schedule D verification roll-forward between years and would recommend

additional clarification language to ensure the security would roll appropriately in Schedule D. Mr. Hudson made a motion,

seconded by Mr. Houston, to expose the agenda item as recommended by NAIC staff. The motion passed unanimously.


Mr. Bruggeman directed the Working Group to agenda item 2015-27: Quarterly Reporting of Investment Schedules.

Ms. Gann advised that during the 2015 Fall National Meeting, the Working Group exposed a proposal for reporting entities

to provide quarterly, electronic-only data as an NAIC supplemental filing that includes the CUSIP, par value, book adjusted

carrying value (BACV) and fair value for Schedule D investments. Ms. Gann noted that interested parties had provided

comments on the exposed proposal, indicating that they do not support any additional quarterly investment reporting.

However, as detailed in the interested parties’ comment letter, if regulators are going to pursue a requirement to provide full

investment holdings, they request consideration of the following alternatives: 1) hire a consultant to help NAIC staff

aggregate investment data; 2) expand time to complete the electronic-only supplemental filing; and 3) replace quarterly

acquisition and disposition schedules with a schedule of owned holdings.

In response to an inquiry from Mr. Hendler, Mr. Bruggeman confirmed that the intent is to expose all three alternatives.

Mr. Bruggeman noted that the intent of exposure is to obtain more information on the costs and benefits of the alternatives to

acquire more information before going forward in making a policy decision. He advised that this exposure will be

specifically highlighted to the Accounting Practices and Procedures (E) Task Force so they can be familiar with the

discussion before the policy decision proceeds to the Task Force. Mr. Bruggeman noted that all of the alternatives have a cost

involved, and the various approaches funnel the additional costs differently between the NAIC and reporting entities. Mr.

Ford made a motion, seconded by Mr. Hudson, to expose the alternatives suggested by interested parties, with a request for

comments and benefits on each. The motion passed unanimously.

Mr. Bruggeman also clarified that for the alternative to replace quarterly acquisition and disposition schedules with full

investment schedules, there would be some quarterly schedules that would be retained, such as Schedule D – Part 5, which

details acquisition and dispositions that occur within the quarter. Ms. Gann identified that other elements with regards to that

alternative were noted in the meeting agenda to be included in the exposure:


The proposal would only be for Schedule D investments. Other investment schedules (e.g., Schedule DB) would

continue with the quarterly acquisition/disposition activity.

The annual reporting of acquisition/dispositions (Schedule D – Part 3 and Schedule D – Part 4) would still be

required in the annual financial statements.

The Schedule D verification would still be required quarterly.

The Schedule D – Part 1B, which shows the acquisition/disposition and nontrading activity by NAIC designation,

and Schedule D – Part 5, which shows items acquired and disposed in the same quarter, would still be required

quarterly.


Mr. Bruggeman directed the Working Group to agenda item 2015-41: 5*/6* Securities. Ms. Gann advised that during the

2015 Fall National Meeting, the Working Group had received a referral from the Valuation of Securities (E) Task Force

regarding the designation of 5* securities and exposed this agenda item requesting comments on whether statutory

accounting revisions are needed if the SVO no longer provides an NAIC 5* designation and if the SVO accepts an insurer

designation for 5*. She advised that the comments received from interested parties responded to the questions identified

within the exposed agenda item, and noted agreement for a new disclosure regarding 5* securities to provide regulators

transparency on the total insurance company population with a 5* designation. Ms. Weaver made a motion, seconded by Mr.

Fry, to expose disclosure revisions to SSAP No. 1 to capture current and prior period information on the number of 5*

securities, with the aggregate BACV and fair value for those securities. For non-AVR filers, the disclosure also captured

information on securities reported at amortized cost and those accounted for at fair value. With this motion, the Working

Group also directed NAIC staff to provide a referral response to the Valuation of Securities (E) Task Force identifying that

the Working Group will consider a new disclosure pertaining to 5* designations in order to provide regulators sufficient

information, but further statutory accounting revisions are not considered necessary at this time in response to the designation

process change. The motion passed.

e. Agenda Item 2015-43

Mr. Bruggeman directed the Working Group to agenda item 2015-43: EITF 99-02: Accounting for Weather Derivatives.

Mr. Arpin advised that at the 2015 Fall National Meeting, the Working Group exposed revisions to SSAP No. 86 to adopt

with modification EITF 99-02, to require weather derivatives to be reported and valued consistently with other derivatives in

SSAP No. 86. He noted that interested parties’ comments inquired whether the guidance in ASC 815 that provides a scope

exception for insurance contracts was included as part of the “adopt with modification.” Upon review, he noted that NAIC

staff’s interpretation is the guidance on the insurance contract scope exception in ASC 815-45-15-2 would be applicable for

inclusion in SSAP No. 86. To clarify the application of this scope exception, Mr. Arpin noted that NAIC staff have provided

an illustrative example. Mr. Hudson made a motion, seconded by Mr. Ford, to expose revisions to SSAP No. 86, which

incorporates the insurance contract scope exception detailed in ASC 815-45 and the proposed NAIC staff illustration. The

motion passed unanimously.

f. Agenda Item 2015-46

Mr. Bruggeman directed the Working Group to agenda item 2015-46: Correction of an Error. Mr. Arpin advised that at the

2015 Fall National Meeting, the Working Group exposed revisions to SSAP No. 3—Accounting Changes and Correction of

an Error to clarify that amended financial statements shall be filed for material accounting errors unless otherwise directed

by the domiciliary regulator, and that the guidance in SSAP No. 3 shall not preclude companies from amending their annual

or quarterly financial statement filings due to reporting errors. He added the NAIC Quality Assurance function frequently

receives responses from companies indicating that they do not need to correct reporting errors because of the language in

SSAP No. 3 for the correction of accounting errors. The main driver for the exposed revisions was to identify that the

correction of reporting errors does not fall within the scope of SSAP No. 3 as only accounting errors are governed by this

statement. He advised that NAIC staff are requesting direction from the Working Group on how to proceed with the agenda

item, as well as noting that NAIC staff have provided responses to the comments received from interested parties.


Mr. Hudson stated that he supports exposing the interested parties’ comments and NAIC staff responses. Ms. Weaver stated

that she is supportive of making it clear that SSAP No. 3 does not govern reporting errors and is supportive of the exposed

SSAP No. 3 language. She added that given that many states want to do away with hard copy filings, domiciliary state

regulators need to do their best to make sure the electronic filings are accurate, as they are frequently used for analysis by

non-domiciled state regulators. Keith Bell (Travelers) representing interested parties, noted that many in industry interpreted

the revisions to SSAP No. 3 differently from what NAIC staff had intended and, therefore, recommends re-exposing the

revisions to SSAP No. 3. He added that further analysis and discussion should occur regarding the communication of these

reporting errors and how they should be addressed. Mr. Hudson made a motion, seconded by Ms. Weaver, to expose the

proposed revisions to SSAP No. 3 and the NAIC staff responses to the interested parties’ comments. The motion passed

unanimously.

g. Agenda Item 2015-51

Mr. Bruggeman directed the Working Group to agenda item 2015-51: Definition of Notional. Ms. Gann advised that during

the 2015 Fall National Meeting, the Working Group exposed nonsubstantive revisions to SSAP No. 86 to incorporate a

definition of “notional principle.” Ms. Gann stated that interested parties had provided comments with suggested changes to

the exposed definition. Mr. Hudson made a motion, seconded by Mr. Houston, to expose the definition for “notional amount”

as suggested by interested parties. Ms. Gann noted that comments are specifically requested on whether the notional amount

initially determined under a derivative agreement can change in response to market changes, as well as requested the

involvement of those familiar with derivative transactions to review the proposed definition. The motion passed

unanimously.

h. Agenda Item 2016-04

Mr. Bruggeman directed the Working Group to agenda item 2016-04: SCA Data Capture Disclosure. Ms. Gann advised that

the purpose of the agenda item is to detail the proposed data-captured template for the SSAP No. 97 disclosure adopted by

the Working Group at the 2015 Fall National Meeting. This disclosure details the reported value for SCAs, as well as

information received after filing the SCA with the NAIC. She noted that the disclosure clarifies that SSAP No. 48 entities are

not included within the disclosure requirement, as well as incorporates codes to identify variations between the filed amount

and the amount reported at year end. Mr. Houston made a motion, seconded by Mr. Ford, to move this agenda item to the

active listing, categorized as nonsubstantive, and exposed the proposed data captured disclosure template and revisions to

SSAP No. 97. With the exposure of this item, a blanks proposal will be submitted to the Blanks (E) Working Group for

concurrent exposure so that the disclosure can be data-captured for year-end 2016. The motion passed unanimously.

i. Agenda Item 2016-05

Mr. Bruggeman directed the Working Group to agenda item 2016-05: Removal of Class 1 List from P&P Manual. Mr. Arpin

advised that the P&P Manual contains the NAIC’s Class 1 List, which identifies money market funds that can be reported as

bonds in part because they are permitted to report stable net asset values (NAV) under SEC regulations. He noted that due to

recent amendments of SEC regulations, the money market funds on the Class 1 List now fit the new SEC definition of

institutional prime funds, which require the use of a floating NAV. Therefore, such money market funds can no longer report

a stable NAV and accordingly will no longer be eligible for bond treatment under statutory accounting. He added that

effective Sept. 30, 2016, the Class 1 List and corresponding instructions will be removed from the P&P Manual. Ms. Rankin

made a motion, seconded by Ms. Weaver, to move this item to the active listing, categorized as nonsubstantive, and exposed

revisions to SSAP No. 26—Bonds, SSAP No. 30—Common Stock and SSAP No. 32—Preferred Stock to reflect the removal of

the Class 1 list from the P&P Manual. In addition, this exposure proposes revisions to specifically identify the remaining

“mutual fund lists” found in Part 6, Section 2 of the P&P Manual. With the exposure of this item, a blanks proposal will be

submitted to the Blanks (E) Working Group for concurrent exposure so that changes needed to remove reference to the

“Class 1 List” and reference the remaining lists can be included for year-end 2016. The motion passed unanimously.

j. Agenda Item 2016-06

Mr. Bruggeman directed the Working Group to agenda item 2016-06: ASU 2016-01 – Financial Instruments. Ms. Gann


advised that ASU 2016-01 was issued to amend guidance on the classification and measurement of financial instruments, as

well as certain disclosure requirements regarding the fair value of financial instruments. She advised that with the previous

rejection of GAAP guidance detailed in FAS 115, Accounting for Certain Investments in Debt and Equity Securities, as well

as the specific measurement guidance within the existing SSAPs for investments, NAIC staff were proposing preliminary

revisions to reject ASU 2016-01 for statutory accounting. However, with the extent of revisions throughout the FASB

codification to reflect ASU 2016-01, NAIC staff were still working to complete a comprehensive project to review all FASB

changes to verify whether any revisions should be reflected in statutory accounting. Mr. Hudson made a motion, seconded by

Ms. Weaver, to move this item to the active listing, categorized as nonsubstantive, and exposed revisions to reject ASU 2016-

01 in various SSAPs, with a request for comments on whether any statutory accounting revisions should be considered. The

motion passed.

k. Agenda Item 2016-07

Mr. Bruggeman directed the Working Group to agenda item 2016-07: ASU 2015-17 – Balance Sheet Classification of

Deferred Taxes. Ms. Gann advised that ASU 2015-17 was issued to simplify the presentation of deferred income taxes under

U.S. GAAP, and requires that deferred tax assets and deferred tax liabilities be presented as noncurrent amounts in the

statement of financial position. She stated that SSAP No. 101—Income Taxes provides specific guidance for the reporting of

deferred taxes and that the statutory financial statements do not present elements in terms of current and noncurrent. Mr.

Hudson made a motion, seconded by Ms. Weaver, to expose proposed revisions to SSAP No. 101 to reject ASU 2015-17.

The motion passed unanimously.

l. Agenda Item 2016-08

Mr. Bruggeman directed the Working Group to agenda item 2016-08: Method for Applying Discount Rates to Measure Net

Periodic Benefit Cost. Mr. Arpin advised that currently, as permitted under ASC 715-30-35-45, the most commonly used

approach for pension plans is to develop a single weighted-average discount rate, which is determined at the pension plan

measurement date based on the projected future benefit payments used in determining the pension obligation. In 2015,

representatives of the Big Four accounting firms met with SEC staff to discuss the possibility of applying an alternative

approach for using discount rates to measure the service cost and interest cost components of net periodic cost by using

individual duration-specific spot rates derived from an acceptable high-quality corporate bond yield curve and matched with

separate cash flows for each future year. This approach has frequently been referred to as the Spot Rate approach. He added

that in response to the request of the accounting firms, SEC staff indicated that it would not object to the use of the Spot Rate

approach; however, the SEC has not and does not plan on issuing any formal guidance on this matter.

Mr. Arpin stated that NAIC staff believe the Spot Rate approach would be appropriate for statutory accounting, as it provides

for a more precise estimate. Upon review of the current guidance in the FASB Codification and SSAP No. 102—Pensions

(literature adopted from FAS 87, Employers’ Accounting for Pensions), it was identified that two paragraphs from the Basis

of Conclusions of FAS 87 related to the use of weighted average discount rates. These paragraphs were subsequently

incorporated into the FASB Codification but were not adopted in SSAP No. 102 as this FASB guidance was originally within

the Basis of Conclusions and not within the FAS 87 adopted standard. Mr. Houston made a motion, seconded by Mr. Ford, to

move this item to the active listing, categorized as nonsubstantive and exposed revisions to SSAPs No. 92—Postretirement

Benefits Other than Pensions and SSAP No. 102, to incorporate the missing FAS 87 paragraphs with minor modifications

into SSAP No. 102, and to incorporate revisions to SSAP No. 102 and SSAP No. 92 to allow the Spot Rate method for

measuring service cost and interest cost components of net periodic benefit cost. The motion passed unanimously.

m. Agenda Item 2016-09

Mr. Bruggeman directed the Working Group to agenda item 2016-09: Collateral Received. Ms. Gann advised that this agenda

item was drafted in response to a regulator inquiry regarding whether the statutory financial statements included an easy way

to identify the total amount of collateral received and reported as assets in the reporting entity’s financial statements. The

regulator also noted that although a corresponding liability is generally recognized for the return of this collateral, the

reporting of this liability may not be consistent, and it may be combined with other elements. Therefore, it is not easily

identifiable in the financial statements. Pursuant to the regulator request, this information is needed to adjust assets and

liabilities to reflect the portion of assets held as collateral in order to accurately calculate analyst ratios and complete an


appropriate analyst assessment. Mr. Bruggeman stated that this disclosure is just asking for the amount of assets and

liabilities that are grossing up the balance sheet. Mr. Hudson made a motion, seconded by Ms. Rankin, to expose

nonsubstantive revisions to SSAP No. 1 to add a new disclosure to capture the aggregate total of collateral assets reported as

assets on the insurer’s financial statements and the corresponding liability to return. The Working Group also sponsored a

blanks proposal to allow for reporting in the 2016 year-end financial statements. The motion passed unanimously.

n. Agenda Item 2016-10

Mr. Bruggeman directed the Working Group to agenda item 2016-10: Appendix A-820. Ms. Marcotte advised that the

agenda item reviews the 2009 amendments to the Standard Valuation Law (#820) adopted by the Life and Health Actuarial

(A) Task Force. The amendments to the Model #820 incorporate language that references the Valuation Manual, which

provides detailed PBR requirements. She added that the agenda item incorporates relevant aspects of these amendments into

Appendix A-820 – Minimum Life and Annuity Standards. The recommended language was developed based on input from

an informal drafting group composed of industry, regulators and various stakeholders. She further noted that the Valuation

Manual contains companywide exemptions that are based on premium thresholds and other criteria. In some instances, these

exemptions could allow a reporting entity to continue to use prior formulaic methods. Therefore, it is important to keep in

mind that not all companies will be applying the same reserving methodology under PBR.

Ms. Marcotte advised that the proposed effective date of these revisions is Jan. 1, 2017. The Principle-Based Reserving

Implementation (EX) Task Force has adopted the Plan to Evaluate Substantially Similar Terms and Provisions to Determine

the Valuation Manual Operative Date, and it continues to track the thresholds specified in Section 11 of Model #820 that

must be met for the Valuation Manual to be operative. She added that it is anticipated that the effective date for this agenda

item would be updated, if necessary, prior to Working Group adoption, with any updates being based on the Principle-Based

Reserving Implementation (EX) Task Force’s evaluation. She noted that once the Valuation Manual becomes effective, there

is a three-year period before PBR would be required, which would begin 2020, with companies being allowed to implement

PBR any year during the three-year period, including the year the Valuation Manual becomes effective. She further noted

that consistent with other changes to Appendix A, Excerpts of Model Laws, the proposed changes focus on incorporating the

parts of Model #820 that are relevant to the financial statements. Mr. Houston made a motion, seconded by Ms. Rankin, to

move this item to the active listing, categorized as nonsubstantive, and exposed revisions to Appendix A-820, to incorporate

relevant aspects of Model #820. The motion passed unanimously.

o. Agenda Item 2016-11

Mr. Bruggeman directed the Working Group to agenda item 2016-11: ILS Data Capture Disclosure. Mr. Arpin advised that at

the 2015 Fall National Meeting, the Working Group adopted revisions to SSAP No. 1 to incorporate a disclosure to identify

possible proceeds for insurance-linked securities (ILS), which was required in the 2015 financial statements but was not data

captured. He noted that NAIC staff received several comments regarding the application and completion of the disclosure

under certain circumstances, including when the reporting entity could not accurately complete all components of the

disclosure, because they were not aware of certain actions taken by a reinsurer or reliable information regarding the number

of contracts was not available. As a result of these inquiries, NAIC staff worked with the Working Group chair to provide

limited application guidance for year-end 2015 by the cedent reporting entity, noting that this application guidance did not

represent authoritative literature. He added that elements from this application guidance have been incorporated into the

proposed revisions detailed in the agenda item. In addition, as noted at the 2015 Fall National Meeting, comments were

provided by the National Association of Mutual Insurance Companies (NAMIC), specifically requesting that the Working

Group consider potential revisions to the disclosure in 2016 to capture indemnity-based versus non-indemnity-based ILS.

Mr. Ford made a motion, seconded by Mr. Hudson, to move this item to the active listing, categorized as nonsubstantive, and

exposed proposed revisions to the annual statement instructions, which include the data-capture disclosure template for 2016

and language clarifying how disclosure components should be completed. Mr. Arpin added that in addition to the exposure,

NAIC staff are recommending that this disclosure template be used for data capture in the 2016 year-end financial statements

to allow for the compilation and review of the aggregate data. Upon review of this data in 2017, including its usefulness and

accuracy, NAIC staff would propose that the Working Group, if it desires, reassess this disclosure for possible modification,

including potential revisions to capture indemnity-based versus non-indemnity-based ILS). Additionally, with the exposure

of this item, a blanks proposal will be submitted to the Blanks (E) Working Group with a request for concurrent exposure so


that the disclosure can be data-captured for year-end 2016. The motion passed unanimously.

p. Agenda Item 2016-12

Mr. Bruggeman directed the Working Group to agenda item 2016-12: Policy Statement Revisions. Mr. Arpin advised that at

the 2015 Fall National Meeting, the Working Group adopted policy statement changes to disband the Emerging Accounting

Issues (E) Working Group and incorporate the interpretation process within the Working Group with a Jan. 1, 2016, effective

date. He noted that a few other proposed policy statement revisions in the original agenda item were deferred as a result of

comments received from interested parties, with direction from the Working Group to consider these revisions in a separate

agenda item. Mr. Arpin noted that the following previously deferred topics are considered within this agenda item: 1)

concurrent exposure of issue papers and related SSAPs; 2) definitions of substantive, including new SSAP and substantively

revised SSAP, nonsubstantive and interpretation revisions; and 3) adoption of revisions once exposure requirements are

satisfied. In addition, he added that the agenda item proposes further revisions to Appendix F—Policy Statements, including:

1) inclusion of an editorial process for the AP&P Manual; 2) issue papers for nonsubstantive revisions; 3) voting

requirements to adopt interpretations; and 4) interpretations temporarily overriding existing SSAP, or creating new SAP. Ms.

Rankin made a motion, seconded by Mr. Houston, to move this item to the active listing, categorized as nonsubstantive, and

exposed revisions to Appendix F. The motion passed unanimously.

q. Agenda Item 2016-13

Mr. Bruggeman directed the Working Group to agenda item 2016-13: Policy Statement on Coordination with P&P Manual,

SVO and Valuation of Securities (E) Task Force. Mr. Arpin advised that through discussions with the Valuation of Securities

(E) Task Force support staff and review of the P&P Manual and AP&P Manual, it was identified that no specific formal

guidance exists outlining the coordination and collaboration between: 1) the two manuals; 2) the Valuation of Securities (E)

Task Force and the Working Group; and 3) the Task Force and Working Group support staff. He added that on a Feb. 22

conference call, the Task Force exposed proposed revisions to the P&P Manual detailing a proposed coordination process.

During this call, the Task Force requested the Working Group staff proceed with presenting a proposed policy statement for

coordination with the Task Force so that the two documents can be concurrently reviewed. Ms. Rankin made a motion,

seconded by Mr. Ford, to move this item to the active listing, categorized as nonsubstantive, and exposed revisions to

Appendix F proposing a new policy statement detailing coordination with the P&P Manual, the SVO and the Valuation of

Securities (E) Task Force. The motion passed unanimously.

r. Agenda Item 2015-25

Mr. Bruggeman directed the Working Group to agenda item 2015-25: SCA Filing Guidance. Ms. Gann advised that during

the 2015 Summer National Meeting, the Working Group agreed to send a referral to the Valuation of Securities (E) Task

Force to review the placement of the SCA filing guidance in the P&P Manual and to coordinate revisions on the location of

the SCA filing guidance. A referral response was received from the Task Force on Feb. 23, 2016 (Attachment K). Pursuant to

that response, the Task Force agreed with retaining the filing requirement for SCAs within the P&P Manual, but that the bulk

of the SCA filing guidance and instructions be moved from the P&P Manual and into SSAP No. 97 or other statutory

accounting guidance. As detailed in the response, the Task Force identified that the calculation of the SCA value originates in

the statutory accounting guidance and is not based on an SVO credit-assessment. The Task Force identified that the ACLI

agreed that the SCA instructions should be transferred from the P&P Manual pending identification of a suitable location.

Ms. Gann informed that the agenda item proposes incorporating the filing guidance as a new exhibit to SSAP No. 97, but

another location, such as a new appendix to the P&P Manual, could also be considered. She noted that the revisions are

similar to the prior exposure, but include a new paragraph to clarify that SCA entities with an equity interest (common or

preferred stock) are subject to the filing guidance. It also clarifies that as joint ventures, partnership and limited liability

companies are accounted for under SSAP No. 48, those investments are not subject to the SSAP No. 97 SCA filing guidance.

Ms. Gann also noted that there are no current exclusions to the equity interest SCA filing requirements, except for domestic

SCA insurance company investments captured in paragraph 8.b.i of SSAP No. 97. Therefore, there are no exclusions for

immaterial and nonadmitted assets, and those items are to be filed. She advised that NAIC staff are charged with notifying

the reporting entities and state regulators when subsequent filings are not submitted, and a complete database of SSAP No. 97

SCAs is needed in order to comply with that notification requirement. Mr. Bruggeman stated that comments received should


be in line with the principles of SSAP No. 97. Mr. Hudson made a motion, seconded by Ms. Weaver, to expose the agenda

item, proposing a new appendix in SSAP No. 97 to capture the SCA filing process. The motion passed.

6. Provided Direction to NAIC Staff


Mr. Bruggeman directed the Working Group to agenda item 2013-36: Investment Classification. Ms. Gann advised that on

Feb. 22, the Working Group exposed a BlackRock paper proposing an approach for calculating a proxy for “amortized cost”

for SVO bond-approved ETFs. Ms. Gann noted that comments had been received from interested parties, which highlighted

that significant issues and questions had yet to be addressed with the proposal, as well as noted complexity in the proposed

approach. She also stated that additional comment letters had been received from smaller insurers, noting the benefit of

holding fixed income ETFs and the benefit these ETFs provide in terms of liquidity, low trading costs and diversification.

These comment letters stated support for BlackRock’s proposal.

In considering comments received, as well as the current inconsistencies that exist in reporting, Ms. Gann recommended that

the Working Group direct NAIC staff to draft guidance for subsequent exposure to allow for discussion during an interim

conference call, or at the Summer National Meeting, that incorporates the following changes to SSAP No. 26:

New measurement method guidance for SVO bond-approved ETFs and SVO-designated bond mutual funds.

Proposed guidance will provide reporting entities either the option to report bond-approved ETFs and bond mutual

funds at either a proxy for “amortized cost” or fair value (allowing net asset value [NAV] as a practical expedient).

The election must be irrevocable per bond-approved ETF/bond mutual fund (by CUSIP) as long as it is held. This

guidance will only be allowed for investments required to be reported at amortized cost by NAIC designation under

SSAP No. 26. With this proposal, investments that would be reported at the lower of amortized cost or fair value per

NAIC designation will be required to be reported at fair value.

If reporting at a proxy for “amortized cost,” the insurer will be required to have a designated approach for determining

the proxy of “amortized cost” (such as the calculation proposed by BlackRock). This approach would not be required

to be approved by the domiciliary state before initial application, but must be reviewable by the regulators, with the

domiciliary state reserving the right to disallow or require modifications to approaches they do not believe are

sufficient. This guidance will specifically identify that reporting at “historical” or “original” cost is not an acceptable

measurement method. Therefore, the method results with the systematic recognition of “amortization/accretion” of the

bond holdings in the ETF.

Disclosures will be required on the company election with specific information (e.g., BACV and fair value) on the

investments held at “amortized cost” or fair value.

In response to an inquiry from Mr. Bruggeman, Ms. Gann advised that she was anticipating that the use of fair value (NAV

as a practical expedient) would be the default option under the proposed guidance as reporting entities would need a

documented approach in order to determine a proxy for amortized cost. If they do not have a documented approach, then

reporting entities would be required to report the investments at fair value/NAV. Mr. Bruggeman specifically requested

comments on the designation of measurement method by CUSIP and whether that was a feasible reporting method. He also

noted that BlackRock is still working to respond to questions initially raised under the proposal, but the intent of those

preliminary questions was intended to see if the proposal was worthy of subsequent consideration. Based on feedback

received, the proposal appears to be a workable solution. Therefore, he suggested going forward with the drafting of

guidance, while Katie Garvey (BlackRock) works to respond to the remaining questions.

In response to an inquiry from Mr. Fry regarding the use of CUSIP as the determinant for measurement, Ms. Gann advised

that since it was not certain whether all ETF issuers—current and future—would be able to provide the elements needed to

use the BlackRock proposal, NAIC staff did not think it was feasible to require a measurement method designation for all

bond-approved ETFs held by the reporting entity. If a blanket measurement method was required, a reporting entity could be

required to hold all of their bond-approved ETFs at fair value simply because one issuer of an ETF the entity holds could not


provide the information to calculate the proxy for amortized cost. Mr. Bruggeman stated that the proposal to use CUSIP is a

starting point for discussion and requested comments on different approaches for grouping ETFs into the two measurement

methods. Mr. Fry stated support for the alternative measurement method to fair value, noting that this ETF asset class is

important for smaller insurance companies.

Mr. Armstrong inquired on whether each reporting entity could have a different process for calculating amortized cost under

the proposed guidance, and, if so, how a state analyst would be able to effectively review the calculations. Ms. Gann noted

that the guidance was drafted to not specify a particular approach as it was uncertain whether all issuers can follow the

elements within the BlackRock proposal. Based on recent comments received, it appears that more issuers are

communicating that they can administer the BlackRock proposal; however, it is uncertain whether all future issuers will be

familiar with the components and be able to comply with the approach. Ms. Gann stated that she assumes that most reporting

entities would use the BlackRock proposal, or something similar, but agreed that the possibility for different measurement

calculations could require additional discussion by the Working Group. Mr. Bruggeman noted that the BlackRock proposal

uses detailed cash flow elements that other issuers may not have in the same level of detail.

Ms. Walker inquired on how this guidance would be included in SSAP No. 26, particularly as these investments do not fit

within the definition of a bond. Ms. Gann responded that she was anticipating the inclusion of subparagraphs in SSAP No. 26

to detail the measurement method for bonds, mandatory convertibles, and these SVO-approved ETFs and bond mutual funds,

with additional guidance in a subsection to specifically identify the required components if using a documented approach for

a “proxy” amortized cost. Ms. Gann noted that if the Working Group would prefer, other options have been identified within

the agenda for consideration. These other options include: 1) retaining these investments within SSAP No. 26, but requiring a

fair value (NAV) measurement method; and 2) moving these investments to SSAP No. 30 and reporting these investments in

a manner consistent with common stock and mutual funds. With the second option, a referral could be provided to the Capital

Adequacy (E) Task Force, with a request to develop an RBC charge that is appropriate for these investments.

Ms. Gann noted that the current option was drafted as prior Working Group direction indicated support for retaining these

within SSAP No. 26, but these investments are outside the definition of a bond. Ms. Walker requested that the revisions to

SSAP No. 26 be drafted to indicate separate guidance for “bonds” from these “bond funds” to be clear that these investments

should not be considered a traditional bond. Ms. Gann stated that she would move forward with this direction.

Mr. Smith requested that a different term be used to reference the measurement method for these ETFs and bond mutual

funds instead of “proxy for amortized cost.” Mr. Smith noted that the measurement is not an amortized cost and that he

would not want anyone that is using the guidance to assume the approach is reflective of an amortized cost measurement.

Mr. Bruggeman stated that NAIC staff would work to propose a different measurement term.

Rose Albrizio (AXA Equitable), representing interested parties, stated support for the option approach, noting that there are

different views among the industry. She noted that many, particularly smaller companies, support the proxy for amortized

cost method; however, she said the BlackRock proposal does have some complexities that need to be considered. Ms.

Albrizio also stated that industry supports the continued retention of these items within SSAP No. 26, and Schedule D-Part 1,

with the RBC that is used for bonds. Dave Chellgren (Conning) inquired on the use of NAV and the recognition of changes

in the NAV. Ms. Gann stated that she would view the use of NAV as a practical expedient to fair value; therefore, changes in

the NAV would be recognized similar to change in fair value as unrealized gains or losses.

Scott Harrison (Alvarez & Marsal Insurance and Risk Advisory Services), representing Vanguard, stated support for the time

the Working Group has spent researching this issue, noting that the amortized cost proxy would be beneficial to small- and

medium-sized companies. As Vanguard had previously been noted as still reviewing the BlackRock proposal, Mr. Harrison

wanted to confirm that Vanguard has reviewed the proposal and is officially providing its unqualified support for the

approach presented in the BlackRock proposal. He stated support for the process going forward and will be prepared to work

with NAIC staff in addressing questions. Mr. Harrison stated that bond-ETFs are a relatively new market and that companies

that do not currently hold these investments may be interested in the measurement conclusion as it would affect their

decisions to acquire these investments. Mr. Bruggeman requested that industry further inquire into their state investment

laws, as regardless of the classification and measurement method determined by the Working Group, reporting entities would

ultimately be confined to their domiciliary state’s investments laws pertaining to measurement and investment limitations.


Katie Garvey (BlackRock) stated that in response to comments on the complexities of the proposal, she would be willing to

provide some clear and simple instructions, using an Excel spreadsheet, to illustrate the calculation.

Mr. Bruggeman requested that Ms. Garvey work with NAIC staff in providing this information. As a result of the discussion,

Mr. Bruggeman directed NAIC staff to prepare guidance detailing new measurement guidance for SVO bond-approved ETFs

and bond mutual funds in SSAP No. 26, following the approach recommended by NAIC staff to use fair value, allowing

NAV as a practical expedient, with an option to use a “proxy for amortized cost.” This draft guidance should consider the

comments received from Working Group members, including the separation of guidance in SSAP No. 26 and the use of

terminology other than “amortized cost.” Mr. Bruggeman stated that the Working Group members should look for this

information subsequent to the Summer National Meeting so that exposure can occur in the interim.

7. Received an Update on Projects and Referrals

a. Restricted Asset (E) Subgroup

Ms. Gann advised that the Restricted Asset (E) Subgroup met via conference call March 15 to discuss disclosure templates

for repurchase and reverse repurchase transactions. As a result of the call, the Subgroup exposed the disclosure templates, as

well as revisions to the disclosure requirements in SSAP No. 103, for a public comment period ending April 29. Ms. Gann

noted that the Subgroup is anticipating sending proposed revisions to the Working Group later this year.

b. Review of GAAP Exposures

Mr. Arpin advised that NAIC staff have reviewed the current U.S. GAAP exposures and have provided brief summaries of

the exposures for the Working Group to review. NAIC staff did not identify any exposures requiring Working Group

assessment during the comment period and would recommend review under the maintenance process once the final standards

are released. He further added that based on the discussions at the 2015 Fall National Meeting, the Working Group formally

submitted a comment letter in response to the prior FASB exposure drafts regarding materiality and disclosures.

c. Certified Reinsurer Public Web page

Mr. Arpin advised that at the 2015 Fall National Meeting, the Reinsurance (E) Task Force, on a recommendation from the

Reinsurance Financial Analysis (E) Working Group, directed NAIC staff to develop a public Web page detailing the certified

reinsurer and passporting process. In addition to increasing transparency on the process, this Web page is intended to assist a

company’s annual statement reporting of reinsurance with certified reinsurers. On Feb. 22, this Web page became accessible

to the public.

d. Industry Update on GAAP Pronouncements

Mike Monahan (ACLI) provided an update that in March, the FASB received its first iteration of the final standard pertaining

to insurance contracts. He stated that the process generally involves three to four versions, at approximately three months

each for the board members to review and offer comments and suggestions. He stated that the FASB members have indicated

that the first iteration was very preliminary; therefore, it is not expected that the final standard will be issued by the June 2017

target date. With regards to the FASB project for targeted improvements to insurance contracts, the FASB has completed

deliberations, and an exposure draft is expected to be released during the second half of 2016. Mr. Monahan noted that the

ACLI submitted a comment letter requesting a full 120-day exposure period, as the FASB had implied that since this issue

was only affecting one industry, less time could be considered. Mr. Monahan stated that the ACLI comment informed the

FASB that insurers are major players in the financial services industry and that the targeted improvements standard results in

significant changes that require a full exposure period.

Mr. Bell provided an industry update on their review of ASU 2015-09: Insurance - Disclosures About Short-Term Contracts,

noting that the ASU is effective for year-end 2016 for public companies and year-end 2017 for private companies. He

advised that industry formed a technical subgroup to review the guidance and has put together a paragraph-by-paragraph

comparison of the ASU to statutory accounting reporting and is currently working with the American Institute of Certified

Public Accountants (AICPA) to finalize a recommendation back to the Working Group.


Ms. Gann announced that the 2016 AP&P Manual is available. She informed the Working Group that issue papers,

superseded SSAPs and nullified interpretations (INTs) have been removed from the printed version, as they are not

traditionally updated after adoption; therefore, the Manual is only two volumes instead of three. It was previously concluded

that there is not a need to reprint these items for continued inclusion in the AP&P Manual, but they will be included on the

website for historical purposes and can be obtained from that location. She advised that the electronic version of the

publication is available on a USB drive, and that product will include the historical content.

Mr. Bruggeman noted that the comment deadline for exposed and new items is May 20, with the exception of agenda item

2016-03, which was exposed for a public comment period ending June 5. He added that the May 20 exposure time frame

should allow for a conference call of the Working Group prior to the Blanks (E) Working Group’s June conference call.

Having no further business, the Statutory Accounting Principles (E) Working Group adjourned.

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Attachment 2

Ref #2016-14

© 2016 National Association of Insurance Commissioners 1


Maintenance Agenda Submission Form

Form A

Issue: Inclusion of Swaptions

Check (applicable entity):

P/C Life Health

Modification of existing SSAP

New Issue or SSAP

Interpretation

Description of Issue: SSAP No. 86—Derivatives (SSAP No. 86) provides the statutory definition of a “derivative instrument” and

descriptions of derivative instruments. The Blanks (E) Working Group has received a request to include reporting

instructions for swaptions within Schedule DB - Part A, Options, Floors, Collars, Swaps and Forwards.

Concurrently with this consideration, NAIC staff recommends that information regarding swaptions be included

within SSAP No. 86 as an example of a derivative instrument.

The U.S. GAAP Codification provides little information on the specific term “swaption,” but does specifically

indicate that it is a derivative instrument, and uses it as an example as a ‘major type’ of credit derivative contracts:

815-10-15-120: An example of a contract with this form of net settlement is a forward contract that requires delivery of an exchange-traded equity security. Even though the number of shares to be delivered is the same as the notional amount of the contract and the price of the shares is the underlying, an exchange-traded security is readily convertible to cash. Another example is a swaption—an option to require delivery of a swap contract, which is a derivative instrument.

815-10-50-4L One way to present the information required by the preceding paragraph for groups of similar credit derivatives would be first to segregate the disclosures by major types of contracts (for example, single-name credit default swaps, traded indexes, other portfolio products, and swaptions) and then, for each major type, provide additional subgroups for major types of referenced (or underlying) asset classes (for example, corporate debt, sovereign debt, and structured finance). With respect to hybrid instruments that have embedded credit derivatives, the seller of the embedded credit derivative shall disclose the information required by the preceding paragraph for the entire hybrid instrument, not just the embedded credit derivatives.

The following information was also obtained from researching swaptions:

General Research: A swaption is an option granting its owner the right but not the obligation to enter into an

underlying swap. Although options can be traded on a variety of swaps, the term "swaption" typically refers to

options on interest rate swaps. There are two types of swaption contracts:

A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed

leg and receive the floating leg.

A receiver swaption gives the owner of the swaption the right to enter into a swap in which they will

receive the fixed leg, and pay the floating leg.

The buyer and seller of the swaption agree on:

The premium (price) of the swaption. (Price paid for the option aspect.)

https://en.wikipedia.org/wiki/Option_(finance)

https://en.wikipedia.org/wiki/Swap_(finance)

https://en.wikipedia.org/wiki/Interest_rate_swap

Attachment 2

Ref #2016-14


Length of the option period (which usually ends two business days prior to the start date of the underlying

swap),

The terms of the underlying swap, including:

o Notional amount (with amortization amounts, if any) (For a swaption, the notional principal is

the amount on which payments to be made on the underlying swap are calculated.)

o In the case of an interest rate swaption, the fixed rate (which equals the strike of the swaption)

o The frequency of observation of the swap (for example, in the case of an interest rate swap,

quarterly for payments based on 3 month LIBOR)

The participants in the swaption market are predominantly large corporations, banks, financial institutions and

hedge funds. End users such as corporations and banks typically use swaptions to manage interest rate risk arising

from their core business or from their financing arrangements. For example, a corporation wanting protection

from rising interest rates might buy a payer swaption. A bank that holds a mortgage portfolio might buy a receiver

swaption to protect against lower interest rates that might lead to early prepayment of the mortgages. A hedge

fund believing that interest rates will not rise by more than a certain amount might sell a payer swaption, aiming

to make money by collecting the premium. Major investment and commercial banks such as JP Morgan Chase,

Bank of America Securities and Citigroup make markets in swaptions in the major currencies, and these banks

trade amongst themselves in the swaption interbank market. The market making banks typically manage large

portfolios of swaptions that they have written with various counterparties. A significant investment in technology

and human capital is required to properly monitor the resulting exposure.

The swaption market has generally been over-the-counter (OTC), but in April 2016 the first swaption was cleared

through a clearing house. Legally, a swaption is a contract granting a party the right to enter an agreement with

another counterparty to exchange the required payments. The counterparties are exposed to each other's failure to

make scheduled payments on the underlying swap, although this exposure is typically mitigated through the use

of collateral agreements whereby margin is posted to cover the anticipated future exposure.

Advantages of a swaption: A swaption hedges the buyer against downside risk, as well as letting the buyer take

advantage of any upside benefits. That is, it gives the buyer the benefit of the agreed upon rate if it is more

favorable than the current market rate, with the flexibility of being able to enter into the current market swap rate

if it is preferable. The advantage of a swaption over a swap is that the buyer has an option, which means if the

market goes one way they can choose to either exercise or not. But the disadvantage is that there is a cost to the

option aspect, which if they choose not to exercise means they have incurred additional cost.

Existing Authoritative Literature: SSAP No. 86—Derivatives

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.

5. Derivative instruments include, but are not limited to; options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards, futures and any other agreements or instruments substantially similar thereto or any series or combination thereof.

https://en.wikipedia.org/wiki/Interest_rate_risk

https://en.wikipedia.org/wiki/JP_Morgan_Chase

https://en.wikipedia.org/wiki/Bank_of_America_Securities

https://en.wikipedia.org/wiki/Citigroup

https://en.wikipedia.org/wiki/Over-the-counter_(finance)

Attachment 2

Ref #2016-14


a. “Caps” are option contracts in which the cap writer (seller), in return for a premium, agrees to limit, or cap, the cap holder’s (purchaser) risk associated with an increase in a reference rate or index. For example, in an interest rate cap, if rates go above a specified interest rate level (the strike price or the cap rate), the cap holder is entitled to receive cash payments equal to the excess of the market rate over the strike price multiplied by the notional principal amount. Because a cap is an option-based contract, the cap holder has the right but not the obligation to exercise the option. If rates move down, the cap holder has lost only the premium paid. A cap writer has virtually unlimited risk resulting from increases in interest rates above the cap rate;

b. “Collar” means an agreement to receive payments as the buyer of an option, cap or floor and to make payments as the seller of a different option, cap or floor;

c. “Floors” are option contracts in which the floor writer (seller), in return for a premium, agrees to limit the risk associated with a decline in a reference rate or index. For example, in an interest rate floor, if rates fall below an agreed rate, the floor holder (purchaser) will receive cash payments from the floor writer equal to the difference between the market rate and an agreed rate multiplied by the notional principal amount;

d. “Forwards” are agreements (other than futures) between two parties that commit one party to purchase and the other to sell the instrument or commodity underlying the contract at a specified future date. Forward contracts fix the price, quantity, quality, and date of the purchase and sale. Some forward contracts involve the initial payment of cash and may be settled in cash instead of by physical delivery of the underlying instrument;

e. “Futures” are standardized forward contracts traded on organized exchanges. Each exchange specifies the standard terms of futures contracts it sponsors. Futures contracts are available for a wide variety of underlying instruments, including insurance, agricultural commodities, minerals, debt instruments (such as U.S. Treasury bonds and bills), composite stock indices, and foreign currencies;

f. “Options” are contracts that give the option holder (purchaser of the option rights) the right, but not the obligation, to enter into a transaction with the option writer (seller of the option rights) on terms specified in the contract. A call option allows the holder to buy the underlying instrument, while a put option allows the holder to sell the underlying instrument. Options are traded on exchanges and over the counter;

g. “Swaps” are contracts to exchange, for a period of time, the investment performance of one underlying instrument for the investment performance of another underlying instrument, typically, but not always, without exchanging the instruments themselves. Swaps can be viewed as a series of forward contracts that settle in cash and, in some instances, physical delivery. Swaps generally are negotiated over-the-counter directly between the dealer and the end user. Interest rate swaps are the most common form of swap contract. However, foreign currency, commodity, and credit default swaps also are common;

h. “Warrants” are instruments that give the holder the right to purchase an underlying financial instrument at a given price and time or at a series of prices and times outlined in the warrant agreement. Warrants may be issued alone or in connection with the sale of other securities, for example, as part of a merger or recapitalization agreement, or to facilitate divestiture of the securities of another business entity.

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC,

FASB, other State Departments of Insurance or other NAIC groups): The SAPWG has a current agenda item

to incorporate a definition for the term “notional” in SSAP No. 86 (agenda item 2015-51).

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None

Attachment 2

Ref #2016-14


Convergence with International Financial Reporting Standards (IFRS): N/A

Staff Recommendation:

Staff recommends that the Working Group move this item to the active listing, categorized as

nonsubstantive, and expose revisions to SSAP No. 86 to include information on “swaptions” as an example

of a derivative instrument.

Proposed Revisions to SSAP No. 86:

The paragraph is proposed as a new paragraph 5h (to follow swaps and options) with the rest of the paragraphs

being renumbered accordingly.

5. Derivative instruments include, but are not limited to; options, warrants used in a hedging

transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards, futures and any other agreements or instruments substantially similar thereto or any series or combination thereof.

f. “Options” are contracts that give the option holder (purchaser of the option rights) the right, but not the obligation, to enter into a transaction with the option writer (seller of the option rights) on terms specified in the contract. A call option allows the holder to buy the underlying instrument, while a put option allows the holder to sell the underlying instrument. Options are traded on exchanges and over the counter;

g. “Swaps” are contracts to exchange, for a period of time, the investment performance of one underlying instrument for the investment performance of another underlying instrument, typically, but not always, without exchanging the instruments themselves. Swaps can be viewed as a series of forward contracts that settle in cash and, in some instances, physical delivery. Swaps generally are negotiated over-the-counter directly between the dealer and the end user. Interest rate swaps are the most common form of swap contract. However, foreign currency, commodity, and credit default swaps also are common;

h. “Swaptions” are contracts granting the owner the right, but not the obligation, to enter into an underlying swap. Although options can be traded on a variety of swaps, the term “swaption” typically refers to options on interest rate swaps. A swaption hedges the buyer against downside risk, as well as lets the buyer take advantage of any upside benefits. That is, it gives the buyer the benefit of the agreed-upon rate if it is more favorable than the current market rate, with the flexibility of being able to enter into the current market swap rate if it is preferable. Conversely, the issuer of swaptions assumes the downside risk, but benefits from the amount paid for the swaption regardless if it is exercised by the buyer and the swap is entered into.

Staff Review Completed by:

Julie Gann, NAIC Staff

May 2016

Status:

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\2 - 16-14 - SSAP No. 86 -

Swaptions.docx

Attachment 3 Ref #2016-15


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

Form A

Issue: Change in Valuation Basis for Life Contracts Check (applicable entity): P/C Life Health

Modification of existing SSAP New Issue or SSAP Interpretation

Description of Issue: Several SSAPs contain accounting and reporting guidance for changes in valuation basis regarding loss reserves. The purpose of this agenda item is to update the existing guidance in SSAP No. 51—Life Contracts (SSAP No. 51) regarding which reserving changes will be recognized as a change in valuation basis under principle-based reserving. The existing guidance in SSAP No. 51 explicitly includes changes in assumptions as being a change in valuation basis. Under the principle-based reserving methodology, some of the reserving assumptions are expected to change annually. This agenda item recommends updating the change in valuation basis guidance in SSAP No. 51 for policies issued on or after the operative date of the Valuation Manual, which apply principle-based reserving. In addition, currently existing guidance will remain relevant for policies issued prior to the operative date of the Valuation Manual. The impact of a change in valuation basis is reported under changes to surplus in specific annual statement lines. The life annual statement reporting line is titled, Change in Reserve on Account of Change in Valuation Basis, (Increase) or Decrease. The health annual statement reporting line is titled, Change in Valuation Basis of Aggregate Policy and Claim Reserves. It should be noted that reporting changes in valuation basis in surplus is in contrast to most other changes in reserving, which are reflected in income. The proposed language identifies changes, which will be reflected as a change in valuation basis (e.g. changes in methodology and new CSO tables), and “routine” changes as required by the methodology, which will not be reflected as a change in valuation basis (e.g annual changes in assumptions required by the methodology). Existing Authoritative Literature: SSAP No. 3—Accounting Changes and Corrections of Errors

Change in Accounting Principle 3. A change in accounting principle results from the adoption of an accepted accounting principle, or method of applying the principle, which differs from the principles or methods previously used for reporting purposes. A change in the method of applying an accounting principle shall be considered a change in accounting principle. 4. A characteristic of a change in accounting principle is that it concerns a choice from among two or more statutory accounting principles. However, a change in accounting principle is neither (a) the initial adoption of an accounting principle in recognition of events or transactions occurring for the first time or previously immaterial in their effect, nor (b) the adoption or modification of an accounting principle necessitated by transactions or events that are clearly different in substance from those previously occurring.



5. The cumulative1 effect of changes in accounting principles shall be reported as adjustments to unassigned funds (surplus) in the period of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at that date if the new accounting principle had been applied retroactively for all prior periods. Change in Accounting Estimate 6. Changes in estimates used in accounting are necessary consequences of periodic presentations of financial statements which require estimating the effects of future events. Examples of items for which estimates are necessary include service lives of depreciable assets and changes in loss reserve estimates for property and casualty companies. Accounting estimates change as new events occur, as more experience is acquired, or as additional information is obtained. 7. A change in accounting estimate shall be included in the statement of income in the period when the change becomes known. 8. If the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, then the change shall be considered as a change in accounting estimate for purposes of applying the accounting principles set forth in this statement.

Disclosures 13. Disclosure of material changes in accounting and correction of errors shall include:

a. A brief description of the change, encompassing a general disclosure of the reason and justification for change or correction; b. The impact of the change or correction on net income, surplus, total assets, and total liabilities for the two years presented in the financial statements (i.e., the balance sheet and statement of income and operations); and c. The effect on net income of the current period for a change in estimate that affects several future periods, such as a change in the service lives of depreciable assets or actuarial assumptions affecting pension costs. Disclosure of the effect on those income statement amounts is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts; however, disclosure is recommended if the effect of a change in the estimate is material; and d. When subsequent financial statements are issued containing comparative restated results as a result of the filing of an amended financial statement, the reporting entity shall disclose that the prior period has been restated and the nature and amount of such restatement.

Footnote 1 If additional changes are identified in subsequent quarters of a fiscal year related to a change in accounting principles recognized initially during the first quarter, such changes shall be considered part of the cumulative effect of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at that date if the new accounting principle had been applied retroactively for all prior periods. For example, adjustments to an amount recorded as of January 1, 2001, would be recorded as changes in accounting principle rather than corrections of an error through the period of 2001.

SSAP No. 51—Life Contracts:

Change In Valuation Basis 34. A change in valuation basis shall be defined as a change in the interest rate, mortality assumption, or reserving method (e.g., net level, preliminary term, etc.) or other factors affecting the



reserve computation of policies in force and meets the definition of an accounting change as defined in SSAP No. 3—Accounting Changes and Corrections of Errors (SSAP No. 3). Consistent with SSAP No. 3, any increase (strengthening) or decrease (destrengthening) in actuarial reserves resulting from such a change in valuation basis shall be recorded directly to surplus rather than as a part of the reserve change recognized in the summary of operations. The impact on surplus is based on the difference between the reserve under the old and new methods as of the beginning of the year. This difference shall not be graded in over time unless an actuarial guideline adopted by the NAIC prescribes a new method and a specific transition that allows for grading.

Note that the following statements of statutory accounting principles also contain similar guidance regarding changes in valuation basis. If the Working Group determines updates to the change in valuation basis guidance is needed to implement principle-based reserving, the updates to these SSAPs will be addressed in a separate agenda item(s):

• SSAP No. 52—Deposit-Type Contracts: • SSAP No. 54— Individual and Group Accident and Health Contracts • SSAP No. 59—Credit Life and Accident and Health Insurance Contracts

The Life Annual Statement Instructions include the following in the Summary of Operations, Capital and Surplus Account:

The purpose of the Capital and Surplus Account is to delineate certain charges and credits not included in operations such as net capital gains and items pertaining to prior years and to reconcile the change in capital and surplus during the year. Line 43 – Change in Reserve on Account of Change in Valuation Basis, (Increase) or Decrease

Column 1 should equal (Exhibit 5A, Line 9999999, Column 4) x – 1.

Include: All reserve strengthening commitments of a permanent nature.

Exclude: Any deficiency reserves.

The Health Annual Statement Instructions include the following in the Statement of Revenue and Expenses, Capital and Surplus Account:

Line 35 – Change in Valuation Basis of Aggregate Policy and Claim Reserves

Refer to SSAP No. 54, Individual and Group Accident and Health Contracts, for accounting guidance.

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): The Statutory Accounting Principles (E) Working Group has been charged by the Principle-based Reserving (Ex) Implementation Task Force to coordinate with the Life Actuarial (A) Task Force on changes to the Accounting Practices and Procedures Manual related to the Valuation Manual VM-A, Requirements, and VM-C, Actuarial Guidelines, and other Valuation Manual requirements. This process will include the receipt of periodic reports on changes to the Valuation Manual on items that require coordination as well as the development of an accounting mechanism to address reserve volatility. On November 15, 2014, based on a recommendation of the PBR Blanks Reporting (EX) Subgroup, the PBR Review (EX) Working Group approved a referral of the question of how to determine the change in valuation basis for



principle-based reserving to the Life Actuarial (A) Task Force and the Statutory Accounting Principles (E) Working Group. Agenda item 2015-47: Principle-Based Reserving SSAP contains substantive revisions to SSAP No. 51—Life Contracts to incorporate references to the Valuation Manual and to facilitate the implementation of Principle-Based Reserving and was exposed on April 3, 2016. Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None. Convergence with International Financial Reporting Standards (IFRS): None. Staff Review Completed by: Robin Marcotte, NAIC Staff May 2016 Staff Recommendation: Staff recommends that the Working Group move this item to the active listing, categorized as substantive and expose revisions to SSAP No. 51 as illustrated below. In addition, staff should be directed to provide notification of the exposure to the Life Actuarial (E) Task Force. This recommendation was developed with input from an informal drafting group composed of regulators, industry and key stakeholders, whose input is gratefully acknowledged. Because of the complexity of the principle-based reserving methodology, the informal drafting group tried to provide high-level guidance with specific examples. The following summarizes key points in the proposed language:

1. Reporting - Recommends continuing the current reporting of the impact of a change in valuation basis in surplus in the change in valuation basis annual statement line.

2. Items included as a change in valuation basis - The scope of items that are a proposed to be included as a change in valuation basis for products subject to principle-based reserving under the NAIC Valuation Manual include items that represent changes in methodology or voluntary choices in the application of the methodology. Historically, new industry CSO mortality tables have been treated as a change in valuation basis and the proposed language recommends continuing this treatment.

3. Items excluded from a change in valuation basis – The principle-based reserving methodology requires a large number of assumptions to change based on experience. Updates to reserving assumptions based on experience as required under the existing methodology are not proposed to be reflected as a change in valuation basis. For example, a change from any of the three calculated reserves types (net premium reserve, deterministic or stochastic) to another as required by the principle-based reserving methodology would not be considered a valuation basis change. In addition, periodic updates to Valuation Manual tables such as the industry valuation basic tables, asset spread tables and default cost tables would not be considered a change in valuation basis.

4. Transition Guidance - Explicit guidance on the initial adoption and application of principle-based reserving is proposed to assist with implementation questions. The Valuation Manual requires prospective application, for policies issued on or after the operative date. Therefore, the change in valuation basis is not expected to result in a day one impact to surplus.



SSAP No. 51 proposed revisions for June 9, 2016 Working Group discussion (paragraph numbering reflects the impact of agenda item 2015-47): Reserve Recognition 3335. The difference between the policy reserves for life contracts at the beginning and end of the reporting period shall be reflected as the change in reserves in the summary of operations, except for any difference due to a change in valuation basis. Change In Valuation Basis 3436. A change in valuation basis for reserves determined under paragraphs 17-21, except for reserves defined under Actuarial Guideline XLIII—CARVM For Variable Annuities (AG 43), as detailed in Appendix C, shall be defined as a change in the interest rate, mortality assumption, or reserving method (e.g., net level, preliminary term, etc.) or other factors affecting the reserve computation of policies in force and meets the definition of an accounting change as defined in SSAP No. 3—Accounting Changes and Corrections of Errors (SSAP No. 3). 37. Changes in reserves developed under paragraph 22 or AG 43, should be reviewed to determine whether the change represents a change in valuation basis and if it meets the definition of a change in accounting as defined in SSAP No. 3.

a. Changes in principle-based reserving assumptions are often the result of updating assumptions

and other factors required by the existing reserving methodology. Reserve changes resulting from the application of principle-based reserving methodology including, but not limited to, updating assumptions based on reporting entity, industry or other experience, and having the reported reserve transition between net premium reserve, deterministic reserve or stochastic reserve, as required under existing guidance, shall not be considered a change in valuation basis. These types of changes also include, but are not limited to, periodic updates in Valuation Manual tables, such as industry valuation basic tables, asset spread tables and default cost tables.

b. A change in valuation basis for principle-based reserves shall include cases where the required reserve methodology has changed or the insurer makes a voluntary decision to choose one allowable reserving method over another. These types of changes include, but are not limited to, new standardized mortality tables such as CSO and regulatory changes in methodology.

38. Consistent with SSAP No. 3, any increase (strengthening) or decrease (destrengthening) in actuarial reserves resulting from such a change in valuation basis shall be recorded directly to surplus (under changes to surplus in the change in valuation basis annual statement line) rather than as a part of the reserve change recognized in the summary of operations. 3739. The impact of a change in valuation basis on surplus is based on the difference between the reported reserve under the old and new methods as of the beginning of the year. This difference shall not be graded in over time unless this statement an actuarial guideline adopted by the NAIC prescribes a new method and a specific transition that allows for grading. Some changes will meet the definition of a change in accounting as defined in SSAP No. 3 and a change in valuation basis as described in paragraphs 36-38, but the adjustment to surplus will be zero. This can happen when the change in valuation basis is prospective and only applies to new policies and reserves meaning that policies inforce for the prior year-end are not affected, or situations in which the change in reserving methodology did not change the reserves reported in the financial statements. The changes remain subject to the disclosures prescribed in SSAP No. 3. The Valuation Manual is effective prospectively for policies written on or after the operative date. Therefore, upon the initial prospective adoption of principle-based reserving, the change in valuation basis reflected as an adjustment to surplus will be zero. After initial adoption of the Valuation Manual, changes in valuation basis will need to be evaluated to determine the amount of any surplus adjustments. G:\DATA\Stat Acctg\1. Statutory\A. Maintenance\a. Form A\1. Active Form A's\2016\16-15 - Change in Valuation Basis.docx

103-1

Exposure Draft

SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

Notice of Public Hearing and Request for Written Comments

Basis for hearings. The Statutory Accounting Principles Working Group (SAPWG) will hold a public hearing to obtain

information from and views of interested individuals and organizations about the standards proposed in this Exposure Draft.

The SAPWG will conduct the hearing in accordance with the National Association of Insurance Commissioners (NAIC)

policy statement on open meetings. An individual or organization desiring to speak must notify the NAIC in writing by May

20, 2016. Speakers will be notified as to the date, location, and other details of the hearings.

Oral presentation requirements. The intended speaker must submit a position paper, a detailed outline of a proposed

presentation or comment letter addressing the standards proposed in the Exposure Draft by May 20, 2016. Individuals or

organizations whose submission is not received by that date will only be granted permission to present at the discretion of the

SAPWG chair. All submissions should be addressed to the NAIC staff at the address listed below.

Format of the hearings. Speakers will be allotted up to 10 minutes for their presentations to be followed by a period for

answering questions from the SAPWG. Speakers should use their allotted time to provide information in addition to their

already submitted written comments as those comments will have been read and analyzed by the SAPWG. Those

submissions will be included in the public record and will be available at the hearings for inspection.

Copies. Exposure Drafts can be obtained on the Internet at the NAIC Home Page (http://www.naic.org). The documents can

be downloaded using Microsoft Word.

Written comments. Participation at a public hearing is not a prerequisite to submitting written comments on this Exposure

Draft. Written comments are given the same consideration as public hearing testimony.

The Statutory Accounting Principles Statement of Concepts was adopted by the Accounting Practices & Procedures (EX4)

Task Force on September 20, 1994, in order to provide a foundation for the evaluation of alternative accounting treatments.

All issues considered by the SAPWG will be evaluated in conjunction with the objectives of statutory reporting and the

concepts set forth in the Statutory Accounting Principles Statement of Concepts. Whenever possible, establish a relationship

between your comments and the principles defining statutory accounting.

The exposure period is not meant to measure support for, or opposition to, a particular accounting treatment but rather to

accumulate an analysis of the issues from other perspectives and persuasive comments supporting them. Therefore, form

letters and objections without valid support for their conclusions are not helpful in the deliberations of the working group.

Comments should not simply register your agreement or disagreement without a detailed explanation, a description of the

impact of the proposed guidelines, or possible alternative recommendations for accomplishing the regulatory objective.

Any individual or organization may send written comments addressed to the Working Group to the attention of Julie Gann at

[email protected], Robin Marcotte at [email protected], Josh Arpin at [email protected] and Fatima Sediqzad at

[email protected] no later than May 20, 2016. Electronic submission is preferred. Julie Gann is the NAIC Staff that is the

project lead for this topic.

National Association of Insurance Commissioners

1100 Walnut Street, Suite 1500, Kansas City, MO 64106-2197

(816) 842-3600

Hearing Date: June 2016 Call or 2016 Summer NM Location: June 2016 Call or 2016 Summer NM

Deadline for Written Notice of Intent to Speak: May 20, 2016

Deadline for Receipt of Written Comments:

May 20, 2016

Attachment 4

mailto:[email protected]




SSAP No. 103 Statement of Statutory Accounting Principles

103-2

Attachment 4

103-1

Statement of Statutory Accounting Principles No. 103

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

Status

Type of Issue: Common Area

Issued: March 3, 2012

Effective Date: January 1, 2013

Affects: Supersedes SSAP No. 91R

Nullifies and incorporates INT 99-22, INT 03-05

Affected by: No other pronouncements

Interpreted by: INT 01-31, INT 04-21, INT 09-08

STATUS ....................................................................................................................................................................... 1

SCOPE OF STATEMENT ......................................................................................................................................... 3

SUMMARY CONCLUSION ...................................................................................................................................... 3

Accounting for Transfers and Servicing of Financial Assets ........................................................................................ 3 Accounting for Transfers of Participating Interests ....................................................................................................... 5 Accounting for Transfers of an Entire Financial Asset or Group of Entire Financial Assets ........................................ 6 Secured Borrowing ........................................................................................................................................................ 6 Recognition and Measurement of Servicing Assets and Liabilities .............................................................................. 7 Financial Assets Subject to Prepayment ........................................................................................................................ 7 Secured Borrowings and Collateral ............................................................................................................................... 7 Extinguishments of Liabilities ....................................................................................................................................... 8 Disclosures .................................................................................................................................................................... 9 Application Guidance .................................................................................................................................................. 16 Unit of Account ........................................................................................................................................................... 16 Participating Interests in an Entire Financial Asset ..................................................................................................... 17 Isolation Beyond the Reach of the Transferor and Its Creditors.................................................................................. 18 Conditions That Constrain a Transferee ...................................................................................................................... 19 Transferor’s Rights or Obligations to Reacquire Transferred Assets or Beneficial Interests ...................................... 20 Effective Control Over Transferred Financial Assets or Beneficial Interests .............................................................. 21 Agreement to Repurchase or Redeem Transferred Financial Assets ........................................................................... 21 Unilateral Ability to Cause the Return of Specific Transferred Financial Assets ....................................................... 22 Arrangements to Reacquire Transferred Financial Assets ........................................................................................... 22 Changes That Result in the Transferor’s Regaining Control of Financial Assets Sold ............................................... 23 Measurement of Interests Held after a Transfer of Financial Assets ........................................................................... 23 Assets Obtained and Liabilities Incurred as Proceeds ................................................................................................. 23 Participating Interests in Financial Assets That Continue to be Held by a Transferor ................................................ 23 Servicing Assets and Liabilities .................................................................................................................................. 23 Securitizations ............................................................................................................................................................. 25 Isolation of Transferred Financial Assets in Securitizations ....................................................................................... 25 Sales of Future Revenues ............................................................................................................................................ 27 Removal-of-Accounts Provisions ................................................................................................................................ 27 Short Sales ................................................................................................................................................................... 27 Securities Lending Transactions .................................................................................................................................. 28 Securities Lending Transactions – Collateral Requirements ....................................................................................... 29 Securities Borrowing Transactions – Sale Criteria is Not Met (Secured Borrowing) ................................................. 30 Repurchase Agreements and "Wash Sales" ................................................................................................................. 30

Attachment 4


103-2

Repurchase Agreements .............................................................................................................................................. 31 Repurchase Financing .................................................................................................................................................. 32 Reverse Repurchase Agreements ................................................................................................................................. 33 Collateral Requirements – Repurchase and Reverse Repurchase Agreements ............................................................ 33 Dollar Repurchase Agreements ................................................................................................................................... 34 Separate Transactions .................................................................................................................................................. 34 Offsetting ..................................................................................................................................................................... 34 Loan Syndications ....................................................................................................................................................... 35 Loan Participations ...................................................................................................................................................... 35 Factoring Arrangements .............................................................................................................................................. 35 Transfers of Receivables with Recourse ...................................................................................................................... 35 Extinguishments of Liabilities ..................................................................................................................................... 36 Relevant Literature ...................................................................................................................................................... 36 Effective Date and Transition ...................................................................................................................................... 39

REFERENCES .......................................................................................................................................................... 39

Relevant Issue Papers .................................................................................................................................................. 39

EXHIBIT A – GLOSSARY ...................................................................................................................................... 40

EXHIBIT B – ILLUSTRATIONS ............................................................................................................................ 45

Illustration—Recording Transfers with Proceeds of Cash, Derivatives, and Other Liabilities.................................... 45 Illustration—Recording Transfers of Participating Interests ....................................................................................... 46 Illustration—Sale of Receivables with Servicing Obtained ......................................................................................... 47 Illustration—Securities Lending Transaction Treated as a Secured Borrowing .......................................................... 48 Illustration - Short Sale Settled with Securities Borrowed Under a Secured Borrowing Agreement .......................... 50 Illustration—Initial Transfer and Repurchase Financing ............................................................................................. 51

Attachment 4

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities SSAP No. 103

103-3

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

SCOPE OF STATEMENT

1. Transfers of financial assets take many forms. Accounting for transfers in which the transferor

has no continuing involvement with the transferred financial assets or with the transferee are generally

straightforward. However, transfers of financial assets often occur in which the transferor has some

continuing involvement either with the assets transferred or with the transferee. Examples of continuing

involvement include, but are not limited to, servicing arrangements, recourse or guarantee arrangements,

agreements to purchase or redeem transferred financial assets, options written or held, derivative financial

instruments that are entered into contemporaneously with, or in contemplation of the transfer,

arrangements to provide financial support, pledges of collateral, and the transferor’s beneficial interests in

the transferred financial assets. Transfers of financial assets with continuing involvement raise issues

about the circumstances under which the transfers should be considered as sales of all or part of the assets

or as secured borrowings. An objective in accounting for transfers of financial assets is for each reporting

entity that is a party to the transaction to recognize only assets it controls and liabilities it has incurred, to

derecognize assets only when control has been surrendered, and to derecognize liabilities only when they

have been extinguished. Sales and other transfers may frequently result in a disaggregation of financial

assets and liabilities into components, which become separate assets and liabilities.

2. This statement focuses on the issues of accounting for transfers1 and servicing of financial assets

and extinguishments of liabilities. This statement establishes statutory accounting principles for transfers

and servicing of financial assets, including asset securitizations and securitizations of policy acquisition

costs, extinguishments of liabilities, repurchase agreements, repurchase financing and reverse repurchase

agreements, including dollar repurchase and dollar reverse repurchase agreements that are consistent with

the Statutory Accounting Principles Statement of Concepts and Statutory Hierarchy (Statement of

Concepts). This statement discusses generalized situations. Facts and circumstances and specific contracts

need to be considered carefully in applying this statement. Securitizations of nonfinancial assets are

outside the scope of this statement. Transfers of financial assets that are in substance real estate shall be

accounted for in accordance with SSAP No. 40R—Real Estate Investments. Additionally, retained

beneficial interests from the sale of loan-backed or structured securities are to be accounted for in

accordance with SSAP No. 43R—Loan-Backed and Structured Securities, Revised.

3. SSAP No. 25—Affiliates and Other Related Parties (SSAP No. 25) shall be followed for

accounting and disclosure requirements for all related party transactions.

4. SSAP No. 91R—Accounting for Transfers and Servicing of Financial Assets and Extinguishments

of Liabilities (SSAP No. 91R) has been superseded by this statement.

5. This statement does not address the securitization of mortality or morbidity risk. The National

Association of Insurance Commissioners’ (NAIC’s) Insurance Securitization Working Group of the

Financial Condition (E) Committee is charged with the development of model laws, model regulations

and proposed accounting guidance for the securitization of mortality and morbidity risk. When such

proposed accounting guidance is finalized the development of a statement will be considered.

SUMMARY CONCLUSION

Accounting for Transfers and Servicing of Financial Assets

6. The objective of paragraph 8 and related implementation guidance is to determine whether a

transferor has surrendered control over transferred financial assets. This determination must consider the

transferor’s continuing involvement in the transferred financial assets and requires the use of judgment

1 Terms defined in the glossary to this statement (Exhibit A) are set in boldface type.

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that must consider all arrangements or agreements made contemporaneously with, or in contemplation of,

the transfer, even if they were not entered into at the time of the transfer.

7. The requirements of paragraph 8 apply to transfers of an entire financial asset, transfers of a

group of entire financial assets, and transfers of a participating interest in an entire financial asset (all of

which are referred to collectively in this statement as transferred financial assets). A participating interest

has all of the following characteristics:

a. From the date of the transfer, it represents a proportionate (pro rata) ownership interest in

an entire financial asset. The percentage of ownership interests held by the transferor in

the entire financial asset may vary over time, while the entire financial asset remains

outstanding as long as the resulting portions held by the transferor (including any

participating interest retained by the transferor or its agents) and the transferee(s) meet

the other characteristics of a participating interest. For example, if the transferor’s interest

in an entire financial asset changes because it subsequently sells another interest in the

entire financial asset, the interest held initially and subsequently by the transferor must

meet the definition of a participating interest.

b. From the date of the transfer, all cash flows received from the entire financial asset are

divided proportionately among the participating interest holders in an amount equal to

their share of ownership. Cash flows allocated as compensation for services performed, if

any, shall not be included in that determination provided those cash flows are not

subordinate to the proportionate cash flows of the participating interest and are not

significantly above an amount that would fairly compensate a substitute service provider,

should one be required, which includes the profit that would be demanded in the

marketplace. In addition, any cash flows received by the transferor as proceeds of the

transfer of the participating interest shall be excluded from the determination of

proportionate cash flows provided that the transfer does not result in the transferor

receiving an ownership interest in the financial asset that permits it to receive

disproportionate cash flows.

c. The rights of each participating interest holder (including the transferor in its role as a

participating interest holder) have the same priority, and no participating interest holder’s

interest is subordinated to the interest of another participating interest holder. That

priority does not change in the event of bankruptcy or other receivership of the transferor,

the original debtor, or any other participating interest holder. Participating interest

holders have no recourse to the transferor, its agents or to each other, other than standard

representations and warranties, ongoing contractual obligations to service the entire

financial asset and administer the transfer contract, and contractual obligations to share in

any set-off benefits received by any participating interest holder. That is, no participating

interest holder is entitled to receive cash before any other participating interest holder

under its contractual rights as a participating interest holder. For example, if a

participating interest holder also is the servicer of the entire financial asset and receives

cash in its role as servicer, that arrangement would not violate this requirement.

d. No party has the right to pledge or exchange the entire financial asset unless all

participating interest holders agree to pledge or exchange the entire financial asset.

If a transfer of a portion of an entire financial asset meets the definition of a participating interest, the

transferor shall apply the guidance in paragraph 8. If a transfer of a portion of a financial asset does not

meet the definition of a participating interest, the transferor and transferee shall account for the transfer in

accordance with the guidance in paragraph 14 as a secured borrowing. However, if the transferor transfers

an entire financial asset in portions that do not individually meet the participating interest definition,

paragraph 8 shall be applied to the entire financial asset once all portions have been transferred.

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8. A transfer of an entire financial asset, a group of entire financial assets, or a participating interest

in an entire financial asset in which the transferor surrenders control over those financial assets shall be

accounted for as a sale if, and only if, all of the following conditions are met:

a. The transferred financial assets have been isolated from the transferor—put

presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or

other receivership. Transferred financial assets are isolated in bankruptcy or other

receivership only if the transferred financial assets would be beyond the reach of the

powers of a bankruptcy trustee or other receiver for the transferor.

b. Each transferee (or, if the transferee is an entity whose sole purpose is to engage in

securitization or asset-backed financing activities and that entity is constrained from

pledging or exchanging the assets it receives, each third-party holder of its beneficial

interests) has the right to pledge or exchange the assets (or beneficial interests) it

received, and no condition both constrains the transferee (or third-party holder of its

beneficial interests) from taking advantage of its right to pledge or exchange and provides

more than a trivial benefit to the transferor (paragraphs 43-46).

c. The transferor or its agents do not maintain effective control over the transferred financial

assets or third-party beneficial interests related to those transferred assets (paragraph 50).

Examples of a transferor’s effective control over the transferred financial assets include,

but are not limited to (1) an agreement that both entitles and obligates the transferor to

repurchase or redeem them before their maturity (paragraphs 51-52), (2) an agreement

that provides the transferor with both the unilateral ability to cause the holder to return

specific financial assets and a more-than-trivial benefit attributable to that ability, other

than through a cleanup call (paragraphs 53-57), or (3) an agreement that permits the

transferee to require the transferor to repurchase the transferred financial assets at a price

that is so favorable to the transferee that it is probable that the transferee will require the

transferor to repurchase them (paragraph 58).

Accounting for Transfers of Participating Interests

9. Upon completion of a transfer of a participating interest that satisfies the conditions to be

accounted for as a sale (paragraph 8), the transferor (seller) shall:

a. Allocate the previous carrying amount of the entire financial asset between the

participating interests sold and the participating interest that continues to be held by the

transferor on the basis of their relative fair values at the date of the transfer (paragraph

61).

b. Derecognize the participating interest(s) sold.

c. Recognize and initially measure at fair value servicing assets, servicing liabilities, and

any other assets obtained and liabilities incurred in the sale (such as cash) (paragraphs 62-

66).

d. Recognize in earnings any gain or loss on the sale.

e. Report any participating interest or interests that continue to be held by the transferor as

the difference between the previous carrying amount of the entire financial asset and the

amount derecognized.

The transferee shall recognize the participating interest(s) obtained, other assets obtained, and any

liabilities incurred and initially measure them at fair value.

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10. Upon completion of a transfer of participating interests that does not satisfy the conditions to be

accounted for as a sale, the guidance in paragraph 14 shall be applied.

Accounting for Transfers of an Entire Financial Asset or Group of Entire Financial Assets

11. Upon completion of a transfer of an entire financial asset or a group of entire financial assets that

satisfies the conditions to be accounted for as a sale (see paragraph 8), the transferor (seller) shall:

a. Derecognize the transferred financial assets;

b. Recognize and initially measure at fair value servicing assets, servicing liabilities, and

any other assets obtained (including a transferor’s beneficial interest in the transferred

financial assets) and liabilities incurred2 in the sale (paragraphs 60 and 62-66).

c. For reporting entities required to maintain an Interest Maintenance Reserve (IMR), the

accounting for realized and unrealized capital gains and losses shall be determined per

the guidance in the SSAP for the specific type of investment (e.g., SSAP No. 43R for

loan-backed and structured securities), or if not specifically stated in the related SSAP, in

accordance with SSAP No. 7—Asset Valuation Reserve and Interest Maintenance

Reserve. For reporting entities not required to maintain an IMR, realized capital gains and

losses shall be reported as net realized capital gains or losses in the statement of income,

and unrealized capital gains and losses shall be reported as net unrealized gains and

losses in unassigned funds (surplus).

The transferee shall recognize all assets obtained and any liabilities incurred, and initially measure them

at fair value.

12. Repurchase agreements, reverse repurchase agreements, repurchase financing, collateral

requirements and dollar repurchase agreements are described in paragraphs 93-109102-118. When an

asset is sold and the proceeds are reinvested within 30 days in the same or substantially the same security,

such transfers shall be considered to be wash sales and shall be accounted for as sales as discussed in

paragraphs 87-9296-101 and disclosed as required by paragraph 28. Unless there is a concurrent contract

to repurchase or redeem the transferred financial assets from the transferee, the transferor does not

maintain effective control over the transferred financial assets.

13. Upon completion of a transfer of an entire financial asset or a group of entire financial assets that

does not satisfy the conditions to be accounted for as a sale in its entirety, the guidance in paragraph 14

shall be applied.

Secured Borrowing

14. If a transfer of an entire financial asset, a group of entire financial assets, or a participating

interest in an entire financial asset does not meet the conditions for a sale in paragraph 8, or if a transfer of

a portion of an entire financial asset does not meet the definition of a participating interest (paragraph 7),

the transferor and transferee shall account for the transfer as a secured borrowing with pledge of collateral

(paragraph 19). The transferor shall continue to report the transferred financial assets in its statement of

financial position with no change in their measurement (that is, basis of accounting).

2 Some assets that might be obtained and liabilities that might be incurred include cash, put or call options that are held or written

(for example, guarantee or recourse obligations), forward commitments (for example, commitments to deliver additional

receivables during the revolving periods of some securitizations) and swaps (for example, provisions that convert interest rates

from fixed to variable).

Attachment 4


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Recognition and Measurement of Servicing Assets and Liabilities

15. An entity shall recognize and initially measure at fair value, a servicing asset or servicing liability

each time it undertakes an obligation to service a financial asset by entering into a servicing contract in

either of the following situations:

a. A servicer’s transfer of an entire financial asset, a group of entire financial assets, or a

participating interest in an entire financial asset that meets the requirements for sale

accounting; or

b. An acquisition or assumption of a servicing obligation that does not relate to financial

assets of the servicer.

An entity that transfers its financial assets to an entity in a transfer that qualifies as a sale in which the

transferor obtains the resulting securities and classifies them as debt securities shall separately recognize

its servicing assets or servicing liabilities.

16. A servicer that transfers or securitizes financial assets in a transaction that does not meet the

requirements for sale accounting and is accounted for as a secured borrowing with the underlying assets

remaining on the transferor’s balance sheet shall not be recognized as a servicing asset or servicing

liability.

17. If distinct servicing rights exist in accordance with the above guidelines, the reporting entity shall

recognize a servicing asset or liability. When the servicing fees to be received exceed the cost of servicing

the transferred assets, a servicing asset is recognized and nonadmitted. When the cost of servicing the

transferred assets is greater than the servicing fees to be received, a liability shall be recorded for the

excess to recognize this obligation. A corresponding loss shall be recorded through the Summary of

Operations in other income. Servicing assets or liabilities shall be measured subsequently at fair value at

each reporting date with fluctuations in fair value reported as unrealized gains and losses. Declines in fair

value which are determined to be other than temporary shall be recorded as realized losses.

Financial Assets Subject to Prepayment

18. Financial assets, except for instruments that are within the scope of SSAP No. 86, that can

contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially

all of its recorded investment shall be subsequently measured like investments in debt securities and loan-

backed and structured securities in accordance with SSAP No. 43R. Examples of such financial assets

include, but are not limited to, interest-only strips, other beneficial interests, loans, or other receivables.

Secured Borrowings and Collateral

19. A debtor may grant a security interest in certain assets to a lender (the secured party) to serve as

collateral for its obligation under a borrowing, with or without recourse to other assets of the debtor. An

obligor under other kinds of current or potential obligations, for example, interest rate swaps, also may

grant a security interest in certain assets to a secured party. If collateral is transferred to the secured party,

the custodial arrangement is commonly referred to as a pledge. Secured parties sometimes are permitted

to sell or repledge (or otherwise transfer) collateral held under a pledge. The same relationships occur,

under different names, in transfers documented as sales that are accounted for as secured borrowings

(paragraph 14). The accounting for noncash3 collateral by the debtor (or obligor) and the secured party

depends on whether the secured party or its agent has the right to sell or repledge the collateral and on

whether the debtor has defaulted. (Paragraphs 85-121 provide application guidance for securities lending,

securities borrowing, and repurchase agreements.)

3 Cash “collateral,” sometimes used, for example, in securities lending transactions, shall be derecognized by the payer and

recognized by the recipient, not as collateral, but rather as proceeds of either a sale or a borrowing.

Attachment 4


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a. If the secured party (transferee) or its agent has the right by contract or custom to sell or

repledge the collateral, then the debtor (transferor) shall report that asset in its balance

sheet.

b. If the secured party (transferee) sells collateral pledged to it, it shall recognize the

proceeds from the sale and its obligation to return the collateral. The sale of the collateral

is a transfer subject to the provisions of this statement.

c. If the debtor (transferor) defaults under the terms of the secured contract and is no longer

entitled to redeem the pledged asset, it shall derecognize the pledged asset, and the

secured party (transferee) shall recognize the collateral as its asset initially measured at

fair value or, if it has already sold the collateral, derecognize its obligation to return the

collateral.

d. Except as provided in paragraph 19.c., the debtor (transferor) shall continue to carry the

collateral as its asset, and the secured party (transferee) shall not recognize the pledged

asset.

20. Reporting entities may enter into certain transactions that require the granting of a security

interest in certain assets to another party to serve as collateral(INT 09-08)

for their performance under a

contract. If the assets pledged are recorded as admitted assets under SSAP No. 4—Assets and

Nonadmitted Assets (SSAP No. 4) and INT 01-31: Assets Pledged as Collateral (INT 01-31) and are not

impaired under the provisions of SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets

(SSAP No. 5R), the pledging entity records the collateral as an admitted asset until committing a contract

default that has not been cured in accordance with the contract provisions. At the time of an uncured

default, the provisions of paragraph 19 shall be used to determine the appropriate accounting treatment for

the collateral. If the secured party utilizes collateral to offset all or a portion of the liability owed by the

pledging entity as a result of the default, then the collateral amount utilized to offset the liability shall be

removed from the balance sheet. At the same time, the amount of the liability that was offset shall be

removed from the balance sheet since that obligation has been satisfied through the secured party’s

utilization of that collateral. To the extent that an uncured default remains without the secured party

utilizing the collateral to offset the obligation, the pledging insurer shall only record an admitted asset for

the amount of collateral that it can redeem.

Extinguishments of Liabilities

21. A debtor shall derecognize a liability if and only if it has been extinguished (see SSAP No. 15—

Debt and Holding Company Obligations (SSAP No. 15)). A liability has been extinguished if either of the

following conditions is met:

a. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the

creditor includes delivery of cash, other financial assets, goods, or services or

reacquisition by the debtor of its outstanding debt securities whether the securities are

canceled or held as so-called treasury bonds; or

b. The debtor is legally released4

from being the primary obligor under the liability, either

judicially or by the creditor.

22. An exchange of debt instruments with substantially different terms is also considered a debt

extinguishment and shall be accounted for in accordance with paragraph 21. A debtor’s exchange of debt

instruments (in a nontroubled debt situation) is accomplished with debt instruments that are substantially

4 If nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that

serves as sole collateral for that debt, the sale and related assumption effectively accomplish a legal release of the seller-debtor

for purposes of applying this Statement.

Attachment 4


103-9

different if the present value of the cash flows under the terms of the new debt instrument is at least 10

percent different from the present value of the remaining cash flows under the terms of the original

instrument. If the difference between the present value of the cash flows under the terms of the new debt

instrument and the present value of the remaining cash flows under the terms of the original debt

instrument is less than 10 percent, a creditor should evaluate whether the modification is more than minor

based on the specific facts and circumstances (and other relevant considerations) surrounding the

modification.

Disclosures

23. The principal objectives of the disclosures required by this statement are to provide users of the

financial statements with an understanding of all of the following:

a. A transferor’s continuing involvement (as defined in the glossary of this statement), if

any, with transferred financial assets.

b. The nature of any restrictions on assets reported by an entity in its statement of financial

position that relate to a transferred financial asset, including the carrying amounts of

those assets.

c. How servicing assets and servicing liabilities are reported under this statement.

d. For transfers accounted for as sales when a transferor has continuing involvement with

the transferred financial assets and for transfers of financial assets accounted for as

secured borrowings, how the transfer of financial assets affects a transferor’s financial

position, financial performance, and cash flows.

Those objectives apply regardless of whether this statement requires specific disclosures. The specific

disclosures required by this statement are minimum requirements and an entity may need to supplement

the required disclosures specified in paragraph 28 depending on the facts and circumstances of a transfer,

the nature of an entity’s continuing involvement with the transferred financial assets, and the effect of an

entity’s continuing involvement on the transferor’s financial position, financial performance, and cash

flows. Disclosures required by other Statement of Statutory Accounting Principles (SSAPs) for a

particular form of continuing involvement shall be considered when determining whether the disclosure

objectives of this statement have been met.

24. Disclosures required by this statement may be reported in the aggregate for similar transfers if

separate reporting of each transfer would not provide more useful information to financial statement

users. A transferor shall disclose how similar transfers are aggregated. A transferor shall distinguish

transfers that are accounted for as sales from transfers that are accounted for as secured borrowings. In

determining whether to aggregate the disclosures for multiple transfers, the reporting entity shall consider

quantitative and qualitative information about the characteristics of the transferred financial assets. For

example, consideration should be given, but not limited, to the following:

a. The nature of the transferor’s continuing involvement.

b. The types of financial assets transferred.

c. Risks related to the transferred financial assets to which the transferor continues to be

exposed after the transfer and the change in the transferor’s risk profile as a result of the

transfer.

25. The disclosures shall be presented in a manner that clearly and fully explains to financial

statement users the transferor’s risk exposure related to the transferred financial assets and any restrictions

on the assets of the entity. An entity shall determine, in light of the facts and circumstances, how much

Attachment 4


103-10

detail it must provide to satisfy the disclosure requirements of this statement and how it aggregates

information for assets with different risk characteristics. The entity must strike a balance between

obscuring important information as a result of too much aggregation and excessive detail that may not

assist financial statement users to understand the entity’s financial position. For example, an entity shall

not obscure important information by including it with a large amount of insignificant detail. Similarly, an

entity shall not disclose information that is so aggregated that it obscures important differences between

the different types of involvement or associated risks.

26. The disclosures in paragraph 28.f. of this statement apply to transfers accounted for as sales when

the transferor has continuing involvement with transferred financial assets as a result of a securitization,

asset-backed financing arrangement, or a similar transfer. If specific disclosures are required for a

particular form of the transferor’s continuing involvement by other SSAPs, the transferor shall provide

the information required in paragraphs 28.f.i.(a) and 28.f.ii.(a) of this statement with a cross-reference to

the separate notes to financial statements so a financial statement user can understand the risks retained in

the transfer. The entity need not provide each specific disclosure required in paragraphs 28.f.i.(b),

28.f.ii.(a)(1)–(4), and 28.f.ii.(b)–(e) if the disclosure is not required by other SSAPs and the objectives of

paragraph 23 are met. For example, if the transferor’s only form of continuing involvement is a

derivative, the entity shall provide the disclosures required in paragraphs 28.f.i.(a) and 28.f.ii.(a) of this

statement and the disclosures about derivatives required by applicable SSAPs. In addition, the entity

would evaluate whether the other disclosures in paragraph 28.f. are necessary for the entity to meet the

objectives in paragraph 23.

27. To apply the disclosures in paragraph 28, an entity shall consider all involvements by the

transferor or its agents to be involvements by the transferor.

28. A reporting entity shall disclose the following:

a. For collateral:

i. If the entity has entered into repurchase agreements or securities lending

transactions, its policy for requiring collateral or other security and the fair value

of the loaned security;

ii. If the entity has pledged any of its assets as collateral that are not reclassified and

separately reported in the statement of financial position pursuant to paragraph

19.a., the carrying amounts and classifications of both those assets and associated

liabilities as of the date of the latest statement of financial position presented,

including qualitative information about the relationship(s) between those assets

and associated liabilities. For example, if assets are restricted solely to satisfy a

specific obligation, the carrying amounts of those assets and associated liabilities,

including a description of the nature of restrictions placed on the assets, shall be

disclosed.

iii. If the entity or its agent has accepted collateral that it is permitted by contract or

custom to sell or repledge, the fair value as of the date of each statement of

financial position presented of that collateral and of the portion of that collateral

that it has sold or repledged, and information about the sources and uses of that

collateral. Additionally, the reporting entity shall disclose the aggregate amount

of contractually obligated open collateral positions (aggregate amount of

securities at current fair value or cash received for which the borrower may

request the return of on demand) and the aggregate amount of contractually

obligated collateral positions under 30-day, 60-day, 90-day, and greater than 90-

day terms.

Attachment 4


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iv. If the entity has accepted collateral that it is not permitted by contract or custom

to sell or repledge, provide detail on these transactions, including the terms of the

contract, and the current fair value of the collateral.

v. For all securities lending transactions, disclose collateral for transactions that

extend beyond one year from the reporting date; and

vi. For securities lending transactions administered by an affiliated agent in which

“one-line” reporting (paragraph 83.89.a.) of the reinvested collateral per

paragraph 8389.c. is optional, at the discretion of the reporting entity, disclose the

aggregate value of the reinvested collateral which is “one line” reported and the

aggregate value of items which are reported in the investment schedules

(paragraph 8389.b.). Identify the rationale between the items which are one line

reported and those that are investment schedule reported and if the treatment has

changed from the prior period and

vii. For securities lending transactions, include separately, the amount of any loaned

securities within the separate account and if the policy and procedures for the

separate account differ from the general account.

b. The reporting entity shall provide the following information by type of program

(repurchase agreement, securities lending or dollar repurchase agreement) with respect to

the reinvestment of the cash collateral and any securities which it or its agent receives as

collateral that can be sold or repledged.

i. The aggregate amount of the reinvested cash collateral (amortized cost and fair

value). Reinvested cash collateral shall be broken down by the maturity date of

the invested asset – under 30-day, 60-day, 90-day, 120-day, 180-day, less than 1

year, 1-2 years, 2-3 years and greater than 3 years.

ii. 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. For in-substance defeasance of debt

i. If debt was considered to be extinguished by in-substance defeasance, a general

description of the transaction and the amount of debt that is considered

extinguished at the end of each the period so long as that debt remains

outstanding.

d. For all servicing assets and servicing liabilities:

i. A description of the risks inherent in servicing assets and servicing liabilities and,

if applicable, the instruments used to mitigate the income statement effect of

changes in fair value to the servicing assets and servicing liabilities. (Disclosure

of quantitative information about the instruments used to manage the risks

inherent in servicing assets and servicing liabilities is encouraged but not

required.)

ii. The amount of contractually specified servicing fees, late fees and ancillary fees

earned for each period for which results of operations are presented, including a

description of where each amount is reported in the statement of income.

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iii. Quantitative and qualitative information about the assumptions used to estimate

the fair value (for example, discount rates, anticipated credit losses, and

prepayment speeds). (An entity that provides quantitative information about the

instruments used to manage the risks inherent in the servicing assets and

servicing liabilities, as encouraged by paragraph 28.d.i., also is encouraged, but

not required to disclose the quantitative and qualitative information about the

assumptions used to estimate the fair value of those instruments.

e. When servicing assets and servicing liabilities are subsequently measured at fair value:

i. For each class of servicing assets and servicing liabilities, the activity in the

balance of servicing assets and the activity in the balance of servicing liabilities

(including a description of where changes in fair value are reported in the

statement of income for each period for which results of operations are

presented), including, but not limited to, the following:

(a) The beginning and ending balances

(b) Additions (through purchases of servicing assets, assumptions of

servicing obligations, and recognition of servicing obligations that result

from transfers of financial assets)

(c) Disposals

(d) Changes in fair value during the period resulting from (i) changes in

valuation inputs or assumptions used in the valuation model and (ii)

other changes in fair value and a description of those changes

(e) Other changes that affect the balance and a description of those changes.

f. For securitizations, asset-backed financing arrangements, and similar transfers accounted

for as sales when the transferor has continuing involvement (as defined in the glossary)

with the transferred financial assets:

i. For each income statement presented:

(a) The characteristics of the transfer (including a description of the

transferor’s continuing involvement with the transferred financial assets,

the nature and initial fair value of the assets obtained as proceeds and the

liabilities incurred in the transfer, and the gain or loss from sale of

transferred financial assets. For initial fair value measurements of assets

obtained and liabilities incurred in the transfer, the following

information:

(1) The level within the fair value hierarchy in which the fair value

measurements in their entirety fall, segregating fair value

measurements using quoted prices in active markets for identical

assets or liabilities (Level 1), significant other observable inputs

(Level 2), and significant unobservable inputs (Level 3)

(2) The key inputs and assumptions5 used in measuring the fair

value of assets obtained and liabilities incurred as a result of the

5 If an entity has aggregated multiple transfers during a period in accordance with paragraphs 24 and 25, it may disclose the range

of assumptions.

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sale that relate to the transferor’s continuing involvement

(including, at a minimum, but not limited to, and if applicable,

quantitative information about discount rates, expected

prepayments including the expected weighted-average life of

prepayable6 financial assets, and anticipated credit losses,

including expected static pool losses7)

8

(b) Cash flows between a transferor and transferee, including proceeds from

new transfers, proceeds from collections reinvested in revolving-period

transfers, purchases of previously transferred financial assets, servicing

fees, and cash flows received from a transferor’s beneficial interests.

ii. For each statement of financial position presented, regardless of when the

transfer occurred:

(a) Qualitative and quantitative information about the transferor’s continuing

involvement with transferred financial assets that provides financial

statement users with sufficient information to assess the reasons for the

continuing involvement and the risks related to the transferred financial

assets to which the transferor continues to be exposed after the transfer

and the extent that the transferor’s risk profile has changed as a result of

the transfer (including, but not limited to, credit risk, interest rate risk,

and other risks), including:

(1) The total principal amount outstanding, the amount that has been

derecognized, and the amount that continues to be recognized in

the statement of financial position.

(2) The terms of any arrangements that could require the transferor

to provide financial support (for example, liquidity arrangements

and obligations to purchase assets) to the transferee or its

beneficial interest holders, including a description of any events

or circumstances that could expose the transferor to loss and the

amount of the maximum exposure to loss.

(3) Whether the transferor has provided financial or other support

during the periods presented that it was not previously

contractually required to provide to the transferee or its

beneficial interest holders, including when the transferor assisted

the transferee or its beneficial interest holders in obtaining

support, including:

(i.) The type and amount of support

(ii.) The primary reasons for providing the support

6 The weighted-average life of prepayable assets in periods (for example, months or years) can be calculated by multiplying the

principal collections expected in each future period by the number of periods until that future period, summing those products,

and dividing the sum by the initial principal balance.

7 Expected static pool losses can be calculated by summing the actual and projected future credit losses and dividing the sum by

the original balance of the pool of assets.

8 The timing and amount of future cash flows for transferor’s interests in transferred financial assets are commonly uncertain,

especially if those interests are subordinate to more senior beneficial interests. Thus, estimates of future cash flows used for a fair

value measurement depend heavily on assumptions about default and prepayment of all the financial assets transferred, because

of the implicit credit or prepayment risk enhancement arising from the subordination.

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(4) Information is encouraged about any liquidity arrangements,

guarantees, and/or other commitments provided by third parties

related to the transferred financial assets that may affect the

transferor’s exposure to loss or risk of the related transferor’s

interest.

(b) The entity’s accounting policies for subsequently measuring assets and

liabilities that relate to the continuing involvement with the transferred

financial assets;

(c) The key inputs and assumptions used in measuring the fair value of

assets or liabilities that relate to the transferor’s continuing involvement

(including, at a minimum, but not limited to, and if applicable,

quantitative information about discount rates, expected prepayments

including the expected weighted-average life of prepayable financial

assets, and anticipated credit losses, including expected static pool

losses);

(d) For the transferor’s interests in the transferred financial assets, a

sensitivity analysis or stress test showing the hypothetical effect on the

fair value of those interests (including any servicing assets or servicing

liabilities) of two or more unfavorable variations from the expected

levels for each key assumption that is reported under paragraph 28.f.ii.(c)

independently from any change in another key assumption, and a

description of the objectives, methodology, and limitations of the

sensitivity analysis or stress test

(e) Information about the asset quality of transferred financial assets and any

other assets that it manages together with them. This information shall be

separated between assets that have been derecognized and assets that

continue to be recognized in the statement of financial position. This

information is intended to provide financial statement users with an

understanding of the risks inherent in the transferred financial assets as

well as in other assets and liabilities that it manages together with

transferred financial assets. For example, information for receivables

shall include, but is not limited to:

(i.) Delinquencies at the end of the period; and

(ii.) Credit losses, net of recoveries, during the period.

g. Disclosure requirements for transfers of financial assets accounted for as secured

borrowing:

i. The carrying amounts and classifications of both assets and associated liabilities

recognized in the transferor’s statement of financial position at the end of each

period presented, including qualitative information about the relationship(s)

between those assets and associated liabilities. For example, if assets are

restricted solely to satisfy a specific obligation, the carrying amounts of those

assets and associated liabilities, including a description of the nature of

restrictions placed on the assets.

h. Description of any loaned securities, including the amount, a description of, and the

policy for, requiring collateral, and whether or not the collateral is restricted;

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i. A description of the securities underlying repurchase and reverse repurchase agreements,

dollar repurchase and dollar reverse repurchase agreements, including book values and

fair values, and maturities for the following categories: (i) securities subject to reverse

repurchase agreements; (ii) securities subject to repurchase agreements; (iii) securities

subject to dollar repurchase agreements; and (iv) securities subject to dollar reverse

repurchase agreements; and

j. A description of the terms of reverse repurchase agreements whose amounts are included

in borrowed money.

k. Disclose any transfers of receivables with recourse.

l. A reporting entity shall disclose the following information for wash sales, as defined in

paragraph 12, involving transactions for securities with a NAIC designation of 3 or

below, or that do not have an NAIC designation:

i. A description of the reporting entity’s objectives regarding these transactions;

ii. An aggregation of transactions by NAIC designation 3 or below, or that do not

have an NAIC designation;

iii. The number of transactions involved during the reporting period;

iv. The book value of securities sold;

v. The cost of securities repurchased; and

vi. The realized gains/losses associated with the securities involved.

m. All repurchase and reverse repurchase transactions and securities borrowing and

securities lending transactions shall be shown gross 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.

n. For reporting entities that have sold securities short within the reporting period, provide

the following disclosures:

i. For Unsettled Short Sale Transactions (outstanding at reporting date) – The

amount of proceeds received and the fair value of the securities to deliver, with

current unrealized gains and/or losses, and the expected settlement timeframe

(number of days). This disclosure shall include the fair value of current

transactions that were not settled within three days and the fair value of the short

sales expected to be satisfied by a securities borrowing transaction. This

disclosure shall be aggregated by security type. (For example, short sales of

common stock shall be aggregated and reported together.)

i.ii. For Settled Short Sale Transactions (settled during the reporting period) – The

aggregate amount of proceeds received and the fair value of the security as of the

settlement date with recognized gains and/or losses. This disclosure shall identify

the aggregated fair value of settled transactions that were not settled within three-

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days and the fair value of transactions that were settled through a securities

borrowing transaction.

29. Refer to the preamble for further discussion regarding disclosure requirements. The disclosures

required by paragraph 28 shall be made for the current quarter in the quarterly statement and for the year

in the annual statement.

Application Guidance

30. This application guidance describes certain provisions of this statement in more detail and

describes how they apply to certain types of transactions. It also discusses generalized situations. Facts

and circumstances and specific contracts need to be considered carefully in applying this statement. This

application guidance is an integral part of the standards provided in this statement.

31. Paragraph 6 of this statement states that the objective of paragraph 8 and related implementation

guidance is to determine whether a transferor has surrendered control over transferred financial assets.

Unit of Account

32. Paragraph 7 establishes the unit of account to which the sale accounting conditions in paragraph 8

shall be applied. Paragraph 7 states that paragraph 8 shall be applied to transfers of an entire financial

asset, transfers of a group of entire financial assets, and transfers of a participating interest in an entire

financial asset. Inherent in that principle is that to be eligible for sale accounting an entire financial asset

cannot be divided into components before a transfer unless all of the components meet the definition of a

participating interest.

33. The legal form of the asset and what the asset conveys to its holders shall be considered in

determining what constitutes an entire financial asset. The following examples illustrate the application of

what constitutes an entire financial asset:

a. A loan to one borrower in accordance with a single contract that is transferred to a

securitization entity before securitization shall be considered an entire financial asset.

Similarly, a beneficial interest in securitized financial assets after the securitization

process has been completed shall be considered an entire financial asset. In contrast, a

transferred interest in an individual loan shall not be considered an entire financial asset;

however, if the transferred interest meets the definition of a participating interest, the

participating interest would be eligible for sale accounting.

b. In a transaction in which the transferor creates an interest-only strip from a loan and

transfers the interest-only strip, the interest-only strip does not meet the definition of an

entire financial asset (and an interest-only strip does not meet the definition of a

participating interest; therefore, sale accounting would be precluded). In contrast, if an

entire financial asset is transferred to a securitization entity and the transfer meets the

conditions for sale accounting, the transferor may obtain an interest-only strip as

proceeds from the sale. An interest-only strip received as proceeds of a sale is an entire

financial asset for purposes of evaluating any future transfers that could then be eligible

for sale accounting.

c. If multiple advances are made to one borrower in accordance with a single contract (such

as a line of credit, credit card loan, or a construction loan), an advance on that contract

would be a separate unit of account if the advance retains its identity, does not become

part of a larger loan balance, and is transferred in its entirety. However, if the transferor

transfers an advance in its entirety and the advance loses its identity and becomes part of

a larger loan balance, the transfer would be eligible for sale accounting only if the

transfer of the advance does not result in the transferor retaining any interest in the larger

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balance or if the transfer results in the transferor’s interest in the larger balance meeting

the definition of a participating interest. Similarly, if the transferor transfers an interest in

an advance that has lost its identity, the interest must be a participating interest in the

larger balance to be eligible for sale accounting.

Participating Interests in an Entire Financial Asset

34. Paragraph 7.b. requires that all cash flows received from the entire financial asset be divided

among the participating interest holders (including any interest retained by the transferor or its agents) in

proportion to their share of ownership. That is, the participating interest definition does not allow for the

allocation of specified cash flows unless each cash flow is proportionately allocated to the participating

interest holders. For example, in the case of an individual loan in which the borrower is required to make

a contractual payment that consists of a principal amount and interest amount on the loan, the transferor

and transferee shall share in the principal and interest payments on the basis of their proportionate

ownership interest in the loan. In contrast, if the transferor is entitled to receive an amount that represents

the principal payments and the transferee is entitled to receive an amount that represents the interest

payments on the loan, that arrangement would not be consistent with the participating interest definition

because the transferor and transferee do not share proportionately in the cash flows received from the

loan. In other cases, a transferor may transfer a portion of an individual loan that represents either a senior

interest or a junior interest in an individual loan. In both of those cases, the transferor would account for

the transfer as a secured borrowing because the senior interest or junior interest in the loan does not meet

the requirements to be participating interests (see paragraph 38).

35. Paragraph 7.b. states that cash flows allocated as compensation for services performed, if any,

shall not be included in that determination provided that those cash flows are not subordinate to the

proportionate cash flows of the participating interest and are not significantly above an amount that would

fairly compensate a substitute service provider, should one be required, including any profit that would be

demanded in the marketplace. Cash flows allocated as compensation for services performed that are

significantly above an amount that would fairly compensate a substitute service provider would result in a

disproportionate division of cash flows of the entire financial asset among the participating interest

holders and, therefore, would preclude the portion of a transferred financial asset from meeting the

definition of a participating interest. Examples of cash flows that are compensation for services performed

include loan origination fees paid by the borrower to the transferor, fees necessary to arrange and

complete the transfer paid by the transferee to the transferor, and fees for servicing the financial asset.

36. The transfer of a portion of an entire financial asset may result in a gain or loss on the transfer

when the contractual interest rate on the entire financial asset differs from the market rate at the time of

transfer. Paragraph 7.b. states that any cash flows received by the transferor as proceeds of a transfer of a

participating interest shall be excluded from the determination of whether the cash flows of the

participating interest are proportionate provided that the transfer does not result in the transferor receiving

an ownership interest in the financial asset that permits it to receive disproportionate cash flows. For

example, if the transferor transfers an interest in an entire financial asset and the transferee agrees to

incorporate the excess interest (between the contractual interest rate on the financial asset and the market

interest rate at the date of transfer) into the contractually specified servicing fee, the excess interest would

likely result in the conveyance of an interest-only strip to the transferor from the transferee. An interest-

only strip would result in a disproportionate division of cash flows of the financial asset among the

participating interest holders and would preclude the portion from meeting the definition of a participating

interest.

37. Paragraph 7.c. requires that the rights of each participating interest holder (including the

transferor in its role as participating interest holder) have the same priority and that no participating

interest holder’s interest is subordinated to the interest of another participating interest holder. In certain

transfers, recourse is provided to the transferee that requires the transferor to reimburse any premium paid

by the transferee if the underlying financial asset is prepaid within a defined timeframe of the transfer

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date. Such recourse would preclude the transferred portion from meeting the definition of a participating

interest. However, once the recourse provision expires, the transferred portion shall be reevaluated to

determine if it meets the participating interest definition.

38. Paragraph 7.c. also requires that participating interest holders have no recourse to the transferor

(or its agents) or to each other, other than standard representations and warranties, ongoing contractual

obligations to service the entire financial asset and administer the transfer contract, and contractual

obligations to share in any set-off benefits. Recourse in the form of an independent third-party guarantee

shall be excluded from the evaluation of whether the participating interest definition is met. Similarly,

cash flows allocated to a third-party guarantor for the guarantee fee shall be excluded from the

determination of whether the cash flows are divided proportionately among the participating interest

holders.

Isolation Beyond the Reach of the Transferor and Its Creditors

39. The nature and extent of supporting evidence required for an assertion in financial statements that

an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial

asset (which are referred to collectively in this statement as transferred financial assets) have been

isolated—put presumptively beyond the reach of the transferor and its creditors, either by a single

transaction or a series of transactions taken as a whole—depend on the facts and circumstances. All

available evidence that either supports or questions an assertion shall be considered, including whether

the contract or circumstances permit the transferor to revoke the transfer. It also may include

consideration of the legal consequences of the transfer in the jurisdiction in which bankruptcy or other

receivership would take place, whether a transfer of financial assets would likely be deemed a true sale at

law (as described in paragraph 40.a.) or otherwise isolated (as described in paragraph 40.b.), whether the

transferor is affiliated with the transferee, and other factors pertinent under applicable law. Derecognition

of transferred financial assets is appropriate only if the available evidence provides reasonable assurance

that the transferred financial assets would be beyond the reach of the powers of a bankruptcy trustee or

other receiver for the transferor and its creditors (paragraph 74.c.). Transactions between related parties or

affiliates are accounted for in accordance with SSAP No. 25.

40. In the context of U.S. bankruptcy laws, a true sale opinion from an attorney is often required to

support a conclusion that transferred financial assets are isolated from the transferor, and its creditors. In

addition, a nonconsolidation opinion is often required if the transfer is to an affiliated entity. In the

context of U.S. bankruptcy laws:

a. A true sale opinion is an attorney’s conclusion that the transferred financial assets have

been sold and are beyond the reach of the transferor’s creditors and that a court would

conclude that the transferred financial assets would not be included in the transferor’s

bankruptcy estate.

b. A nonconsolidation opinion is an attorney’s conclusion that a court would recognize that

an entity holding the transferred financial assets exists separately from the transferor.

Additionally, a nonconsolidation opinion is an attorney’s conclusion that a court would

not order the substantive consolidation of the assets and liabilities of the entity holding

the transferred financial assets and the assets and liabilities of the transferor in the event

of the transferor’s bankruptcy or receivership.

A legal opinion may not be required if a transferor has a reasonable basis to conclude that the appropriate

legal opinion(s) would be given if requested. For example, the transferor might reach a conclusion

without consulting an attorney if (1) the transfer is a routine transfer of financial assets that does not result

in any continuing involvement by the transferor or (2) the transferor had experience with other transfers

with similar facts and circumstances under the same applicable laws and regulations.

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41. For insurers that are subject to conservatorship, or other receivership procedures, judgments about

whether transferred financial assets have been isolated need to be made in relation to the powers of

conservators or receivers in those jurisdictions.

42. Whether securitizations isolate transferred financial assets may depend on such factors as whether

the securitization is accomplished in one step or multiple step transfers (paragraphs 71-76). Some

common financial transactions, for example, typical repurchase agreements and securities lending

transactions, may isolate transferred financial assets from the transferor, although they may not meet the

other conditions for surrender of control (paragraph 8).

Conditions That Constrain a Transferee

43. Sale accounting is allowed under paragraph 8.b. only if each transferee (or, if the transferee is an

entity whose sole purpose is to engage in securitization or asset-backed financing arrangements and that

entity is constrained from pledging or exchanging the assets it receives, each third-party holder of its

beneficial interests) has the right to pledge or exchange the assets or beneficial interests it received, and

no condition both constrains the transferee (or third-party holder of its beneficial interests) from taking

advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor.

Many transferor-imposed or other conditions on a transferee’s right to pledge or exchange both constrain

a transferee from pledging or exchanging and, through that constraint, provide more than a trivial benefit

to the transferor. Judgment is required to assess whether a particular condition results in a constraint.

Judgment also is required to assess whether a constraint provides a more-than-trivial benefit to the

transferor. If the transferee is an entity whose sole purpose is to engage in securitization or asset-backed

financing activities, that entity may be constrained from pledging or exchanging the transferred financial

assets to protect the rights of beneficial interest holders in the financial assets of the entity. Paragraph 8.b.

requires that the transferor look through the constrained entity to determine whether each third-party

holder of its beneficial interests has the right to pledge or exchange the beneficial interests that it holds.

The considerations in paragraphs 47-49 apply to the transferee or the third-party holders of its beneficial

interests in an entity that is constrained from pledging or exchanging the assets it receives and whose sole

purpose is to engage in securitization or asset-backed financing activities

44. Some conditions may constrain a transferee from pledging or exchanging the financial asset and

may provide the transferor with more than a trivial benefit. For example, a provision that prohibits selling

or pledging a transferred loan receivable not only constrains the transferee but also provides the transferor

with the more-than-trivial benefit of knowing who holds the financial asset (a prerequisite to repurchasing

the financial asset) and of being able to block the financial asset from being transferred to a competitor for

the loan customer’s business. Transferor-imposed contractual constraints that narrowly limit timing or

terms, for example, allowing a transferee to pledge only on the day assets are obtained or only on terms

agreed to with the transferor, also constrain the transferee and presumptively provide the transferor with

more-than-trivial benefits. In some circumstances in which the transferor has no continuing involvement

with the transferred financial assets, some conditions may constrain a transferee from pledging or

exchanging the financial assets. If the transferor and its agents have no continuing involvement with the

transferred financial assets, the condition under paragraph 8.b. is met. For example, if a transferor

receives only cash in return for the transferred financial assets and the transferor and its agents have no

continuing involvement with the transferred financial assets, sale accounting is allowed under paragraph

8.b. even if the transferee entity is significantly limited in its ability to pledge or exchange the transferred

assets.

45. However, some conditions may not constrain a transferee from pledging or exchanging the

transferred financial asset. For example, a transferor’s right of first refusal on the occurrence of a bona

fide offer to the transferee from a third party presumptively would not constrain a transferee. This is

because the right in itself does not enable the transferor to compel the transferee to sell the financial asset

and the transferee would be in a position to receive the sum offered by exchanging the financial asset,

albeit possibly from the transferor rather than the third party. Further examples of conditions that

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presumptively would not constrain a transferee for purposes of this statement include (a) a requirement to

obtain the transferor’s permission to sell or pledge that is not to be unreasonably withheld, (b) a

prohibition on sale to the transferor’s competitor if other potential willing buyers exist, (c) a regulatory

limitation such as on the number or nature of eligible transferees (as in the case of securities issued under

Securities Act Rule 144A or debt placed privately), and (d) illiquidity, for example, the absence of an

active market. However, judgment is required to assess the significance of some conditions. For example,

a prohibition on sale to the transferor’s competitor would be a constraint if that competitor were the only

potential willing buyer other than the transferor.

46. A condition imposed by a transferor that constrains the transferee presumptively provides more

than a trivial benefit to the transferor. A condition not imposed by the transferor that constrains the

transferee may or may not provide more than a trivial benefit to the transferor. For example, if the

transferor refrains from imposing its usual contractual constraint on a specific transfer because it knows

an equivalent constraint is already imposed on the transferee by a third party, it presumptively benefits

more than trivially from that constraint. However, the transferor cannot benefit from a constraint if it is

unaware at the time of the transfer that the transferee is constrained.

Transferor’s Rights or Obligations to Reacquire Transferred Assets or Beneficial Interests

47. Some rights or obligations to reacquire transferred financial assets or beneficial interests both

constrain the transferee and provide more than a trivial benefit to the transferor, thus precluding sale

accounting under paragraph 8.b. A freestanding call option written by a transferee to the transferor may

benefit the transferor and, if the transferred financial assets are not readily obtainable in the marketplace,

is likely to constrain a transferee because the transferee might have to default if the call was exercised and

the transferee had pledged or exchanged the financial assets. For example, if a transferor in a

securitization transaction has a call option to repurchase third-party beneficial interests at the price paid

plus a stated return, that arrangement conveys more than a trivial benefit to the transferor (paragraphs 53

and 54). If the third-party holders of its beneficial interests are constrained from pledging or exchanging

their beneficial interests due to that call option, the transferor would be precluded from accounting for the

transfer of financial assets to the securitization entity as a sale. Similarly, a freestanding forward

purchase-sale contract between the transferor and the transferee on transferred financial assets not readily

obtainable in the marketplace would benefit the transferor and is likely to constrain a transferee in much

the same manner. Alternatively, freestanding rights to reacquire transferred assets that are readily

obtainable presumptively do not constrain the transferee from pledging or exchanging them and thus do

not preclude sale accounting under paragraph 8.b.

48. Other rights or obligations to reacquire transferred financial assets, regardless of whether they

constrain the transferee, may result in the transferor’s maintaining effective control over the transferred

financial assets, as discussed in paragraphs 50-58, thus precluding sale accounting under paragraph 8.c.

For example, an attached call in itself would not constrain a transferee who is able, by exchanging or

pledging the asset subject to that call, to obtain substantially all of its economic benefits. However, an

attached call could result in the transferor’s maintaining effective control over the transferred asset(s)

because the attached call gives the transferor the unilateral ability to cause whoever holds that specific

asset to return it.

49. The concept of qualified special-purpose entities (QSPEs) was previously included within SSAP

No. 91R. With the issuance of this Statement, this concept is no longer included within statutory

accounting guidance. Although this concept has been eliminated and is no longer a factor in determining

whether a transfer of assets qualifies for sale accounting, reporting entities may continue to form, conduct

transfers between, or have investments in trusts or other such legal vehicles that may have previously met

the conditions to be considered a QSPE. Accounting for transfers of assets between the insurer and such

trusts or other legal vehicles, including whether such transfers qualify for sale accounting, are subject to

the provisions of this Statement. As noted within paragraph 3, SSAP No. 25 shall be followed for

accounting and disclosure requirements for all related party transactions.

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Effective Control Over Transferred Financial Assets or Beneficial Interests

50. Judgment is required to assess whether the transferor maintains effective control over transferred

financial assets or third-party beneficial interests. The transferor must evaluate whether a combination of

multiple arrangements maintains effective control of transferred financial assets. When the transferee

issues beneficial interests in the transferred financial assets, the evaluation of whether the transferor

maintains effective control over the transferred financial assets also shall consider whether the transferor

maintains effective control over the transferred financial assets through its control over the third-party

beneficial interests. To assess whether the transferor maintains effective control over the transferred

financial assets, all continuing involvement by the transferor or its agents shall be considered continuing

involvement by the transferor. When assessing effective control, the transferor only considers the

involvements of an agent when the agent acts for and on behalf of the transferor. In other words, if the

transferor and transferee have the same agent, the agent’s activities on behalf of the transferee would not

be considered in the transferor’s evaluation of whether it has effective control over a transferred financial

asset. For example, an investment manager may act as a fiduciary (agent) for both the transferor and the

transferee; therefore, the transferor need only consider the involvements of the investment manager when

it is acting on its behalf.

Agreement to Repurchase or Redeem Transferred Financial Assets

51. An agreement that both entitles and obligates the transferor to repurchase or redeem transferred

financial assets from the transferee maintains the transferor’s effective control over those assets as

described in paragraph 8.c.(1) when all of the following conditions are met:

a. The financial assets to be repurchased or redeemed are the same or substantially the same

as those transferred (paragraph 52).

b. The agreement is to repurchase or redeem them before maturity, at a fixed or

determinable price.

c. The agreement is entered into contemporaneously with, or in contemplation of, the

transfer.

52. To be substantially the same, the financial asset that was transferred and the financial asset that is

to be repurchased or redeemed need to have all of the following characteristics:

a. The same primary obligor (except for debt guaranteed by a sovereign government, central

bank, government-sponsored enterprise or agency thereof, in which case the guarantor

and the terms of the guarantee must be the same);

b. Identical form and type so as to provide the same risks and rights;

c. The same maturity (or in the case of mortgage-backed pass-through and pay-through

securities similar remaining weighted-average maturities that result in approximately the

same market yield);

d. Identical contractual interest rates;

e. Similar assets as collateral; and

f. The same aggregate unpaid principal amount or principal amounts within accepted “good

delivery" standards for the type of security involved.

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Unilateral Ability to Cause the Return of Specific Transferred Financial Assets

53. A transferor maintains effective control over transferred financial assets when the transferor has

the unilateral ability to cause the holder to return specific financial assets and that ability provides more

than a trivial benefit to the transferor. A cleanup call, however, is permitted as an exception to that

general principle. A call on a transferred financial asset provides the transferor with effective control over

that financial asset if, under its price and other terms, the call provides the transferor with the unilateral

ability to reclaim the transferred financial asset and conveys more than a trivial benefit to the transferor. A

call or other right conveys more than a trivial benefit if the price to be paid is fixed, determinable, or

otherwise potentially advantageous, unless because that price is so far out of the money or for other

reasons it is probable when the option is written that the transferor will not exercise it. A transferor’s

unilateral ability to cause a securitization entity to return to the transferor or otherwise dispose of specific

transferred financial assets, for example, in response to its decision to exit a market or a particular

activity, would provide the transferor with effective control over the transferred financial assets if it

provides more than a trivial benefit to the transferor. However, a call on readily obtainable assets at fair

value may not provide the transferor with more than a trivial benefit. (Paragraph 56 provides an example

in which, due to the combination of arrangements, the transferor would maintain effective control.).

54. Effective control over transferred financial assets can be present even if the right to reclaim is

indirect. For example, if a call allows a transferor to buy back the beneficial interests at a fixed price, the

transferor may maintain effective control of the financial assets underlying those beneficial interests. If

the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing

activities, that entity may be constrained from choosing to pledge or exchange the transferred financial

assets. In that circumstance, any call held by the transferor on third-party beneficial interests is effectively

an attached call on the transferred financial assets. Depending on the price and other terms of the call, the

transferor may maintain effective control over the transferred financial assets.

55. An embedded call would not result in the transferor’s maintaining effective control because it is

the issuer rather than the transferor who holds the call and the call does not provide more than a trivial

benefit to the transferor. For example, a call embedded by the issuer of a callable bond or the borrower of

a prepayable mortgage loan would not provide the transferor with effective control over the transferred

financial asset.

56. A right to reclaim specific transferred financial assets by paying their fair value when reclaimed

generally does not maintain effective control when it does not convey a more than trivial benefit to the

transferor. However, a transferor has maintained effective control if it has such a right and also holds the

residual interest in the transferred financial assets. For example, if a transferor holds the residual interest

in securitized financial assets and can reclaim the transferred financial assets at termination of the

securitization entity by purchasing them in an auction, and thus at what might appear to be fair value, then

sale accounting for the transfer of those financial assets it can reclaim would be precluded. Such

circumstances provide the transferor with a more than trivial benefit and effective control over the

financial assets, because it can pay any price it chooses in the auction and recover any excess paid over

fair value through its residual interest in the transferred financial assets.

57. Removal-of-account provisions do not result in the transferor’s maintaining effective control, and

are thus precluded from being accounted for as sales under statutory accounting as discussed in paragraph

78.

Arrangements to Reacquire Transferred Financial Assets

58. A transferor maintains effective control over the transferred financial asset as described in

paragraph 8.c.(3) through an agreement that permits the transferee to require the transferor to repurchase

the transferred financial asset at a price that is so favorable to the transferee at the date of the transfer that

it is probable that the transferee will require the transferor to repurchase the transferred financial asset.

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For example, a put option written to the transferee generally does not provide the transferor with effective

control over the transferred financial asset. However, a put option that is sufficiently deep in the money

when it is written would provide the transferor effective control over the transferred financial asset

because it is probable that the transferee will exercise the option and the transferor will be required to

repurchase the transferred financial asset. In contrast, a sufficiently out-of-the-money put option held by

the transferee would not provide the transferor with effective control over the transferred financial asset if

it is probable when the option is written that the option will not be exercised. Likewise, a put option held

by the transferee at fair value would not provide the transferor with effective control over the transferred

financial asset.

Changes That Result in the Transferor’s Regaining Control of Financial Assets Sold

59. A change in law or other circumstance may result in a transferred portion of an entire financial

asset no longer meeting the conditions of a participating interest (paragraph 7) or the transferor’s

regaining control of transferred financial assets after a transfer that was previously accounted for as a sale,

because one or more of the conditions in paragraph 8 are no longer met. Such changes, unless they arise

solely from the initial application of this statement or from a change in market prices (for example, an

increase in price that moves into-the-money a freestanding call on a non-readily-obtainable transferred

financial asset that was originally sufficiently out-of-the-money that it was judged not to constrain the

transferee), are accounted for in the same manner as a purchase of the transferred financial assets from the

former transferee(s) in exchange for liabilities assumed (paragraph 9 or 11). (This “re-purchase” premise

is consistent with INT 04-21: EITF 02-09: Accounting for Changes that Result in a Transferor Regaining

Control of Financial Assets Sold.) After that change, the transferor recognizes in its financial statements

those transferred financial assets together with liabilities to the former transferee(s) or beneficial interest

holders of the former transferee(s). The transferor initially measures those transferred financial assets and

liabilities at fair value on the date of the change, as if the transferor purchased the transferred financial

assets and assumed the liabilities on that date. The former transferee would derecognize the transferred

financial assets on that date, as if it had sold the transferred financial assets in exchange for a receivable

from the transferor.

Measurement of Interests Held after a Transfer of Financial Assets

Assets Obtained and Liabilities Incurred as Proceeds

60. The proceeds from a sale of financial assets consist of the cash and any other assets obtained,

including beneficial interests and separately recognized servicing assets, in the transfer less any liabilities

incurred, including separately recognized servicing liabilities. Any asset obtained is part of the proceeds

from the sale. Any liability incurred, even if it is related to the transferred financial assets, is a reduction

of the proceeds. Any derivative financial instrument entered into concurrently with a transfer of financial

assets is either an asset obtained or a liability incurred and part of the proceeds received in the transfer.

All proceeds and reductions of proceeds from a sale shall be initially measured at fair value.

Participating Interests in Financial Assets That Continue to be Held by a Transferor

61. Participating interests in financial assets that continue to be held by a transferor are not part of the

proceeds of the transfer, and the carrying amount of those participating interests shall be measured at the

date of the transfer by allocating the previous carrying amount between the participating interests

transferred and sold, and the participating interests that are not transferred and continue to be held by a

transferor, based on their relative fair values.

Servicing Assets and Liabilities

62. Servicing of mortgage loans, credit card receivables, or other financial assets commonly includes,

but is not limited to, collecting principal, interest, and escrow payments from borrowers; paying taxes and

insurance from escrowed funds; monitoring delinquencies; executing foreclosure if necessary;

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temporarily investing funds pending distribution; remitting fees to guarantors, trustees, and others

providing services; and accounting for and remitting principal and interest payments to the holders of

beneficial interests or participating interests in the financial assets. Servicing is inherent in all financial

assets; it becomes a distinct asset or liability for accounting purposes only in the circumstances described

in paragraph 63. If a transferor sells a participating interest in an entire financial asset, it would recognize

a servicing asset or a servicing liability only related to the participating interest sold.

63. An entity that undertakes a contract to service financial assets shall recognize either a servicing

asset or a servicing liability, each time it undertakes an obligation to service a financial asset that (a)

results from a servicer’s transfer of an entire financial asset, a group of entire financial assets, or a

participating interest in an entire financial asset that meets the requirements for sale accounting, or (b) is

acquired or assumed and the servicing obligation does not relate to financial assets of the servicer.

However, if the transferor transfers the assets to an entity in a transfer that qualifies as a sale in which the

transferor obtains the resulting securities, and classifies them as debt securities, the servicing asset or

servicing liability may be reported together with the asset being serviced and not recognized separately. A

servicer of financial assets commonly receives the benefits of servicing—revenues from contractually

specified servicing fees, a portion of the interest from the financial assets, late charges, and other ancillary

sources, including “float,” all of which it is entitled to receive only if it performs the servicing—and

incurs the costs of servicing the financial assets. Typically, the benefits of servicing are expected to be

more than adequate compensation to a servicer for performing the servicing, and the contract results in a

servicing asset. However, if the benefits of servicing are not expected to adequately compensate a servicer

for performing the servicing, the contract results in a servicing liability. (A servicing asset may become a

servicing liability, or vice versa, if circumstances change, and the initial measure for servicing may be

zero if the benefits of servicing are just adequate to compensate the servicer for its servicing

responsibilities.) A servicer would account for its servicing contract that qualifies for separate recognition

as a servicing asset or a servicing liability initially measured at its fair value regardless of whether explicit

consideration was exchanged.

64. A servicer that transfers or securitizes financial assets in a transaction that does not meet the

requirements for sale accounting and is accounted for as a secured borrowing with the underlying

financial assets remaining on the transferor’s balance sheet shall not recognize a servicing asset or a

servicing liability.

65. A servicer that recognizes a servicing asset or servicing liability shall account for the contract to

service financial assets separately from those financial assets, as follows:

a. Report servicing assets separately from servicing liabilities as a nonadmitted asset in the

statement of financial position.

b. Initially measure servicing assets and servicing liabilities at fair value, (paragraph 15).

c. Account separately for rights to future interest income from the serviced assets that

exceed contractually specified servicing fees. Those rights are not servicing assets; they

are financial assets, effectively interest-only strips to be accounted for in accordance with

paragraph 18 of this statement. (Interest-only strips preclude a portion of a financial asset

from meeting the definition of a participating interest; see paragraph 36.)

d. Identify classes of servicing assets and servicing liabilities based on (1) the availability of

market inputs used in determining the fair value of servicing assets and servicing

liabilities, (2) an entity’s method for managing the risks of its servicing assets and

servicing liabilities, or (3) both.

e. Subsequently measure each class of separately recognized servicing assets and servicing

liabilities at fair value. Changes in fair value should be reported as unrealized gains and

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losses (paragraph 17). Declines in fair value which are determined to be other-than-

temporary shall be recorded as realized losses.

66. As indicated above, transferors sometimes agree to take on servicing responsibilities when the

future benefits of servicing are not expected to adequately compensate them for performing that servicing.

In that circumstance, the result is a servicing liability rather than a servicing asset. For example, if in the

transaction illustrated in Exhibit B – Illustration 3 the transferor had agreed to service the loans without

explicit compensation and it estimated the fair value of that servicing obligation at $50, net proceeds

would be reduced to $980, gain on sale would become a loss on sale of $20, and the transferor would

report a servicing liability of $50.

Securitizations

67. Financial assets, such as mortgage loans, are commonly transferred in securitizations.

Securitizations of mortgage loans may include pools of single-family residential mortgages or other types

of real estate mortgage loans, for example, multifamily residential mortgages and commercial property

mortgages. Both financial and nonfinancial assets can be securitized; life insurance policy loans, patent

and copyright royalties, and even taxi medallions also have been securitized. But securitizations of

nonfinancial assets are outside the scope of this statement.

68. An originator of a typical securitization (the transferor) transfers a portfolio of financial assets to

a securitization entity, commonly a trust. In “pass-through” and “pay-through” securitizations, receivables

are transferred to the entity at the inception of the securitization, and no further transfers are made; all

cash collections are paid to the holders of beneficial interests in the entity.

69. Beneficial interests in the securitization entity are sold to investors and the proceeds are used to

pay the transferor for the assets transferred financial assets. Those beneficial interests may comprise

either a single class having equity characteristics or multiple classes of interests, some having debt

characteristics and others having equity characteristics. The cash collected from the portfolio is

distributed to the investors and others as specified by the legal documents that established the entity.

70. Pass-through and pay-through securitizations that meet the conditions in paragraph 8 qualify for

sale accounting under this statement. All financial assets obtained and liabilities incurred by the transferor

of a securitization that qualifies as a sale shall be recognized and measured as provided in paragraphs 9

and 11; that includes the implicit forward contract to sell additional financial assets during a revolving

period, which may become valuable or onerous to the transferor as interest rates and other market

conditions change.

Isolation of Transferred Financial Assets in Securitizations

71. A securitization carried out in one transfer or a series of transfers may or may not isolate the

transferred financial assets beyond the reach of the transferor and its creditors. Whether it does depends

on the structure of the securitization transaction taken as a whole, considering such factors as the type and

extent of further involvement in arrangements to protect investors from credit, and interest rate, and other

risks, the availability of other financial assets, and the powers of bankruptcy courts or other receivers. The

discussion in paragraphs 72-74 relates only to the isolation condition in paragraph 8.a. The conditions in

paragraphs 8.b. and 8.c. also must be considered to determine whether a transferor has surrendered

control over the transferred financial assets.

72. In certain securitizations, a corporation that, if it failed, would be subject to the U.S. Bankruptcy

Code transfers financial assets to a securitization entity exchange for cash. The entity raises that cash by

issuing to investors beneficial interests that pass through all cash received from the financial assets, and

the transferor has no further involvement with the trust or the transferred financial assets. The Board

understands that those securitizations generally would be judged as having isolated the assets, because, in

the absence of any continuing involvement, there would be reasonable assurance that the transfer would

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be found to be a true sale at law that places the assets beyond the reach of the transferor, and its creditors,

even in bankruptcy or other receivership.

73. In other securitizations, a similar corporation transfers financial assets to a securitization entity in

exchange for cash and beneficial interests in the transferred financial assets. That entity raises the cash by

issuing to investors commercial paper that gives them a senior beneficial interest in cash received from

the financial assets. The beneficial interests obtained by the transferring corporation represent a junior

interest to be reduced by any credit losses on the financial assets in the entity. The senior beneficial

interests (commercial paper) are highly rated by credit rating agencies only if both (a) the credit

enhancement from the junior interest is sufficient and (b) the transferor is highly rated. Depending on

facts and circumstances, the Board understands that those “single-step” securitizations often would be

judged in the United States as not having isolated the financial assets, because the nature of the continuing

involvement may make it difficult to obtain reasonable assurance that the transfer would be found to be a

true sale at law that places the financial assets beyond the reach of the transferor and its creditors in U.S.

bankruptcy (paragraph 39). If the transferor fell into bankruptcy and the transfer was found not to be a

true sale at law, investors in the transferred financial assets might be subjected to an automatic stay that

would delay payments due them, and they might have to share in bankruptcy expenses and suffer further

losses if the transfer was recharacterized as a secured loan.

74. Still other securitizations use multiple transfers intended to isolate transferred financial assets

beyond the reach of the transferor and its creditors, even in bankruptcy. For example, in “two-step”

structures:

a. First, the corporation transfers a group of financial assets to a special-purpose corporation

that, although wholly owned, is so designed that the possibility is remote that the

transferor or its creditors could reclaim the financial assets. This first transfer is designed

to be judged to be a true sale at law, in part because the transferor does not provide

“excessive” credit or yield protection to the special-purpose corporation, and the Board

understands that transferred financial assets are likely to be judged beyond the reach of

the transferor or the transferor’s creditors even in bankruptcy or other receivership.

b. Second, the special-purpose corporation transfers a group of financial assets to a trust or

other legal vehicle with a sufficient increase in the credit or yield protection on the

second transfer (provided by a transferor’s junior beneficial interest or other means) to

merit the high credit rating sought by third-party investors who buy senior beneficial

interests in the trust. Because of that aspect of its design, that second transfer might not

be judged to be a true sale at law and, thus, the transferred financial assets could at least

in theory be reached by a bankruptcy trustee for the special-purpose corporation.

c. However, the special-purpose corporation is designed to make remote the possibility that

it would enter bankruptcy. For example, its charter forbids it from undertaking any other

business or incurring any liabilities, so that there can be no creditors to petition to place it

in bankruptcy. Furthermore, its dedication to a single purpose is intended to make it

extremely unlikely, even if it somehow entered bankruptcy, that a receiver under the U.S.

Bankruptcy Code could reclaim the transferred financial assets because it has no other

assets to substitute for the transferred financial assets.

75. The Board understands that the “two-step” securitizations described above, taken as a whole,

generally would be judged under present U.S. law as having isolated the financial assets beyond the reach

of the transferor and its creditors, even in bankruptcy or other receivership. However, each entity involved

in a transfer must be evaluated under the applicable accounting guidance.

76. The powers of receivers vary considerably by state of domicile, and therefore some receivers may

be able to reach financial assets transferred under a particular arrangement and others may not. A

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securitization may isolate transferred financial assets from a transferor subject to such a receiver and its

creditors even though it is accomplished by only one transfer directly to a securitization entity that issues

beneficial interests to investors and the transferor provides credit or yield protection.

Sales of Future Revenues

77. In addition to securitization of assets, some reporting entities have entered into transactions

characterized as a sale of future revenues. These transactions are sometimes referred to as securitizations

and are sometimes characterized as selling deferred acquisition costs. A sale of future revenues by a

reporting entity shall not result in the immediate recognition of income or surplus. The proceeds of any

such sale shall be established as a liability and shall be reduced as the proceeds are repaid.

Removal-of-Accounts Provisions

78. Many transfers of financial assets that involve transfers of a group of entire financial assets to an

entity whose sole purpose is to engage in securitization or asset-backed financing activities empower the

transferor to reclaim assets subject to certain restrictions. Such a power is sometimes called a removal-of-

accounts provision (ROAP). Transfers of assets that include ROAP provisions are precluded from being

accounted for as sales under statutory accounting and shall follow the guidance in paragraph 14 for

secured borrowing.

Short Sales

79. A short sale, as defined for statutory accounting, is the sale of a security that a selling reporting

entity (seller) does not own at the time of sale or a sale which is consummated by the delivery of a

security borrowed by, or for the account of, the seller. Short sales are normally settled by the delivery of a

security borrowed by or on behalf of the seller. The seller later closes out the position by returning the

borrowed security to the lender, typically by purchasing securities on the open market. If the price of the

security rises, short sellers who buy it at the higher price will incur a loss.

80. In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to

make delivery to the buyer within the standard three-day settlement period (T+3). As a result, the seller

fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").

81. Consistent with GAAP guidance, short-sales generally do not meet the definition of a derivative

unless a forward purchase or forward sale is involved. Even if a forward purchase or forward sale element

is included, if the contract meets the regular-way security trade exception, it would not be subject to the

derivative guidance.

82. State statutes or state laws may have restrictions regarding whether a reporting entity is permitted

to sell securities short. In situations in which state regulations do not prohibit, or otherwise provide

specific guidance, short-sale transactions shall be accounted for in accordance with this statement.

83. Selling a security short is an action by a reporting entity, which results with the reporting entity

recognizing proceeds from the sale and an obligation to deliver the sold security. For statutory accounting

purposes, obligations to deliver securities resulting from short sales shall be reported as contra-assets

(negative assets) in the respective investment schedule for the type of asset sold, with an investment code

detailing the item as a short sale. The obligation (negative asset) shall be initially reflected at fair value,

with changes in fair value recognized as unrealized gains and losses. These unrealized gains and losses

shall be realized upon settlement of the short sale obligation. Interest on short sale positions shall be

accrued periodically and reported as interest expense.

84. If short sales are supported by a securities borrowing transaction, the accounting and reporting

guidelines in paragraphs 93-95 shall also be followed.

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Securities Lending Transactions

79.85. Securities lending transactions are generally initiated by broker-dealers and other financial

institutions that need specific securities to cover a short sale or a customer’s failure to deliver securities

sold. Securities lending transactions typically extend less than one year. Transferees (borrowers) of

securities generally are required to provide collateral to the transferor (lender) of securities, commonly

cash but sometimes other securities or standby letters of credit, with a value slightly higher than that of

the securities borrowed. If the collateral is cash, the transferor typically earns a return by investing that

cash at rates higher than the rate paid or rebated to the transferee. If the collateral is other than cash, the

transferor typically receives a fee. Securities custodians or other agents commonly carry out securities

lending activities on behalf of clients. Because of the protection of collateral (typically valued daily and

adjusted frequently for changes in the market price of the securities transferred) and the short terms of the

transactions, most securities lending transactions in themselves do not impose significant credit risks on

either party. Other risks arise from what the parties to the transaction do with the assets they receive. For

example, investments made with cash collateral impose market and credit risks on the transferor.

80.86. If the criteria conditions in paragraph 8 (sales criteria) are met, securities lending transactions

shall be accounted for:

a. By the transferor as a sale of the “loaned” securities for proceeds consisting of the cash

collateral”9 and a forward repurchase commitment.

b. By the transferee as a purchase of the “borrowed” securities in exchange for the collateral

and a forward resale commitment. During the term of that agreement, the transferor has

surrendered control over the securities transferred and the transferee has obtained control

over those securities with the ability to sell or transfer them at will. In that case, creditors

of the transferor have a claim only to the “collateral” and the forward repurchase

commitment.

81.87. Many securities lending transactions are accompanied by an agreement that entitles and obligates

the transferor to repurchase or redeem the transferred financial assets before their maturity under which

the transferor maintains effective control over those financial assets (paragraphs 51-52). Those

transactions shall be accounted for as secured borrowings, in which cash (or securities that the holder or

its agent is permitted by contract or custom to sell or repledge) received as collateral is considered the

amount borrowed, the securities loaned are considered pledged as collateral against the cash or securities

borrowed and reclassified as set forth in paragraph 19.a., and any rebate paid to the transferee of securities

is interest on the cash or securities the transferor is considered to have borrowed.

82.88. The transferor of securities being “loaned” accounts for cash received in the same way whether

the transfer is accounted for as a sale or a secured borrowing. The cash received shall be recognized as the

transferor’s asset – as shall investments made with that cash, even if made by agents or in pools with

other securities lenders – along with the obligation to return the cash. If securities that may be sold or

repledged are received, the transferor of the securities being “loaned” accounts for those securities in the

same way as it would account for cash received.

83.89. The transferor of securities being “loaned” accounts for collateral received in the same way

whether the transfer is accounted for as a sale or a secured borrowing. The collateral received shall be

recognized as the transferor’s asset – as shall investments made with that collateral, even if made by

agents or in pools with other securities lenders – along with the obligation to return the collateral. If

9 If the “collateral” in a transaction that meets the criteria in paragraph 8 is a financial asset that the holder or its agent is

permitted by contract or custom to sell or repledge, that financial asset is proceeds of the sale of the “loaned” securities. To the

extent that the “collateral” consists of letters of credit or other financial instruments that the holder or its agent is not permitted by

contract or custom to sell or repledge, a securities lending transaction does not satisfy the sale criteria and is accounted for as a

loan of securities by the transferor to the transferee.

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securities that may be sold or repledged are received by the transferor or its agent, the transferor of the

securities being “loaned” accounts for those securities in the same way as it would account for collateral

received. Collateral which may be sold or repledged by the transferor or its agent is reflected on balance

sheet, along with the obligation to return the asset10. Collateral received which may not be sold or

repledged by the transferor or its agent is off balance sheet11. For collateral on the balance sheet, the

reporting is determined by the administration of the program.

a. Securities lending programs where the collateral received by the reporting entity’s

unaffiliated agent that can be sold or repledged is reported on the balance sheet. The

collateral received and reinvestment of that collateral by the reporting entity’s

unaffiliated agent shall be reflected as a one-line entry on the balance sheet (Securities

Lending Collateral) and a detailed schedule will be required each quarter and at year-end

to list the description of the collateral asset. This description shall include the NAIC

designation, fair value; book adjusted carrying value and maturity date. A separate

liability shall also be established to record the obligation to return the collateral

(Collateral from Securities Lending Activities)

b. Securities lending programs where the collateral received by the reporting entity that can

be sold or repledged is reported on the balance sheet. If the reporting entity is the

administrator of the program, then, the collateral received and any reinvestment of that

collateral is reported with the invested assets of the reporting entity based on the type of

investment (i.e. bond, common stock, etc). A separate liability shall also be established to

record the obligation to return the collateral (Collateral from Securities Lending

Activities)

c. Securities lending programs where the collateral received by the reporting entity’s

affiliated agent can report using either one line reporting (paragraph 8389.a.) or

investment schedule reporting (paragraph 8389.b.).

84.90. Reinvestment of the collateral by the reporting entity or its agent shall follow the same

impairment guidance as other similar invested assets reported on the balance sheet. Any fees received by

the transferor for loaning the securities shall be recorded as miscellaneous investment income.

Securities Lending Transactions – Collateral Requirements12

85.91. The reporting entity shall receive collateral having a fair value as of the transaction date at least

equal to 102 percent of the fair value of the loaned securities at that date. If at any time the fair value of

the collateral received from the counterparty is less than 100 percent of the fair value of the loaned

securities, the counterparty shall be obligated to deliver additional collateral by the end of the next

business day, the fair value of which, together with the fair value of all collateral then held in connection

with the transaction at least equals 102 percent of the fair value of the loaned securities. If the collateral

received from the counterparty is less than 100 percent at the reporting date, the difference between the

actual collateral and 100 percent will be nonadmitted. Collateral value is measured and compared to the

loaned securities in aggregate by counterparty.

10 If cash is received by the transferor or its agent and reinvested or repledged it is reported on balance sheet. It is explicitly

intended that when the lender bears reinvestment risk, that collateral is on balance sheet.

11 An example of collateral which is off balance sheet is when securities are received by the transferor or its agent in which the

collateral must be held and returned, without the ability to transfer or repledge the collateral. This would involve limited

situations in which the transferor or agent is prohibited from reinvesting the collateral.

12 The collateral requirements are required for determining admitted assets under statutory accounting, but the receipt of collateral

is not a factor in determining whether the transferor has effective control over the loaned assets in accordance with paragraph 51.

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86.92. In the event that foreign securities are loaned and the denomination of the currency of the

collateral is other than the denomination of the currency of the loaned foreign securities, the amount of

collateral shall be at least equal to 105 percent of the fair value of the loaned securities at that date. If at

any time the fair value of the collateral received from the counterparty is less than 102 percent of the fair

value of the loaned securities, the reporting entity must obtain additional collateral by the end of the next

business day, the fair value of which together with the fair value of all collateral then held in connection

with the transaction at least equals 105 percent of the fair value of the loaned securities. If the collateral

received from the counterparty is less than 100 percent at the reporting date, the difference between the

actual collateral and 100 percent will be nonadmitted. Collateral value is measured and compared to the

loaned securities in aggregate by counterparty.

Securities Borrowing Transactions – Sale Criteria is Not Met (Secured Borrowing)

93. In addition to being the transferor of securities being loaned and receiving collateral under a

securities lending arrangement, reporting entities may be a transferee of borrowed securities, and provide

collateral under a securities borrowing arrangement.

94. A transferee that sells borrowed securities shall recognize the proceeds from the sale of the

securities and an obligation, at fair value, to return the borrowed securities to the transferor. If cash

proceeds from the sale of borrowed securities are invested into other assets, or if non-cash proceeds are

received from the sale, the assets acquired shall be shown as assets on the reporting entity’s (transferee’s)

financial statements and accounted and reported in accordance with the SSAP for the type of assets

acquired. For all instances in which the transferee sells borrowed securities, the reporting entity shall

designate restricted assets equivalent to the fair value of the obligation to return the borrowed securities to

the transferor.

95. A reporting entity transferee that borrows securities captured under this section (sale criteria is

not met) and uses the borrowed securities to settle a short sale transaction shall eliminate the contra-asset

recognized under the short sale (paragraph 83) until the reporting entity acquires the security to return to

the transferor. The accounting / reporting for the short sale and the secured borrowing transaction shall be

separately reflected within the financial statements. As such, use of the borrowed asset for the short sale

would be similar to recognizing “proceeds” from selling a borrowed asset, as such, if the borrowed asset

is used to settle a short sale, the reporting entity shall recognize the borrowed asset and the obligation to

return the asset under the secured borrowing agreement until the asset has been returned under the secured

borrowing transaction. and recognize an obligation, at fair value, to return the borrowed securities.

Repurchase Agreements and "Wash Sales"

87.96. Government securities dealers, banks, other financial institutions, and corporate investors

commonly use repurchase agreements to obtain or use short-term funds. Under those agreements, the

transferor ("repo party") transfers a security to a transferee ("repo counterparty" or "reverse party") in

exchange for cash13 and concurrently agrees to reacquire that security at a future date for an amount equal

to the cash exchanged plus a stipulated "interest" factor. Repurchase agreements, reverse repurchase

agreements and dollar repurchase agreements meet the definition of assets as defined in SSAP No. 4—

Assets and Nonadmitted Assets and are admitted assets to the extent they conform to the requirements of

this statement.

88.97. Repurchase agreements can be effected in a variety of ways. Some repurchase agreements are

similar to securities lending transactions in that the transferee or its agent has the right to sell or repledge

the securities to a third party during the term of the repurchase agreement. In other repurchase

agreements, the transferee does not have the right to sell or repledge the securities during the term of the

13 Instead of cash, other securities or letters of credit sometimes are exchanged. Those transactions are accounted for in the same

manner as securities lending transactions (paragraphs 79-8685-92).

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repurchase agreement. For example, in a tri-party repurchase agreement, the transferor transfers securities

to an independent third-party custodian that holds the securities during the term of the repurchase

agreement. Also, many repurchase agreements are for short terms, often overnight, or have indefinite

terms that allow either party to terminate the arrangement on short notice. However, other repurchase

agreements are for longer terms, sometimes until the maturity of the transferred financial asset. Some

repurchase agreements call for repurchase of securities that need not be identical to the securities

transferred.

89.98. If the conditions in paragraph 8 are met, the transferor shall account for the repurchase agreement

as a sale of financial assets and a forward repurchase commitment, and the transferee shall account for the

agreement as a purchase of financial assets and a forward resale commitment. Other transfers that are

accompanied by an agreement to repurchase the transferred financial assets that may be accounted for as

sales include transfers with agreements to repurchase at maturity. (Repurchase financing is addressed in

paragraphs 96-101105-110.)

90.99. Furthermore, "wash sales" that previously were not recognized if the same financial asset was

purchased within 30 days before or after the sale shall be accounted for as sales under this statement.

Unless there is a concurrent contract to repurchase or redeem the transferred financial assets from the

transferee, the transferor does not maintain effective control over the transferred financial assets.

91.100. As with securities lending transactions, under many agreements to repurchase transferred

financial assets before their maturity the transferor maintains effective control over those financial assets.

Repurchase agreements that do not meet all the conditions in paragraph 8 shall be treated as secured

borrowings. Fixed-coupon and dollar-roll repurchase agreements, and other contracts under which the

securities to be repurchased need not be the same as the securities sold, qualify as borrowings if the return

of substantially the same (paragraph 52) securities as those concurrently transferred is assured. Therefore,

those transactions shall be accounted for as secured borrowings by both parties to the transfer.

92.101. If a transferor has transferred securities to an independent third-party custodian, or to a transferee,

under conditions that preclude the transferee from selling or repledging the assets during the term of the

repurchase agreement (as in most tri-party repurchase agreements), the transferor has not surrendered

control over those assets.

Repurchase Agreements

93.102. Repurchase agreements are defined as agreements under which a reporting entity sells securities

and simultaneously agrees to repurchase the same or substantially the same securities at a stated price on

a specified date. For securities to be substantially the same, the criteria defined in paragraph 52 must be

met, and for mortgage-backed securities excluding mortgage pass-through securities, the projected cash

flows of the securities must be substantially the same under multiple scenario prepayment assumptions.

94.103. For repurchase agreements that are accounted for as collateralized borrowings in accordance with

paragraph 91 100 of this statement, the underlying securities shall continue to be accounted for as an

investment owned by the reporting entity. The proceeds from the sale of the securities shall be recorded as

a liability, and the difference between the proceeds and the amount at which the securities will be

subsequently reacquired shall be reported as interest expense, calculated on the straight-line method or the

scientific interest (constant yield) method, over the term of the agreement.

95.104. Reporting entities generally take possession of the underlying collateral under repurchase

agreements and in many cases may obtain additional collateral when the estimated fair value of such

securities falls below their current contract value. However, to the extent that the current fair value of the

collateral is less than the recorded amount, the shortfall shall reduce the admitted asset value of the

repurchase agreement.

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Repurchase Financing

96.105. Repurchase financing is a repurchase agreement that relates to a previously transferred financial

asset between the same counterparties (or affiliates of either counterparty) that is entered into

contemporaneously with, or in contemplation of, the initial transfer.

97.106. A repurchase financing involves the transfer of a previously transferred financial asset back to the

initial transferor as collateral for a financing between the initial transferee (the borrower) and the initial

transferor (the lender). A repurchase financing also typically involves the initial transferor returning the

transferred financial asset (or substantially the same asset) to the initial transferee when the financing is

repaid on a stated date. A repurchase financing is entered into in contemplation of the initial transfer if

both transactions are considered together at the execution of the initial transfer.

98.107. When the transferor transfers a financial asset and also enters into a repurchase financing with the

transferee, there are typically three transfers of the financial assets:

a. Initial transfer – An initial transferor transfers a financial asset to an initial transferee.

b. Repurchase financing – The initial transferee (the borrower) transfer the previously

transferred financial asset back to the initial transferor (the lender) as collateral for a

financing between the initial transferor and initial transferee.

c. Settlement – The initial transferor (the lender) returns the financial asset (or substantially

the same asset) to the initial transferee (the borrower) upon receipt of payment from the

initial transferee.

99.108. Repurchase financing that is entered into contemporaneously with, or in contemplation of, an

initial transfer of financial asset between the same counterparties (or affiliates of either counterparty) shall

not be separately accounted for as a transfer of a financial asset and a related repurchase financing unless

(a) the two transactions have a valid and distinct business or economic purpose for being entered into

separately and (b) the repurchase financing does not result in the initial transferor regaining control over

the financial asset. Unless the provisions in paragraph 100 109 are met, the initial transfer and repurchase

financing shall be evaluated as a linked transaction. The linked transaction shall be evaluated to determine

whether it meets the requirements for sale accounting per paragraph 8. If the linked transaction does not

meet the requirements for sale accounting, the linked transaction shall be accounted for based on the

economies of the combined transactions, which generally represent a forward contract. SSAP No. 86—

Derivatives shall be used to evaluate whether the linked transaction shall be accounted for as a derivative.

100.109. An initial transfer of a financial asset and repurchase financing that are entered into

contemporaneously with, or in contemplation of, one another shall be considered linked unless all of the

following criteria are met at the inception of the transaction:

a. The initial transfer and the repurchase financing are not contractually contingent on one

another. Even if no contractual relationship exists, the pricing and performance of either

the initial transfer or the repurchase financing must not be dependent on the terms and

execution of the other transaction.

b. The repurchase financing provides the initial transferor with recourse to the initial

transferee upon default. That recourse must expose the initial transferor to the credit risk

of the initial transferee, or its affiliates, and not solely to the market risk of the transferred

financial asset. The initial transferee’s agreement to repurchase the previously transferred

financial asset (or substantially the same asset) for a fixed price and not fair value.

c. The financial asset subject to the initial transfer and repurchase financing is readily

obtainable in the marketplace. In addition, the initial transfer of a financial asset and the

Attachment 4


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repurchase financing are executed at market rates. This criterion may not be

circumvented by embedding off-market terms in a separate transaction contemplated with

the initial transfer or the repurchase financing.

d. The financial asset and repurchase agreement are not coterminous (the maturity of the

repurchase financing must be before the maturity of the financial asset.)

101.110. In accordance with paragraph 99109, an initial transfer of assets and a repurchase

financing shall not be considered separate transactions unless the provisions of paragraph 100 109 are

met. If the provisions of paragraph 100 109 are met, the initial transfer shall be evaluated to determine

whether it meets the requirements for sale accounting without taking into consideration the repurchase

financing. In such situations, the repurchase financing shall then be separately analyzed as a repurchase

agreement.

Reverse Repurchase Agreements

102.111. Reverse repurchase agreements are defined as agreements under which a reporting entity

purchases securities and simultaneously agrees to resell the same or substantially the same securities at a

stated price on a specified date. For securities to be substantially the same, the criteria defined in

paragraph 52 must be met, and for mortgage-backed securities excluding mortgage pass-through

securities, the projected cash flows of the securities must be substantially the same under multiple

scenario prepayment assumptions.

103.112. For reverse repurchase agreements that are accounted for as collateralized lendings in

accordance with paragraph 10091 of this statement, the underlying securities shall not be accounted for as

investments owned by the reporting entity. The amount paid for the securities shall be reported as a short-

term investment, and the difference between the amount paid and the amount at which the securities will

be subsequently resold shall be reported as interest income, calculated on the straight-line method or the

scientific interest (constant yield) method, over the term of the agreement.

Collateral Requirements – Repurchase and Reverse Repurchase Agreements14

104.113. The collateral requirements for repurchase and reverse repurchase agreements are as

follows:

Repurchase Transaction

a. The reporting entity shall receive collateral having a fair value as of the transaction date

at least equal to 95 percent of the fair value of the securities transferred by the reporting

entity in the transaction as of that date. If at any time the fair value of the collateral

received from the counterparty is less than 95 percent of the fair value of the securities so

transferred, the counterparty shall be obligated to deliver additional collateral by the end

of the next business day the fair value of which, together with the fair value of all

collateral then held in connection with the transaction, at least equals 95 percent of the

fair value of the transferred securities. If the collateral is less than 95 percent at the

reporting date, the difference between the actual collateral and 95 percent will be

nonadmitted.

Reverse Repurchase Transaction

b. The reporting entity shall receive as collateral transferred securities having a fair value at

least equal to 102 percent of the purchase price paid by the reporting entity for the

14 The collateral requirements are required for determining admitted assets under statutory accounting, but the receipt of collateral

is not a factor in determining whether the transferor has effective control over the loaned assets in accordance with paragraph 50.

Attachment 4


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securities. If at any time the fair value of the collateral is less than 100 percent of the

purchase price paid by the reporting entity, the counterparty shall be obligated to provide

additional collateral, the fair value of which, together with fair value of all collateral then

held in connection with the transaction, at least equals 102 percent of the purchase price.

Dollar Repurchase Agreements

105.114. Dollar repurchase and dollar reverse repurchase agreements are defined as repurchase

and reverse repurchase agreements involving debt instruments that are pay-through securities

collateralized with Government National Mortgage Association (GNMA), Federal Home Loan Mortgage

Corporation (FHLMC) and Federal National Mortgage Association (FNMA) collateral, and pass-through

certificates sponsored by GNMA, mortgage participation certificates issued by the FHLMC or similar

securities issued by the FNMA. Dollar repurchase agreements are also commonly referred to as dollar roll

transactions. To meet the definition of dollar repurchase and dollar reverse repurchase agreements, the

securities underlying the agreements must meet the criteria defined in paragraph 52, and for mortgage-

backed securities excluding mortgage pass-through securities, the projected cash flows of the securities

must be substantially the same under multiple scenario prepayment assumptions.

106.115. For the seller in a dollar repurchase agreement accounted for as collateralized borrowing

in accordance with paragraph 91 100 of this statement, a liability is recorded for the amount of proceeds

of the sale and the sold mortgage-backed securities are not removed from the accounting records. During

the period of the agreement, interest income is recorded as if the mortgage-backed security had been held

during the term of the agreement. This is offset by an equal amount of interest expense related to the

proceeds received from the sale. Additional interest expense is recorded representing the difference

between the sales price and the repurchase price of the mortgage-backed securities sold.

107.116. When the mortgage-backed securities are repurchased under the agreement, the original

mortgage-backed securities sold are removed from the accounting records and the purchased mortgage-

backed securities are recorded. The principal amount of the mortgage-backed securities repurchased must

be in good delivery form consistent with paragraph 52.

108.117. If the principal amount repurchased is greater than the amount sold, the cash paid is

recorded as an additional investment in the newly acquired certificates. If the principal amount

repurchased is less than the amount sold, a gain or loss relating to the original certificates held is

recorded.

109.118. For the purchaser in a dollar reverse repurchase agreement accounted for as collateralized

lending in accordance with paragraph 91 100 of this statement, an asset is recorded for the amount of the

purchase. Upon completion of the reverse repurchase agreement, cash is received in exchange for a

“substantially the same” security. The difference between the purchase and reselling price represents

interest income for the lending of short-term funds.

Separate Transactions

110.119. Agreements to repurchase and resell securities that do not meet the definitions in

paragraphs 79-9285-101 of this statement shall be accounted for as two separate transactions, that is, as a

sale and purchase or as a purchase and sale, in accordance with the relevant statutory accounting

guidance. For example, sales of bonds would result in recognition of realized gains or losses.

Offsetting

111.120. Reporting entities may operate on both sides of the repurchase agreement market

resulting in recording of liabilities and assets representing repurchase and reverse repurchase agreements,

respectively.

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112.121. Reporting entities shall offset such liabilities and assets only to the extent that a legal

right to offset exists as defined in SSAP No. 64, paragraph 2. Otherwise, separate assets and liabilities

shall be recognized.

Loan Syndications

113.122. Borrowers often borrow amounts greater than any one lender is willing to lend.

Therefore, it is common for groups of lenders to jointly fund those loans. That may be accomplished by a

syndication under which several lenders share in lending to a single borrower, but each lender loans a

specific amount to the borrower and has the right to repayment from the borrower.

114.123. A loan syndication is not a transfer of financial assets. Each lender in the syndication

shall account for the amounts it is owed by the borrower. Repayments by the borrower may be made to a

lead lender who then distributes the collections to the other lenders of the syndicate. In those

circumstances, the lead lender is also functioning as a servicer and, therefore, shall only recognize its

portion of the loan as a financial asset.

Loan Participations

115.124. Groups of banks or other entities also may jointly fund large borrowings through loan

participations in which a single lender makes a large loan to a borrower and subsequently transfers

interests in the loan to other entities.

116.125. Transfers by the originating lender may take the legal form of either assignments or

participations. The transfers are usually on a nonrecourse basis, and the transferor (originating lender)

continues to service the loan. The transferee (participating entity) may or may not have the right to sell or

transfer its participation during the term of the loan, depending upon the terms of the participation

agreement.

117.126. If the loan participation agreement transfers a participating interest in an entire financial

asset (as described in paragraph 7 of this statement) and the conditions in paragraph 8 are met, the transfer

shall be accounted for by the transferor as a sale of a participating interest. A transferor’s right of first

refusal on a bona fide offer from a third party, a requirement to obtain the transferor’s permission that

shall not be unreasonably withheld, or a prohibition on sale to the transferor’s competitor is a limitation

on the transferee’s rights but presumptively does not constrain a transferee from exercising its right to

pledge or exchange. However, if the loan participation agreement constrains the transferees from pledging

or exchanging its participating interest and that constraint provides a more-than-trivial benefit to the

transferor, the transferor has not relinquished control and shall account for the transfer as a secured

borrowing.

Factoring Arrangements

118.127. Factoring arrangements are a means of discounting accounts receivable on a nonrecourse,

notification basis. Accounts receivable in their entireties are sold outright, usually to a transferee (the

factor) that assumes the full risk of collection, without recourse to the transferor in the event of a loss.

Debtors are directed to send payments to the transferee. Factoring arrangements that meet the conditions

in paragraph 8 shall be accounted for as sales of financial assets because the transferor surrenders control

over the receivables to the factor.

Transfers of Receivables with Recourse

119.128. In a transfer of an entire receivable, a group of entire receivables, or a portion of an entire

receivable with recourse, the transferor provides the transferee with full or limited recourse. The

transferor is obligated under the terms of the recourse provision to make payments to the transferee or to

repurchase receivables sold under certain circumstances, typically for defaults up to a specified

Attachment 4


103-36

percentage. A transfer of receivables with recourse shall not be recognized as a sale, but rather as secured

borrowing. (This provision is applied regardless if the transfer was comprised of the entire receivable, a

group of the entire receivable, or a portion of the entire receivable.) A transfer of receivables without

recourse shall only be recognized if the transferor receives cash for the receivables. The sale shall be

recognized when cash is received. Sales of premium receivables are addressed in SSAP No. 42—Sale of

Premium Receivables.


120.129. If a creditor releases a debtor from primary obligation on the condition that a third party

assumes the obligation and that the original debtor becomes secondarily liable, that release extinguishes

the original debtor’s liability. However, in those circumstances, whether or not explicit consideration was

paid for that guarantee, the original debtor becomes a guarantor. As a guarantor, it shall recognize a

guarantee obligation in the same manner as would a guarantor that had never been primarily liable to that

creditor, with due regard for the likelihood that the third party will carry out its obligations. The guarantee

obligation shall be initially measured at fair value, and that amount reduces the gain or increases the loss

recognized on extinguishment.

121.130. Exchanges of debt instruments or debt instrument modifications are considered

extinguishments if the exchange or modification results with substantially different terms or is considered

more than minor. If the cash flows under the terms of the new debt instrument are at least 10 percent

different from the present value of the remaining cash flows under the terms of the original instrument,

then the exchange of, or modification to, debt instruments is consider substantially different and/or more

than minor.

Relevant Literature

122.131. The accounting guidance in this statement adopts with modification FAS 166, Accounting

for the Transfers of Financial Assets, an Amendment to FAS 140 (FAS 166), FAS 140, Accounting for

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140), as amended by

FAS 166, and FAS 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement

No. 140, as amended by FAS 166. Statutory modifications from these adoptions include:

a. Rejects the GAAP consideration for “consolidated affiliates” as the concept of

consolidation has not been adopted for statutory accounting.

b. Rejects reference to GAAP standards and GAAP methods not adopted for statutory as

well as concepts that are not pertinent for insurers. For example, references to

investments “held-to-maturity”, “available for sale” or “trading” and reference to FASB

standards are replaced with statutory terms and references to statutory standards.

c. Rejects GAAP reference and guidance regarding “Revolving-Period Securitizations” as

this GAAP guidance is not applicable to statutory accounting. This concept was also

deemed not applicable to statutory accounting under SSAP No. 91R.

d. Rejects GAAP guidance for “Sale-Type and Direct-Financing Lease Receivables” as

leases shall be accounted for in accordance with SSAP No. 22—Leases (SSAP No. 22).

This conclusion is consistent with SSAP No. 91R.

e. Rejects GAAP guidance for “Banker’s Acceptances and Risk Participations in Them,” as

not applicable for statutory accounting. This GAAP guidance was also deemed not

applicable to statutory accounting under SSAP No. 91R.

f. Rejects GAAP guidance for “Removal of Account Provisions” that allows recognition of

sale accounting. For statutory, transfers that would empower the transferor to reclaim

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assets under certain conditions (considered “removal-of-accounts provisions”) are

precluded from being accounted for as sales. This conclusion is consistent with SSAP

No. 91R.

g. Rejects GAAP guidance for “Transfers of Receivables with Recourse” that allows

transfers of receivables in their entirety with recourse to be accounted for as sales. For

statutory, a transfer of receivables with recourse shall be accounted for as a secured

borrowing. This conclusion is consistent with SSAP No. 91R.

h. Rejects illustrations for transactions involving transfers of lease financing receivables

with residual values and banker’s acceptances with a risk participation as the GAAP

guidance in FAS 166 related to these topics has been rejected for statutory accounting.

i. Rejects the optionality provided within FAS 156 for subsequent measurement of

servicing assets and servicing liabilities using either fair value or an amortization method.

This statement requires application of a fair value method for subsequent measurement.

j. Incorporates guidance previously included in SSAP No. 91R specific to insurance

entities, and guidance that was adopted from GAAP guidance not revised through the

issuance of FAS 166. Items incorporated include:

i. Clarification that transfers of financial assets that are in substance real estate shall

be accounted for in accordance with SSAP No. 40R—Real Estate Investments

(paragraph 2).

ii. Clarification that transactions between related parties or affiliates are accounted

for in accordance with SSAP No. 25—Affiliates and Other Related Parties

(paragraph 3).

iii. Clarification that the guidance does not address the securitization of mortality or

morbidity risk (paragraph 5).

iv. Guidance on the accounting of sale transactions for entities required to maintain

an interest maintenance reserve (IMR). This guidance requires such entities to

account for realized and unrealized capital gains and losses per the guidance in

the SSAP for the specific type of investment, or if not specifically stated in the

related SSAP, in accordance with SSAP No. 7 (paragraph 11.c.).

v. Clarification of when servicing assets and servicing liabilities shall be recognized

as well as measurement of these items. Continues prior statutory decision that

servicing rights assets shall be nonadmitted (paragraphs 15-17).

vi. Guidance on the accounting for transactions that require the granting of a security

interest in certain assets to another party to serve as collateral for their

performance under a contract (paragraph 20).

vii. Disclosures on security lending transactions, loaned securities; securities

underlying repurchase and reverse repurchase agreements, dollar repurchase and

dollar reverse repurchase agreements; receivables with recourse; and wash sales

(paragraphs 28.a., 28.b., and 28.h.-28.l.).

viii. Guidance on the sales of future revenues (paragraph 77).

ix. Guidance on collateral requirements for securities lending transactions

(paragraph 9185).

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x. Clarification that repurchase agreements, reverse repurchase agreements and

dollar repurchase agreements meet the definition of assets as defined in SSAP No.

4—Assets and Nonadmitted Assets and are admitted assets to the extent they

conform to the requirements of this guidance (paragraph 8796).

xi. Guidance on Repurchase Agreements (paragraphs 93-10196-110).

xii. Guidance on Reverse Repurchase Agreements (paragraphs 102-103111-112).

xiii. Guidance on Collateral for Reverse and Repurchase Agreements (paragraph

104113).

xiv. Guidance on Dollar Repurchase Agreements (paragraph 105-109114-118).

xv. Guidance for Separate Transactions (paragraph 110119).

xvi. Guidance for Offsetting (paragraph 112121). (This guidance was revised in

November 2012 to only allow offsetting when a valid right to offset exists in

accordance with SSAP No. 64. This is different from previous guidance reflected

in SSAP No. 91R.)

xvii. Guidance for Transfers of Receivables with Recourse (paragraph 120128).

123.132. This statement also adopts FASB Staff Position 140-3, Accounting for Transfers of

Financial Assets and Repurchase Financing Transactions (FSP FAS 140-3), ASU 2011-03, Transfers and

Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements and AICPA

Statement of Position 90-3, Definition of the Term Substantially the Same for Holders of Debt

Instruments, as used In Certain Audit Guides and a Statement of Position. This statement adopts FASB

Emerging Issues Task Force (EITF) No. 87-34, Sale of Mortgage Servicing Rights with a Subservicing

Agreement, FASB EITF No. 88-11, Allocation of Recorded Investment When a Loan as Part of a Loan is

Sold, FASB EITF No. 88-18, Sales of Future Revenues, FASB EITF No. 88-22, Securitization of Credit

Card and Other Receivable Portfolios, FASB EITF No. 90-21, Balance Sheet Treatment of a Sale of

Mortgage Servicing Rights with a Subservicing Agreement, FASB EITF No. 95-5, Determination of What

Risks and Rewards, If Any, Can Be Retained and Whether Any Unresolved Contingencies May Exist in a

Sale of Mortgage Loan Servicing Rights, FASB EITF No. 96-19, Debtor’s Accounting for a Modification

or Exchange of Debt Instruments, as amended by FAS 166, and FASB EITF No. 01-7, Creditor’s

Accounting for a Modification or Exchange of Debt Instruments. This statement adopts FASB ASC

guidance for short sales with modification to require the short sale obligation to be reflected as a contra-

asset rather than a liability. Also, the recognition of unrealized gains and losses is consistent with

statutory accounting recognition, rather than directly to net income under GAAP. (The adopted ASC

guidance includes guidance reflected in 942-405-25-1 through 25-2, 942-405-35-1, and 942-405-45-1.

Additionally, the guidance in ASC 815-10-55-57 through 59 and 815-10-15-15 through 17, which

addresses whether short sales are within the scope of SSAP No. 86, and the definition of a regular-way

security trade is also adopted.)

124.133. This statement rejects FASB EITF No. 84-5, Sale of Marketable Securities with a Put

Option, and FASB EITF No. 92-2, Measuring Loss Accruals by Transferors of Receivables with Recourse

and FTB 01-1: Effective Date for Certain Financial Institutions of Certain Provisions of Statement 140

related to Isolation of Transferred Financial Assets. This statement rejects FIN 41, Offsetting Amounts

Related to Certain Repurchase and Reverse Repurchase Agreements. This rejection, as it is a reversal of

the prior adoption of this guidance in SSAP No. 45, and the revisions to paragraphs 112-113120-121

adopted November 2012, are effective January 1, 2013. This guidance has been rejected as it permits

optionality as to whether offsetting and net reporting occurs for repurchase and reverse purchase

agreements under master netting agreements. The provisions of SSAP No. 64 shall be used in determining

whether assets and liabilities shall be offset and reported net.

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Effective Date and Transition

125.134. This standard shall be effective for years beginning on and after January 1, 2013

(effective date) and shall be applied prospectively. This statement must be applied as of the beginning of

the reporting entity’s first annual reporting period after the effective date, for interim periods within that

first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is

prohibited. This statement must be applied to transfers occurring on or after the effective date. On and

after the effective date, the concept of a qualifying special purpose entity is no longer relevant for

statutory accounting purposes. The disclosure provisions of this statement shall be applied to transfers

that occurred both before and after the effective date of this statement. Guidance reflected in paragraph 22

added from INT 03-05, EITF 01-7: Creditor’s Accounting for a Modification or Exchange of Debt

Instruments has been in effect since June 22, 2003. Guidance in paragraphs 22 and 121 was originally

contained in INT 99-14: EITF No. 96-19, Debtor’s Accounting for a Modification or Exchange of Debt

Instruments, as amended by FAS 166 and was effective October 4, 1999.

REFERENCES

Other

SSAP No. 18—Transfers and Servicing of Financial Assets and Extinguishments of

Liabilities

SSAP No. 33—Securitization

SSAP No. 45—Repurchase Agreements, Reverse Repurchase Agreements and Dollar

Repurchase Agreements

SSAP No. 91R—Accounting for Transfers and Servicing of Financial Assets and


Purposes and Procedures Manual of the NAIC Investment Analysis Office

Relevant Issue Papers

Issue Paper No. 122—Accounting for Transfers and Servicing of Financial Assets and


Issue Paper No. 134—Servicing Assets/Liabilities, An Amendment of SSAP No. 91

Issue Paper No. 141—Accounting for Transfers and Servicing of Financial Assets and


Issue Paper No. 144—Substantive Revisions to SSAP No. 91R—Accounting for Transfers

and Servicing of Financial Assets and Extinguishments of Liabilities - Revised

Attachment 4


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EXHIBIT A – GLOSSARY

Adequate Compensation

The amount of benefits of servicing that would fairly compensate a substitute servicer should one be

required, which includes the profit that would be demanded in the marketplace.

Agent

A party that acts for and on behalf of another party. For example, a third-party intermediary is an agent of

the transferor if it acts on behalf of the transferor.

Attached Call

A call option held by the transferor of a financial asset that becomes part of and is traded with the

underlying instrument. Rather than being an obligation of the transferee, an attached call is traded with

and diminishes the value of the underlying instrument transferred subject to that call.

Beneficial Interests

Rights to receive all or portions of specified cash inflows received by a trust or other entity, including, but

not limited to, senior and subordinated shares of interest, principal, or other cash inflows to be “passed-

through” or “paid-through,” premiums due to guarantors, commercial paper obligations, and residual

interests, whether in the form of debt or equity.

Benefits of Servicing

Revenues from contractually specified servicing fees, late charges, and other ancillary sources, including

“float.”

Cleanup Call

An option held by the servicer or its affiliate, which may be the transferor, to purchase the remaining

transferred financial assets, or the remaining beneficial interests not held by the transferor, its affiliates, or

its agents in an entity (or in a series of beneficial interests in transferred financial assets within an entity),

if the amount of outstanding financial assets or beneficial interests falls to a level at which the cost of

servicing those assets or beneficial interests becomes burdensome in relation to the benefits of servicing.

Collateral

Personal or real property in which a security interest has been given.

Continuing Involvement

Any involvement with the transferred financial assets that permits the transferor to receive cash flows or

other benefits that arise from the transferred financial assets or that obligates the transferor to provide

additional cash flows or other assets to any party related to the transfer. All available evidence shall be

considered, including, but not limited to, explicit written arrangements, communications between the

transferor and the transferee or its beneficial interest holders, and unwritten arrangements customary to

similar transfers. Examples of continuing involvement with the transferred financial assets include, but

are not limited to, servicing arrangements, recourse or guarantee arrangements, agreements to purchase or

redeem transferred financial assets, options written or held, derivative financial instruments that are

entered into contemporaneously with, or in contemplation of, the transfer, arrangements to provide

financial support, pledges of collateral, and the transferor’s beneficial interests in the transferred financial

assets.

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Contractually Specified Servicing Fees

All amounts that, per contract, are due to the servicer in exchange for servicing the financial asset and

would no longer be received by a servicer if the beneficial owners of the serviced assets (or their trustees

or agents) were to exercise their actual or potential authority under the contract to shift the servicing to

another servicer. Depending on the servicing contract, those fees may include some or all of the

difference between the interest rate collectible on the financial asset being serviced and the rate to be paid

to the beneficial owners of those financial assets.

Derecognize

Remove previously recognized assets or liabilities from the statement of financial position.

Derivative Financial Instrument

A derivative instrument (as defined in SSAP No. 86—Derivatives) that is a financial instrument (refer to

SSAP No. 27—Off-Balance-Sheet and Credit Risk Disclosures, paragraph 2).

Embedded Call

A call option held by the issuer of a financial instrument that is part of and trades with the underlying

instrument. For example, a bond may allow the issuer to call it by posting a public notice well before its

stated maturity that asks the current holder to submit it for early redemption and provides that interest

ceases to accrue on the bond after the early redemption date. Rather than being an obligation of the initial

purchaser of the bond, an embedded call trades with and diminishes the value of the underlying bond.

Financial Asset

Cash, evidence of an ownership interest in an entity, or a contract that conveys to a one entity a right (a)

to receive cash or another financial instrument from a second entity or (b) to exchange other financial

instruments on potentially favorable terms with the second entity.

Financial Liability

A contract that imposes on one entity an obligation (a) to deliver cash or another financial instrument to a

second entity or (b) to exchange other financial instruments on potentially unfavorable terms with the

second entity.

Freestanding Call

A call that is neither embedded in nor attached to an asset subject to that call.

Interest-Only Strip

A contractual right to receive some or all of the interest due on a bond, mortgage loan, collateralized

mortgage obligation, or other interest-bearing financial asset.

Naked Short Sale

A short sale in which the seller does not borrow or arrange to borrow the securities in time to make

delivery to the buyer within the standard three-day settlement period (T+3). As a result, the seller fails to

deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").

Participating Interest

A participating interest has the following characteristics:

a. From the date of the transfer, it represents a proportionate (pro rata) ownership interest in

an entire financial asset. The percentage of ownership interests held by the transferor in

Attachment 4


103-42

the entire financial asset may vary over time, while the entire financial asset remains

outstanding as long as the resulting portions held by the transferor or its agents) and the

transferee(s) meet the other characteristics of a participating interest. For example, if the

transferor’s interest in an entire financial asset changes because it subsequently sells

another interest in the entire financial asset, the interest held initially and subsequently by

the transferor must meet the definition of a participating interest.

b. From the date of the transfer, all cash flows received from the entire financial asset are

divided proportionately among the participating interest holders in an amount equal to

their share of ownership. Cash flows allocated as compensation for services performed, if

any, shall not be included in that determination provided those cash flows are not

subordinate to the proportionate cash flows of the participating interest and are not

significantly above an amount that would fairly compensate a substitute service provider,

should one be required, which includes the profit that would be demanded in the

marketplace. In addition, any cash flows received by the transferor as proceeds of the

transfer of the participating interest shall be excluded from the determination of

proportionate cash flows provided that the transfer does not result in the transferor

receiving an ownership interest in the financial asset that permits it to receive

disproportionate cash flows.

c. The rights of each participating interest holder (including the transferor in its role as a

participating interest holder) have the same priority, and no participating interest holder’s

interest is subordinated to the interest of another participating interest holder. That

priority does not change in the event of bankruptcy or other receivership of the transferor,

the original debtor, or any other participating interest holder. Participating interest

holders have no recourse to the transferor, its agents or to each other, other than standard

representations and warranties, ongoing contractual obligations to service the entire

financial asset and administer the transfer contract, and contractual obligations to share in

any set-off benefits received by any participating interest holder. That is, no participating

interest holder is entitled to receive cash before any other participating interest holder

under its contractual rights as a participating interest holder. For example, if a

participating interest holder also is the servicer of the entire financial asset and receives

cash in its role as servicer, that arrangement would not violate this requirement.

d. No party has the right to pledge or exchange the entire financial asset unless all

participating interest holders agree to pledge or exchange the entire financial asset.

Proceeds

Cash, beneficial interests, servicing assets, derivatives, or other assets that are obtained in a transfer of

financial assets, less any liabilities incurred.

Recourse

The right of a transferee of receivables to receive payment from the transferor of those receivables for (a)

failure of debtors to pay when due, (b) the effects of prepayments, or (c) adjustments resulting from

defects in the eligibility of the transferred receivables.

Regular-Way Security Trade

Contracts that provide for delivery of a security within a period of time after the trade date generally

established by regulations or conventions in the marketplace or exchange in which it is being executed.

Attachment 4


103-43

Securitization

The process by which financial assets are transformed into securities.

Security Interest

A form of interest in property that provides that upon default of the obligation for which the security

interest is given, the property may be sold in order to satisfy that obligation.

Seller

A transferor that relinquishes control over financial assets by transferring them to a transferee in exchange

for consideration.

Servicing Asset

A contract to service financial assets under which the estimated future revenues from contractually

specified servicing fees, late charges, and other ancillary revenues are expected to more than adequately

compensate the servicer for performing the servicing. A servicing contract is either (a) undertaken in

conjunction with selling or securitizing the financial assets being serviced or (b) purchased or assumed

separately.

Servicing Liability

A contract to service financial assets under which the estimated future revenues from contractually

specified servicing fees, late charges, and other ancillary revenues are not expected to adequately

compensate the servicer for performing the servicing.

Short Sale

A short sale, as defined for statutory accounting, is the sale of a security that a selling reporting entity

(seller) does not own at the time of sale or a sale which is consummated by the delivery of a security

borrowed by, or for the account of, the seller.

Standard Representations and Warranties

Representations and warranties that assert the financial asset being transferred is what it is purported to be

at the transfer date. Examples include representations and warranties about (a) the characteristics, nature,

and quality of the underlying financial asset, including characteristics of the underlying borrower and the

type and nature of the collateral securing the underlying financial asset, (b) the quality, accuracy, and

delivery of documentation relating to the transfer and the underlying financial asset, and (c) the accuracy

of the transferor’s representations in relation to the underlying financial asset.

Transfer

The conveyance of a noncash financial asset by and to someone other than the issuer of that financial

asset. Thus, a transfer includes selling a receivable, putting it into a securitization trust, or posting it as

collateral but excludes the origination of that receivable, the settlement of that receivable, or the

restructuring of that receivable into a security in a troubled debt restructuring.

Transferee

An entity that receives a financial asset, an interest in a financial asset, or a group of financial assets from

a transferor.

Transferor

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103-44

An entity that transfers a financial asset, an interest in a financial asset, or a group of financial assets that

it controls to another entity.

Unilateral Ability (See paragraphs 53 and 54)

A capacity for action not dependent on the actions (or failure to act) of any other party.

Attachment 4


103-45

EXHIBIT B – ILLUSTRATIONS

Illustration—Recording Transfers with Proceeds of Cash, Derivatives, and Other Liabilities

1. Company A transfers entire loans with a carrying amount of $1,000 to a subsidiary and receives

proceeds with a fair value of $1,030 and the transfer is accounted for as a sale. Company A undertakes no

servicing responsibilities and assumes a limited recourse obligation to repurchase delinquent loans.

Company A agrees to provide the transferee a return at a floating rate of interest even though the

contractual terms of the loan are fixed rate in nature (that provision is effectively an interest rate swap).

Fair Values

Cash proceeds $1,050

Interest rate swap asset 40

Recourse obligation 60

Net Proceeds

Cash received $1,050

Plus: Interest rate swap asset 40

Less: Recourse obligation (60)

Net proceeds $1,030

Gain on Sale $1,030

Net proceeds 1,000

Carrying amount of loans sold $ 30

Gain on sale

Journal Entry

Cash 1,050

Interest rate swap asset 40

Loans 1,000

Recourse obligation 60

Gain on sale 30

To record transfer

Attachment 4


103-46

Illustration—Recording Transfers of Participating Interests

2. Company B transfers a nine-tenths participating interest in a loan with a fair value of $1,100 and

a carrying amount of $1,000, and the transfer is accounted for as a sale. The servicing contract has a fair

value of zero because Company B estimates that the benefits of servicing are just adequate to compensate

it for its servicing responsibilities.

Fair Values

Cash proceeds for nine-tenths sold ($1,100 x 9/10) $990

One-tenth interest continued to be held by the transferor

($1,100 x 1/10)

110

Allocated Carrying Amount Based on Relative Fair Values

Fair Value

Percentage

Of Total

Fair Value

Allocated

Carrying

Amount

Nine-tenths participating

interest sold ($1,100 x 9/10)

$990 90 $900

One-tenth participating interest

continued to be held by the

transferor ($1,100 x 1/10)

110 10 100

Total $ 1,100 100 $1,000

Gain on Sale

Net proceeds $ 990

Less: Carrying amount of loans sold (900)

Gain on sale $90

Journal Entry

Cash 990

Loans 900

Gain on sale 90

To record transfer

Attachment 4


103-47

Illustration—Sale of Receivables with Servicing Obtained

3. Company C originates $1,000 of loans that yield 10 percent interest income for their estimated

lives of 9 years. Company C transfers the entire loans to an entity and the transfer is accounted for as a

sale. Company C receives as proceeds $1,000 cash, a beneficial interest to receive 1 percent on the

contractual interest on the loans (an interest-only strip receivable), and an additional 1 percent of the

contractual interest as compensation for servicing the loans. The fair values of the servicing asset and the

interest-only strip receivable are $40 and $60, respectively.

Fair Values


Servicing asset 40

Interest-only strip receivable 60

Net Proceeds


Servicing Asset 40


Net Proceeds $1,100

Gain on Sale

Net proceeds $1,100

Less: Carrying amount of loans sold (1,000)

Gain on sale $ 100

Journal Entries

Cash 1,000


Servicing Asset 40

Loans 1,000

Gain on sale 100

To record transfer and to recognize

interest-only strip receivable and servicing

asset

Attachment 4


103-48

Illustration—Securities Lending Transaction Treated as a Secured Borrowing

4. The following example illustrates the accounting for a securities lending transaction treated as a

secured borrowing, in which the securities borrower sells the securities upon receipt and later buys similar

securities to return to the securities lender:

Facts

Transferor’s carrying amount and fair value of security loaned $1,000

Cash “collateral” 1,020

Transferor’s return from investing cash collateral at a 5 percent annual rate 5

Transferor’s rebate to the securities borrower at a 4 percent annual rate 4

For simplicity, the fair value of the security is assumed not to change during the 35-day term of the

transaction.

Journal Entries for the Transferor

At inception:

Cash 1,020

Payable under securities loan agreements 1,020

To record the receipt of cash collateral

Securities pledged to creditors 1,000

Securities 1,000

To reclassify loaned securities that the secured party has the right to sell or repledge

Money market instrument 1,020

Cash 1,020

To record investment of cash collateral

At conclusion:

Cash 1,025

Interest 5

Money market instrument 1,020

To record results of investment

Securities 1,000

Securities pledged to creditors 1,000

To record return of security

Payable under securities loan agreements 1,020

Interest (“rebate”) 4

Cash 1,024

To record repayment of cash collateral plus interest

Journal Entries for the Transferee

At inception:

Receivable under securities loan agreements 1,020

Cash 1,020

To record transfer of cash collateral

Attachment 4


103-49

Cash 1,000

Obligation to return borrowed securities 1,000

To record sale of borrowed securities to a third party and the resulting obligation to return securities that

it no longer holds

At conclusion:

Obligation to return borrowed securities 1,000

Cash 1,000

To record the repurchase of securities borrowed

Cash 1,024

Receivable under securities loan agreements 1,020

Interest revenue (“rebate”) 4

To record the receipt of cash collateral and rebate

interest

Attachment 4


103-50

Illustration - Short Sale Settled with Securities Borrowed Under a Secured Borrowing Agreement

5. The following example illustrates the accounting for a securities borrowing transaction treated as

a secured borrowing, in which the insurer borrows securities and delivers the borrowed securities to a

different counterparty to settle a short sale transaction.

Cash

Contra-Asset – Securities Sold Short

To recognize the cash received and the obligation to delivery securities under a short-sale

Receivable Under Securities Loan Agreement (Borrow Securities)

Cash

To recognize transfer of cash under the security borrowing agreement, with recognition of a receivable

for the return. The actual securities borrowed under the agreement (as sale accounting criteria is not

met) shall not be recognized on the financial statements.

Borrowed Asset (“Proceeds” of selling asset)

Obligation to return Securities Borrowed

To recognize the use of the borrowed security to settle a short-sale transaction. This transaction would be

similar to receiving “proceeds” from the sale of a borrowed security – but instead of “cash” recognition

of the actual borrowed asset, with an obligation to return the borrowed securities.


Cash

To recognize the acquisition of securities to return under a short sale.

Obligation to Return Securities Borrowed

Borrowed Asset

To recognize the return of the asset borrowed under the securities borrowing arrangement.

Cash

Receivable Under Securities Loan Agreement

To recognize the return of cash collateral from the transferor and the unwinding of the securities

borrowing agreement.

Attachment 4


103-51

Illustration—Initial Transfer and Repurchase Financing

65. The following diagram is an example of an initial transfer of a financial asset and a subsequent

repurchase financing, as described in paragraphs 96-101105-110.

Attachment 4

© 2016 National Association of Insurance Commissioners

Exposure Draft

ISSUE PAPER NO. 152—SHORT SALES


Basis for hearings. The Statutory Accounting Principles Working Group (SAPWG) will hold a public

hearing to obtain information from and views of interested individuals and organizations about the

standards proposed in this Exposure Draft. The SAPWG will conduct the hearing in accordance with the

National Association of Insurance Commissioners (NAIC) policy statement on open meetings. An

individual or organization desiring to speak must notify the NAIC in writing by May 20, 2016. Speakers

will be notified as to the date, location, and other details of the hearings.

Oral presentation requirements. The intended speaker must submit a position paper, a detailed outline of

a proposed presentation or comment letter addressing the standards proposed in the Exposure Draft by May

20, 2016. Individuals or organizations whose submission is not received by that date will only be granted

permission to present at the discretion of the SAPWG chair. All submissions should be addressed to the

NAIC staff at the address listed below.

Format of the hearings. Speakers will be allotted up to 10 minutes for their presentations to be followed

by a period for answering questions from the SAPWG. Speakers should use their allotted time to provide

information in addition to their already submitted written comments as those comments will have been read

and analyzed by the SAPWG. Those submissions will be included in the public record and will be available

at the hearings for inspection.

Copies. Exposure Drafts can be obtained on the Internet at the NAIC Home Page (http://www.naic.org).

The documents can be downloaded using Microsoft Word.

Written comments. Participation at a public hearing is not a prerequisite to submitting written comments

on this Exposure Draft. Written comments are given the same consideration as public hearing testimony.

The Statutory Accounting Principles Statement of Concepts was adopted by the Accounting Practices &

Procedures (EX4) Task Force on September 20, 1994, in order to provide a foundation for the evaluation of

alternative accounting treatments. All issues considered by the SAPWG will be evaluated in conjunction

with the objectives of statutory reporting and the concepts set forth in the Statutory Accounting Principles

Statement of Concepts. Whenever possible, establish a relationship between your comments and the

principles defining statutory accounting.

The exposure period is not meant to measure support for, or opposition to, a particular accounting treatment

but rather to accumulate an analysis of the issues from other perspectives and persuasive comments

supporting them. Therefore, form letters and objections without valid support for their conclusions are not

helpful in the deliberations of the working group. Comments should not simply register your agreement or

disagreement without a detailed explanation, a description of the impact of the proposed guidelines, or

possible alternative recommendations for accomplishing the regulatory objective.

Any individual or organization may send written comments addressed to the Working Group to the

attention of Julie Gann at [email protected], Robin Marcotte at [email protected], Josh Arpin at

[email protected] and Fatima Sediqzad at [email protected] no later than May 20, 2016. Electronic

submission is preferred. Julie Gann is the NAIC Staff that is the project lead for this topic.


1100 Walnut Street, Suite 1500, Kansas City, MO 64106-2197

(816) 842-3600

Hearing Date: June 2016 Call or 2016 Summer NM Location: June 2016 Call or 2016 Summer NM



May 20, 2016

Attachment 5





Ref #2015-02

Short Sales

© 2016 National Association of Insurance Commissioners 152-1

Issue Paper No. 152

Short Sales

STATUS

Exposure Draft – April 3, 2016 (Items shaded were revised from the prior November 2015 exposure.)

Type of Issue:

Common Area

SUMMARY OF ISSUE

1. This issue paper provides explicit statutory accounting guidance for short sales in scope of SSAP

No. 103—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP No.

103), with reference added to the proposed guidance in SSAP No. 86—Derivatives (SSAP No. 86).

SUMMARY CONCLUSION

2. This issue paper proposes to substantively revise SSAP No. 103—Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities (SSAP No. 103) (resulting in SSAP No. 103R) to

incorporate guidance for short sales and securities borrowing transactions that do not meet sale criteria.

Substantive Revisions to SSAP No. 103R:

Short Sales

79. A short sale, as defined for statutory accounting, is the sale of a security that a selling reporting entity (seller) does not own at the time of sale or a sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. Short sales are normally settled by the delivery of a security borrowed by or on behalf of the seller. The seller later closes out the position by returning the borrowed security to the lender, typically by purchasing securities on the open market. If the price of the security rises, short sellers who buy it at the higher price will incur a loss.

80. In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period (T+3). As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail").

81. Consistent with GAAP guidance, short-sales generally do not meet the definition of a derivative are not included within derivative guidance unless a forward purchase or forward sale is involved. Even if a forward purchase or forward sale element is included, if the contract meets the includes a regular-way security trade exception, it would not be subject to the derivative guidance. Regular-way security trades are defined as contracts that provide for delivery of a security within a period of time after the trade date generally established by regulations or conventions in the marketplace or exchange in which it is being executed. (With the provision for settlement being a standard three-day settlement period, short sales are generally not captured as derivatives.)

82. State statutes or state laws may have restrictions regarding whether a reporting entity is permitted to sell securities short. In situations in which state regulations do not prohibit, or otherwise provide specific guidance, short-sale transactions shall be accounted for in accordance with this statement.

Attachment 5

Attachment 5

Ref #2015-02

Issue Paper


83. Selling a security short is an action by a reporting entity, which results with the reporting entity recognizing proceeds from the sale and an obligation to deliver the sold security. For statutory accounting purposes, obligations to deliver securities resulting from short sales shall be reported as contra-assets (negative assets) in the respective investment schedule for the type of asset sold, with an investment code detailing the item as a short sale. (For example, a short sale of common stock shall be reflected as a negative asset on Schedule D – Part 2 – Section 2.) The obligation (negative asset) shall be initially reflected at fair value, with changes in fair value recognized as unrealized gains and losses. These unrealized gains and losses shall be realized upon settlement of the short sale obligation. Interest on short sale positions shall be accrued periodically and reported as interest expense.

84. If short sales are supported by a securities borrowing transaction, the accounting and reporting guidelines in paragraphs 93-95 87-89 shall also be followed.

Disclosures

28n. For reporting entities that have sold securities short within the reporting period, provide the following disclosures:

i. For Unsettled Short Sale Transactions (outstanding at reporting date) – The amount of proceeds received and the fair value of the securities to deliver, with current unrealized gains and/or losses, and the expected settlement timeframe (# number of days). This disclosure shall include the fair value of current transactions that were not settled within three days and the fair value of the short sales expected to be satisfied by a securities borrowing transaction. This disclosure shall be aggregated by security type. (For example, short sales of common stock shall be aggregated and reported together.)

ii. For Settled Short Sale Transactions (settled during the reporting period) – The aggregate amount of proceeds received and the fair value of the security as of the settlement date with recognized gains and/or losses. This disclosure shall identify the aggregated fair value of settled transactions that were not settled within three-days and the fair value of transactions that were settled through a securities borrowing transaction.

The following are example disclosure templates. These are not proposed to be in SSAP No. 103, but upon adoption of the proposed revisions would be referred to the Blanks (E) Working Group for consideration as illustrations in the annual statement instructions.

Unsettled Short Sale Transactions (Outstanding as of Reporting Date)

Proceeds Received

Current Fair Value of

Securities Sold Short

Unrealized Gain or Loss

Expected Settlement (# of Days)

Fair Value of Short Sales

Exceeding (or expected to exceed) 3 Settlement

Days


Expected to be

Settled by Secured

Borrowing

Bonds

Common Stock

Totals

Attachment 5

Ref #2015-02

Short Sales


Settled Short Sale Transactions

Proceeds Received

Current Fair Value of

Securities Sold Short

Realized Gain or Loss

on Transaction

Fair Value of Short

Sales that Exceeded 3 Settlement

Days


Settled by Secured

Borrowing

Bonds

Common Stock

Totals

The following proposed revisions provide explicit “secured borrowing” guidance within SSAP No. 103: SECURED BORROWINGS AND COLLATERAL

19. A debtor may grant a security interest in certain assets to a lender (the secured party) to serve as collateral for its obligation under a borrowing, with or without recourse to other assets of the debtor. An obligor under other kinds of current or potential obligations, for example, interest rate swaps, also may grant a security interest in certain assets to a secured party. If collateral is transferred to the secured party, the custodial arrangement is commonly referred to as a pledge. Secured parties sometimes are permitted to sell or repledge (or otherwise transfer) collateral held under a pledge. The same relationships occur, under different names, in transfers documented as sales that are accounted for as secured borrowings (paragraph 14). The accounting for noncash

1 collateral by the debtor (or obligor) and the

secured party depends on whether the secured party or its agent has the right to sell or repledge the collateral and on whether the debtor has defaulted. (Paragraphs 85-121 79-112 provide application guidance for securities lending, securities borrowing, and repurchase agreements.)

a. If the secured party (transferee) or its agent has the right by contract or custom to sell or repledge the collateral, then the debtor (transferor) shall report that asset in its balance sheet.

b. If the secured party (transferee) sells collateral pledged to it, it shall recognize the proceeds from the sale and its obligation to return the collateral. The sale of the collateral is a transfer subject to the provisions of this statement.

c. If the debtor (transferor) defaults under the terms of the secured contract and is no longer entitled to redeem the pledged asset, it shall derecognize the pledged asset, and the secured party (transferee) shall recognize the collateral as its asset initially measured at fair value or, if it has already sold the collateral, derecognize its obligation to return the collateral.

d. Except as provided in paragraph 19.c., the debtor (transferor) shall continue to carry the collateral as its asset, and the secured party (transferee) shall not recognize the pledged asset.

Securities Borrowing Transactions – Sale Criteria is Not Met (Secured Borrowing)

87. In addition to being the transferor of securities being loaned and receiving collateral under a securities lending arrangement, reporting entities may be a transferee of borrowed securities, and provide collateral under a securities borrowing arrangement. The transferee (borrower) of securities shall

1 Cash “collateral,” sometimes used, for example, in securities lending transactions, shall be derecognized by the payer and

recognized by the recipient, not as collateral, but rather as proceeds of either a sale or a borrowing.

Attachment 5

Attachment 5

Ref #2015-02

Issue Paper


derecognize the cash (or non-cash securities that can be sold or pledged for cash by the transferor) provided to borrow securities with recognition of a receivable to reflect the return from the transferor under a securities borrowing agreement. The transferee shall not recognize the borrowed securities on the balance sheet even if the transferee has the ability to sell or repledge the securities.

88. A transferee that sells borrowed securities shall recognize the proceeds from the sale of the securities and an obligation, at fair value, to return the borrowed securities to the transferor. If cash proceeds from the sale of borrowed securities are invested into other assets, or if non-cash proceeds are received from the sale, the assets acquired shall be shown as assets on the reporting entity’s (transferee’s) financial statements and accounted and reported in accordance with the SSAP for the type of assets acquired. For all instances in which the transferee sells borrowed securities, the reporting entity shall designate restricted assets equivalent to the fair value of the obligation to return the borrowed securities to the transferor.

89. A reporting entity transferee that borrows securities captured under this section (sale criteria is not met) and uses the borrowed securities to settle a short sale transaction shall eliminate the contra-asset recognized under the short sale (paragraph 83 85) until the reporting entity acquires the security to return to the transferor. The accounting / reporting for the short sale and the secured borrowing transaction shall be separately reflected within the financial statements. As such, use of the borrowed asset for the short sale would be similar to recognizing “proceeds” from selling a borrowed asset, as such, if the borrowed asset is used to settle a short sale, the reporting entity shall recognize the borrowed asset and the obligation to return the asset under the secured borrowing agreement until the asset has been returned under the secured borrowing transaction. and recognize an obligation, at fair value, to return the borrowed securities.

126. This statement also adopts FASB Staff Position 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (FSP FAS 140-3), ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements and AICPA Statement of Position 90-3, Definition of the Term Substantially the Same for Holders of Debt Instruments, as used In Certain Audit Guides and a Statement of Position. This statement adopts FASB Emerging Issues Task Force (EITF) No. 87-34, Sale of Mortgage Servicing Rights with a Subservicing Agreement, FASB EITF No. 88-11, Allocation of Recorded Investment When a Loan as Part of a Loan is Sold, FASB EITF No. 88-18, Sales of Future Revenues, FASB EITF No. 88-22, Securitization of Credit Card and Other Receivable Portfolios, FASB EITF No. 90-21, Balance Sheet Treatment of a Sale of Mortgage Servicing Rights with a Subservicing Agreement, FASB EITF No. 95-5, Determination of What Risks and Rewards, If Any, Can Be Retained and Whether Any Unresolved Contingencies May Exist in a Sale of Mortgage Loan Servicing Rights, FASB EITF No. 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, as amended by FAS 166, and FASB EITF No. 01-7, Creditor’s Accounting for a Modification or Exchange of Debt Instruments. This statement adopts FASB ASC guidance for short sales with modification to require the short sale obligation to be reflected as a contra-asset rather than a liability. Also, the recognition of unrealized gains and losses is consistent with statutory accounting recognition, rather than directly to net income under GAAP. (The adopted ASC guidance includes guidance reflected in 942-405-25-1 through 25-2, 942-405-35-1, and 942-405-45-1. Additionally, the guidance in ASC 815-10-55-57 through 59 and 815-10-15-15 through 17, which addresses whether short sales are within the scope of SSAP No. 86, and the definition of a regular-way security trade is also adopted.)

New Illustration - # 5 - Short Sale Settled with Securities Borrowed Under a Secured Borrowing Agreement (Does not Meet Sales Criteria): (Note: This transaction is intended to present a basic short sales settled by a secured borrowing and does not detail the recognition of gains / losses or interest expense. If the WG/IPs desire illustration for clarity, staff can incorporate those elements.)

1) Cash Contra-Asset – Securities Sold Short

(To recognize the cash received and the obligation to delivery securities under a short-sale)

Attachment 5

Ref #2015-02

Short Sales


2) Receivable Under Securities Loan Agreement (Borrow Securities) Cash

(To recognize transfer of cash under the security borrowing agreement, with recognition of a receivable for the return. The actual securities borrowed under the agreement (as sale accounting criteria is not met) shall not be recognized on the financial statements.)

3) Borrowed Asset (“Proceeds” of selling asset) Obligation to return Securities Borrowed

(To recognize the use of the borrowed security to settle a short-sale transaction. This transaction would be similar to receiving “proceeds” from the sale of a borrowed security – but instead of “cash” recognition of the actual borrowed asset, with an obligation to return the borrowed securities.)

4) Contra-Asset – Securities Sold Short Cash Obligation to Return Securities Borrowed

(To recognize the acquisition of securities to return under a short sale.) eliminate the short-sale obligation (previously recognized as a contra-asset) and recognize an obligation to return securities under the security borrowing agreement.)

5) Obligation to Return Securities Borrowed Borrowed Asset Cash

(To recognize the return of the asset borrowed under the securities borrowing arrangement.) acquisition of securities to return under the securities borrowing agreement.)

6) Cash Receivable Under Securities Loan Agreement

(To recognize the return of cash collateral from the transferor and the unwinding of the securities borrowing agreement.)

In addition to the revisions above, the following terms will be added in the SSAP No. 103 Glossary:

Short Sale - A short sale, as defined for statutory accounting, is the sale of a security that a selling reporting entity (seller) does not own at the time of sale or a sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. Naked Short Sale – A short sale in which the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period (T+3). As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a "failure to deliver" or "fail"). T+3 – Standard Three-Day Settlement Period. Regular-Way Security Trade - Contracts that provide for delivery of a security within a period of time after the trade date generally established by regulations or conventions in the marketplace or exchange in which it is being executed.

Attachment 5

Attachment 5

Ref #2015-02

Issue Paper


Proposed Revisions to SSAP No. 86—Derivative Instruments

59. This statement adopts FASB GAAP ASC guidance for determining whether short sales are considered a derivative instrument and the definition and application of including the regular-way security trade exceptions. The adopted GAAP ASC guidance includes ASC 815-10-55-57 through 59 and 815-10-15-15 through 17. As a result, Per the ASC guidance, short sales shall generally be accounted for in accordance with SSAP No. 103. Contracts that may resemble “short sales” but do not meet the criteria may be in scope of SSAP No. 86 as forward contracts.

DISCUSSION

3. During the 2015 Spring National Meeting, an agenda item was initially presented to the Statutory

Accounting Principles (E) Working Group to address questions on whether guidance for short sales shall

be incorporated within statutory accounting principles. This agenda item identified that there is no explicit

guidance for short sales within statutory accounting, and prior references to the derivative guidance for

income generation transactions (which are required to be “covered”) is inconsistent with the GAAP

guidance for the treatment of short sales.

4. In determining whether to proceed with guidance on short sales, it was identified that current

statutory accounting guidance does not address the accounting of “short sales.” Historically, questions

received regarding the statutory accounting treatment for short sales have generally been addressed by

directing the inquirer to the state of domicile, with notation that a number of states prohibit short sales in

their state laws. Recently, the amount of questions have increased, with inquiries on whether statutory

accounting guidance should address these transactions, and if these actions should be in scope of SSAP

No. 103—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP No. 103)

or SSAP No. 86—Derivatives (SSAP No. 86).

5. In response to the questions received, an agenda item was drafted detailing the statutory

accounting derivative guidance for income generation transactions and the U.S. GAAP and SEC guidance

for short sales. As a result of the research completed for this agenda item, it was identified that short sales

are often supported by a securities borrowing transaction. It was also noted that the current statutory

accounting guidance was limited on securities borrowing transactions if borrowing securities. (Statutory

guidance is detailed for securities lending transactions (reporting entity lends securities) that do not meet

sale criteria, but is not explicit for securities borrowing transactions.)

6. During a June 17, 2015 conference call, the Working Group considered interested party

comments from the exposure of the agenda item regarding statutory accounting guidance for short sales.

Based on interested party feedback supporting the use of state laws for the restriction of short sales, the

Working Group directed the preparation of an issue paper to incorporate statutory guidance for short sales

and securities borrowing transactions that do not meet sale criteria.

7. In the agenda item it was identified that the current statutory accounting guidance for “receivable

for securities” allows a 15-day settlement period for admittance purposes, whereas, SEC guidance

considers a three-day settlement period to be an industry standard (T+3). Although nonadmitted guidance

is a statutory-specific concept, settlement after T+3, particularly in terms of short-sales, results with the

transaction being considered “naked” and subject to greater scrutiny. As a result of the discussion, a

proposal to review the settlement guidance for “receivables for securities” – to assess whether a shorter

timeframe for admittance should be implemented for statutory purposes - was directed to be addressed in

a separate agenda item.

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Definition of Short Sales

8. The SEC defines a short sale as “A short sale is the sale of a stock that an investor does not own

or a sale which is consummated by the delivery of a stock borrowed by, or for the account of, the

investor.” The FASB defines short sales as “Sales of securities that the seller does not own at the time of

sale.” The FASB explicitly excludes short sales from the scope of their debt and equity investment

guidance as short sales are obligations and not investments.

9. For purposes of statutory accounting, the definition of a short sale is proposed to incorporate

elements from both the FASB and SEC definitions. Although the SEC definition indicates that these

transactions involve “stock,” it has been identified that short-sales have occurred with debt instruments.

As such, the definition proposed for statutory accounting uses the broader GAAP reference for “securities

that an investor does not own” but also includes the SEC guidance to include “a sale which is

consummated by the delivery of a security borrowed by, or for the account of, the investor.”

Accounting for Short Sales

10. The accounting guidance detailed in this issue paper for short sales is modified from the GAAP

guidance. Under GAAP, the obligations for short-sales are reflected as liabilities, and are generally

labeled in the financial statements as “securities sold, not yet purchased.” Consistent with the prior

Statutory Accounting Principles (E) Working Group decision for the reporting of negative cash, this issue

paper details that short-sales shall be reported as negative assets in the statutory balance sheet. As detailed

in Issue Paper No. 2—Definition of Cash (Issue Paper No. 2), paragraph 7, the treatment of recording

negative cash as a negative asset in the statutory balance sheet follows the concept of conservatism as

many regulatory limitations are calculated based on the total admitted assets.

11. If short sales followed the GAAP accounting and were reported as a liability, the overall surplus

presentation would still be correct (proceeds received and the liability would both be reflected gross),

however, the admitted asset portion (as it would include the gross proceeds received from the sale, but not

a deduction for the sold security) would not be reflective of the actual assets available. With the guidance

to reflect the obligation to provide a security as a negative asset, the overall surplus position is still

correct, and the assets reported on the statutory balance sheet as of the reporting date would reflect the

assets available for policyholder claims after satisfying the delivery of the security sold short.

12. Pursuant to the SEC guidelines to prevent classification as a “naked short sale”, the seller must

arrange to make delivery to the buyer within the standard three-day settlement period (T+3). The short-

duration of this obligation further supports the reporting as a negative asset (rather than as a liability), as

reporting as a negative asset would prevent scenarios in which short sales are conducted immediately

prior to a reporting date to arbitrarily increase assets.

13. From preliminary information received, staff does not believe that there are significant instances

of securities sold short, however, it has been communicated that instances of these transactions have

previously been reported as negative amounts on the investment schedules, therefore, this guidance may

not result in changes for companies that have previously engaged in short sales.

Short Sale Disclosures

14. The disclosure guidance is intended to provide information to the regulators regarding the

outstanding short sale transactions at each reporting date, as well as information regarding the short sale

transactions that occurred during a reporting period. As the extent of overall transactions and the resulting

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impact to the financial statements is perceived to be the information necessary for assessment, the

disclosures are proposed to be completed on an aggregate basis, by financial instrument type.

Securities Borrowing Transactions

15. Pursuant to U.S. GAAP guidance, securities lending transactions are initiated by broker-dealers

or other financial institutions that need specific securities to cover a short sale. In reviewing the

possibility to incorporate short sale guidance within statutory accounting principles, it was identified that

securities borrowing guidance, for transactions accounted for as secured borrowings, was not detailed

within statutory accounting principles. The guidance in SSAP No. 103 focuses on collateral received (and

the reinvestment of that collateral) from the lending of securities, with limited guidance for the borrowing

of securities when sales criteria were met. Due to the limited guidance, the Form A recommended

inclusion of securities borrowing guidance to address these scenarios.

16. Consistent with U.S. GAAP, this issue paper has incorporated guidance to clarify that the

proceeds provided to borrow securities (cash and non-cash securities for which the transferor can sell or

repledge) are removed from the transferee’s financial statements with an offsetting receivable reflecting

the return of the cash/non-cash securities under the securities borrowing agreement. Also consistent with

U.S. GAAP, the securities borrowed under a secured-borrowing arrangement are not reflected on the

reporting entity’s financial statements. However, if the borrowed securities are sold by the reporting entity

(transferee), the reporting entity would recognize the proceeds from the sale as well as an obligation to

return the borrowed security to the transferor.

17. This issue paper provides information to detail how a borrowed security utilized to satisfy a short

sale obligation would be reflected in statutory accounting. Although that guidance is not explicitly

detailed under U.S. GAAP, with the exception that the statutory guidance utilizes a contra-asset (instead

of a liability) for short sale recognition, the guidance is intended to be consistent with how the

transactions would occur under U.S. GAAP.

EFFECTIVE DATE

18. Upon adoption of this issue paper, the NAIC will release a substantively revised Statement of

Statutory Accounting Principles (SSAP) for comment. The SSAP will contain the adopted Summary

Conclusion of this issue paper. Users of the Accounting Practices and Procedures Manual should note

that issue papers are not represented in the Statutory Hierarchy (see Section IV of the Preamble) and

therefore the conclusions reached in this issue paper should not be applied until the corresponding SSAP

has been adopted by the Plenary of the NAIC. It is expected that the SSAP will contain an effective date

of reporting periods after January 1, 2016.

RELEVANT STATUTORY ACCOUNTING AND GAAP GUIDANCE

Statutory Accounting

19. SSAP No. 2—Cash, Drafts and Short-Term Investments

TREATMENT OF NEGATIVE CASH BALANCES

5. If a reporting entity has multiple cash accounts, the net amount of all accounts shall be reported jointly. Cash accounts with positive balances shall not be reported separately from cash accounts with negative balances. If in the aggregate, the reporting entity has a net negative cash balance, it shall be reported as a negative asset and shall not be recorded as a liability.

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Rationale from Issue Paper No. 2—Cash, Drafts and Short-Term Investments: 7. The treatment of recording negative cash as a negative asset in the statutory balance

sheet follows the concept of conservatism as many regulatory limitations are calculated based upon total admitted assets.

20. SSAP No. 103—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

(SSAP No. 103) provides the accounting for transactions accounted for as secured borrowings and

securities lending transactions. SSAP No. 103 adopts GAAP with modifications for statutory-specific

treatment, specifically for collateral requirements and reinvested collateral from securities lending

transactions. (This guidance is not duplicated in this issue paper.)

Generally Accepted Accounting Principles

21. The current GAAP guidance in the Accounting Standards Codification (ASC) is identified below

along with the original source of the ASC guidance and the related statutory accounting action. The

related excerpts from the GAAP guidance are then included.

a. ASC 942-405 – Financial Services – Depository and Lending – Liabilities

o SOP 01-06, Statement of Position 01-6, Accounting by Certain Entities (Including

Entities With Trade Receivables) That Lend to or Finance the Activities of Others –

Rejected as not applicable.

b. ASC 815-10 & 815-15 – Derivatives and Hedging – Scope and Implementation Guidance

o FAS 133, Accounting for Derivative Instruments and Hedging Activities – Adopted

with modification in SSAP No. 86.

c. ASC 860-30 – Transfers and Servicing, Secured Borrowing and Collateral

o FAS 140, Accounting for Transfers and Servicing of Financial Assets and

Extinguishments of Liabilities, A Replacement of FAS 125 – Adopted with

modification in SSAP No. 103.

o QA 140 (FASB Staff Implementation Guide) – Not reviewed for statutory

accounting

o ASU 2014-11, Transfers and Servicing, Repurchase-to-Maturity Transactions,

Repurchase Financings and Disclosures – Pending statutory accounting review

22. FASB Codification 942 Financial Services—Depository and Lending – 405 Liabilities provides

the accounting for short sales. As a note, the obligations incurred are reported as liabilities at fair value.

Short Sales of Securities (SOP 01-06)

942-405-25-1 The obligations incurred in short sales shall be reported as liabilities. Such liabilities are generally called securities sold, not yet purchased. 942-405-25-2 See paragraph 815-10-55-57 for additional guidance concerning short sales. 942-405-35-1 The obligations incurred in short sales shall be subsequently measured at fair value through the income statement at each reporting date. Interest on the short positions shall be accrued periodically and reported as interest expense. 942-405-45-1 The fair value adjustment on short sales of securities shall be classified in the income statement with gains and losses on securities.

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23. FASB Codification 815 Derivatives and Hedging – 10 Overall - 55 Implementation Guidance and

Illustrations identifies that short sales are generally not considered derivatives.

Short Sales (Sales of Borrowed Securities) (FAS 133)

815-10-55-57 The following discussion applies only to short sales with the characteristics described. Some groups of transactions that are referred to as short sales may have different characteristics. If so, a different analysis would be appropriate, and other derivative instruments may be involved. Short sales (sales of borrowed securities) typically involve all of the following activities:

a. Selling a security (by the short seller to the purchaser)

b. Borrowing a security (by the short seller from the lender)

c. Delivering the borrowed security (by the short seller to the purchaser)

d. Purchasing a security (by the short seller from the market)

e. Delivering the purchased security (by the short seller to the lender).

Those five activities involve three separate contracts. 815-10-55-58 A contract that distinguishes a short sale involves activities in (b) and (e) in the preceding paragraph, borrowing a security and replacing it by delivering an identical security. Such a contract has two of the three characteristics of a derivative instrument. The settlement is based on an underlying (the price of the security) and a notional amount (the face amount of the security or the number of shares), and the settlement is made by delivery of a security that is readily convertible to cash. However, the other characteristic, no initial net investment or an initial net investment that is smaller by more than a nominal amount than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, is not present. (See paragraphs 815-10-15-94 through 15-96.) The borrowed security is the lender's initial net investment in the contract. Consequently, the contract relating to activities in (b) and in (e) in the preceding paragraph is not a derivative instrument. 815-10-55-59 The other two contracts (one for activities in paragraph 815-10-55-57[a] and in paragraph 815-10-55-57[c] and the other for activity in paragraph 815-10-55-57[d]) are routine and do not generally involve derivative instruments. However, if a forward purchase or forward sale is involved, and the contract does not qualify for the exception in paragraphs 815-10-15-15 through 15-17, it is subject to the requirements of this Subtopic.

24. FASB Codification 815 Derivatives and Hedging - 10 Overall - 15 Scope and Scope Exceptions

provides the definition for a “regular-way security trade”. As discussed in 815-10-55-59, even if a

forward purchase or forward sale is involved with a short sale, if the contract qualifies as a regular-way

security trade exception, then it is not subject to the derivative guidance.

Regular-Way Security Trades 815-10-15-15 Regular-way security trades are defined as contracts that provide for delivery of a security within the period of time (after the trade date) generally established by regulations or conventions in the marketplace or exchange in which the transaction is being executed. For example, a contract to purchase or sell a publicly traded equity security in the United States customarily requires settlement within three business days. If a contract for purchase of that type of security requires settlement in three business days, the regular-way security trades scope exception applies, but if the contract requires settlement in five days, the regular-way security

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trades scope exception does not apply unless the reporting entity is required to account for the contract on a trade-date basis. 815-10-15-16 Except as provided in (a) in the following paragraph, a contract for an existing security does not qualify for the regular-way security trades scope exception if either of the following is true:

a. It requires or permits net settlement (as discussed in paragraphs 815-10-15-100 through 15-109).

b. A market mechanism exists to facilitate net settlement of that contract (as discussed in paragraphs 815-10-15-110 through 15-118).

815-10-15-17 The scope exception for regular-way security trades applies only to a contract that requires delivery of securities that are readily convertible to cash except that the scope exception also shall or may apply in any of the following circumstances:

a. If an entity is required, or has a continuing policy, to account for a contract to purchase or sell an existing security on a trade-date basis, rather than a settlement-date basis, and thus recognizes the acquisition (or disposition) of the security at the inception of the contract, then the entity shall apply the regular-way security trades scope exception to that contract.

b. If an entity is required, or has a continuing policy, to account for a contract for the purchase or sale of when-issued securities or other securities that do not yet exist on a trade-date basis, rather than a settlement-date basis, and thus recognizes the acquisition or disposition of the securities at the inception of the contract, that entity shall apply the regular-way security trades scope exception to those contracts.

c. Contracts for the purchase or sale of when-issued securities or other securities that do not yet exist, except for those contracts accounted for on a trade-date basis, are excluded from the requirements of this Subtopic as a regular-way security trade only if all of the following are true:

1. There is no other way to purchase or sell that security.

2. Delivery of that security and settlement will occur within the shortest period possible for that type of security.

3. It is probable at inception and throughout the term of the individual contract that the contract will not settle net and will result in physical delivery of a security when it is issued. (The entity shall document the basis for concluding that it is probable that the contract will not settle net and will result in physical delivery.)

25. FASB Codification 860-10 – Transfers and Servicing, Overall provides guidance for securities

lending transactions

> > Securities Lending Transactions

860-10-05-16 (FAS 140 / SSAP No. 103, paragraph 79) Securities lending transactions are initiated by broker-dealers and other financial institutions that need specific securities to cover a short sale or a customer's failure to deliver securities sold. Securities custodians or other agents commonly carry out securities lending activities on behalf of clients. 860-10-05-17 (FAS 140 / SSAP No. 103, paragraph 79) Transferees (borrowers) of securities generally are required to provide collateral to the transferor (lender) of securities, commonly cash

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but sometimes other securities or standby letters of credit, with a value slightly higher than that of the securities borrowed. If the collateral is cash, the transferor typically earns a return by investing that cash at rates higher than the rate paid or rebated to the transferee. If the collateral is other than cash, the transferor typically receives a fee. 860-10-05-18 (FAS 140 / SSAP No. 103, paragraph 79) Because of the protection of collateral (typically valued daily and adjusted frequently for changes in the market price of the securities transferred) and the short terms of the transactions, most securities lending transactions in themselves do not impose significant credit risks on either party. Other risks arise from what the parties to the transaction do with the assets they receive. For example, investments made with cash collateral impose market and credit risks on the transferor.

26. FASB Codification 860-30 – Transfers and Servicing, Secured Borrowing and Collateral provides

guidance for secured borrowing transactions (transactions which do not meet sale criteria).

860-30-25-1 This Section provides guidance on the recognition of transfers of financial assets as secured borrowings with a pledge of collateral. It addresses the following areas:

a. Cash collateral

b. Noncash collateral

c. Cash or securities received as proceeds

d. Sales of collateral received.

860-30-25-2 (FAS 140 / SSAP No. 103, paragraph 14) The transferor and transferee shall account for a transfer as a secured borrowing with pledge of collateral in either of the following circumstances:

a. If a transfer of an entire financial asset, a group of entire financial assets, or a participating

interest in an entire financial asset does not meet the conditions for a sale in paragraph 860-10-40-5

b. If a transfer of a portion of an entire financial asset does not meet the definition of a participating interest.

The transferor shall continue to report the transferred financial asset in its statement of financial position with no change in the asset’s measurement (that is, basis of accounting). > Cash Collateral

860-30-25-3 (FAS 140 / SSAP No. 103, paragraph 82) Transfers of financial assets in exchange for cash collateral cannot be distinguished from borrowing cash. Further, because cash is fungible, it is impossible to determine whether it has been used by the secured party. Accordingly, all cash collateral shall be recorded as an asset by the party receiving it (the secured party), together with a liability for the obligation to return it to the payer (obligor), whose asset is a receivable. 860-30-25-4 (FAS 140 / Not In SSAP No. 103) Cash collateral used, for example, in securities lending transactions (see paragraphs 860-10-05-16 through 05-18) shall be derecognized by the obligor and recognized by the secured party, not as collateral but rather as proceeds of either a sale or a borrowing. See paragraphs 860-30-25-6 through 25-9 for further discussion of recognition of cash and noncash collateral as proceeds of a transfer. > Noncash Collateral

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860-30-25-5 (FAS 140 / SSAP No. 103, paragraph 19) The accounting for noncash collateral by the obligor (or debtor) and the secured party depends on whether the secured party has the right to sell or repledge the collateral and on whether the obligor has defaulted. Noncash collateral shall be accounted for as follows:

a. If the secured party (transferee) has the right by contract or custom to sell or repledge the collateral, then paragraph 860-30-45-1 requires that the obligor (transferor) reclassify that asset and report that asset in its statement of financial position separately (for example, as security pledged to creditors) from other assets not so encumbered.

b. If the secured party (transferee) sells collateral pledged to it, it shall recognize the proceeds from the sale and its obligation to return the collateral. The sale of the collateral is a transfer subject to the provisions of this Topic.

c. If the obligor (transferor) defaults under the terms of the secured contract and is no longer entitled to redeem the pledged asset, it shall derecognize the pledged asset as required by paragraph 860-30-40-1 and the secured party (transferee) shall recognize the collateral as its asset. (See paragraph 860-30-30-1 for guidance on the secured party's initial measurement of collateral recognized. See paragraph 860-30-40-1 for further guidance if the debtor has sold the collateral.)

d. Except as provided in paragraph 860-30-40-1 the obligor (transferor) shall continue to carry the collateral as its asset, and the secured party (transferee) shall not recognize the pledged asset.

> Cash or Securities Received as Proceeds

860-30-25-6 Paragraph 860-10-55-55A discusses securities lending transactions in which the criteria in paragraph 860-10-40-5 for a sale are met. The following guidance relates to securities lending or similar transactions in which a transferor (lender) transfers securities and receives either cash or securities as collateral and the transfer does not meet the sale criteria in that paragraph.

860-30-25-7 (FAS 140 / SSAP No. 103, paragraph 81) Many securities lending transactions are accompanied by an agreement that both entitles and obligates the transferor to repurchase or redeem the transferred financial assets before their maturity. Paragraph 860-10-40-24 states that an agreement that both entitles and obligates the transferor to repurchase or redeem transferred financial assets from the transferee maintains the transferor’s effective control over those assets as described in paragraph 860-10-40-5(c)(1), if all of the conditions in paragraph 860-10-40-24 are met. Those transactions shall be accounted for as secured borrowings, in which either cash or securities that the holder is permitted by contract or custom to sell or repledge received as collateral are considered the amount borrowed, the securities loaned are considered pledged as collateral against the cash borrowed and reclassified as set forth in paragraph 860-30-25-5(a), and any rebate paid to the transferee of securities is interest on the cash the transferor is considered to have borrowed. 860-30-25-8 (FAS 140 / Partly in SSAP No. 103, paragraph 82) In a securities lending transaction, the transferor of securities being loaned accounts for cash received in the same way whether the transfer is accounted for as a sale or a secured borrowing. Cash collateral or securities received as collateral that a securities lender is permitted to sell or repledge are the proceeds of a borrowing secured by them. The cash received shall be recognized as the transferor's asset, as shall investments made with that cash, even if made by agents or in pools with other securities lenders, along with the obligation to return the cash. If securities that may be sold or repledged are received, the transferor of the securities being loaned accounts for those securities in the same way as it would account for cash received. See Example 1 (paragraph 860-30-55-1) for an illustration of a securities lending transaction that is accounted for as a secured borrowing in which cash collateral is transferred.

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860-30-25-9 (QA 140 / Not in SSAP No. 103) As noted in paragraphs 860-30-25-4 and 860-30-25-8, the collateral accounting provisions do not apply to cash, or securities that can be sold or pledged for cash, received as so-called collateral for noncash financial assets, for example, in certain securities lending transactions. Such cash or securities that can be sold or pledged for cash are accounted for as proceeds of either a sale or a borrowing. > Sales of Collateral Held 860-30-25-10 (FAS 140 / Not in SSAP No. 103) Obligations to return to the transferor assets borrowed and then sold have sometimes been effectively recognized as part of a liability for securities sold but not yet purchased, and this Section does not require any change in that practice. 860-30-30 – Initial Measurement > Noncash Collateral

860-30-30-1 (FAS 140 / Not in SSAP No. 103) Noncash collateral recognized by the secured party as its asset under paragraph 860-30-25-5(c) that the secured party has not already sold shall be initially measured at fair value. 860-30-35 – Subsequent Measurement

860-30-35-1 This Section provides subsequent measurement guidance for the following assets and liabilities related to transfers that are accounted for as secured borrowings:

a. Pledged assets required to be reclassified

b. Obligation to return transferred collateral.

> Pledged Assets Required to Be Reclassified

860-30-35-2 (QA 140 / Not in SSAP No. 103) A transferor that has transferred collateral that must be reclassified in accordance with paragraph 860-30-25-5(a) (for example, as securities pledged to creditors) shall not change its measurement of that collateral. The transferor shall follow the same measurement principles as before the transfer. For example, securities reclassified from the available-for-sale category to securities pledged to creditors should continue to be measured at fair value, with changes in fair value reported in comprehensive income, while debt securities reclassified from the held-to-maturity category to securities pledged to creditors should continue to be measured at amortized cost. See Topic 320 for guidance related to measurement of investments in securities classified as available for sale and held to maturity. > Obligation to Return Transferred Collateral

860-30-35-3 (QA 140 / Not in SSAP No. 103) This Section does not provide specific guidance on the subsequent measurement of the obligation to return transferred collateral. The liability to return the collateral shall be measured in accordance with other relevant accounting guidance. Paragraph 942-405-35-1 requires that a bank or savings institution that, as transferee, sells transferred collateral subsequently measure that liability like a short sale at fair value.

860-30-40 – Derecognition

860-30-40-1 (FAS 140 / Not in SSAP No. 103) In circumstances where an obligor (transferor) transfers noncash collateral in a secured borrowing and the obligor (transferor) defaults under the terms of the secured contract and is no longer entitled to redeem the pledged asset, the obligor shall derecognize the pledged asset. If the secured party has already sold the collateral, the secured party shall derecognize its obligation to return the collateral.

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860-30-40-2 Otherwise paragraph 860-30-25-5(c) addresses the secured party's accounting for the collateral. (Paragraph 860-30-25-5c is paragraph 19c in SSAP No. 103)

860-30-45 – Other Presentation Matters

860-30-45-1 (FAS 140 / Mostly in SSAP No. 103, paragraph 19a) If the secured party (transferee) has the right by contract or custom to sell or repledge the collateral, then the obligor (transferor) shall reclassify that asset and report that asset in its statement of financial position separately (for example, as security pledged to creditors) from other assets not so encumbered. 860-30-45-2 (QA 140 / Not in SSAP No. 103) Liabilities incurred by either the secured party or obligor in securities borrowing or resale transactions shall be separately classified. 860-30-45-3 (QA 140) This Section does not specify the classification or the terminology to be used to describe the following:

a. Pledged assets reclassified by the transferor of securities loaned or transferred under a repurchase agreement accounted for as a collateralized borrowing if the transferee is permitted to sell or repledge those securities

b. Liabilities incurred by either the secured party or obligor in securities borrowing or resale transactions.

Example 1 (see paragraph 860-30-55-1) illustrates possible classifications and terminology.

860-30-50 – Disclosure 860-30-50-1A An entity shall disclose all of the following for collateral:

a. If the entity has entered into repurchase agreements or securities lending transactions, it shall disclose its policy for requiring collateral or other security. (SSAP No. 103, paragraph 28a.i)

b. As of the date of the latest statement of financial position presented, both of the following:

1. The carrying amount and classifications of both of the following: (SSAP No. 103, paragraph 28a.ii)

i. Any assets pledged as collateral that are not reclassified and separately reported in the statement of financial position in accordance with paragraph 860-30-25-5(a)

ii. Associated liabilities.

2. Qualitative information about the relationship(s) between those assets and associated liabilities; for example, if assets are restricted solely to satisfy a specific obligation, a description of the nature of restrictions placed on those assets. (SSAP No. 103, paragraph 28a.ii)

c. If the entity has accepted collateral that it is permitted by contract or custom to sell or repledge, it shall disclose all the following: (SSAP No. 103, paragraph 28a.iii)

1. The fair value as of the date of each statement of financial position presented of that collateral

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2. The fair value as of the date of each statement of financial position presented of the portion of that collateral that it has sold or repledged

3. Information about the sources and uses of that collateral.

For overall guidance on Topic 860’s disclosures, see Section 860-10-50.

860-30-50-7 (ASU 2014-11) To provide an understanding of the nature and risks of short-term collateralized financing obtained through repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions, that are accounted for as secured borrowings at the reporting date, an entity shall disclose the following information for each interim and annual period about the collateral pledged and the associated risks to which the transferor continues to be exposed after the transfer:

a. A disaggregation of the gross obligation by the class of collateral pledged. An entity shall determine the appropriate level of disaggregation and classes to be presented on the basis of the nature, characteristics, and risks of the collateral pledged. 1. Total borrowings under those agreements shall be reconciled to the amount of the gross

liability for repurchase agreements and securities lending transactions disclosed in accordance with paragraph 210-20-50-3(a) before any adjustments for offsetting. Any difference between the amount of the gross obligation disclosed under this paragraph and the amount disclosed in accordance with paragraph 210-20-50-3(a) shall be presented as reconciling item(s).

b. The remaining contractual maturity of the repurchase agreements, securities lending

transactions, and repurchase-to-maturity transactions. An entity shall use judgment to determine an appropriate range of maturity intervals that would convey an understanding of the overall maturity profile of the entity’s financing agreements.

c. 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.

860-30-50-8 (ASU 2013-01 / SSAP No. 64, paragraph 6) A reporting entity also shall disclose the information required by paragraphs 210-20-50-1 through 50-6 for both of the following that are either offset in accordance with Section 210-20-45 or subject to an enforceable master netting arrangement or similar agreement:

a. Recognized repurchase agreements accounted for as a collateralized borrowing and reverse repurchase agreements accounted for as a collateralized borrowing

b. Recognized securities borrowing and securities lending transactions.

860-30-60 – Relationships 860-30-60-1 (FIN 41 / SSAP No. 64) For the conditions that must be met for an entity to be permitted to offset amounts recognized as payables under repurchase agreements accounted for as collateralized borrowings and amounts recognized as receivables under reverse repurchase agreements accounted for as collateralized borrowings, see paragraphs 210-20-45-11 through 45-12. 860-30-55 – Implementation Guidance and Illustrations

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Illustrations > > Example 1: Securities Lending Transaction Accounted for as a Secured Borrowing

860-30-55-1 (FAS 140 / SSAP No. 103 – Illustration 4) This Example illustrates the guidance in paragraph 860-30-25-8 related to accounting for a securities lending transaction treated as a secured borrowing, in which the securities borrower sells the securities upon receipt and later buys similar securities to return to the securities lender. This Example has the following assumptions:

a. Transferor's carrying amount and fair value of security loaned: $1,000

b. Cash collateral: $1,020

c. Transferor's return from investing cash collateral at a 5 percent annual rate: $5

d. Transferor's rebate to the securities borrower at a 4 percent annual rate: $4.

860-30-55-2 For simplicity, the fair value of the security is assumed not to change during the 35-day term of the transaction. 860-30-55-3 The journal entries for the transferor and the transferee are as follows.

Attachment 5

Attachment 5

Ref #2015-02

Issue Paper


Attachment 5

Ref #2015-02

Short Sales


> > Example 2: Disclosures for Repurchase Agreements, Securities Lending Transactions, and Repurchase-to-Maturity Transactions Accounted for as Secured Borrowings

860-30-55-4 (ASU 2014-11 / Pending review for SAP) This Example illustrates one approach for satisfying the quantitative disclosure requirements in paragraph 860-30-50-7.

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Spring\NM Exposures\Updated\15-02 - IP152 - ED 4-3-16.docx

Attachment 5

Attachment 6

Ref #2015-41


Statutory Accounting Principles Working Group


Form A

Issue: 5*/6* Securities


P/C Life Health


New Issue or SSAP

Interpretation

Description of Issue: This agenda item was drafted in response to a referral from the Valuation of Securities (E) Task Force (VOSTF),

which requested an evaluation by the Statutory Accounting Principles (E) Working Group (SAPWG) on whether

changes to the Special Reporting Instructions (also referred to as the 5*/6* process) in the Purposes and

Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) would be consistent with the

accounting and reporting guidance in the Accounting Practices and Procedures Manual (AP&P Manual). The

following provides excerpts from the referral:

This referral is concerned with the component in Part Two, Section 5 (f) and (g). That component permits an insurer to obtain a 5* or a 6*, (i.e., regulatory designations) if the insurer certifies that it lacks documentation necessary for the SVO to assign an analytically determined NAIC Designation but is receiving agreed upon payments and expects to continue to do so (the “certification process”). Applicable text indicates the certification process can be used to obtain NAIC 5* and NAIC 6* Designations for structured securities. The SVO sought an amendment to clarify that the phrase structured securities refers to complex corporate securities and not to structured finance transactions as some insurers have asserted. The SVO opinion reflects that the Rule has always applied to securities required to be filed with the SVO with an Audited Financial Statement, that the SVO has never had a structured finance assessment function and that structured finance securities are not assessed using Audited Financial Statements. The only instance in which the Rule provides for the assignment of a 5* or 6* to a structured finance security is with respect to RMBS and CMBS in the component of the Rule related to financial modeling administered by the SSG, not the certification process administered by the SVO.

In public discussions, the SVO has expressed a number of related concerns. The population has grown 435% between 2011 and 2014. Increasingly, transactions submitted under the certification process cannot be evaluated by the SVO or SSG prior to permitting the certification because the nature of the transactions is not matched by SVO or SSG skill sets. While some insurers ask the SVO if a certification is appropriate for a given security, others dispute that the SVO has any authority to intervene except to process the certification. And, as most relevant here, and in connection with the increase in complex filings, the SVO is concerned that the certification process, which antedates the AP&PM, may be inconsistent with current admitted asset standards. The Task Force is in agreement with a recommendation that if the conversion process is intended to be an insurer certification, the SVO should have no analytical role in it, and perhaps should be moved into an interrogatory as the ACLI has requested. There are other components of the Rule that are adjuncts to SVO and or SSG analytical functions and that are therefore not implicated in the discussion about the certification process

The Task Force requests that the Statutory Accounting Principles (E) Working Group evaluate the accounting & reporting impact of removing the SVO from the application of 5*/6* Rule by allowing insurer’s to provide a similar certification in the General Interrogatories to the Annual & Quarterly Statements. Under current guidance in the AP&P Manual, 5* and 6* securities receive the same accounting treatment as similar lower-quality securities for which credit analysis has been completed (NAIC designations of 5 & 6). As identified in this memorandum, the population of 5*/6* securities reported in the statutory financial statements has grown exponentially, and the SVO and SSG have expressed concerns regarding their ability to perform adequate due diligence related to the current Instruction.

Attachment 6

Ref #2015-41


Existing Authoritative Literature:

As identified in the referral, statutory accounting guidance does not differ for “starred” (*) securities.

NAIC 5 and 5* are accounted for the same within a SSAP.

NAIC 6 and 6* are accounted for the same within a SSAP.

The specific SSAP for the investment determines the appropriate accounting and reporting:

SSAP No. 26—Bonds

5 or 5* - Non-AVR Filer – Lower of Amortized Cost or Fair Value

5 or 5* - AVR Filer – Amortized Cost

6 or 6* - Lower of Amortized Cost or Fair Value (both AVR and Non-AVR filers)

SSAP No. 43R—Loan-Backed and Structured Securities

5 or 5* - Non-AVR Filer – Lower of Amortized Cost or Fair Value

5 or 5* - AVR Filer – Amortized Cost

6 or 6* - Lower of Amortized Cost or Fair Value (both AVR and Non-AVR filers)

SSAP No. 32—Preferred Stock (No variations between AVR & Non-AVR filers)

5 or 5* - Redeemable Preferred (Characteristics of Debt) - Lower of Amortized Cost or Fair Value

5 or 5* - Perpetual Preferred (Characteristics of Equity) - Lower of Amortized Cost or Fair Value

6 or 6* - Lower of Amortized Cost or Fair Value

AVR Impact - Factors for AVR:

Basic Contribution

Factors

Reserve Objective

Factor

Maximum Reserve

Factor

Exempt 0.0000 0.0000 0.0000

NAIC 1 0.0004 0.0023 0.0030

NAIC 2 0.0019 0.0058 0.0090

NAIC 3 0.0093 0.0230 0.0340

NAIC 4 0.0213 0.0530 0.0750

NAIC 5 0.0432 0.1100 0.1700

NAIC 6 0.0000 0.2000 0.2000

If a lower value was initially reported for an item reported at NAIC 5, the AVR factor would be taken

against the lower amount, resulting in a lower contribution to AVR. (This is an ongoing circumstance for

all instances in which BACV is reduced, but is after adjustments for when losses are recorded.)

However, if the decision was made to require a lower of amortized cost or fair value for NAIC 5

investments, it is anticipated that there would need to be an adjustment to AVR to potentially change the

factors (potentially in an approach similar to NAIC 6).

In reviewing the RBC charges, there is no distinction between “starred” (*) and non-starred securities:

Line of Business 5 * and 5* Designation 6 and 6* Designation

Life, Accident and Health .23 .3

Fraternal .23 .3

Property and Casualty .1 .3

Health .1 .3

Attachment 6

Ref #2015-41


In reviewing the financial statements for year-end 2014 for 5* securities:

Total 5* Designated Bond

Securities

# of

5*

Fraternal

7 3 Reported at amount less than Fair Value

4 Reported at Fair Value (Agreed to AC)

1 Reported at zero value

Life 309 129 Reported at amount less than Fair Value

80 Reported at Fair Value (2 instances still greater than AC)

100 Reported at amount greater than Fair Value

Property & Casualty 101 63 Reported at amount less than Fair Value


Health 26 3 Reported at amount less than Fair Value


In reviewing the individual percentage differences between the reported BACV and fair value for 5* items or the

100 items (life) reported at an amount greater than fair value:

Differences Between the

Reported BACV and Fair Value

18 Less than 1%

17 Between 1-2%

11 Between 2-3%

6 Between 3-5%

18 Between 5-10%

19 Between 10-20%

6 Between 20-30%

2 Between 30-50%

1 67%

1 93%

Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC, FASB,

other State Departments of Insurance or other NAIC groups): This agenda item is in direct response from a

2015 referral received from the VOSTF regarding 5* securities.

Additionally, agenda item 2015-17 is currently discussing the NAIC 5 measurement method. As the

measurement method (and RBC) is consistent between NAIC 5 and NAIC 5* investments, the decisions

made within that agenda item may impact this item. In reviewing the individual percentage differences

between the reported BACV and fair value for NAIC 5 items for the 113 (life) reported at an amount greater than

fair value:

Total 5 Designated

Bond Securities

# of 5

Life 295 91 Reported at amount less than Fair Value

91 Reported at Fair Value

Attachment 6

Ref #2015-41


113 Reported at amount greater than Fair Value

Differences Between the

Reported BACV and Fair Value

18 Less than 1%

7 Between 1-2%

3 Between 2-3%

8 Between 3-5%

22 Between 5-10%

31 Between 10-20%

6 Between 20-30%

13 Between 30-50%

1 50%

1 67%

1 70%

1 75%

1 82%


Recommendation:

It is recommended that the Working Group move this item to the nonsubtantive active listing and expose

this agenda item requesting comments on whether revisions are needed to statutory accounting if the SVO

no longer provides a designation of 5* investments after reviewing insurer self-certifications. This process

would remove the SVO from all elements of the designation process for 5* securities (including due-

diligence work on whether the investment should have been filed), and ultimately result with 5* securities

being consider insurer-designated securities with a general interrogatory identifying the self-designation.

(Currently, 5* securities are not considered insurer-designated, and only 6* securities are considered as

such.) The SVO has asked to be removed from providing oversight to insurer self-certifications and the VOSTF

has accepted an industry recommendation that the alternative of an interrogatory be considered and a referral for

this purpose has been made to the SAPWG. If this proposal is adopted, the SVO role for would be limited to an

“administrative role” to log the self-assigned designations into NAIC systems.

Possible elements for discussion:

Should NAIC 5 and 5* continue to receive the same measurement and RBC if the SVO is removed from

the NAIC 5* designation process and the insurer self-designates 5* securities?

Although credit-assessments do not occur, prior SVO actions for 5* securities have included due-

diligence to determine whether the security could/should be filed with the NAIC for a designation. With

the insurer self-certification, is there concern that securities that should be filed, will not be filed with the

NAIC? As NAIC 5* securities are permitted amortized cost measurement under SSAP No. 26 and 43R,

and the same RBC charge, it may be perceived more advantageous (based on the security and/or costs to

file) to utilize the 5* self-designation approach rather than file the security and receive an NAIC 6

designation or pay the filing fee.

Would regulators find a disclosure be beneficial to identify the number of 5* securities, increase in such

securities from the prior year, and a comparison of the reported value and fair value?

Attachment 6

Ref #2015-41


In response to the exposure of agenda item 2015-17, Measurement Method for NAIC 5 Designations, the

following comments related to this item were received from interested parties:

Interested parties are supportive of the existing initiative to end filing of principle and interest certifications with the NAIC Investment Analysis Office, while creating a new General Interrogatory to capture information on NAIC 5* designated bonds. We believe this change will increase transparency around NAIC 5* bonds held by insurers while providing a useful tool for financial examiners to identify and test these investments. We do not believe any additional changes are needed to the accounting and reporting framework. The Valuation of Securities Task Force (the VOSTF) developed the NAIC 5* Designation in order to fulfill its charge of providing the procedures for specifying an NAIC Designation for all bonds and preferred stock. While rating agencies provide ratings for a majority of bonds with the Investment Analysis also providing ratings, the NAIC 5* /6* methodology adopted by the VOSTF fills what would otherwise be a gap. Common examples of the use of this designation include bonds with financial statements prepared in accordance with accounting standards the SVO has not been authorized to evaluate, and bonds where the insurer has recourse to affiliates of the issuer, and those affiliates do not have audited financial statements. Under these circumstances, if the insurer expects to receive all principle and interest payments, they can receive a 5* designation, otherwise the security receives a 6* rating. While it is true that the Investment Analysis Office does not perform a credit analysis on these securities, applying a NAIC 5 rating requires insurers to establish an AVR and hold capital at levels reserved for securities that have a high probability of default, even though these investments as a whole generally have credit risk associated with higher rated bonds. NAIC 5 bonds overall represent approximately 1% of insurers bond holdings, and out of this population less than 10% are designated NAIC 5*. Given these circumstances as well as the increased transparency that would result from the proposed General Interrogatory, we do not believe further revisions by regulators are needed.


Julie Gann – October 2015

Status:

On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the

nonsubstantive active listing and exposed this agenda item requesting comments on whether revisions are needed

to statutory accounting if the SVO no longer provides a designation of 5* investments after reviewing insurer self-

certifications and if insurers self-designate with disclosure in a general interrogatory.

On April 3, 2016, the Statutory Accounting Principles (E) Working Group exposed nonsubstantive revisions to

incorporate a new disclosure to capture current and prior period information on the number of 5* securities and

the book adjusted carrying value and fair value for those securities. The Blanks (E) Working Group also exposed

revisions to data-capture this disclosure information. The Working Group also directed NAIC staff to respond to

the Valuation of Securities (E) Task Force referral noting the proposal of the disclosure in response to the change

for determining 5* designations.

SSAP No. 1 – New section, subsequent paragraphs will be renumbered:

5* Security Disclosure

28. For each annual reporting period, a comparable disclosure to the prior annual reporting period of the number of 5* securities, by investment type, and the book adjusted carrying value and fair value for those securities. This disclosure is required in the interim, pursuant to the Preamble, if there have been significant changes from the prior annual reporting statement. If significant changes require inclusion in more than one quarterly reporting statement in a single

Attachment 6

Ref #2015-41


annual reporting year, the comparison period shall continue to reflect the prior annual reporting period.

The following shows the proposed annual statement illustration but is not proposed to be copied in the SSAPs:

AVR Filers:

Investment Number of 5* Securities Aggregate BACV Aggregate Fair Value

Current Year Prior Year Current Year Prior Year Current Year Prior Year

Bonds

LB&SS

Preferred Stock

Non-AVR Filers:

Investment Number of 5* Securities Aggregate BACV Aggregate Fair Value

Current Year Prior Year Current Year Prior Year Current Year Prior Year

Bonds – AC

Bonds – FV

LB&SS - AC

LB&SS - FV

Preferred Stock - AC

Preferred Stock - FV

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\6 - 15-41 - Referral from VOSTF

on 5 Star_6 Star Securities.docx

Attachment 7

Ref #2016-04




Form A

Issue: SSAP No. 97 – Data Captured SCA Disclosure


P/C Life Health


New Issue or SSAP

Interpretation

Description of Issue:

On Nov. 19, 2015, the Statutory Accounting Principles (E) Working Group (Working Group) adopted revisions to

SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities to incorporate a new disclosure

detailing the reported value for SCAs, as well as information received after filing the SCA with the NAIC

(Agenda Item Ref #2015-25). This disclosure was a nonsubstantive revision and effective for the 2015 financial

statements (narrative disclosure). The Working Group directed staff to prepare a blanks proposal for the

disclosure to be data-captured in the 2016 financial statements. The adopted disclosure to SSAP No. 97:

34. All SCA investments (except 8b.i. entities) shall include disclosure of the SCA balance sheet value (admitted and non-admitted) as well as information received from the NAIC in response to the SCA filing (e.g., date and type of filing, NAIC valuation amount, whether resubmission of filing is required). This disclosure shall include an aggregate total of all SCAs (except 8.b.i entities) with detail of the aggregate gross value under SSAP No. 97, with the admitted and nonadmitted amounts reflected on the balance sheet.

The purpose of this agenda item is to detail the proposed data-captured template for the SSAP No. 97, paragraph

34 disclosure. Proposed revisions to the adopted disclosure addresses the following: 1) at the request of a

regulator, the disclosure identifies the company’s ownership percentage of the SCA, 2) inclusion of a code

column to assist companies in completing this disclosure, and 3) removal of the exclusion for 8.b.i entities. These

revisions are intended to address questions with respect to the types of differences that may arise between the

disclosed balances. Also, 8.b.i entities are exempt from filing with the NAIC, however, including on the

disclosure (without requiring filing info) will allow for a full disclosure of SCAs.

Existing Authoritative Literature: SSAP No. 97, Paragraph 34, as detailed above.


FASB, other State Departments of Insurance or other NAIC groups): Agenda Item Ref #2015-25




Staff recommends that the Working Group move this agenda item to the active listing, categorized as

nonsubstantive, and expose the proposed revisions as detailed in the Spring 2016 National Meeting section

of this agenda item. In addition to the data-captured template, staff is proposing a revision to the disclosure to

remove the reference that 8b.i entities are excluded and clarify that SSAP No. 48 entities are not subject to this

disclosure. With the exposure of this item, a blanks proposal will be submitted to the Blanks (E) Working Group

with a request for concurrent exposure so that the disclosure can be data-captured for year-end 2016.

Staff Review Completed by: Josh Arpin and Fatima Sediqzad, NAIC Staff — March 2016

Attachment 7

Ref #2016-04


Status:

On April 3, 2016, the Working Group moved the agenda item to the active listing, categorized as nonsubstantive,

and exposed revisions as detailed in the Spring 2016 National Meeting section below.

Ref #2016-04


Spring 2016 National Meeting Proposed Revisions

Staff recommends the following revision to SSAP No. 97:

34. All SCA investments within the scope of SSAP No. 97 (except 8b.i. entities) shall include disclosure of the SCA balance sheet value (admitted and non-admitted) as well as information received from the NAIC in response to the SCA filing (e.g., date and type of filing, NAIC valuation amount, whether resubmission of filing is required). This disclosure shall include an aggregate total of all SCAs (except 8.b.i entities) with detail of the aggregate gross value under SSAP No. 97, with the admitted and nonadmitted amounts reflected on the balance sheet. (As noted in paragraph 4 of SSAP No. 97, joint ventures, partnerships and limited liability companies are accounted for under the guidance in SSAP No. 48. As such, those entities are not subject to this disclosure.)

Staff recommends the following data-captured template for the disclosure outlined above (see following page for additional information):

Description of SCA

Investment

(Per SSAP No. 97)

Percentage

(%) of SCA

Ownership

#

Gross

Amount

(Balance

Sheet

column

1)

Nonadmitted

Amount

(Balance

Sheet Column

2)

Admitted

Asset

Amount

(Balance

Sheet

Column

3)

Date of

Filing

to

NAIC

Type of NAIC

Filing

(Sub-1, Sub-2,

or

Resubmission

of Disallowed

Filing)

NAIC

Response

Received

(yes/no)

NAIC

Valuation

(Amount)

NAIC

Disallowed

Entity’s

Valuation

Method,

Resubmission

Required

(yes/no)

Code

(1 or 2 as

noted

below)

A B C D E F G H I J K

a. 8a Entities

Total – 8a entities

b. 8b(i) Entities*

c. 8b(ii) Entities

d. 8b(iii) Entities

e. 8b(iv) Entities

Total – 8b Entities

Aggregate Total:

Ref #2016-04


* — 8b.i entities are not required to be filed with the NAIC. Therefore, columns F through K are not applicable to

8b.i entities. Columns A through E are still required to be completed, as the NAIC will compile this information.

# — SCA Ownership is defined in SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities.

The amount represented in this column shall reflect the reporting entity’s percentage of ownership in the SCA.

This percentage may be less than the full holding company ownership percentage which determined “control”

resulting in the requirement to file.

Additional Column Information:

Code Options (Column K)

1. Immaterial changes in the reported SCA amount should be noted in this column with an “I.”

2. Any material changes in the reported SCA amount and/or NAIC disallowed or nonadmitted changes

should be noted with an “M” and described in a narrative disclosure accompanying the table.

Admitted Asset Balance and NAIC Valuation (Columns E and I)

The amount reported in column E represents the current year-end financial statement, whereas the amount

reported in column I represents the amount from the company’s NAIC filing, received earlier in the year. The

NAIC filing is supported by the prior year-end annual audited financial statements of the SCA. As such, there is a

difference in the reporting time frames of the information contained in this disclosure, which generally is based on

any gains or losses of the SCA (pursuant to SSAP No. 97). These gains and losses generally represent an

immaterial amount of the reported SCA balance, however, material changes shall be coded with an “M” in

column K and further disclosed.

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\7 - 16-04 - SSAP No. 97 - SCA

Disclosure.docx

Attachment 8

Ref #2016-05




Form A

Issue: Removal of the Class 1 List from the P&P Manual


P/C Life Health


New Issue or SSAP

Interpretation


Effective October 14, 2016, under regulations recently adopted by the US Securities and Exchange Commission

(SEC), institutional prime money market funds are required to report a floating net asset value (NAV) instead of a

stable net asset value (NAV). Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual (P&P Manual)

contains the NAIC’s Class 1 List, which identifies money market funds that can be reported as bonds by insurers

in part because they are permitted to report stable NAV under SEC regulations. Because of the regulations

adopted by the SEC, the money market funds on the Class 1 List fit the SEC definition of institutional prime

funds and therefore, such money market funds can no longer report stable NAV and accordingly will no longer be

eligible for bond treatment under statutory accounting. At the 2015 Fall National Meeting, the Valuation of

Securities (E) Task Force instructed the SVO to complete the following: (1) renew the Class 1 List for January

2016, but to provide for the expiration of the Class 1 List effective September 30, 2016 and (2) prepare an

amendment to the P&P Manual to delete instructions related to the Class 1 List, effective September 30, 2016.

As a result of the actions taken by the Task Force, NAIC staff identified necessary revisions to SSAP No. 26—

Bonds, SSAP No. 30—Common Stock and SSAP No. 32—Preferred Stock to reflect the removal of the Class 1

List. In addition to the removal of references to the Class 1 List, staff has proposed revisions to specifically

identify the remaining “Mutual Fund Lists” found in Part 6, Section 2 of the P&P Manual.


SSAP 26—Bonds:

2. Bonds shall be defined as any securities representing a creditor relationship, whereby there is a fixed schedule for one or more future payments. This definition includes:

i. Exchange Traded Funds, which qualify for bond treatment, as identified in the Purposes and Procedures Manual of the NAIC Investment Analysis Office, and

j. Class 1 Bond Mutual Funds, as identified in the Purposes and Procedures Manual of the NAIC Investment Analysis Office.

SSAP No. 30—Common Stock

3. Common stocks (excluding investments in affiliates) are securities which represent a residual ownership in a corporation and shall include:

d. Shares of mutual funds, except for certain money market funds, Class 1 Bond Funds, and Exchange Traded Funds, which qualify for bond or preferred stock treatment, as designated in the Purposes and Procedures Manual of the NAIC Investment Analysis Office, regardless of the types or mix of securities owned by the fund, e.g., bonds, stocks, money market instruments, or other type of investments;

Attachment 8

Ref #2016-05


SSAP No. 32—Preferred Stock

3. ……. Preferred Stock shall include but not limited to:

c. Exchange Traded Funds, which qualify for preferred stock treatment, as identified in the Purposes and Procedures Manual of the NAIC Investment Analysis Office

Purposes and Procedures Manual: Part Six, Section 2 (b) (ii)

A money market fund is eligible for listing on the Class 1 List if the fund meets the following conditions: (A) The fund maintains a rating of Am or better from Standard and Poor's or a rating of A-mf or better from Moody’s Investor's Services or an equivalent or better rating from another NAIC CRP. (B) The fund maintains a stable net asset value per share of $1.00 at all times. (C) The fund allows a maximum of seven-day redemption of proceeds. (D) The fund invests at least ninety-seven percent (97%) of its total assets in any combination of: the U.S. Government securities listed in Section 2 (e) of this Part below, securities rated in the highest short-term rating category by an NAIC CRP, unrated securities determined by the fund's Board to be of comparable quality, securities of money market funds that are registered investment companies and collateralized repurchase agreements comprised of such obligations at all times. The remaining three percent (3%) may be invested in Second Tier Securities as that phrase is defined by Rule 2a-7 of the Investment Company Act of 1940 (17 CFR 270.2a-7).


FASB, other State Departments of Insurance or other NAIC groups): The revisions proposed to the

Accounting Practices and Procedures Manual are the direct result of actions taken by the VOSTF and SVO.

Therefore, discussion (if any) on the regulations adopted by the SEC, and the elimination of the Class 1 list,

should be held at the VOSTF.

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:

None

Convergence with International Financial Reporting Standards (IFRS): None



nonsubstantive, and expose revisions to SSAP Nos. 26, 30 and 32 as outlined in the “Spring 2016 National

Meeting – Proposed Revisions” section of the agenda item. With the exposure of this item, a blanks proposal

will be submitted to the Blanks (E) Working Group with a request for concurrent exposure so that the changes

needed to remove the references to the “Class 1 List” and properly reference the remaining lists in the financial

statements for year-end 2016.


Josh Arpin, NAIC Staff — January 2016

Status:

On April 3, 2016, the Working Group moved the agenda item to the active listing, categorized as nonsubstantive

and exposed revisions to SSAP Nos. 26, 30 and 32 as shown below:

Spring 2016 National Meeting – Exposed Revisions

Consistent with the amendments to the P&P Manual, the following revisions are proposed to have an effective

date of September 30, 2016. Additionally, SSAP paragraph references will be updated as applicable.

Attachment 8

Ref #2016-05


SSAP 26—Bonds: 2. Bonds shall be defined as any securities representing a creditor relationship, whereby there is a fixed schedule for one or more future payments. This definition includes:

i. Exchange Traded Funds, which qualify for bond treatment, as identified designated in Part Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office, ; and

j. Class 1 Bond Mutual Funds which qualify for the Bond List, as identified designated in Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office., and

k. Money Market Funds which qualify for the U.S. Direct Obligations / Full Faith and Credit Exempt List, as designated in Part Six, Section 2 (b) (i) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office.

SSAP 30—Common Stock:


d. Shares of mutual funds, except for certain money market funds, Class 1 Bond Funds, and Exchange Traded Funds, which qualify for bond or preferred stock treatment, as designated in the Purposes and Procedures Manual of the NAIC Investment Analysis Office, regardless of the types or mix of securities owned by the fund, (e.g., bonds, stocks, money market instruments, or other type of investments), except for;:

i. Bond Mutual Funds which qualify for the Bond List, as designated in Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office;

i.ii. Money Market Funds which qualify for the U.S. Direct Obligations / Full Faith and Credit Exempt List, as designated in Part Six, Section 2 (b) (i) pf the Purposes and Procedures Manual of the NAIC Investment Analysis Office

e. Exchange Traded Funds, except for those which qualify for bond or preferred stock treatment, as designated in Part Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office;

SSAP No. 32—Preferred Stock: 3. Preferred Stock shall include but not limited to:

c. Exchange Traded Funds, which qualify for preferred stock treatment, as identified designated in Part Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office

May 18, 2016 –Updated Staff Recommendation: In considering questions regarding the reporting of Money Market Mutual Funds after the elimination of the Class

1 List, staff proposes additional revisions to SSAP No. 2 as illustrated below. As detailed in the recommended

revisions, staff recommends that all Money Market Mutual Funds registered under the Investment Company Act

of 1940 and regulated under rule 2a-7 of the Act be considered short-term investments. With this short-term

classification, these investments will be on Schedule DA. Staff also recommends a referral to the VOSTF to

remove reporting references related to MMMFs in the P&P Manual, as well as a referral to the Blanks

Task Force requesting an amendment to their exposure. This amendment would not delete the current “Class

Attachment 8

Ref #2016-05


1” reporting line on DA, but instead rename it to “All Other MMMFs”. (The exempt MMMFs already have a

separate line.)

Staff believes the following components of the SEC Rule support this classification:

MMMF portfolio is not allowed to include any security that has a remaining maturity of over 397

calendar days. The MMMF must maintain a dollar-weighted average portfolio maturity that does not

exceed 60 days.

MMMF portfolio shall limit investments to US denominated securities that present minimal credit risks.

The portfolio must be 97% “first tier securities”. (First Tier Securities are defined as securities with the

highest short-term debt obligation rating from an NRSRO, unrated securities deemed comparable to those

required with a rating from an NRSRO, another MMMF, or a government security.) For the 3% that can

be second-tier, they must mature within 45 calendar days.

MMMF rules prevent acquisition of any illiquid security that would result with more than 5% of the fund

in illiquid securities. The rule defines “illiquid security” as one that cannot be sold or disposed of in the

ordinary course of business within 7 days at approximately the value ascribed to it in the fund. There are

also requirements on the percentage of “daily liquid” assets and “weekly liquid” assets to be in the

MMMF. If the 30% weekly liquid percentage is not met, then the fund could impose fees (no more than

2%) to redeem, or temporarily suspend (gate) redemptions for up to 10 days. The rules prevent MMMF

from imposing a “gate” for more than 10 days in any 90-day period.

Institutional prime and institutional municipal money market funds will be required to transact at a

market-based, or variable, net asset value (NAV). Once implemented, daily share prices of these money

market funds will fluctuate along with changes, if any, in the market-based value of their underlying

portfolio securities. (With the inclusion in SSAP No. 30, MMMFs will be reported at fair value. This is

considered consistent with the market-based valuation required by the SEC. Subsequent consideration

will occur for NAV, (as that will be a broader scope agenda item) however, due to the nature of MMMFs,

there is no anticipated difference between fair value and NAV.)

It is staff’s recommendation that the 10-day “gate” or any fees related to redeeming when the MMMF has not met

its percentage of “weekly liquid assets” should not restrict classification as short-term.

(Staff note – References to “designated” on the SVO lists have been changed back to “identified.” This was

originally changed to reflect initial preference from the SVO, but after subsequent decisions, use of the word

“identified” has been deemed to provide sufficient guidance, and may be considered less confusing with other

uses of the word “designate.”)

To reflect staff’s recommendation, additional revisions are proposed to SSAP No. 2 as illustrated (shaded) below:

SSAP 2—Cash, Drafts and Short-Term Investments:

Short-Term Investments

10. All investments with remaining maturities (or repurchase dates under repurchase agreements) of one year or less at the time of acquisition (excluding those investments classified as cash equivalents as defined in paragraph 3) shall be considered short-term investments. Short-term investments include, but are not limited to, bonds, commercial paper, money market instruments, repurchase agreements, and collateral and mortgage loans which meet the above criteria. Money Market Mutual Funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7 of the Act are short-term investments whether they are accounted for under SSAP No. 26

2 or SSAP No. 30. Short-term investments shall not include certificates of deposit.

Attachment 8

Ref #2016-05


New Footnote 2: As detailed in SSAP No. 26, money market mutual funds on the U.S. Direct Obligations / Full Faith and Credit Exempt List, as identified in Part Six, Section 2 of the Purposes and Procedures Manual of the NAIC Investment Analysis Office are accounted for under SSAP No. 26. All other Money Market Mutual Funds shall be accounted for under SSAP No. 30.

11. All short-term investments shall be accounted for in the same manner as similar long-term investments. Investments in money market funds shall be reported in accordance with the guidance in the Purposes and Procedures Manual of the NAIC Investment Analysis Office. 12. Short-term investments meet the definition of assets as defined in SSAP No. 4 and are admitted assets to the extent they conform to the requirements of this statement.

SSAP 26—Bonds:

2. Bonds shall be defined as any securities representing a creditor relationship, whereby there is a fixed schedule for one or more future payments. This definition includes:

i. Exchange Traded Funds, which qualify for bond treatment, as identified designated identified in Part Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office, ; and

j. Class 1 Bond Mutual Funds which qualify for the bond treatmentList, as identified designated identified in Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office., and

k. Money Market Mutual Funds which qualify foron the U.S. Direct Obligations / Full Faith and Credit Exempt List, as designated identified in Part Six, Section 2 (b) (i) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office.

SSAP 30—Common Stock:


f. Shares of mutual funds, except for certain money market funds, Class 1 Bond Funds, and Exchange Traded Funds, which qualify for bond or preferred stock treatment, as designated in the Purposes and Procedures Manual of the NAIC Investment Analysis Office, regardless of the types or mix of securities owned by the fund, (e.g., bonds, stocks, money market instruments, or other type of investments), except for;:

i. Bond Mutual Funds which qualify for the Bond List treatment, as identified designated in Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office;

i.ii. Money Market Mutual Funds which qualify foron the U.S. Direct Obligations / Full Faith and Credit Exempt List, as designated identified in Part Six, Section 2 (b) (i) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office

f.g. Exchange Traded Funds, except for those which qualifyidentified for bond or preferred stock treatment, as identified designated in Part Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office;

SSAP No. 32—Preferred Stock: 4. Preferred Stock shall include but not limited to:

Attachment 8

Ref #2016-05


d. Exchange Traded Funds, which qualify for preferred stock treatment, as identified designated identified in Part Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\8 - 16-05 - 5-18-2016 - Removal of the Class 1 List from the P&P Manual.docx

Attachment 9

Ref #2016-09




Form A

Issue: Collateral Received


P/C Life Health


New Issue or SSAP

Interpretation

Description of Issue: A regulator has brought to the attention of NAIC Staff that Statutory Accounting Principles currently does not

have guidance or a reporting requirement for the aggregate amount and nature of assets received as collateral and

reported within the insurer’s financial statements. Although a corresponding liability is generally recognized for

the return of this collateral, it was noted that the location and classification of this liability may not be consistent,

and it could be included with other liabilities, making it difficult to identify within the financial statements. If the

collateral assets are included with the insurer’s assets on the balance sheet and investment schedules, financial

assessments made based off of this data can be skewed (e.g., liquidity assessments can be overstated, creating a

favorable position, as collateral received is incorrectly included in the calculation). Although the balance sheet is

correctly stated (with both assets and liabilities reported), a request has been received for further disclosures to

allow regulators the ability to make adjustments in their assessments when reviewing the invested assets of a

reporting entity.


Statutory accounting principles provide guidance for collateral pledged and still reflected on the balance sheet

(SSAP No. 1 and INT 01-31). There is limited guidance for collateral received, and most of this pertains to

securities lending in SSAP No. 103. (Information on securities lending collateral “on-balance sheet” is captured in

Schedule DL. As collateral can be received and reflected on balance sheet in scenarios outside of securities

lending, the current guidance does not encompass all possible scenarios.


FASB, other State Departments of Insurance or other NAIC groups): None



Recommendation:


nonsubstantive, and expose revisions to SSAP No. 1—Accounting Policies, Risks & Uncertainties and Other

Disclosures to add an additional disclosure to capture the aggregate total of collateral assets reported as

assets on the insurer’s financial statement and the corresponding liability. At this time, staff is only

proposing an aggregate disclosure, but feedback from regulators is requested on the amount of detail that would

be beneficial for their use.

Attachment 9

Ref #2016-09


SSAP No. 1

23. For each year that a balance sheet is presented (annual), reporting entities shall disclose the following information in the financial statements:

a. Amounts not recorded in the financial statements that represent segregated funds held for others, the nature of the assets and the related fiduciary responsibilities associated with such assets. One example of such an item is escrow accounts held by title insurance companies; and

b. The amount and nature of any assets pledged to others as collateral or otherwise

restricted (e.g., not under the exclusive control, assets subject to a put option contract, etc.)

1 in the general and separate accounts

2 by the reporting entity in comparison to total

assets and total admitted assets. (Pursuant to SSAP No. 4, paragraph 6, all assets pledged as collateral or otherwise restricted shall be reported in this disclosure regardless if the asset is considered an admitted asset.) This disclosure shall include the following items:

i. Reported assets subject to contractual obligation for which liability is not

shown; ii. Collateral held under security lending agreements; iii. Assets subject to repurchase agreements; iv. Assets subject to reverse repurchase agreements; v. Assets subject to dollar repurchase agreements; vi. Assets subject to dollar reverse repurchase agreements; vii. Assets placed under option contracts; viii. Letter stock or securities restricted as to sale – excluding FHLB stock; ix. FHLB capital stock; x. Assets on deposit with states; xi. Assets on deposit with other regulatory bodies; xii. Pledged as collateral to the FHLB (including assets backing funding

agreements); xiii. Assets pledged as collateral not captured in other categories; and xiv. Other restricted assets c. The amount and nature of any assets received as collateral, reflected as assets within

the reporting entity’s financial statements, and the recognized liability to return these collateral assets, in the general and separate accounts in comparison to total assets and admitted assets.


Fatima Sediqzad - NAIC Staff, March 2016

Status:


and exposed revisions to SSAP No. 1—Accounting Policies, Risks & Uncertainties and Other Disclosures to add

an additional disclosure to capture the aggregate total of collateral assets reported as assets on the insurer’s

financial statement and the corresponding liability.

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\9 - 16-09 - Collateral Received.docx

Attachment 10

Ref #2016-11




Form A

Issue: Insurance Linked Securities – Disclosure Data Capture


P/C Life Health


New Issue or SSAP

Interpretation

Description of Issue: On November 19, 2015, the Working Group adopted revisions to SSAP No. 1—Accounting Policies, Risks &

Uncertainties and Other Disclosures to incorporate a disclosure to identify possible proceeds for insurance-linked

securities. This disclosure was required in the 2015 financial statements as a “pdf” disclosure. The Working

Group indicated that they would review the disclosure in 2016 to consider if modifications to the disclosure are

appropriate, and proceed with a blanks proposal to have the disclosure data-captured.

Subsequent to the adoption of the disclosure, staff received several comments regarding the application and

completion of the disclosure under certain circumstances, including when the reporting entity could not accurately

complete all components of the disclosure, because they were not aware of certain actions taken by a reinsurer or

reliable information regarding the number of contracts was not available. As a result of these inquiries, staff

worked with the SAPWG chair to provide limited application guidance for year-end 2015 by the cedent reporting

entity. (The application guidance was specific for cedents, and did not apply to direct writer issued ILS and did

not represent authoritative literature) Elements from this application guidance have been incorporated into the

proposed Annual Statement Blank and Instruction revisions detailed in the agenda item. In addition, as noted at

the 2015 Fall National Meeting, comments were provided by the National Association of Mutual Insurance

Companies (NAMIC), specifically requesting that the Working Group consider potential revisions to the

disclosure in 2016 to capture indemnity versus non-indemnity based ILS.

Existing Authoritative Literature: SSAP No. 1

25. Reporting entities shall disclose information when they may receive possible proceeds as the issuer, ceding insurer, or counterparty of insurance-linked securities. Insurance-linked securities (ILS) are securities whose performance is linked to the possible occurrence of pre-specified events that relate to insurance risks. While catastrophe bonds (cat bonds) may be the most well-known type of ILS, there are other non-cat-bond ILS, including those based on mortality rates, longevity and medical-claim costs. ILS securities may be used by an insurer, or any other risk-bearing entity, in addition to (or as an alternative to) the purchase of insurance or reinsurance. This disclosure shall specifically identify the following:

a. Whether the reporting entity may receive possible proceeds as is the issuer, ceding insurer, or counterparty of insurance-linked securities as a way of managing risks related to directly-written insurance risks. This disclosure shall include the number of outstanding ILS contracts, and the aggregate maximum proceeds that could be received as of the reporting date under the terms of the ILS. b. Whether the reporting entity may receive possible proceeds as is the issuer, ceding insurer, or counterparty of insurance-linked securities as a way of managing risk related to assumed insurance risks. This disclosure shall include the number of outstanding ILS contracts, and the aggregate maximum proceeds that could be received as of the reporting date under the terms of the ILS.

Attachment 10

Ref #2016-11



FASB, other State Departments of Insurance or other NAIC groups): Agenda Item 2015-34





Nonsubstantive, and expose proposed revisions to the Annual Statement Instructions as shown in the

“Spring 2016 National Meeting Proposed Data Capture Disclosure Template” section below. These

revisions include the data-capture disclosure template for 2016 and language clarifying how disclosure

components should be completed. Staff is recommending that this disclosure template be used for data capture in

the 2016 year-end financial statements to allow for the compilation and review of the aggregate data. Upon review

of this data in 2017, including its usefulness and accuracy, staff would propose that the Working Group, if they

desire, reassess this disclosure for possible modification (including potential revisions to capture indemnity vs.

non-indemnity based ILS).


Josh Arpin, NAIC Staff

March 2016

Status:

On April 3, 2016, the Working Group moved this agenda item to the active listing, categorized as nonsubstantive,

and exposed the proposed data capture disclosure template with instructions to complete the disclosures, as

illustrated below:

Spring 2016 National Meeting Proposed Data Capture Disclosure Template

Staff Note: The following was also exposed by the Blanks (E) Working Group during the 2016

Spring National Meeting. The information included in Footnote 1 provides additional information

for completing the disclosure for ceding insurers. No changes to the existing SSAP No. 1 disclosure

were exposed.

H. Insurance-Linked Securities (ILS) Contracts

Reporting entities shall disclose information when they may receive possible proceeds as the issuer, ceding insurer, or counterparty of insurance-linked securities. Insurance-linked securities (ILS) are securities whose performance is linked to the possible occurrence of pre-specified events that relate to insurance risks. While catastrophe bonds (cat bonds) may be the most well-known type of ILS, there are other non-cat-bond ILS, including those based on mortality rates, longevity and medical-claim costs. ILS securities may be used by an insurer, or any other risk-bearing entity, in addition to (or as an alternative to) the purchase of insurance or reinsurance. This disclosure shall specifically identify the following:

Whether the reporting entity may receive possible proceeds as the issuer, ceding insurer1, or

counterparty of insurance-linked securities as a way of managing risks related to directly-written insurance risks. This disclosure shall include the number of outstanding ILS contracts, and the aggregate maximum proceeds that could be received as of the reporting date under the terms of the ILS.

Whether the reporting entity may receive possible proceeds as the issuer, ceding insurer2, or

counterparty of insurance-linked securities as a way of managing risk related to assumed

Attachment 10

Ref #2016-11


insurance risks. This disclosure shall include the number of outstanding ILS contracts, and the aggregate maximum proceeds that could be received as of the reporting date under the terms of the ILS.

Footnote 1: In situations in which a reporting entity has ceded risk to a reinsurer, and the reinsurer has engaged in ILS (either directly or through a broker), the following should be used by the cedent reporting entity in completing the disclosure

The ceding company shall complete the disclosure with information that they know regarding the reinsurance entities’ involvement with ILS that would likely be used to satisfy their reinsurance arrangement. For this disclosure, information shall be provided that details the maximum possible ILS proceeds as a result of the reinsurer’s ILS activity. If information is known regarding the number of ILS contracts that information shall also be included. If specific information is not known by the cedent on the number of ILS contracts, the cedent shall report the information known (such as whether there is one ILS contract, or more than one ILS contract, or that the number of ILS contracts is not known). With the cedent entity reporting what is known (and what is not known), the regulator has needed information to further inquire with the ceding company.

Additionally, the ceding company should be knowledgeable of their reinsurance counterparty. As such, the cedent should be aware on whether the reinsurer is following a traditional approach, or whether the reinsurer is engaging in ILS to satisfy reinsurance claims. Footnote 2: See footnote 1

Disclosure Template

H. Insurance-Linked Securities (ILS) Contracts

Number of Outstanding ILS

Contacts

Aggregate Maximum Proceeds

Management of Risk Related To: (1) Directly-Written Insurance Risks

a. ILS Contracts as Issuer .......................... $ ...................... b. ILS Contracts as Ceding

Insurer .......................... $ ......................

c. ILS Contracts as Counterparty .......................... $ ...................... (2) Assumed Insurance Risks .......................... $ ......................

a. ILS Contracts as Issuer .......................... $ ...................... b. ILS Contracts as Ceding

Insurer .......................... $ ......................

c. ILS Contracts as Counterparty

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\10 - 16-11 - ILS Data Capture Disclosure.docx

Attachment 11

Ref #2015-23




Form A

Issue: Prepayment Penalties and Presentation of Callable Bonds – Bifurcation of Agenda Item 2015-04


P/C Life Health


New Issue or SSAP

Interpretation


Based on comments received from interested parties, staff recommended that the Working Group bifurcate the

contents of agenda item 2015-04: Prepayment Penalties and Amortization of Callable Bonds into two separate

Form A’s. The topic of amortization on callable bonds (including bonds with make whole call provisions) will

continue to be documented in agenda item 2015-04; with the topics of accounting for prepayment penalties and

presentation of callable bonds (including make whole call provisions) being documented in this agenda item

(2015-23).

SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities currently has guidance requiring

prepayment penalties and acceleration fees received upon liquidation of a bond prior to its scheduled termination

date to be reported as investment income upon receipt. However, this guidance is conflicting with existing annual

statement instructions, as well as how information currently flows on Schedule D-Part 4. Furthermore, with the

differences in types of calls (e.g., make-whole call provisions), the “penalty” may not be as easily identifiable

(e.g., a standard call price of 105 indicates a penalty of 5).

This agenda item requests Working Group direction on how they would like to proceed with the accounting

treatment of prepayment penalties and acceleration fees, either as investment income (current SSAP No. 26

guidance) or as realized capital gains (subject to authoritative literature within SSAP No. 7—Asset Valuation

Reserve and Interest Maintenance Reserve). A key issue discussed throughout this document and posed to the

Working Group, is whether they believe that prepayment penalties should be reflected within IMR, or if the

current accounting treatment is appropriate. To illustrate the impact to IMR under the current accounting

treatment (investment income) and the proposed option of realized capital gains, staff has documented examples

below.

Investment Income

Consideration Par

Value

BACV

at

Disposal

Date

Gain

(Loss)

BACV-Par

Penalty

Investment

Income

Consideration-Par

Decrease to

IMR**

1/1/2016

Call

Exercised

104 100 102 (2) 4 2

** As illustrated, the holder of the bond recognizes two accounting benefits at the exercise date; 1) The loss

recognized (BACV less Par) will decrease the IMR liability (balance sheet benefit) and 2) The penalty

recognized as investment income (Consideration less Par) would increase revenue (income statement

benefit).

Attachment 11

Ref #2015-23


Realized Capital Gains

Consideration Par

Value

BACV

at

Disposal

Date

Gain

(Loss)

BACV-Par

Penalty

Gain (Loss)

Consideration-Par

Net

Increase to

IMR*

1/1/2016

Call

Exercised

104 100 102 (2) 4 2

* As detailed above, if this scenario was accounted for under the current accounting treatment of

investment income, the holder of the bond would recognize two accounting benefits at exercise date. As

shown in this table, the gains/losses at the exercise date offset, leaving an increase to the IMR liability of 2.

To determine the consistency of reporting (on Schedule D-Part 4) across entities for a bond called under a make

whole call provision, staff reviewed a CUSIP, which impacted 21 reporting entities, noting that 15 of the entities

reported the difference between Consideration and BACV (at the call date) within the Realized Gain/Loss

Column (Col. 18) and with no investment income recorded in column 20 (therefore differing from SSAP No. 26

and Schedule D-Part 4 instructions). Additionally, these 15 entities all reported bond interest equal to the same

percentage of Par in column 20. Therefore, it appears that (at least for purposes of Schedule D-Part 4) some

entities are electing to record the prepayment penalties as realized gains and not within investment income.

For those entities using this reporting, staff welcomes comments on whether these balances are included or

excluded from the IMR calculation.


SSAP No. 26—Bonds, Excluding Loan-backed and Structured Securities: 15. 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.

SSAP No. 37—Mortgage Loans:

(Staff Note: Similar language is also included in SSAP No. 37 for investment income.) 11. A mortgage loan may provide for a prepayment penalty or acceleration fee in the event the loan is liquidated prior to its scheduled termination date. Such fees shall be reported as investment income when received.

SSAP No. 43R—Loan-Backed and Structured Securities:

(Staff Note: Similar language is also included in SSAP No. 43R for investment income.) 11. A loan-backed or structured security may provide for a prepayment penalty or acceleration fee in the event the investment is liquidated prior to its scheduled termination date. These fees shall be reported as investment income when received.

Additional Information – Superseded SSAP Guidance:

INT 99-04: Recognition of Prepayment Penalties Upon Adoption of Codification:

1. SSAP No. 37 requires insurers to report a prepayment penalty or acceleration fee as investment income when received. Currently, some insurers record these fees as realized gains and thus amortize them through IMR. SSAP No. 37 also stipulates a change resulting from the adoption of the statement be accounted for as a change in accounting principle. Upon adoption of Codification, it is probable that some

Attachment 11

Ref #2015-23


insurers might continue to amortize the existing gain included in IMR and recognize subsequent fees as investment income.

2. Should an insurer release all unamortized amounts included in IMR and related to prepayment penalties upon adoption of Codification and recognize such change in accordance with SSAP No. 3— Accounting Changes and Corrections of Errors (SSAP No. 3)?

INT 99-04 Discussion 3. The working group reached a consensus to instruct insurer’s to release all unamortized amounts included in IMR related to prepayment penalties upon adoption of Codification and recognize such change in accordance with SSAP No. 3.


other State Departments of Insurance or other NAIC groups): The topic addressed in this agenda item was

previously discussed and exposed for comment at the Spring 2015 National Meeting, as outlined in agenda item

2015-04. Comment Letters addressing agenda item 2015-04 are included as an attachment to the Summer

2015 National Meeting Materials.

As detailed in the INT 99-04 excerpt above, prior to codification, some insurers were recording prepayment

penalties and acceleration fees on mortgage loans as realized gains and amortizing through IMR. While the intent

of INT 99-04 was to no longer have prepayment penalties or acceleration fees recognized as realized gains upon

adoption of Codification (and release all unamortized amounts within IMR); it was noted, through discussions

with regulators and interested parties, that some insurers would still record these fees as realized gains and

amortize through IMR. If the Working Group chooses to recognize prepayment penalties and acceleration fees as

realized capital gains for bonds, staff also recommends revisions to SSAP No. 37—Mortgage Loans to clarify this

accounting treatment.



Summary: It is recommended that the Working Group move agenda item 2015-23 to the nonsubstantive

active listing and expose for comment three potential options for the accounting and presentation

treatment for prepayment penalties. The three options include: 1) maintaining current treatment of

investment income, 2) reported as realized capital gains, subject to the authoritative literature within SSAP

No. 7—Asset Valuation Reserve and Interest Maintenance Reserve and 3) reported as realized capital

gains, but excluded from the calculation of IMR. Based on comments received, it is requested that the

Working Group direct staff on the accounting and presentation treatment they prefer. Based on the

Working Group’s direction, staff will prepare revisions (for exposure at a future meeting of the Working Group)

to SSAP Nos. 26, 37 and 43R (as applicable) and the Annual Statement Blanks and Instructions (as applicable) to

clarify the accounting treatment and reporting presentation for prepayment penalties and acceleration fees.

As further detailed in the “Additional Discussion” section, staff request comments from the Working Group and

interested regulators on the following:

Do the current instructions/schedules for IMR provide the appropriate level of detail for review

and analysis, or would additional schedules and/or instructions be beneficial?

Would a disclosure pertaining to callable bonds (including make whole call provisions) would be

beneficial?

Additional Discussion Supporting the Proposed Accounting Treatments of Prepayment Penalties:

Attachment 11

Ref #2015-23


As noted throughout the agenda item and comments received from interesting parties, the key issue surrounding

prepayment penalties is whether the penalties should be subject to IMR and the authoritative literature in SSAP

No. 7. Based on review of interested parties’ comments and discussion with NAIC staff, there appears to be

diversity in the reporting of prepayment penalties, both on Schedule D and the calculation of IMR. In addition,

based on review of the Annual Statement Blanks and Instructions for IMR, it appears that there is not a clear way

for regulators to identify which individual securities were included or excluded from the calculation of IMR.

While the intent of a make whole call provision is to make the bond holder “whole” if the issuer elects to call the

bond prior to maturity, it has been identified that an increasing number of bonds being called under this provision

are leading to negative total returns for the bond holder. (A negative total return is a LOSS to an insurer.) This

occurs when the loss recognized (BACV less Par) exceeds the prepayment penalty received (Consideration less

Par). Additionally, research indicates that bonds containing make whole call provisions have frequently been

listed as “non-callable” on bond indexes. Therefore, there is concern that an insurer could potentially be holding a

callable bond as a result of the make whole call provision and not be aware it is callable. Also, while there are

instructions for Schedule D to identify callable bonds, it appears that the reporting of this information is

inconsistent across entities.

Based on the comments received, staff has documented three proposed options for the accounting treatment of

prepayment penalties. The purpose of these options is to provide greater transparency regarding the

reporting of callable bonds (including those with make whole call provisions) and prepayment penalties.

Staff recommends that the Working Group review these options and direct staff to proceed with drafting revisions

for the accounting treatment that they prefer.

Based on the direction elected by the Working Group, staff will proceed with drafting proposed revisions to

SSAPs, Annual Statement Blanks and Instructions (and draft a blanks proposal) and Disclosures. Below, staff has

identified the following areas to be considered by the Working Group for potential revisions (if applicable based

on WG direction). Staff welcomes comments from regulators and interested parties on potential revisions to aid in

the transparency and reporting of callable bonds, including those with make whole call provisions.

Staff Note: The Investment Reporting (E) Subgroup is currently discussing revisions to the presentation of

Schedule D. The actions taken by this subgroup and the Blanks (E) Working Group will be considered when

drafting proposed revisions to Annual Statement Blanks and Instructions.

Schedule D-Part 1:

Revisions to instructions/blanks to identify callable bonds, including those with make whole call

provisions

Schedule D-Part 4:

Revisions to instructions/blanks to identify bonds that were sold, redeemed, or otherwise disposed of

as a result of a call provision (including make whole call).

Revisions to instructions/blanks to identify the amount of investment income recognized as a result of

a call provisions (including make whole call).

IMR:

Revisions to clarify the accounting treatment for prepayment penalties.

SSAP Nos. 26, 37 and 43R:

Revisions to clarify the accounting treatment for prepayment penalties.

Revisions to SSAP No. 26 to create a disclosure pertaining to callable bonds (including bonds with

make whole call provisions).

Attachment 11

Ref #2015-23


Option One: Continued treatment as investment income (Penalties do not impact IMR)

Based on the current guidance within SSAP No. 26, paragraph 14, these prepayment and acceleration fees are

classified as investment income. The following would be recognized at the call date (when called prior to

scheduled termination date).

Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Investment Income

BACV in excess of Par (Premium) = Loss

Par in excess of BACV (Discount) = Gain

Currently, Schedule D-Part 4 does not include a column specific for investment income. However, per the Annual

Statement instructions, the proportionate share of investment income directly related to the securities reported

shall be included within column 20 (Bond Interest/Stock Dividends Received during the Year). If these fees

continue to be reported as investment income, staff would recommend revisions to Schedule D-Part 4,

which would show the investment income generated upon disposal of callable bonds (i.e. the prepayment

penalty) as the current reporting comingles the penalty with bond interest. Additionally, the annual statement

instructions for Schedule D-Part 4, Column 18 specifies that the realized gain (loss) on disposal should be the

difference between the Consideration received (Column 7) and the Book Adjusted Carrying Value at Disposal

Date (Column 16). If a portion of the Consideration (for the penalty/fee) is deemed to be investment income

(Column 20), then revisions to the annual statement instructions for Column 18 would be needed to clarify

the presentation of disposals of callable bonds on Schedule D-Part 4.

During review of some entities Schedule D-Part 4, which had bonds disposed of as a result of a make whole

provision; balances reported were being manipulated (i.e. consideration, column 7), so the appropriate gain/loss

was shown in column 18 (i.e. the balance that would impact IMR), and the remainder of the schedule balances

flowed (with the prepayment penalty reflected in column 20). If the Working Group elects to continue to have

these fees reported as investment income, staff would recommend that the Working Group consider whether

they are concerned with the manipulation of this schedule and whether revisions to the Annual Statement

Instructions are necessary to eliminate this manipulation.

Gains and losses incurred at the call date are recognized and documented on Schedule D Part 4, column 18 and

are subject to authoritative literature (if applicable) within SSAP No. 7—Asset Valuation Reserve and Interest

Maintenance Reserve. Per the current accounting guidance in SSAP No. 26, the gain/loss incurred at the call date

is the difference between the BACV and Par.

Option Two: Reported as realized capital gains (Penalties subject to the IMR)

If prepayment penalties and acceleration fees were recognized as a gain upon liquidation the following accounting

would be recognized when the bond is called prior to scheduled termination date:

Call Price in excess of Par = Prepayment Penalty (or Acceleration Fee) = Gain

BACV in excess of Par (Premium) = Loss

Par in excess of BACV (Discount) = Gain

Under this option, the prepayment penalty would be included with other gains and losses (BACV in excess of Par)

and would be recognized and documented on Schedule D-Part 4, Column 18. With this change, the

“Consideration” (amount received) received in disposal of a bond would flow through existing columns in

Schedule D-Part 4. However, staff would still suggest clarification revisions to annual statement instructions.

Gains and losses incurred at the call date will be subject to the authoritative literature (if applicable) within SSAP

No. 7—Asset Valuation Reserve and Interest Maintenance Reserve. SSAP No. 7, paragraphs 2-3 state the

following (only applicable text included)

Attachment 11

Ref #2015-23


2. The IMR defers recognition of the realized capital gains and losses resulting from changes in the general level of interest rate. These gains and losses shall be amortized into investment income over the expected remaining life of the investments sold.

3. The IMR and AVR shall be calculated and reported as determined per guidance in the SSAP for the specific type of investment (e.g. SSAP No. 43R for loan-backed and structured securities), or if not specifically stated in the respective SSAP, in accordance with the NAIC Annual Statement Instructions for Life and Accident and Health Insurance Companies.

In general, prepayment penalties on callable bonds (including bonds with make whole call provisions) are

structured to compensate the holder of the bond as a result of unfavorable interest rate fluctuations. Therefore, as

these penalties are derived to account for interest rate fluctuations, it appears that the penalties fall under the

concept of IMR, as stated in SSAP No. 7, paragraph 2 (see above).

As noted by interested parties in their comment letter (dated 5/26/15), if the Working Group elects to recognize

prepayment penalties as realized capital gains, a new difference between GAAP and SAP will be created

requiring insurers to audit and explain this difference. Through review of GAAP and discussions with an AICPA

representative, it was identified that GAAP guidance is not specific on the presentation of prepayment penalties,

but rather focuses on when recognition shall occur. Additionally, it was identified that there are at least two views

with respect to the treatment of prepayment penalties, interest income and gain on settlement and both are

acceptable with ample footnote disclosure.

Option Three: Reported as Realized Capital Gains (Penalties Excluded from IMR Calculation)

As noted above, it appears that (at least for purposes of Schedule D-Part 4) some entities are electing to record the

prepayment penalties as realized gains and not within investment income. Under this option, the prepayment

penalty would be included with other gains and losses (BACV in excess of Par) and would be recognized and

documented on Schedule D-Part 4, Column 18. With this change, the “Consideration” (amount received) received

in disposal of a bond would flow through existing columns in Schedule D-Part 4. However, staff would still

suggest clarification revisions to annual statement instructions.

While the reporting of prepayment penalties on Schedule D-Part 4 is consistent between Options Two and Three,

the differentiating factor under Option Three is that these penalties would be reported on Schedule D-Part 4 as

realized gains/losses, but would not be subject the IMR calculation.


Josh Arpin – July 2015

Status: August 15, 2015, the Statutory Accounting Principles (E) Working Group bifurcated agenda item 2015-04, with

the original agenda item focusing on guidance to clarify the yield-to-worst concept for callable bonds, and this

agenda item (Ref #2015-23) focusing on the accounting and reporting treatment of prepayment penalties.

Additionally, the Working Group moved this item to the nonsubstantive active listing and exposed this agenda

item with a request for comments on three options for the accounting and reporting of prepayment penalties: 1)

Report as investment income; 2) Report as realized capital gains subject to IMR; and 3) Report as realized capital

gains not subject to IMR.

On October 19, 2015, the Statutory Accounting Principles (E) Working Group directed staff draft proposed

revisions to the Schedule D and Annual Statement Blanks and Instructions, based on the Working Group’s

preferred accounting treatment of Investment Income.

Attachment 11

Ref #2015-23


It is anticipated that the proposed revisions will be initially presented and discussed at the Fall National Meeting

(likely to be exposed). These proposed revisions would address the following: 1) Revise SSAPs to reflect the

preferred accounting treatment (if applicable); 2) conflicting language between the SSAP and the Annual

Statement Instructions; 3) identify callable bonds (including those sold, redeemed, or otherwise disposed) and 4)

identify the amount of investment income recognized as a result of a call provision (including make whole call).

Staff highlights that the proposed revisions would ultimately go to the Blanks (E) Working Group for

consideration. However, staff proposes that the SAPWG review and adopt the desired changes initially.

On November 19, 2015, the Statutory Accounting Principles (E) Working Group exposed revisions to various

SSAPs and reporting tools to clarify the appropriate reporting of prepayment penalties within the investment

schedules. These exposed revisions are shown throughout the “2015 Fall National Meeting Discussion and

Proposed Revisions” as illustrated below:

2015 Fall National Meeting Discussion and Proposed Revisions

In response to the Working Group direction at the Summer National Meeting, staff has proposed the following

recommendations:

Effective Date

As a result of the revisions being suggested, industry is recommending that an effective date be applied, to assist

entities in the event that these revisions would require significant system changes and possible impact on

historical IMR balances.

To determine the effective date for these revisions, as part of the recommended exposure, staff is requesting

input from industry and regulators on the timing of these revisions and the appropriate effective date to

allow entities to make any necessary changes to their systems, as well as consider whether historical IMR

balances would need to be adjusted.

Staff Note: Per discussion at the Fall National Meeting, regulator comments indicated that an effective date

would not be necessary for the following reasons: 1) the revisions to the SSAPs are only clarifying revisions and

do not change the accounting treatment of prepayment penalties as currently prescribed by the SSAPs and 2)

nonsubstantive revisions are generally effective upon adoption and the earliest this agenda item would be adopted

is Spring 2016, therefore, the regulators noted that this should provide ample time for companies to make

changes to their systems and work with their state regulators to determine if historical IMR balances need to be

adjusted.

SSAP Revisions

As detailed above, there is inconsistency in the reporting of prepayment penalties, including what portion of

proceeds reflects the “penalty.” To clarify the amount of investment income and/or realized capital

gains/losses to be reported upon disposal of an investment, staff recommends that the Working Group

expose the following revisions to SSAPs No. 26 and 43R:

(Staff Note: Paragraph and footnote references will be updated as needed)

SSAP No. 26—Bonds: 15. 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

1.

Attachment 11

Ref #2015-23


Footnote: The amount of investment income reported is equal to the total proceeds (consideration) received less the Par value of the investment. Any difference between the BACV and Par at the time of disposal shall be reported as realized capital gains and losses, subject to the authoritative literature in SSAP No. 7.

SSAP No. 43R—Loan-Backed and Structured Securities: 11. A loan-backed or structured security may provide for a prepayment penalty or acceleration fee in the event the investment is liquidated prior to its scheduled termination date. These fees shall be reported as investment income when received

1.

Footnote: The amount of investment income reported is equal to the total proceeds (consideration)

received less the Par value of the investment. Any difference between the BACV and Par at the time of disposal shall be reported as realized capital gains and losses, subject to the authoritative literature in SSAP No. 7.

Staff Note: Currently, SSAP No. 37 includes similar language with respect to the treatment to prepayment

penalties as SSAPs No. 26 and 43R. As a “Par” value is not currently presented on Schedule B-Part 3, staff has

not suggested revisions to SSAP No. 37 to clarify how the amount of investment income and realized gain/loss is

calculated. However, based on the direction of the Working Group regarding the proposed revisions to Schedule

D-Part 3 (see below), staff request comments on potential language (if any) that should be added to SSAP No. 37.

Code Column/Description

The Investment Reporting (E) Subgroup is currently having ongoing discussions regarding potential revisions to

the presentation and reporting on Schedule D. One of the topics being discussed is revisions to the code and bond

characteristics columns (columns 3 and 5 on Schedule D-Part 1). These revisions would assist in identifying

specific features included within the bond, including callable features (such as a make whole call provision). Staff

will continue to monitor the actions taken by this subgroup and the Blanks (E) Working Group in considering any

proposed revisions to Annual Statement Blanks and Instructions.

At this time, staff recommends that the Working Group include in the blanks proposal a revision to

Schedule D – Part 1, Part 4 and Part 5, to add (or revise existing) codes and bond characteristic identifiers

in order to aid regulators in identifying callable features, including investments with make whole call

provisions.

Staff Note: Refer to Annual Statement Instructions section below for additional revisions associated with these

revisions.

Investment Income – Electronic Only Column

Currently, Schedule D-Part 4 does not include a column specific for investment income. However, per the Annual

Statement instructions, the proportionate share of investment income directly related to the securities reported

shall be included within column 20 (Bond Interest/Stock Dividends Received during the Year). As the

prepayment penalty (i.e. amount recognized in investment income) is not easily identifiable and is comingled with

the security’s related bond interest, staff recommends revisions to add an electronic-only column, which

would show the investment income generated upon early disposal of callable bonds/mortgage loans/loan

backed structured securities (i.e. the prepayment penalty) to the following schedules:

Schedule D—Part 4: Long Term Bonds and Stocks Sold, Redeemed or Otherwise Disposed Of

During Current Year

Schedule D—Part 5: Long Term Bonds and Stocks Acquired During the Year and Fully Disposed

of During Current Year

Schedule B—Part 3: Mortgage Loans Disposed, Transferred or Repaid During the Current Year

Attachment 11

Ref #2015-23


Staff Note: Refer to Annual Statement Instructions section below for additional revisions associated with the

inclusion of an electronic only column.

Annual Statement Blanks and Instructions

Staff proposed revisions address the following:

Revisions to the Code and Bond Characteristics columns to identify callable features, including

investments with make whole call provisions.

The creation of an electronic only column, which would capture the investment income recognized as a

result of prepayment penalties.

Clarify the amounts to be reported as investment income and realized capital gains/losses on applicable

investment schedules

Schedule D—Part 1 Staff Note: the assignment of each code would be at the discretion of the Blanks (E) Working Group. Column 3 – Code

Enter “*” in this column for all Class One Bond Mutual Funds.

Enter “#” in this column for all Exchange Traded Funds.

Enter “@” in this column for all Principal STRIP Bonds or other zero coupon bonds.

Enter “$” in this column for Certificates of Deposit under the FDIC limit.

Enter “&” in this column for TBA (To Be Announced) securities.

Enter “^” in this column for all assets that are bifurcated between the insulated separate account filing and the non-insulated separate account filing.

Enter “_” in this column for all investments containing callable features (including those with make whole call provisions).

Column 5 – Bond Characteristics

If bonds have one or more of the following characteristics, then list the appropriate number(s). If none of the characteristics apply, then leave the column blank.

1. Call Option.

2. Securities (exclude items reported in 1) where the issuer has the right to vary the timing of principal or coupon payments, for example, such mortgage-backed and sinking fund securities that do not have a fixed payment schedule.

3. Variable coupon securities, where the issuer has the right to vary the amount of periodic payments (include: equity-linked coupons, exclude: floating rate notes with an unleveraged coupon, linked directly to an interest rate index).

4. Terms that may result in principal (or initial investment) not being repaid in full (include: Catastrophe bonds, IOs).

5. Payments linked to foreign exchange rates (exclude: bonds simply denominated in a currency other than US dollars).

6. Securities where payments are determined by the performance of a credit other than that of the issuer (include: credit-linked notes).

Attachment 11

Ref #2015-23


7. Mandatory Convertible.

8. Other types of options controlled by the issuer (exclude items reported in 1 – 7).

9. Securities containing Make-Whole Call Provisions Schedule D—Part 4

Staff Note: As detailed above, staff research identified manipulation of the balances reported in the consideration

column (column 7) in order for the remainder of the schedule balances to flow. The balance in this column should

equal the full amount of proceeds received.

Unlike Schedule D-Part 1, Part 4 does not currently contain code or bond characteristics columns. As the purpose

of this schedule is to provide a detailed listing of all securities that were sold/disposed of during the current

reporting year (that were owned as of the beginning of the year), staff believes that it would be beneficial to

regulators to identify, through the addition of a code column, the reason/purpose for the security being reported on

this schedule. Staff’s proposed code column, would use the existing examples outlined at the beginning of the

schedule’s instructions, with the addition of codes to specifically address callable characteristics (including make

whole call provisions). This information would likely be most beneficial if included as a column on the face of the

schedule, however, staff defers to the Working Group on the presentation of this column (either on the face or as

an electronic only column).

Proposed Revision to Include a Code Column (the assignment of each code would be at the discretion of the

Blanks (E) Working Group):

Column _ – Code

Enter “_” in this column for pay downs of securities still owned (including CMO prepayments). Enter “_” in this column for subsequent partial sales of investment issues still owned. Enter “_” in this column for reallocation of the cost basis of an already owned stock to the cost basis of a new stock received as a dividend (e.g., spin off). Enter “_” in this column for any decreases in the investments in SCA companies that adjust the cost basis, not including other-than-temporary impairments alone (e.g., subsequent return of capital from investments in SCA companies valued using the equity method). Enter “_” in this column for called securities (including those called under a make whole call provision).

New Electronic Only Column:

Investment Income Reported as a Result of Prepayment Penalties

For those securities sold, redeemed or otherwise disposed which generated investment income as a result of a prepayment penalty, include the proportionate share of investment income included within Column 20 of this schedule.

Column 18 – Realized Gain (Loss) on Disposal

This should be the difference between the Consideration column amount and the Book/Adjusted Carrying Value at Disposal Date, excluding any portion that is attributable to foreign exchange differences. For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty; the amount of realized gain (loss) reported is equal to the BACV at the Disposal Date (column 16) less the Par value of the investment (column 8)

Attachment 11

Ref #2015-23


For Class One Bond Mutual Funds and Exchange Traded Funds, enter the difference between the consideration, Column 7 and aggregate cost Column 9 at date of sale.

Column 20 – Bond Interest/Stock Dividends Received During Year

For Mutual Funds (including Class One Bond Mutual Funds and Exchange Traded Funds), enter the amount of distributions received in cash or reinvested in additional shares.

Include: The proportionate share of investment income directly related to the

securities reported in this schedule.

For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty; the amount of investment income reported is equal to the total consideration received (column 7) less the Par value of the investment (column 8)

Schedule D—Part 5

As detailed in Part 4 above, Staff also recommends similar revisions to Part 5 regarding the addition of a code

column. This schedule provides a detailed listing of all securities that were sold/disposed of during the current

reporting year (that were acquired during the current reporting year),

Proposed Revision to Include a Code Column (the assignment of each code would be at the discretion of the

Blanks (E) Working Group):

Column _ – Code

Enter “_” in this column for pay downs of securities still owned (including CMO prepayments). Enter “_” in this column for subsequent partial sales of investment issues still owned. Enter “_” in this column for reallocation of the cost basis of an already owned stock to the cost basis of a new stock received as a dividend (e.g., spin off). Enter “_” in this column for any decreases in the investments in SCA companies that adjust the cost basis, not including other-than-temporary impairments alone (e.g., subsequent return of capital from investments in SCA companies valued using the equity method). Enter “_” in this column for called securities (including those called under a make whole call provision)


This should be the difference between the Consideration column amount and the Book/Adjusted Carrying Value at Disposal Date, excluding any portion that is attributable to foreign exchange differences. For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty; the amount of realized gain (loss) reported is equal to the BACV at the Disposal Date (column 11) less the Par value of the investment (column 8)

Column 20 – Interest and Dividends Received During Year

For Mutual Funds (including Class One Bond Mutual Funds and Exchange Traded Funds), enter the amount of distributions received in cash or reinvested in additional shares.

Include: The proportionate share of investment income directly related to the

securities reported in this schedule.

Report amounts net of foreign withholding tax.

Attachment 11

Ref #2015-23


For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty; the amount of investment income reported is equal to the total consideration received (column 10) less the Par value of the investment (column 8)



For those securities sold, redeemed or otherwise disposed which generated investment income as a result of a prepayment penalty, include the proportionate share of investment income included within Column 20 of this schedule.

Schedule B—Part 3



If a mortgage loan liquidated prior to its scheduled termination date provides for a prepayment penalty or acceleration fee, report the portion of proceeds received as a result of this penalty (i.e. the investment income).

2016 Spring National Meeting Discussion and Proposed Revisions

Gray shading reflects revisions from the Fall National Meeting exposure language)

At the 2015 Fall National Meeting, the Statutory Accounting Principles (E) Working Group exposed revisions to

various SSAPs and reporting tools to clarify the appropriate reporting of prepayment penalties within the

investment schedules. After consideration of the comment letter received by interested parties and work being

completed by other NAIC working groups, staff is recommending the Working Group expose revisions

related to the following:

Revisions to SSAP Nos. 26 and 43R to clarify the amount of investment income and/or realized capital

gains/losses to be reported upon disposal of an investment. In addition to new paragraphs, these revisions

prescribe a new disclosure, which would require the reporting entity to identify the amount of investment

income generated as a result of a prepayment penalty and/or acceleration fee. These revisions have a

proposed effective date of January 1, 2017. (Refer to “Proposed Revisions to SSAP No. 26 and SSAP No.

43R” for additional information)

Revisions to the Annual Statement Blanks and Instructions as a result of the proposed revisions to SSAP

Nos. 26 and 43R. (Refer to “Proposed Revisions to Annual Statement Blanks and Instructions” for

additional information)

Proposed Revisions to SSAP No. 26 and SSAP No. 43R

In their comment letter, interested parties stated the following:

“We have polled companies on how consideration is applied when a bond is called with a make-whole provision and the bond is not carried at par. In this case, some companies record the entire difference between the cash received and BACV in net investment income while others bi-furcate it between net investment income and realized capital gains (losses) as described in the proposed footnote. The impact of any change will be extremely immaterial for companies, and the industry as a whole; however, for those companies impacted, it would require significant costs to change the way payments are applied by investment systems. Thus, we recommend not prescribing this in the SSAPs. If the proposed guidance is

Attachment 11

Ref #2015-23


adopted, we recommend it be effective January 1, 2017 on a prospective basis. This will give system vendors adequate time to implement the changes and eliminate the potentially difficult task of restating historical IMR balances.”

“As we have stated in the past, we do not object to the financial statement providing additional information on bonds with make-whole provisions and believe a simple disclosure could accomplish this objective at a reasonable cost. However, we believe the proposed changes to the investment schedules are unreasonable considering make whole provisions represent an immaterial portion of income for most insurance companies, and present no risks to the solvency of insurance companies or policyholders.”

Staff Response: Consistent with previous discussions by the Working Group, there is a clear lack of consistency

with how companies are accounting and reporting for prepayment penalties and acceleration fees. After

considering interested parties comments, specifically the lack of consistency in reporting and the costs associated

with changes to investment systems, staff is recommending revisions to SSAP Nos. 26 and 43R, which includes

the addition of a new disclosure and an effective date consistent with the recommendation from interested parties.

These revisions include:

To clarify the appropriate breakout of investment income and realized gains/loss, staff has proposed a

new paragraph to SSAP Nos. 26 (paragraph 16) and 43R (paragraph 12). (Note: The language used in the

new paragraph is consistent with the previously exposed footnote language, which has been deleted).

To provide companies adequate time to implement changes to their investment systems, staff has

proposed for the new revisions to be effective January 1, 2017 and apply for all interim and reporting

periods thereafter. As some companies are already accounting and reporting for prepayment penalties and

acceleration fees consistent with the proposed revisions, early application of this guidance is permitted.

Based on the work being completed by the Investment Reporting (E) Subgroup and the Blanks (E)

Working Group with respect to revisions to Schedule D (Refer to the “Proposed Revisions to Annual

Statement Blanks and Instructions” section below), specifically improving the bond characteristics

column to assist regulators in identifying investments with callable features, staff is no longer

recommending the addition of new columns to the Schedule D. To aid regulators in identifying the

amount of investment income generated as a result of prepayment penalties and/or acceleration fees (as

this amount is currently comingled with bond interest in column 20 of Schedule D-Part 4), staff has

proposed a disclosure, which would identify the aggregate amount of securities sold, disposed or

otherwise redeemed and the aggregate amount of investment income generated as a result of a

prepayment penalty and/or acceleration fee.

Proposed Revisions

(Staff Note: Paragraph and footnote references will be updated as needed)

SSAP No. 26—Bonds: Income

15. 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

1.

16. 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

Attachment 11

Ref #2015-23


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.


Disclosures

2122. The financial statements shall include the following disclosures:

m. For securities sold, redeemed or otherwise disposed as a result of a callable feature (including make whole call provisions), the following categories shall disclose the number of CUSIPs sold, disposed or otherwise redeemed and the aggregate amount of investment income generated as a result of a prepayment penalty and/or acceleration fee: 1) traditional call features; 2) make whole call provisions and 3) other callable features.


2526. This statement is effective for years beginning January 1, 2001. [Detail Eliminated to Conserve Space] Guidance adopted in December 2013 clarifying the ‘yield-to-worst’ concept for bonds with make-whole call provisions is a nonsubstantive change initially effective January 1, 2014, unless the company has previously been following the guidance. (Companies that have previously been following the original intent, as clarified in the revisions, should not be impacted by these changes.). The guidance in paragraph 16, with respect to the calculation of investment income for prepayment penalty and/or acceleration fees is effective January 1, 2017, and is required for interim and annual reporting periods thereafter. Early application is permitted.

SSAP No. 43R—Loan-Backed and Structured Securities: 11. A loan-backed or structured security may provide for a prepayment penalty or acceleration fee in the event the investment is liquidated prior to its scheduled termination date. These fees shall be reported as investment income when received

1.

12. 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.


Disclosures

4950. In addition to the disclosures required for invested assets in general, the following disclosures regarding loan-backed and structured securities shall be made in the financial statements. Regardless of the allowances within paragraph 62 of the Preamble, the disclosures in paragraph 49.f., 49.g. and 49.h. are required in separate, distinct notes to the financial statements:

Attachment 11

Ref #2015-23


l. For securities sold, redeemed or otherwise disposed as a result of a callable feature (including make whole call provisions), the following categories shall disclose the number of CUSIPs sold, disposed or otherwise redeemed and the aggregate amount of investment income generated as a result of a prepayment penalty and/or acceleration fee: 1) traditional call features; 2) make whole call provisions and 3) other callable features


(New paragraph) 64. The guidance in paragraph 12, with respect to the calculation of investment income for

prepayment penalty and/or acceleration fees is effective January 1, 2017, and is required for interim and annual reporting periods thereafter. Early application is permitted

Proposed Revisions to Annual Statement Blank and Instructions

In their comment letter, interested parties stated the following:

Currently, interested parties and NAIC staff are working within a Project Group to revise and clean up the instructions for the Schedule D, Part 1, Bond Characteristic and Collateral Type column codes. In view of the many revisions that are taking place on adopted Schedule D column/code instructions, interested parties question the value of continuing to add new columns, codes and identifiers when we are aware of the issues with some of the columns and codes that have been adopted; therefore, we believe the work of the Project Group should be allowed to be completed, and other ongoing code and column initiatives should not be proposed at this time.

As noted previously, the Investment Reporting (E) Subgroup has been having ongoing discussions regarding

potential revisions to the presentation and reporting on Schedule D. One of the topics being discussed is revisions

to the code and bond characteristics columns (columns 3 and 5 on Schedule D-Part 1). These revisions would

assist in identifying specific features included within an investment, including callable features (such as a make

whole call provision). On February 17, 2016, the Subgroup agreed to send, for consideration by the Blanks (E)

Working Group at the Spring National Meeting, revisions to Schedule D (refer to “Schedule D-Part 1” below for

proposed revisions applicable to this agenda item).

After consideration of the comments received and the proposed revisions recommended by the Investment

Reporting (E) Subgroup, staff believes that the exposed additional columns (both to the face of the schedules and

electronic-only) to Schedule D are not necessary at this time. Once the Blanks (E) Working Group and the

Investment Reporting (E) Subgroup have completed their revisions to Schedule D, staff would encourage the

Working Group to reevaluate whether further modifications to the schedule should be recommended.

Staff recommends the following revisions to the Annual Statement Blank and Instructions:

(Note: These revisions apply to all statement types)

Disclosures

These revisions are consistent with the revisions to SSAP No. 26 and SSAP No. 43R outlined above.

Note 5 - Investments

m. Prepayment Penalty and Acceleration Fees For securities sold, redeemed or otherwise disposed as a result of a callable feature (including make whole call provisions), the following categories shall disclose the number of CUSIPs sold, disposed or otherwise redeemed and the aggregate amount of investment income generated as a result of a

Attachment 11

Ref #2015-23


prepayment penalty and/or acceleration fee: 1) traditional call features; 2) make whole call provisions and 3) other callable features

Note 5.m - Illustration

Category Number of CUSIPs Aggregate Amount of

Investment Income

Traditional Call Features

Make Whole Call Provisions

Other Callable Features

Schedule D-Part 4

As detailed above, staff research identified manipulation of the balances reported in the consideration column

(column 7) in order for the remainder of the schedule balances to flow. To clarify the amount of investment

income and/or realized capital gains/losses to be reported in Schedule D-Part 4 and Part 5 upon disposal of an

investment, the following revisions are recommended. (Note: These revisions are consistent with the revisions to

SSAP No. 26 and SSAP No. 43R outlined above)


For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty and/or acceleration fee; the amount of realized gain (loss) reported is equal to the BACV at the Disposal Date (column 16) less the Par value of the investment (column 8)

Column 20 – Bond Interest/Stock Dividends Received During Year

Include: The proportionate share of investment income directly related to the securities reported in this schedule.

For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty and/or acceleration fee; the amount of investment income reported is equal to the total consideration received (column 7) less the Par value of the investment (column 8)

Schedule D-Part 5

Refer to discussion under Schedule D-Part4.


For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty and/or acceleration fee; the amount of realized gain (loss) reported is equal to the BACV at the Disposal Date (column 11) less the Par value of the investment (column 8)

Column 20 – Interest and Dividends Received During Year

Include: The proportionate share of investment income directly related to the securities reported in this schedule.

For securities sold, redeemed or otherwise disposed of, which generate investment income as a result of a prepayment penalty and/or acceleration fee; the amount of investment income

Attachment 11

Ref #2015-23


reported is equal to the total consideration received (column 10) less the Par value of the investment (column 8)

Schedule D – Part 1

These revisions were approved by the Investment Reporting (E) Subgroup and are being presented to the Blanks

(E) Working Group at 2016 Spring National Meeting. Column 5 – Bond Characteristics

If bonds have one or more of the following characteristics, then list the appropriate number(s). If none of the characteristics apply, then leave the column blank.

1. Bonds that are callable at the discretion of the issuer, provided that in no instance will the call price be below par, based on a specified formula for the payoff amount (generally discounting future cash flows at then current interest rates which is generally referred to as a “make whole call provision”).

2. Bonds that are callable at the discretion of the issuer, provided that in no instance will the call price be below par with a specified payoff amount based on a fixed schedule.

3. Bonds that are callable at the discretion of the issuer at a price that can be less than par.

Spring 2016 National Meeting Status Update:


SSAPs No. 26 and 43R to propose a new disclosure, as well as clarifying guidance on the amount of investment

income and/or realized capital gains/losses to be reported upon disposal of an investment, as shown within the

2016 Spring National Meeting Discussion and Proposed Revisions section above.

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\11 - 15-23 - Prepayment Penalties and Presentation of Callable Bonds - Bifurication of Agenda Item 2015-04.docx

Attachment 12

Ref #2016-12




Form A

Issue: Revisions to Appendix F—Policy Statement


P/C Life Health


New Issue or SSAP

Interpretation


On Nov. 19, 2015, the Working Group adopted policy statement changes to disband the Emerging Accounting

Issues (E) Working Group (EAIWG) and incorporate the interpretation process within the SAPWG with a Jan. 1,

2016 effective date (Ref #2015-18). Included with that original agenda item were a few other proposed policy

statement revisions that were deferred as a result of comments received. With the deferral of those items, the

Working Group directed staff to consider those items in a separate agenda item.

The following topics were deferred from Ref # 2015-18 and will be considered within this agenda item:

Concurrent Exposure of Issue Papers and Related SSAPs.

Definitions of Substantive (including new SSAP and substantively revised SSAP), Nonsubstantive and

Interpretation Revisions.

Adoption of Revisions Once Exposure Requirements Are Satisfied

In addition, this agenda item proposes additional revisions to the Appendix F—Policy Statements, including:

Inclusion of an Editorial Process for the AP&P Manual

Issue Papers for Nonsubstantive Revisions

Voting Requirements to Adopt Interpretations

Interpretations Temporarily Overriding Existing SSAP, or Creating New SAP

Other Editorial Revisions

Existing Authoritative Literature: Policy Statements in Appendix F of the AP&P Manual are not included in

the statutory hierarchy and are not considered accounting guidance. These are included to detail the policies and

procedures of the Working Group and are included in the AP&P Manual for informational purposes only.

Activity to Date (issues previously addressed by the SAPWG, EAIWG, SEC, FASB, other State

Departments of Insurance or other NAIC groups): Agenda Item 2015-18





nonsubstantive and expose revisions to Appendix F—Policy Statement, which have been detailed throughout

the agenda item and the accompanying appendices.

Staff Review Completed by: Josh Arpin, NAIC Staff — February 2016

Ref #2016-12


Status


and exposed revisions to Appendix F as shown in Appendices 1-6:

Discussion on Previously Deferred Revisions

Concurrent Exposure of Issue Paper and SSAP and Election to Forgo the Issue Paper Process

In their October 2, 2015 comment letter, interested parties stated the following (underlined for emphasis):

“We note the following wording: The Working Group may, by majority vote, elect to combine the IP and SSAP process, resulting in concurrent exposure of the two documents. Additionally, the Working Group may, by simple majority vote, agree to forego completion of an IP and only proceed with a new or substantively revised SSAP. As the above process would bypass the normal exposure process resulting in a shorter review and exposure period for a substantive change, we believe a super majority vote should be obtained to approve the exception to the process to reduce the likelihood of conclusions changing back and forth over time.”

Staff Response: Per the Policy Statement, the usual process for substantive revisions (new SSAPs and

substantively-revised SSAPs) is to have an exposure period and public hearing on an issue paper, followed by an

exposure period and public hearing on the new or substantively revised SSAP. Historically, in certain

circumstances, the Working Group has elected to forgo the development of an issue paper (which is allowed

under the current policy statement language) or adopt revisions to a SSAP prior to the development of the

corresponding issue paper. However, staff notes that these elections are not currently detailed in the policy

statement as the “usual process” for new and substantively revised SSAPs. As concurrent exposure and/or

foregoing completion of the issue paper deviates from the usual process, staff would be supportive of the

interested parties’ recommendation. Staff recommends the following revision to the NAIC Policy Statement on

Maintenance of Statutory Accounting Principles (Appendix 1 of agenda item):

The Working Group may, by a super majority vote (7 out of 10 members, 8 out of 11 or 12, 9 out of 13, 10 out of 14, and 11 out of 15) elect to: 1) combine the IP and SSAP process, resulting in concurrent exposure of the two documents; 2) expose and adopt revisions to a SSAP prior to the drafting/adoption of the related IP and/or 3) forego completion of an IP and only proceed with revisions to a substantively revised SSAP. This super majority process vote would be separate from the simple majority requirement for adoption of the IP or the new or substantively revised SSAP.

Definitions of Substantive, Nonsubstantive and Interpretations

In their October 2, 2015 comment letter, interested parties stated the following:

Interested parties note the new terms "substantively revised SSAP or Substantive revisions" have been introduced into the policy statements, although this has been applied in practice. We believe that the terms should be more clearly defined as those items may not be consistent with the substantive listing (see Maintenance Agenda process).

Nonsubstantive changes have historically been difficult to differentiate from substantive, resulting in many discussions on whether certain changes are substantive or nonsubstantive. The classification is important as the process for discussion, exposure and implementation timing of substantive vs. nonsubstantive changes are very different. We note above that only one example is provided. As the process of differentiating between substantive and nonsubstantive has been in place for years, perhaps we should provide clarity for substantive vs. nonsubstantive changes by more examples of what has been considered nonsubstantive. In particular, the Working Group states that “Generally, these items are considered editorial or technical in nature”. What does technical in nature mean? Perhaps examples of the nonsubstantive categories defined would be helpful

Ref #2016-12


Staff Response: To ensure consistency between the policy statements, staff recommends revisions to both the

NAIC Policy Statement on Maintenance of Statutory Accounting Principles (Appendix 1) and NAIC Policy

Statement on Statutory Accounting Principles Maintenance Agenda Process (Appendix 3), as detailed

below.

Proposed Revisions to the Policy Statement on Maintenance of Statutory Accounting Principles (Appendix 1)

Development of New or Substantively Revised SSAPs New SSAPs will be developed to address but will not be limited to: 1) concepts not previously addressed by a SSAP and do not fit within the scope of an existing SSAP; 2) concepts that fit within the scope of an existing SSAP, but the Working Group elects to supersede existing SSAPs and 3) existing concepts that warrant significant revisions. Substantively-revised SSAPs will be developed to address but will not be limited to: 1) concepts that fit within the accounting topic of an existing SSAP, but have not been addressed by the Working Group; 2) changes to the valuation and/or measurement guidance in an existing SSAP and 3) modifies the overall application of existing SSAPs. New or substantively revised SSAPs will be developed from time to time that: 1) address issues not covered by existing SAP guidance; 2) amend existing SSAPs; or, 3) supersede existing SSAPs. The decision to undertake development of a new or substantively revised SSAP will rest with the SAPWGWorking Group. The SAPWG will report to the Task Force on its actions at each national meeting of the NAIC. New SSAPs or substantively revised SSAPs will have a specified effective date.

Development of Nonsubstantive Revisions to SSAPs

Nonsubstantive revisions to SAP will be developed to address but will not be limited to: 1) clarification of the intent or application of existing SSAPs; 2) new disclosures and modification of existing disclosures; 3) revisions that do not change the intent of existing guidance and 4) revisions to Appendix A—Excerpts of NAIC Model Laws to reflect amendments to NAIC adopted model laws and regulations. Nonsubstantive revisions to the Accounting Practices and Procedures Manual will be developed to revise SSAP guidance to clarify the intent or application of existing guidance, modify disclosures or update references to model laws. Research and drafting of nonsubstantive revisions will be performed by the NAIC staff under the direction and supervision of the SAPWGWorking Group. Public comment will be solicited on nonsubstantive revisions, and the item will be included on the agenda for at least one public hearing before the SAPWG Working Group adopts nonsubstantive revisions. Nonsubstantive revisions are considered effective immediately after adoption by the SAPWGWorking Group, unless the SAPWG Working Group incorporates a specific effective date. If opposing comments are not received during the public comment period, the SAPWG Working Group may adopt the proposal collectively (one motion/vote) with other “non-contested” positions after opportunity is given during the hearing to separately discuss the proposal.

Development of Interpretations to SSAPs and Referencing Interpretations Within SSAPs

Interpretations will be developed to address but not limited to issues requiring timely application or clarification of existing SAP, which shall not amend, supersede or conflict with existing, effective SSAPs (except as defined within this policy statement).An interpretation to an existing SSAP may be developed to provide timely application or clarification guidance. SAPWG issues that are classified as an “interpretation” shall not amend, supersede or conflict with existing, effective SSAPs. Issues being considered as an interpretation must be discussed at no less than two open meetings. (Original introduction of the issue when the SAPWG Working Group identifies the intent to address the issue as an “interpretation” during a public discussion is considered the first open meeting discussion.) The process must allow opportunity for interested parties to provide comments, but as interpretations are intended to provide timely responses to questions of application or interpretation and clarification of guidance, no minimum exposure timeframe is required.

Proposed Revisions to the NAIC Policy Statement on Statutory Accounting Principles Maintenance Agenda

Process (Appendix 3):

Ref #2016-12


The Active Listing identifies agenda items that are in the process of development and includes the following:

Substantive: These agenda items address the development of new SSAPs and substantially-revised SSAPs as defined in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles.

Nonsubstantive: These agenda items address the development of nonsubstantive revisions to SAP as defined in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles.

Interpretations: These agenda items address the development of interpretations to SAP as defined in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles. If SSAP revisions are subsequently deemed necessary, the Working Group will need to re-categorize the agenda item as either Substantive or Nonsubstantive, as applicable, and follow the appropriate process to consider and adopt revisions.

After review of the agenda item (including any interested party comments), at their discretion, the Working Group makes the ultimate determination of whether an agenda item is categorized (or re-categorized) as substantive (either as a new SSAP or substantively-revised SSAP), nonsubstantive or an interpretation.

Adoption of Revisions Once Exposure Requirements Are Satisfied

In their October 2, 2015 comment letter, interested parties stated the following:

“It should be noted that this Policy Statement addresses the process and the flow of information. The timing is left to the discretion of the SAPWG. For instance, once public discussion requirements have been met, the SAPWG can take action on an item at their discretion. In determining whether it is appropriate to adopt items that were not exposed immediately-preceding the adoption consideration, the Working Group must consider when the last exposure occurred and the extent of any prior comments and discussions. Additionally, there is no timeframe in which items must be addressed, and items will remain on the Active Report until the SAPWG formally disposes of the item. Is this proposing that despite the processes enumerated in the Policy statement, SAPWG can make a decision to not follow that process? If this is the intent, interested parties would have serious concerns about such a proposal.”

Staff Response: The intent of this language is to allow the SAPWG to adopt agenda items from the “meeting

agenda” once all public discussion requirements have been satisfied (which are detailed in the NAIC Policy

Statement on Maintenance of Statutory Accounting Principles). The shaded language above was originally

proposed to ensure that the significance of an agenda item, including prior comments and discussions, were

considered prior to the SAPWG taking any actions.

This process has occurred historically. One such example is the Working Group’s actions with respect to ASU

2010-20 - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

and ASU 2011-01 - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update

No. 2010-20 (agenda item 2011-22). The following details the process flow for this agenda item:

These ASU’s were originally proposed to be identified as not applicable to statutory accounting (2011

Fall NM-Meeting Agenda).

However, based on comments from interested parties that rejecting these ASUs would create additional

GAAP to SAP differences, the Working Group re-exposed revisions related to these ASUs and sent a

referral to the NAIC/AICPA Working Group requesting their review and input on the proposed revisions

(2012 Spring NM-Hearing Agenda).

Interested parties supported the proposed revisions, however, since a response on had not yet been

received the NAIC/AICPA Working Group, they agreed to defer this item to provide more time to receive

a response from the NAIC/AICPA Working Group (2012 Summer NM-Hearing Agenda).

Ref #2016-12


The Working Group received response from the NAIC/AICPA Working Group (citing no objections) and

at the 2012 Fall National Meeting, the Working Group adopted the revisions outlined in the agenda item

(2012 Fall NM-Meeting Agenda; public hearing on comments previously occurred at Spring NM). As

exposure and public discussion requirements had been previously satisfied, the Working Group adopted

this agenda item from the “meeting agenda.”

Please note, any action taken by the Working Group will occur in a public forum and therefore, interested parties

will have the opportunity to express any comments or concerns if the Working Group were to consider adopting

from the “meeting agenda.”

Staff recommends the following revisions to the NAIC Policy Statement on Statutory Accounting Principles

Maintenance Agenda Process (Appendix 3):

It should be noted that this Policy Statement addresses the process and the flow of information. The timing is left to the discretion of the SAPWGWorking Group. For instance, an item can move from the Pending List to the Substantive Disposition Report in one, two or three national meetings. For instance, once public discussion requirements have been met, as detailed in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles, the Working Group can take action on an item at their discretion. In determining whether it is appropriate to take specific actions (including adoption), the Working Group must consider when the last exposure period occurred and the extent of any prior comments received and discussions held. Additionally, there is no timeframe in which items must be addressed. Items will remain on the Active Listing until formally disposed of by the Working Group.

Additional Revisions Proposed by NAIC Staff

Inclusion of Editorial Process for Accounting Practices and Procedures Manual

(Proposed revisions have been incorporated into the NAIC Policy Statement on Statutory Accounting Principles

Maintenance Agenda Process, as detailed in Appendix 3. An example of the proposed template has been

provided as Appendix 6 of the agenda item)

Over time, during review and publication of the Accounting Practices and Procedures Manual (AP&P Manual),

NAIC staff have identified inadvertent editorial errors and other consistency updates needed within the content of

the AP&P Manual. These are editorial in nature and include grammatical errors, reference changes (i.e.

paragraphs, SSAPs and Model Laws and Regulations) and formatting issues. To aid in correcting these items and

improve the overall usefulness of the AP&P Manual, NAIC staff are proposing an editorial process similar to the

process followed by FASB for maintenance updates. The following language is from FASB’s About the

Codification (v 4.10) regarding the issuance of maintenance updates:

“While the intent is to produce error-free content, any publishing process inadvertently may have irregularities. To accommodate the immediate nature of the necessary corrections, the FASB issues Maintenance Updates. These documents are prepared by the FASB staff and are not addressed by the Board. Maintenance Updates provide nonsubstantive corrections to the Codification, such as editorial corrections, link-related changes, and source fragment information changes (used for Cross Reference and the Printer-Friendly with Sources). Maintenance Updates appear on the Codification website under Other Sources.” (https://asc.fasb.org/help&cid=1176163588636)

While the FASB process is completed by staff and not addressed by the Board, NAIC staff proposes the following

process for the AP&P Manual:

At each meeting of the Working Group, if NAIC staff have identified (or have been informed by interested parties or regulators) any grammatical errors, reference changes and/or formatting issues, NAIC staff will present a public memorandum to the Working Group outlining the proposed amendments to the AP&P Manual. These corrections are not intended to clarify or revise existing guidance and as such, do not ordinarily warrant the use of a Form A or addition to the Maintenance Agenda.

Ref #2016-12


After presentation of the memorandum to the Working Group, if no objections are raised by the Working Group, interested regulators or interested parties, the revisions will be considered adopted and incorporated into the AP&P Manual, with the revisions being posted on the Accounting Practices and Procedures Manual Updates secure Web page. Under this process, these revisions 1) will not be exposed for a public comment period and 2) will be shown as tracked changes to the Manual unless otherwise noted.

If objections are raised by the Working Group, interested regulators or interested parties, the proposed revisions will either be rejected without further discussion or incorporated into a Form A to be presented to the Working Group and subsequently exposed for a public comment period. Under this process, the revisions will follow the Maintenance Agenda process as outlined in this Policy Statement. Further, if additional time is needed to review the proposed editorial revisions, the Working Group may elect to defer discussion and consideration of the revisions until a subsequent meeting of the Working Group.

Staff also notes that a similar editorial process is utilized by the Blanks (E) Working Group for purposes of

amending the annual and quarterly statement blanks and instructions.

Issue Papers for Nonsubstantive Revisions

Over time, the SAPWG, interested regulators and interested parties will engage in significant discussions over

proposed nonsubstantive revisions to SAP. As a mechanism for capturing the historical discussion and adopted

revisions to SAP, at their discretion, the SAPWG may direct NAIC staff to draft an issue paper for nonsubstantive

revisions.

Staff recommends the following revision to the NAIC Policy Statement on Maintenance of Statutory

Accounting Principles (Appendix 1):

At its discretion, the Working Group may request that an issue paper be drafted for nonsubstantive revisions in order to capture historical discussions and adopted revisions.

Voting Requirements to Adopt Interpretations

Now that the substantive, nonsubstantive and interpretation processes all fall under the purview of the SAPWG,

staff are proposing that the voting requirements to adopt interpretations be revised from a super majority to a

simple majority to be consistent with the voting requirements of substantive and nonsubstantive revisions. Staff

recommends the following revision to the NAIC Policy Statement on Maintenance of Statutory Accounting

Principles (Appendix 1):

The voting requirement to adopt an interpretation is a simple majority.In order to adopt an interpretation, the SAPWG must have 67% of their members voting (10 out of the 15 members). The voting requirement to adopt an interpretation is 7 out of 10 members, 8 out of 11 or 12 members, 9 out of 13 members, 10 out of 14, and 11 out of 15 members. As interpretations do not amend, supersede or conflict with existing SSAP guidance, the interpretation is effective upon SAPWG Working Group adoption unless specifically stated otherwise. The SAPWG Working Group shall report the adopted interpretation to the Task Force as part of its public report during the next NAIC national meeting (or earlier if applicable). Interpretations can be overturned, amended or deferred only by a two-thirds majority of the Task Force membership.

INT Temporarily Overriding Existing SSAP, or Creating New SAP

In rare circumstances, the SAPWG may adopt an interpretation which creates new SAP or conflicts with existing

SSAPs. Historically, these interpretations temporarily modified statutory accounting principles or specific

disclosures were developed in response to nationally significant events (i.e. Hurricane Sandy, September 11,

2001). Prior to disbandment of the Emerging Accounting Issues (E) Working Group, the following language was

included in the NAIC Policy Statement on Emerging Accounting Issues Agenda Process (This language was

removed from the 2016 AP&P Manual in accordance with the actions taken by the SAWPWG for agenda item

2015-18):

Ref #2016-12


In the rare event that an opinion of the EAIWG would create SAP not addressed by SSAPs, concurrence of SAPWG (as determined by a majority vote) will be necessary before the guidance becomes effective.

As the ability to deviate from the normal interpretation process to address nationally significant events has been

historically important, staff are recommending the following revision be added to the NAIC Policy Statement

on Maintenance of Statutory Accounting Principles (Appendix 1):

In rare circumstances, the Working Group may adopt an interpretation which creates new SAP or conflicts with existing SSAPs. Historically, these interpretations temporarily modified statutory accounting principles and/or specific disclosures were developed in response to nationally significant events (i.e. Hurricane Sandy, September 11, 2001). In order to adopt an interpretation that creates new SAP or conflicts with existing SSAPs, the SAPWG must have 67% of their members voting (10 out of 15 members), with a super majority (7 out of 10, 8 out of 11 or 12, 9 out of 13, 10 out of 14 or 11 out of 15) supporting adoption.

Other Editorial Revisions

Throughout Appendices 1-5 of this agenda item, staff has recommended additional revisions to the policy

statements; which include:

Editorial revisions; including grammatical, reorganization and formatting

Consistency revisions as a result of other proposed revisions to the Policy Statement

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\12 - 16-12 - Appendix F - Policy

Statement Revisions.docx


APPENDIX 1

NAIC Policy Statement on

Maintenance of Statutory Accounting Principles

Statutory accounting principles (SAPs) provide the basis for insurers to prepare financial statements to be filed

with and utilized by state insurance departments for financial regulation purposes. Accuracy and completeness of

such filings are critical to meaningful solvency monitoring. Accordingly, maintenance of SAP guidance for

changes in the industry and changes in regulatory concerns is vital to preserving the usefulness of SAP financial

statements.

The promulgation of new or revised SAP guidance by the NAIC ultimately requires action of the entire NAIC

membership. Responsibility for proposing new or revised SAP guidance will be delegated through the NAIC

committee structure to the Accounting Practices and Procedures (E) Task Force (Task Force). The Task Force

will charge the Statutory Accounting Principles (E) Working Group (SAPWGWorking Group) with the exclusive

responsibility to develop and propose new Statements of Statutory Accounting Principles (SSAPs), to revise

existing SSAPs, and to issue interpretations.

Composition of the Statutory Accounting Principles (E) Working Group

The chair of the Task Force shall determine membership of the Statutory Accounting Principles (E) Working

Group subject to approval by the Financial Condition (E) Committee. The Statutory Accounting Principles (E)

Working Group shall be limited in size to no more than 15 members and will include representation from the four

zones of the NAIC. Membership shall be vested in the state (until such time as the membership may be changed)

but continuity of individuals, to the extent possible, is extremely desirable.

Development of New or Substantively Revised SSAPs

New SSAPs will be developed to address, but will not be limited to: 1) concepts not previously addressed by a

SSAP and do not fit within the scope of an existing SSAP; 2) concepts that fit within the scope of an existing

SSAP, but the Working Group elects to supersede existing SSAPs and 3) existing concepts that warrant

significant revisions. Substantively-revised SSAPs will be developed to address, but will not be limited to: 1)

concepts that fit within the accounting topic of an existing SSAP, but have not been addressed by the Working

Group; 2) changes to the valuation and/or measurement of an existing SSAP and 3) modifies the overall

application of existing SSAPs. New or substantively revised SSAPs will be developed from time to time that: 1)

address issues not covered by existing SAP guidance; 2) amend existing SSAPs; or, 3) supersede existing SSAPs.

The decision to undertake development of a new or substantively revised SSAP will rest with the

SAPWGWorking Group. The SAPWG will report to the Task Force on its actions at each national meeting of the

NAIC. New SSAPs or substantively revised SSAPs will have a specified effective date.

Research and drafting on of new or substantially revised SSAPs will be performed by the NAIC staff under the

direction and supervision of the SAPWGWorking Group, which may enlist the assistance of interested parties

and/or consultants with requisite technical expertise as needed or desired. The first step in developing new and

substantively revised SSAPs will usually be the drafting of an issue paper (IP), which will contain summary

summaries of the issue and conclusion, discussion and relevant literature sections. Public comment will be

solicited on the IPs (at least one exposure period), and at least one public hearing will be held on an IP before it is

converted to a SSAP. Upon approval by the SAPWGWorking Group, all proposed SSAPs will be exposed for

public comment for a period commensurate with the length of the draft and the complexities of the issue(s). After

a hearing of comments, Adoption adoption of new or substantively revised SSAPs (including any amendments

from exposure) by the SAPWG, after hearing and any further amendments, may be made by simple majority. If

comments are not received during the public comment period, the SAPWGWorking Group may adopt the

proposal collectively (one motion/vote) with other “non-contested” positions after the opportunity is given during


the hearing to separately discuss the proposal. All new and substantively revised SSAPs must be on the agenda for

at least one public hearing before presentation to the Task Force for consideration. Adoption by the Task Force,

its parent and the NAIC membership shall be governed by the NAIC bylaws. If comments are not received during

the public comment period, the SAPWG may adopt the proposal collectively (one motion/vote) with other “non-

contested” positions after opportunity is given during the hearing to separately discuss the proposal.

The Working Group may, by a super majority vote (7 out of 10 members, 8 out of 11 or 12, 9 out of 13, 10 out of

14, and 11 out of 15) elect to: 1) combine the IP and SSAP process, resulting in concurrent exposure of the two

documents; 2) expose and adopt revisions to a SSAP prior to the drafting/adoption of the related IP and/or 3)

forego completion of an IP and only proceed with revisions to a substantively revised SSAP.

If accounting guidance, reserving standards, asset valuation standards, or any other standards or rules affecting

accounting practices and procedures are first developed by other NAIC working groups, task forces,

subcommittees, or committees, such proposed guidance, standards or rules must shall be presented reviewed by to

the SAPWGWorking Group for consideration and converted to a SSAP or a revised appendix. In cases where

such guidance has already been subjected to substantial due process (e.g., public comment periods and/or public

hearings), the SAPWG Working Group may elect to shorten comments periods and/or eliminate public hearings,

and in such cases, will notify the Task Force of these actions. recommend to the Task Force that either the IP or

SSAP comment periods may be shortened or eliminated or the hearings may be eliminated.

Development of Nonsubstantive Revisions to SSAPs

Nonsubstantive revisions to SAP will be developed to address, but will not be limited to: 1) clarification of the

intent or application of existing SSAPs; 2) new disclosures and modification of existing disclosures; 3) revisions

that do not change the intent of existing guidance and 4) revisions to Appendix A—Excerpts of NAIC Model Laws

to reflect amendments to NAIC adopted model laws and regulations. Nonsubstantive revisions to the Accounting

Practices and Procedures Manual will be developed to revise SSAP guidance to clarify the intent or application

of existing guidance, modify disclosures or update references to model laws. Research and drafting of

nonsubstantive revisions will be performed by the NAIC staff under the direction and supervision of the

SAPWGWorking Group. Public comment will be solicited on nonsubstantive revisions, and the item will be

included on the agenda for at least one public hearing before the SAPWG Working Group adopts nonsubstantive

revisions. Nonsubstantive revisions are considered effective immediately after adoption by the SAPWGWorking

Group, unless the SAPWG Working Group incorporates a specific effective date. If comments are not received

during the public comment period, the SAPWG Working Group may adopt the proposal collectively (one

motion/vote) with other “non-contested” positions after opportunity is given during the hearing to separately

discuss the proposal. At its discretion, the Working Group may request that an issue paper beis drafted for

nonsubstantive revisions in order to capture historical discussion and adopted revisions. Adoption of

nonsubstantive revisions by the Task Force, its parent and the NAIC membership shall be governed by the NAIC

bylaws.

Development of Interpretations to SSAPs and Referencing Interpretations Within SSAPs

Interpretations will be developed to address, but will not be limited to issues requiring timely application or

clarification of existing SAP, which shall not amend, supersede or conflict with existing, effective SSAPs. An

interpretation to an existing SSAP may be developed to provide timely application or clarification guidance.

SAPWG issues classified as an “interpretation” shall not amend, supersede or conflict with existing, effective

SSAPs. Issues being considered as an interpretation must be discussed at no less than two open meetings.

(Original introduction of the issue when the SAPWG Working Group identifies the intent to address the issue as

an “interpretation” during a public discussion is considered the first open meeting discussion.) The process must

allow opportunity for interested parties to provide comments, but as interpretations are intended to provide timely

responses to questions of application or interpretation and clarification of guidance, no minimum exposure

timeframe is required.


The voting requirement to adopt an interpretation is a simple majority. In order to adopt an interpretation, the

SAPWG must have 67% of their members voting (10 out of the 15 members). The voting requirement to adopt an

interpretation is 7 out of 10 members, 8 out of 11 or 12 members, 9 out of 13 members, 10 out of 14, and 11 out

of 15 members. As interpretations do not amend, supersede or conflict with existing SSAP guidance, the

interpretation is effective upon SAPWG Working Group adoption unless specifically stated otherwise. The

SAPWG Working Group shall report the adopted interpretation to the Task Force as part of its public report

during the next NAIC national meeting (or earlier if applicable). Interpretations can be overturned, amended or

deferred only by a two-thirds majority of the Task Force membership.

In rare circumstances, the Working Group may adopt an interpretation which creates new SAP or conflicts with

existing SSAPs. Historically, these interpretations temporarily modified statutory accounting principles and/or

specific disclosures were developed in response to nationally significant events (e.g. Hurricane Sandy, September

11, 2001). In order to adopt an interpretation that creates new SAP or conflicts with existing SSAPs, the Working

Group must have 67% of its members voting (10 out of 15 members), with a super majority (7 out of 10, 8 out of

11 or 12, 9 out of 13, 10 out of 14, or 11 out of 15) supporting adoption. These interpretations can be adopted,

overturned, amended or deferred only by a two-thirds majority of the Task Force membership.

As new SSAPs are developed, it is essential to review and, if necessary, update the status of interpretations related

to SSAPs that are being replaced and/or new SSAPs being developed. The following list of options is available to

the SAPWG Working Group when a SSAP with existing interpretations is replaced:

a. Interpretation of the new SSAP - If the SAPWG Working Group would like to maintain the

interpretation, the new SSAP can be added to the list of statements interpreted by the

interpretation. In addition, the status section of the new SSAP will list the interpretation number

next to the heading “Interpreted by.”

b. Nullification - When an interpretation is nullified by a subsequent SSAP or superseded by

another interpretation, the interpretation is deemed no longer technically helpful, is shaded and

moved to Appendix H (Superseded SSAPs and Nullified Interpretations), and the reason for the

change is noted beneath the interpretation title. The status section of the SSAP describes the

impact of the new guidance and the effect on the interpretation (for example, nullifies,

incorporated in the new SSAP with paragraph reference, etc.).

c. Incorporation - When an interpretation is incorporated into a new SSAP, the SAPWG Working

Group can choose from the following two options:

i. If the interpretation only interprets one SSAP, then the interpretation is listed as being

nullified under the “affects” section of the SSAP and is not referenced under the

“interpreted by” section of the status page of the SSAP.

ii. If the interpretation references additional SSAPs, and the SAPWG Working Group

intends to maintain the guidance, the interpretation is unchanged (no nullification). The

new SSAP (Summary of Issue section) reflects that the interpretation issue has been

incorporated into the new statement.


APPENDIX 2

NAIC Policy Statement on

Comments to GAAP & IFRS Exposure Drafts

As expressed in the Statement of Concepts, Statutory Accounting Principles (SAP) utilize the framework

established by U.S. Generally Accepted Accounting Principles (GAAP). The NAIC’s guidance on SAP (defined

in the Accounting Practices and Procedures Manual) is comprehensive for those principles that differ from

GAAP based on the concepts of statutory accounting. Those GAAP Pronouncements pronouncements that are not

applicable to insurance companies will not be adopted by the NAIC. For GAAP Pronouncements pronouncements

that do not differ from SAP may specifically be adopted by the NAIC may specifically adopt those GAAP

Pronouncements to be included in statutory accounting. GAAP Pronouncements do not become part of SAP until

and unless adopted by the NAIC. Future SAP Pronouncements will specifically identify any GAAP

Pronouncements pronouncements that are to be included in SAP whether in whole, in part, or with modification

as well as any GAAP Pronouncements pronouncements that are rejected. Future GAAP

Pronouncementspronouncements, which SAP has not yet addressed, shall not be considered as providing

authoritative statutory guidance.

As illustrated stated by the previous paragraph, the NAIC believes it is important to comment on GAAP exposure

drafts that will affect SAP before such guidance is finalized. Exposing potentially contentious issues to the

applicable GAAP bodies before completion will create a more efficient and effective maintenance process for the

Statutory Accounting Principles (E) Working Group (SAPWGWorking Group). In addition, this also allows the

NAIC to be proactive to GAAP rather than reactive under the current system. The NAIC also believes that there

may be instances in which it is important to comment on exposure drafts of the International Financial Reporting

Standards (IFRS). This is particularly is important on projects in which U.S. FASB and the International

Accounting Standards Board (IASB) are attempting to converge, or to limit differences between U.S. GAAP and

IFRS.

Comments on exposed GAAP Pronouncements pronouncements or IFRS exposure drafts will be developed at the

discretion of the SAPWG Working Group chair. After a comment letter has been agreed to by the

SAPWGWorking Group, the chairs of the Accounting Practices and Procedures (E) Task Force and the Financial

Condition (E) Committee must review and approve the comment letter before it is sent to the applicable standard

board. Every reasonable attempt will be made to provide an adequate comment period to interested parties;

however, FASB and IFRS deadlines may inhibit exposure in every instance. The chairs will consider factors such

as comment deadline and level of controversy surrounding the issue. The chair of the parent task force or

committee may override such a decision at any time.

Comment letters submitted to the FASB on GAAP exposure drafts may be considered when the SAPWG

Working Group is reviewing finalized GAAP Pronouncements (as defined in the NAIC Policy Statement on

Maintenance of Statutory Accounting Principles). Nevertheless, these letters will not bind the SAPWG Working

Group to its tentative position during its deliberation to adopt, modify or reject the final GAAP guidance.

APPENDIX 3

NAIC Policy Statement on Statutory Accounting Principles

Maintenance Agenda Process

The purpose of the following Policy Statement is to document the Statutory Accounting Principles (E) Working

Group (SAPWGWorking Group) maintenance agenda process.

As acknowledged in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles, the

promulgation of statutory accounting principles (SAP) guidance will be delegated through the NAIC committee

structure to the Accounting Practices and Procedures (E) Task Force (Task Force). The Task Force will charge the

Statutory Accounting Principles (E) Working Group (SAPWG)Working Group with the responsibility to develop

and propose new statements of statutory accounting principles (SSAPs), to propose revisions to existing SSAPs,

and to issue interpretations in response to questions of application and clarification on existing SSAPs.

Information and issues can be presented to the SAPWG Working Group in a variety of ways. Issues can be

recommended or forwarded from 1) other NAIC committees, task forces or working groups; or task forces, or

from 2) interested parties; 3) interested regulators and 4) NAIC staff. Also, if any guidance within the Generally

Accepted Accounting Principles (GAAP) Hierarchy (see § V of the Preamble to the Accounting Practices and

Procedures Manual (AP&P Manual)) is added or revised, those changes must be considered by the

SAPWGWorking Group for potential revisions to SAP. In order for an issue to be placed on the Pending Listing,

the recommending party must complete a Statutory Accounting Principles Maintenance Agenda Submission Form

(Form A) and submit it to the NAIC SAPWG Working Group support staff no later than 20 business days prior to

the next scheduled SAPWG Working Group meeting. The NAIC staff will prepare a submission form for all

GAAP pronouncements that have not been previously addressed by the SAPWGWorking Group. NAIC staff will

update the Pending Listing before each national meeting and will notify the recommending party of such action.

If the SAPWG Working Group does not wish to address the issue (e.g.; issue deemed not applicable to statutory

accounting) or rejects the position presented, then the SAPWG may move the item to the Rejected

ReportListing. Should the SAPWG Working Group choose to address an issue, it is moved to the Active

Listing, where it is prioritized and categorized as either the a Substantive, Nonsubstantive or Interpretation

Listing agenda itemfor consideration.

The Active Listing identifies agenda items that are in the process of development and includes the following:

Substantive: These agenda items address the development of new SSAPs and substantially revised

SSAPs as defined in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles.

Nonsubstantive: These agenda items address the development of nonsubstantive revisions to SAP as

defined in the NAIC Policy Statement on Maintenance of Statutory Accounting Principles.

Interpretations: These agenda items address the development of interpretations to SAP as defined in the

NAIC Policy Statement on Maintenance of Statutory Accounting Principles. If SSAP revisions are

subsequently deemed necessary, the Working Group shall re-categorize the agenda item as either

Substantive or Nonsubstantive, as applicable, and follow the appropriate process to consider and adopt

revisions.

After review of the agenda item (including any interested party comments), at its discretion, the Working Group

makes the ultimate determination of whether an agenda item is categorized (or re-categorized) as substantive

(either as a new SSAP or substantively-revised SSAP), nonsubstantive or an interpretation.

The Substantive Listing includes items that require a new issue paper and a new or substantively revised

SSAP to address the issue. Once items are placed on this listing, they are prioritized and the formal

maintenance policy is followed (see NAIC Policy Statement on Maintenance of Statutory Accounting

Principles). The SAPWG will utilize the NAIC website for exposure of substantive items.

The Nonsubstantive Listing contains items that are considered editorial or technical in nature and,

therefore, a new SSAP or substantively revised SSAP will not be developed. In other words, a revision to

a SSAP for these items will not be deemed to modify its conclusion or original intent.

The Interpretation Listing includes items for which the SAPWG will be issuing an interpretation in

response to questions that relate to application, interpretation or clarification of existing statutory

accounting guidance. Items included on the Interpretation Listing will not result in revisions to SSAPs. If

SSAP revisions are subsequently deemed necessary, the SAPWG will need to move the item to either the

Substantive or Nonsubstantive Listing, as applicable, and follow the appropriate process to consider and

adopt revisions.

The Rejected Report Listing identifies items that were proposed to the SAPWG Working Group and

rejected without consideration. The Active Report identifies items that are in the process of completion. The

Active Report is prioritized and shows the status of agenda items not finalized by the SAPWG. The Disposition

Report Listing includes captures the conclusionsall agenda items considered by of the SAPWGWorking Group

and provides the conclusions and guidance given for all adopted revisions to SAP and for all agenda items

disposed without modification to SAP..

It should be noted that this Policy Statement addresses the process and the flow of information. The timing is left

to the discretion of the SAPWGWorking Group. For instance, an item can move from the Pending List to the

Substantive Disposition Report in one, two or three national meetings. For instance, once public discussion

requirements have been met, as detailed in the NAIC Policy Statement on Maintenance of Statutory Accounting

Principles, the Working Group can take action on an item at their discretion. In determining whether it is

appropriate to take specific actions (including adoption), the Working Group must consider when the last

exposure period occurred and the extent of any prior comments received and discussions held. Additionally, there

is no timeframe in which items must be addressed. Items will remain on the Active Listing until formally disposed

of by the Working Group.

NAIC staff will maintain the following on the Working Group Web page

(http://naic.org/committees_e_app_sapwg.htm): 1) a blank Form A (Attachment A to this Policy Statement); 2)

the current Maintenance Agenda and 3) current substantive, nonsubstantive and/or interpretation revisions

exposed for public comment. Attachment B to this policy statement will be attached to all exposures with

proposed substantive revisions and serves as the request for written comment and notice of a public hearing.

The NAIC staff will maintain a current Maintenance Agenda on the NAIC website at www.naic.org. Attachment

A to this Policy Statement includes a blank Form A. Attachment B is an example of the document that will be

attached to all exposed documents with proposed substantive revisions and will serve as the notice of public

hearing and request for written comments.

Correction of Editorial Errors

Over time, during review and publication of the AP&P Manual, NAIC staff may identify inadvertent editorial

errors and necessary revisions to the content of the Manual. These are editorial in nature and include grammatical

errors, reference changes (i.e. paragraphs, SSAPs and Model Laws and Regulations) and formatting issues. To aid

in the correcting of these items and improve the overall usefulness of the Manual, the Working Group has

implemented the following process:

At each meeting of the Working Group, if NAIC staff have identified (or have been informed by

interested parties or regulators) any grammatical errors, reference changes and/or formatting issues, NAIC

staff will present a public memorandum to the Working Group outlining the proposed amendments to the

AP&P Manual. These corrections are not intended to clarify or revise existing guidance and as such, do

Appendix 3

not ordinarily warrant the use of a Form A or addition to the Maintenance Agenda.

After presentation of the memorandum to the Working Group, if no objections are raised by the Working

Group, interested regulators or interested parties, the revisions will be considered adopted and

incorporated into the AP&P Manual, with the revisions being posted on the “Updates to the AP&P

Manual” secure Web page. Under this process, these revisions 1) will not be exposed for a public

comment period and 2) will be shown as tracked changes to the Manual unless otherwise noted.

If objections are raised by the Working Group, interested regulators or interested parties, the proposed

revisions will either be rejected without further discussion or incorporated into a Form A to be presented

to the Working Group and subsequently exposed for a public comment period. Under this process, the

revisions will follow the Maintenance Agenda process as outlined in this Policy Statement. Further, if

additional time is needed to review the proposed editorial revisions, the Working Group may elect to

defer discussion and consideration of the revisions until a subsequent meeting of the Working Group.

Attachment A



Form A

Issue:

____________________________________________________________________________________


P/C Life Health Correction Modification of existing SSAP

New issue or SSAP

Interpretation

*Description of Issue:

____________________________________________________________________________________

*Existing Authoritative Literature:

____________________________________________________________________________________

*Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,

FASB, other State Departments of Insurance or other NAIC groups):

____________________________________________________________________________________

*Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:

____________________________________________________________________________________

Recommended Conclusion or Future Action on Issue:

____________________________________________________________________________________

Recommending Party:

____________________________________________________________________________________

(Organization, Person Submitting, Title)

____________________________________________________________________________________

(Address, City, State, ZIP)

____________________________________________________________________________________

(Phone and Email Address)

___________________

(Date Submitted)

* Indicates required information before NAIC staff will accept form as a final document.

Attachment B

EXPOSURE DRAFT NUMBER - TITLE


Hearing Date: __________________

Location: _________________

Deadline for Written Notice of Intent to speak:


Basis for hearings. The Statutory Accounting Principles (E) Working Group (SAPWGWorking Group) will hold a

public hearing to obtain information from and views of interested individuals and organizations about the standards

proposed in this Exposure Draft. The SAPWG Working Group will conduct the hearing in accordance with the

National Association of Insurance Commissioners (NAIC) Policy Statement on Open Meetings. An individual or

organization desiring to speak must notify the NAIC in writing by __________. Speakers will be notified as to the

date, location and other details of the hearings.

Oral presentation requirements. The intended speaker must submit a position paper, a detailed outline of a

proposed presentation or comment letter addressing the standards proposed in this Exposure Draft by __________.

Individuals or organizations whose submission is not received by this date will only be granted permission to present

at the discretion of the SAPWG Working Group chair. All submissions should be addressed to NAIC staff at the

address listed below. Comments can also be submitted by electronic mail to [email protected].

Format of hearings. Speakers will be allotted up to 10 minutes for their presentations to be followed by a period for

answering questions from the SAPWGWorking Group. Speakers should use their allotted time to provide

information in addition to their already submitted written comments as those comments will have been read and

analyzed by the SAPWGWorking Group. Those submissions will be included in the public record and will be

available at the hearings for inspection.

Copies. Exposure drafts can be obtained on the Working Group’s Web page NAIC website at

http://naic.org/committees_e_app_sapwg.htmwww.naic.org.

Written comments. Participation at a public hearing is not a prerequisite to submitting written comments on this

Exposure Draft. Written comments are given the same consideration as public hearing testimony.

The Statutory Accounting Principles Statement of Concepts was adopted by the Accounting Practices & Procedures

(EX4) Task Force on September 20, 1994, in order to provide a foundation for the evaluation of alternative

accounting treatments. All issues considered by the SAPWG will be evaluated in conjunction with the objectives of

statutory reporting and the concepts set forth in the Statutory Accounting Principles Statement of Concepts.

The exposure period is not meant to only measure support for, or opposition to, a particular accounting treatment but

rather to accumulate an analysis of the issues from other perspectives and persuasive comments supporting them.

Therefore, form letters and objections without valid support for their conclusions are not helpful in the deliberations

of the SAPWG. Comments should register agreement or disagreement with a detailed explanation, a description of

the impact of the proposed guidelines, and possible alternative recommendations for accomplishing the regulatory

objective.

Any individual or organization may send written comments to ____________ by electronic mail in Microsoft Word

format to [email protected]. After written comments have been reviewed by the SAPWG, the letters will be posted

publicly on the NAIC website.


1100 Walnut Street, Suite 1500

Kansas City, MO 64106-2197 (816) 842-3600

APPENDIX 4

NAIC Policy Statement on the Impact of Statements of Statutory

Accounting Principles on NAIC Publications

The purpose of this Policy Statement is to document the process and procedure for identifying the impact of

statements of statutory accounting principles (SSAPs) on NAIC publications.

New and revised SSAPs can affect various NAIC publications in many different ways. New accounting practices

or procedures may result in new disclosures and reporting requirements (affecting annual statement blanks and

instructions), modified analysis techniques (affecting RBC formula or IRIS ratios), or new examination

procedures (affecting the Financial Condition Examiners Handbook).

The SAPWG Statutory Accounting Principles (E) Working Group (Working Group) shall evaluate the impact that

newly adopted SSAPs will have on other NAIC publications. To that end, the SAPWG Working Group shall

submit a referral to any group in response to new or revised SSAPs expected to impact other NAIC groups or

publications. (Instead of a referral, a blanks proposal may be sponsored by the SAPWG Working Group and

submitted to the Blanks (E) Working Group). These referrals and blanks proposals are only required to be

approved by the chair of the SAPWG Working Group prior to submission to the other groups, but may be shared

with and approved by all SAPWG Working Group members.

F-16

APPENDIX 5

NAIC Policy Statement on Coordination of the Accounting

Practices and Procedures Manual and the Annual Statement Blank The purpose of the codification of statutory accounting principles (SAP) project was to produce a comprehensive

guide to SAP for use by insurance departments, insurers, and auditors. Statutory accounting principles, as they

existed prior to codification did not always provide a consistent and comprehensive basis of accounting and

reporting. Insurance companies were sometimes uncertain about what rules to follow and regulators were

sometimes unfamiliar with the accounting rules followed by insurers in other states. This was due in part to the

fact that prior to codification, accounting guidance could be found in the NAIC Accounting Practices and

Procedures Manual, annual statement instructions, the Financial Condition Examiners Handbook, and various

states’ laws and regulations. As a result, insurers’ financial statements were not prepared on a comparable basis.

Now that accounting requirements have been more rigidly stipulated by the NAIC, it is imperative that the

accounting requirements and the reporting and disclosure requirements remain synchronized. This is an excellent

opportunity to create a system of parallel requirements. This effort has already been recognized by the

NAIC/AICPA (E) Working Group. In 1999, the working Working group Group modified the Model Regulation

Requiring Annual Audited Financial Reports to require the following for audited financial statements:

Notes to financial statements. These notes shall be those required by the appropriate NAIC annual

statement instructions and the NAIC Accounting Practices and Procedures Manual. The notes shall

include a reconciliation of differences, if any, between the audited statutory financial statements and the

annual statement filed pursuant to Section [insert applicable section] of the [insert state] insurance law

with a written description of the nature of these differences.

As stated in the model regulation, the NAIC/AICPA (E) Working Group has an expectation that the requirements

of the annual statement instructions and the Accounting Practices and Procedures Manual will be identical in all

pertinent parts that are subject to audit. There is no reason to create a different set of audit requirements in the

annual statement instructions when a complete and comprehensive guide to statutory accounting exists. However,

it must be noted that the statements of statutory accounting principles (SSAPs) are not intended to prescribe the

specific format of the detailed financial statements.

The scope of this Policy Statement is defined as follows:

Any change to the annual statement core financials (balance sheet, income statement, cash flow and notes

to the financial statements) must be reviewed by the Statutory Accounting Principles (E) Working Group

to determine whether it conflicts with the disclosure requirements of the SSAPs.

The scope is defined in broad terms because it is very difficult to specify what constitutes a conflict with the

SSAPs. For example, the renumbering of the assets page does not conflict because there is not a SSAP that

prescribes the order of asset presentation. Contrast this with a seemingly innocuous proposal to modify Schedule

P - Part 1 that would create a disclosure conflict with the related SSAP.

In order to ascertain that the requirements of the annual statement instructions and blank are in harmony with the

SSAPs (as they relate solely to the core financial statements), the following procedures shall be followed:

1. The Blanks Agenda Item Submission Form will include an interrogatory that will indicate to the Blanks

(E) Working Group whether the proposal:

a. Affects the core financial statements

b. Conflicts with an existing SSAP

c. Is not currently required by a SSAP

d. Has been reviewed by the Statutory Accounting Principles (E) Working Group

2. One staff member from the Statutory Accounting Principles (E) Working Group and the Blanks (E)

Working Group is charged with verifying the accuracy of the interrogatory proposed in paragraph 1 above. After

the staff member reviews the proposals, they will report their findings back to the applicable groups before each

national meeting of the Blanks (E) Working Group. If the staff members identifies identify issues that need

further exploration or consultation, the chairs of the two groups or certain members from each group will hold a

joint meeting before the national meeting.

3. The Blanks (E) Working Group will reject proposals that will delete/modify information contained within

the core financial statements that are required by an existing SSAP.

4. The Blanks (E) Working Group will either reject proposals that would require additional audited

disclosure or audited information within the core financial statements if that same item is not required by an

existing SSAP; or move it outside the core financial statements. The sponsoring party will still have the option of

placing this information outside the core financial statements (e.g., general interrogatories or interrogatories to

schedules) until the disclosure is included in a SSAP. If the disclosure were added to a SSAP in the future, it

could be moved to the Notes to the Financial Statements and subject to audit at that time.

5. The NAIC will maintain a SSAP to annual statement cross-reference. This cross-reference will contain

two significant features. First, it will list all of the SSAP disclosures and reference them to where in the annual

statement the disclosure requirement is met. Second, the cross-reference will identify the annual statement

components that are required by a SSAP. The cross-reference can be used by the Blanks (E) Working Group and

interested parties in completing the new Blanks Agenda Item Submission Form Interrogatory.

APPENDIX 6

Editorial Process Template

(The below template is an example of what NAIC staff would present to the Statutory Accounting Principles (E) Working Group at each National Meeting)

NAIC Accounting Practices and Procedures Manual

Editorial and Maintenance Update 2016-XX

Released: April XX, 2016

Maintenance updates provide revisions to the Accounting Practices and Procedures Manual, such as editorial corrections, reference changes and

formatting. The following revisions reflect changes to the “As of March 2016” version of the AP&P Manual.

SSAP/Appendix Section Description Revision Effective Date

SSAP No. 94R—

Transferable and Non-

Transferable State Tax

Credits

Title

Revisions to SSAP title to be

consistent with other SSAP title

changes made in 2015.

SSAP No. 94R—Transferable and

Non-Transferable State Tax Credits 04/XX/2016

SSAP No. 61R—Life,

Deposit-Type and Accident

and Health Reinsurance

Paragraph

75.a.

This regulation is currently in the

drafting process and the title has not

been formally established. This

revision is to make the reference to

the Model Regulation consistent

throughout SSAP No. 61R.

The applicable standard shall be (1)

the NAIC Term Life and Universal

Life with Secondary Guarantees

(XXX/AXXX) Credit for Reinsurance

Model Regulation, if such regulation

has been adopted and is effective for

the reporting period in the reporting

entity’s state of domicile; or (2) in all

other cases, Actuarial Guideline

XLVIII—Actuarial Opinion and

Memorandum Requirements for the

Reinsurance of Policies Required to

be Valued Under Sections 6 and 7 of

the NAIC Valuation of Life Insurance

Policies Model Regulation (AG 48).

04/XX/2016

SSAP No. 103—Transfers

and Servicing of Financial

Assets and Extinguishment

of Liabilities

Paragraph 2

and

Footnote 1

Footnote 1 is no longer applicable as

the terms defined in the glossary are

no longer bolded in the publication

Footnote 1: Terms defined in the

glossary to this statement (Exhibit A)

are set in boldface type.

04/XX/2016

Note: The effective date represents the date the memorandum is presented to the Working Group. If no objections are raised, the revisions are

considered adopted on this date

Attachment 13

Ref #2015-43




Form A

Issue: EITF 99-02: Accounting for Weather Derivatives


P/C Life Health


New Issue or SSAP

Interpretation


In reviewing SSAP No. 86—Derivatives, it was identified that several Emerging Issues Task Force opinions

(EITF) noted as adopted with modification in Appendix D of the Accounting Practices and Procedures Manual

were not referenced within the “Relevant Literature” section of SSAP No. 86. In review, these EITFs were likely

intended to be included in the “framework” adoption of FAS 133 detail in SSAP No. 86. However, staff is unable

to find specific reference in historical documents regarding this intent. These EITFs have been identified as

adopted in Appendix D since 2003, which is the same year as the effective date of SSAP No. 86. At the 2015

Summer National Meeting, based on comments received, the Working Group directed NAIC staff to mark these

EITF’s as “pending” in Appendix D and prepare subsequent agenda items for the Working Group to review and

discuss these GAAP pronouncements.

For purposes of this agenda item, staff is separately addressing EITF 99-02: Accounting for Weather Derivatives.

This EITF was superseded by Accounting Standards Codification (ASC) Topic 105, Generally Accepted

Accounting Principles and the information was incorporated into ASC Topic 815-45, Weather Derivatives. (The

other noted EITFs will be addressed in subsequent Form A’s.)

Included below are excerpts of ASC 815-45, which outline the definition and accounting treatment of weather

derivatives:

The guidance in this subtopic applies to all weather derivatives that are not exchange-traded (and therefore not subject to the requirements of subtopic 815-10). The guidance in this Subtopic does not apply to contracts written by insurance entities that entitle the holder to be compensated only if, as a result of an insurable event, the holder incurs a liability or there is an adverse change in the value of a specific asset or liability for which the holder is at risk. (ASC 815-45-15-2)

Glossary – Weather Derivatives: A forward-based or option-based contract for which settlement is based on a climatic or geological variable. One example of such a variable is the occurrence or nonoccurrence of a specified amount of snow at a specified location within a specified period of time. (ASC 815-45-20)

An entity that enters into a non-exchange-traded forward-based weather derivative in connection with nontrading activities shall account for the contract by applying an intrinsic value method. The intrinsic value method requires that the reporting entity allocate the cumulative strike amount to individual periods within the contract term. That allocation shall reflect reasonable expectations at the beginning of the contract term of normal or expected experience under the contract. That allocation shall be based on data from external statistical sources, such as the National Weather Service. (ASC 815-45-25-1 and ASC 815-45-30-3)

All weather derivative contracts entered into under trading or speculative activities shall be measured initially at their fair value. All subsequent changes in fair value of weather derivative contracts entered into under trading or speculative activities shall be reported currently in earnings. (ASC 815-45-30-4 and ASC 815-45-35-7)

Attachment 13

Ref #2015-43


Existing Authoritative Literature: SSAP No. 86—Derivatives

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.

56. This statement adopts the framework established by FAS 133, FASB Statement No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133, An amendment of FASB Statement No. 133 (FAS 137) and FASB Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, An amendment of FASB Statement No. 133 (FAS 138), for fair value and cash flow hedges, including its technical guidance to the extent such guidance is consistent with the statutory accounting approach to derivatives utilized in this statement. This statement adopts the provisions of FAS 133 and 138 related to foreign currency hedges. With the exception of guidance specific to foreign currency hedges and amendments specific to refining the hedging of interest rate risk (under FAS 138, the risk of changes in the benchmark interest rate would be a hedged risk), this statement rejects FAS No. 137 and 138 as well as the various related Emerging Issues Task Force interpretations. This statement adopts paragraphs 4 and 25 of FASB Statement No. 149: Amendment of Statement 133 on Derivative Instruments and Hedging Activities (FAS 149) regarding the definition of an underlying and guidance for assessing hedge effectiveness. All other paragraphs in FAS 149 are rejected as not applicable for statutory accounting. This statement adopts FSP FAS 133-1 and FIN 45-5: Disclosures about Credit Derivatives and Certain Guarantees, An Amendment of FASB Statement No. 133 and FASB Interpretation No.45 and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN 45-4) and requires disclosures by sellers of credit derivatives. This statement rejects FSP FIN 39-1, Amendments of FASB Interpretation No. 39, and ASU 2014-03, Derivatives and Hedging – Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach.


other State Departments of Insurance or other NAIC groups): Further discussion of this topic and SSAP No.

86 Relevant Literature is detailed in agenda item 2015-22. Additional EITFs are addressed in agenda item 2015-

48.



Staff recommends that the Working Group move this agenda item to the nonsubstantive active listing and

expose nonsubstantive revisions to SSAP No. 86 as detailed below. These revisions incorporate the GAAP

definition of weather derivatives into SSAP No. 86 and adopt with modification EITF 99-02 to require

weather derivatives to be reported and valued consistent with other derivatives under the SSAP No. 86.

(Staff expects weather derivatives will likely not meet the criteria to be effective hedges, therefore will mostly be

accounted for at fair value, but the provisions allow them to be reported under the hedge accounting method if

meeting the effective hedge criteria.)

Proposed Revisions:

Attachment 13

Ref #2015-43


SSAP No. 86—Derivatives Definitions (for purposes of this statement) (New paragraph 13, paragraph references will be updated accordingly)

13. Weather derivatives are defined as a forward-based or option-based contract for which settlement is based on a climatic or geological variable. One example of such a variable is the occurrence or nonoccurrence of a specified amount of snow at a specified location within a specified period of time.

Relevant Literature (New paragraph 60, paragraph references will be updated accordingly)

60. This statement adopts with modification ASC Topic 815-45: Weather Derivatives. Weather derivatives are within scope of SSAP No. 86 and shall be accounted and reported as other derivatives.

Appendix D

GAAP Pronouncem

ent

Name Status Disposition

Stat. Ref.

Acctg. Stds.

Codification Topic-

Subt.

99-2 Accounting for Weather Derivatives

PendingComplete

Supersed

ed by ASC

Topic 105 and

incorporated into

ASC 815-45

Adopt/M 86 815-45


Josh Arpin, NAIC Staff – September 2015

Status:


nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 86 and Appendix D, as illustrated

above, to incorporate the definition of a weather derivative, and to adopt with modification EITF 99-02 to require

weather derivatives to be reported and valued consistently with other derivatives in SSAP No. 86.

Spring 2016 National Meeting Update

As noted in their comment letter, interested parties’ inquired whether the guidance from ASC 815-45-15-2 would

be adopted as part of the modifications to SSAP No. 86 and recommended that the proposed revisions to SSAP

No. 86 be clarified and re-exposed for comment.

Staff Response

As part of the “adopt with modification ASC 815-45,” it is staff’s interpretation that the guidance in ASC 815-45-

15-2 would be applicable for inclusion in SSAP No. 86. Under this guidance, an insurance contract issued by the

insurer would not fall under the scope of weather derivatives and the accounting of SSAP No. 86. However, staff

Attachment 13

Ref #2015-43


would note, weather derivatives entered into as a method to manage the risk to the policyholders (i.e. not an

insurance contract), would fall within the scope of weather derivatives and the accounting of SSAP No. 86. To

illustrate this difference, staff has provided the following illustration:

A: Security issued directly (or through a broker), in which settlement is based on a climatic or geological variable

(i.e. earthquake). This security would meet the definition of a weather derivative (proposed to be incorporated into

SSAP No. 86) and be accounted for and reported consistent with other derivatives in SSAP No. 86.

B: A policy issued directly from the insurer to the policyholder in which coverage (and payment of claims) is

based on a climatic or geological variable (i.e. earthquake coverage). This would be classified as insurance

contract and be subject to the scope exclusion in ASC 815-45-15-2 that is proposed to be included in SSAP No.

86.

Staff Note: The illustration above (and the proposed revisions to SSAP No. 86) is not intended to override state

insurance laws or state regulator’s determination of what qualifies as an insurance contract.

Staff recommends that the Working Group re-expose the following revisions to SSAP No. 86 and Appendix

D, with the inclusion of language from ASC 815-45-15-2 as suggested by interested parties (which has been

shaded below).

Spring 2016 Proposed Revisions:

SSAP No. 86—Derivatives Definitions (for purposes of this statement) (New paragraph 13, paragraph references will be updated accordingly)

13. Weather derivatives are defined as a forward-based or option-based contract for which settlement is based on a climatic or geological variable. One example of such a variable is the occurrence or nonoccurrence of a specified amount of snow at a specified location within a specified period of time.

Relevant Literature (New paragraph 60, paragraph references will be updated accordingly)

Insurer

Policyholder

Counterparty

A

B

Attachment 13

Ref #2015-43


60. This statement adopts with modification ASC Topic 815-45: Weather Derivatives. Weather derivatives are within scope of SSAP No. 86 and shall be accounted and reported as other derivatives. The guidance in this statement does not apply to contracts written by insurance entities that entitle the holder to be compensated only if, as a result of an insurable event, the holder incurs a liability or there is an adverse change in the value of a specific asset or liability for which the holder is at risk.

Appendix D

GAAP Pronouncem

ent

Name Status Disposition

Stat. Ref.

Acctg. Stds.

Codification Topic-

Subt.

99-2 Accounting for Weather Derivatives

PendingComplete

Supersed

ed by ASC

Topic 105 and

incorporated into

ASC 815-45

Adopt/M 86 815-45


SSAP No. 86 and Appendix D, as illustrated above within the Spring 2016 Proposed Revisions, to incorporate the

definition of a weather derivative, and to adopt with modification EITF 99-02 to require weather derivatives to be

reported and valued consistently with other derivatives in SSAP No. 86. Additionally, the Working Group

exposed the illustration detailed in the staff response to interested parties comments identifying the difference

between an insurance contract between an insurer and a policyholder and a weather derivative.

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\13 - 15-43 - EITF 99-02 -

Accounting for Weather Derivatives.docx

Attachment 14

Ref #2015-47




Form A

Issue: Principles Based Reserving SSAP


P/C Life Health


New Issue or SSAP

Interpretation


The Principle Based Reserving (PBR) project for life and health reserving has been ongoing at the NAIC for a

number of years and is approaching implementation. Currently, insurers set aside funds or reserves, to pay

insurance claims when due. Under the current system of reserving, formulas and assumptions are used to

determine these reserves, as prescribed by state laws and regulations.

Under PBR, companies will hold the higher of a) the reserve using prescribed factors and b) the reserve, which

considers a wide range of future economic conditions, computed using justified company experience factors, such

as mortality, policyholder behavior and expenses.

The Valuation Manual is established by the Standard Valuation Law and would be used to detail the reserve

calculation requirements. The revised Standard Valuation Law in the Minimum Life and Annuity Reserve

Standards Model Regulation (#820) and the Valuation Manual are built to encompass requirements for all life

and health insurers and the business they write. Initially, reserving methods only change for life insurance.

However, over time, PBR is expected to be developed for other product lines.

The formulaic approach prescribed by current state laws and regulations needs to be frequently updated as new

product designs are introduced. PBR alleviates this need to a great degree.

Current formulas do not always accurately reflect the risks or the true cost of the liability or obligations of the

insurer. For some products this leads to excessive conservatism in reserve calculations and for others it results in

inadequate reserves.

The current system locks in certain assumptions, resulting in reserves that do not change as economic conditions

change or as insurers accumulate actual experience. PBR adjusts reserves as economic conditions change and as

insurers accumulate credible experience.

The calculation of PBR reserves will require insurers to model and assess the risks they undertake in offering

their products to consumers. Insurers writing complex products are exposed to various risks and should already

be utilizing sophisticated actuarial models to manage those risks. Thus, the new modeling requirements of PBR

should not represent challenges to those insurers. To the extent insurers do not offer products with complex risks,

compliance with the new requirements will be less demanding. The Valuation Manual includes exclusion tests

that allow less complex products to be excluded from PBR calculations.

The PBR approach is built with numerous safeguards: Prescriptive and limiting elements have been introduced into the Valuation Manual that will limit

the extent to which reserves will be reduced from the current levels.

If the new PBR method produces higher reserves than the minimum reserve floor, that higher

reserve must be booked.

Attachment 14

Ref #2015-47


The asset spread PBR data tables will be updated quarterly and the default cost PBR data tables will be updated

on an annual basis. NAIC staff will be responsible for updating the PBR data tables.

Determining the PBR Valuation Manual Operative Date

The Valuation Manual becomes effective January 1 after the July 1 when 42 states representing at least 75% of

the specified premium have adopted significantly similar terms and provisions in their Standard Valuation Laws.

The PBR Implementation (EX) Task Force is working to determine how to measure “significantly similar” for

this purpose.

The states have begun the legislative adoption process for the revised Standard Valuation Law which is contained

in Model Law 820 and the Standard Nonforfeiture Law for Life Insurance which is NAIC Model Law 808. As of

September 30, 2015, 37 states representing 67% of premium have enacted legislation.

PBR will be phased-in over 3 years after the Valuation Manual is in effect. PBR only applies to new policies

issued after the revised Standard Valuation Law and Valuation Manual are in effect.

Small Company Exemption

PBR includes a small company exemption. The premium threshold for exemption is $300 million for the legal

entity and less than $600 million for the associated group, as long as the group meets the risk-based capital (RBC)

requirements and other exemption thresholds. The NAIC promotes use of the small company exemption in the

Valuation Manual rather than including a small company exemption in a state Standard Valuation Law (SVL),

unless required.


Several statements of statutory accounting principles currently reference existing model laws in Appendix A

which contain formulaic reserving guidance for life and health reserves. In addition, many of the reserving

statements also reference existing actuarial guidelines. Statements which have been preliminarily identified for

review include:

SSAP No. 51—Life Contracts,

SSAP No. 52—Deposit-Type Contracts,

SSAP No. 54—Individual and Group Accident and Health Contracts,

SSAP No. 56—Separate Accounts,

SSAP No. 59—Credit Life and Accident and Health Insurance Contracts,

SSAP No. 61 – Revised—Life, Deposit-Type and Accident and Health,

SSAP No. 72—Surplus and Quasi-Reorganization, and

SSAP No. 97—Subsidiary, Controlled and Affiliated Entities.


FASB, other State Departments of Insurance or other NAIC groups):

Numerous groups are involved in the development of PBR, including Life Actuarial (A) Task Force, Life

Insurance (A) Committee, Health Actuarial (B) Task Force, and Health Insurance (B) Committee. The Principle

Based Reserving Implementation (EX) Task Force is coordinating the implementation process.

The PBR Review (EX) Working Group is responsible for coordinating the development of financial analysis,

examination and actuarial review procedures and evaluating NAIC and state insurance department actuarial staff

resource requirements.

The PBR Blanks (EX) Subgroup has created a set of proposed annual statement PBR blanks changes and a VM-

20 PBR Reserve Supplement. The PBR Review Procedures (EX) Subgroup drafted a proposed PBR VM-31

Attachment 14

Ref #2015-47


data collection template for reporting of company modeling and modeling assumptions. They are considering

changes to the Financial Condition Examiners Handbook and Financial Analyst Handbook, and are developing

some new regulatory tools.

Peer and quality reviews of PBR will be conducted by the new Valuation Analysis (E) Working Group (VAWG).

The VAWG will operate in a manner similar to the Financial Analysis (E) Working Group, working

collaboratively with state insurance regulators, responding to issues and questions, and recommending PBR

requirements and interpretations. Charges and operating procedures for the VAWG are in final form and are

awaiting adoption by the Principle-Based Reserving Implementation (EX) Task Force.


None

Convergence with International Financial Reporting Standards (IFRS):

Not applicable.


The NAIC Accounting Practices and Procedures Manual currently references existing model laws for life and

health reserving requirements. Several statements of statutory accounting principles will need to be updated to

reference the new reserving requirements and the Valuation Manual for policies that are issued on or after the

effective date of the date the Valuation Manual becomes operative which could be as soon as January 1, 2017. At

the 2015 Summer National Meeting, the Working Group directed staff to begin preparations with industry

representatives and regulators for this project, which will result in substantive amendments to the several SSAPs

and an issue paper. It is staff’s recommendation that the Working Group move this item to the substantive

active listing and direct staff as follows: 1) develop an issue paper; 2) propose substantive amendments to

relevant SSAPs or a separate statement as needed to address PBR and 3) continue to work with industry

representatives and regulators throughout the development of these items.


Robin Marcotte

NAIC Staff

Status:


substantive active listing and directed NAIC staff to: 1) develop an issue paper; 2) propose substantive

amendments to relevant SSAPs or a separate statement as needed to address PBR; and 3) continue to work with

industry representatives and regulators throughout the development of these items.

On April 3, 2016, the Statutory Accounting Principles (E) Working Group exposed substantive revisions to SSAP

No. 51—Life Contracts to incorporate references to the Valuation Manual and to facilitate the implementation of

principle-based reserving. Drafting Notes are not planned for inclusion in the final publication.

For Spring 2016 National Meeting Discussion:

Staff worked with the informal drafting group composed of industry regulators and various stakeholders, and has

prioritized the items that affect life statements.

Staff recommends that the Working Group expose substantive revisions to SSAP No. 51—Life Contracts as

reflected in Exhibit A. It should be noted that a forthcoming separate agenda will address change in valuation

basis as the Working Group is charged with coordinating with the Life Actuarial (A) Task Force on this topic.

The outcome of the valuation basis agenda will affect SSAP No. 51—Life Contracts; and SSAP No. 54—

Individual and Group Accident and Health Contracts. During the development of the changes staff noted that it

Attachment 14

Ref #2015-47


will be more efficient to expose the changes to the SSAPs first before drafting the issue paper, because several

SSAPs will be affected by PBR.

The informal drafting group identified a minor technical edit related to the dividend liability and the ACLI has

submitted an amendment proposal form to the Life Actuarial (A) Task Force. This proposed change to VM 20

section 7C, paragraph 6 recommends deleting “declared but” so that the language in the Valuation Manual is

consistent with the dividend liability concepts in SSAP No. 51.

Changes to the life Standard Valuation Law are also being presented at the Spring 2016 National Meeting for

exposure in agenda item 2016-10: Changes to A-820 Standard Valuation Law for Principle-based Reserving.

This agenda includes a summary for the multiple parts of the Accounting Practices and Procedures Manual that

will be impacted to implement PBR and the below table will be periodically updated.

Agenda

item

Accounting Manual Section Status Adopted date

2015-47 SSAP No. 51—Life Contracts, Exposed at 2016 Spring

National Meeting

2016-10 A-820 Minimum Life And

Annuity Reserve Standards

Exposed at 2016 Spring

National Meeting to

incorporate 2009 SVL

changes.

Change in valuation basis in

SSAP No. 51 and 54

Agenda item in

development

SSAP No. 52—Deposit-Type

Contracts,

SSAP No. 54—Individual and

Group Accident and Health

Contracts,

Agenda item in

development

SSAP No. 56—Separate

Accounts,

SSAP No. 59—Credit Life and

Accident and Health Insurance

Contracts,

SSAP No. 61 – Revised—Life,

Deposit-Type and Accident and

Health,

SSAP No. 72—Surplus and

Quasi-Reorganization, and

SSAP No. 97—Subsidiary,

Controlled and Affiliated

Entities

A-10 Minimum Reserve

Standards for Individual and

Group Health Insurance

Contracts

Attachment 14

Ref #2015-47


G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\14 - 15-47 - PBR SSAP.docx

Exhibit A

Ref #2015-47


Exposure Draft

SSAP NO. 51 – REVISED —LIFE CONTRACTS


Basis for hearings. The Statutory Accounting Principles Working Group (SAPWG) will hold a public hearing to obtain

information from and views of interested individuals and organizations about the standards proposed in this Exposure

Draft. The SAPWG will conduct the hearing in accordance with the National Association of Insurance Commissioners

(NAIC) policy statement on open meetings. An individual or organization desiring to speak must notify the NAIC in

writing by May 20, 2016. Speakers will be notified as to the date, location, and other details of the hearings.

Oral presentation requirements. The intended speaker must submit a position paper, a detailed outline of a proposed

presentation or comment letter addressing the standards proposed in the Exposure Draft by May 20, 2016. Individuals or

organizations whose submission is not received by that date will only be granted permission to present at the discretion

of the SAPWG chair. All submissions should be addressed to the NAIC staff at the address listed below.

Format of the hearings. Speakers will be allotted up to 10 minutes for their presentations to be followed by a period for

answering questions from the SAPWG. Speakers should use their allotted time to provide information in addition to their

already submitted written comments as those comments will have been read and analyzed by the SAPWG. Those

submissions will be included in the public record and will be available at the hearings for inspection.

Copies. Exposure Drafts can be obtained on the Internet at the NAIC Home Page (http://www.naic.org). The documents

can be downloaded using Microsoft Word.

Written comments. Participation at a public hearing is not a prerequisite to submitting written comments on this

Exposure Draft. Written comments are given the same consideration as public hearing testimony.

The Statutory Accounting Principles Statement of Concepts was adopted by the Accounting Practices & Procedures

(EX4) Task Force on September 20, 1994, in order to provide a foundation for the evaluation of alternative accounting

treatments. All issues considered by the SAPWG will be evaluated in conjunction with the objectives of statutory

reporting and the concepts set forth in the Statutory Accounting Principles Statement of Concepts. Whenever possible,

establish a relationship between your comments and the principles defining statutory accounting.

The exposure period is not meant to measure support for, or opposition to, a particular accounting treatment but rather to

accumulate an analysis of the issues from other perspectives and persuasive comments supporting them. Therefore, form

letters and objections without valid support for their conclusions are not helpful in the deliberations of the working

group. Comments should not simply register your agreement or disagreement without a detailed explanation, a

description of the impact of the proposed guidelines, or possible alternative recommendations for accomplishing the

regulatory objective.

Any individual or organization may send written comments addressed to the Working Group to the attention of Julie

Gann at [email protected], Robin Marcotte at [email protected] and Josh Arpin at [email protected] at no later than May

20, 2016. Electronic submission is preferred. Robin Marcotte is the NAIC Staff that is the project lead for this topic.



Kansas City, MO 64106-2197

(816) 842-3600

Hearing Date: June 2016 Call or 2016 Summer

NM

Location: June 2016 Call or 2016 Summer

NM



May 20, 2016




Ref #2015-47 SSAP No. 51R Statement of Statutory Accounting Principles

51R–2

Exhibit A

Ref #2015-47


Statement of Statutory Accounting Principles No. 51 – Revised

Life Contracts

STATUS

Type of Issue: Life, Accident and Health

Issued: Initial Draft; substantively revised – TBD

Effective Date: January 1, 2001; substantive revisions – January 1, 2017

Affects: Supersedes SSAP No. 80 with guidance incorporated November 2011;

Nullifies and incorporates INT 00-30, INT 01-26

Affected by: No other pronouncements

Interpreted by: INT 00-03

STATUS ....................................................................................................................................................................... 3

SCOPE OF STATEMENT ......................................................................................................................................... 5

SUMMARY CONCLUSION ...................................................................................................................................... 5

Types of Premiums ........................................................................................................................................................ 5 Premium Income Recognition ....................................................................................................................................... 5 Premium Adjustments ................................................................................................................................................... 6 Uncollected Premium Balances ..................................................................................................................................... 6 Other Considerations Received ..................................................................................................................................... 6 Waiver of Monthly Deductions for Flexible Premium Universal Life Insurance Policies ............................................ 6 Policy Reserves ............................................................................................................................................................. 6 Valuation (Reserve) Method and Deferred Premiums................................................................................................... 7 Mean Reserve Method ................................................................................................................................................... 8 Mid-Terminal Method ................................................................................................................................................... 8 Advance Premiums ........................................................................................................................................................ 9 Policyholder Dividend Liability .................................................................................................................................... 9 Coupons ......................................................................................................................................................................... 9 Reserve Recognition .................................................................................................................................................... 10 Change In Valuation Basis .......................................................................................................................................... 10 Supplemental Benefits ................................................................................................................................................. 10 Unearned Income ........................................................................................................................................................ 10 Accelerated Benefits .................................................................................................................................................... 10 Additional Reserves Not Included Elsewhere ............................................................................................................. 11 Disclosures .................................................................................................................................................................. 11 Relevant Literature ...................................................................................................................................................... 13 Effective Date and Transition ...................................................................................................................................... 14

REFERENCES .......................................................................................................................................................... 14

Other ............................................................................................................................................................................ 14 Relevant Issue Papers .................................................................................................................................................. 14


51R–4


Ref #2015-47 Life Contracts SSAP No. 51R


Life Contracts

SCOPE OF STATEMENT

1. This statement establishes statutory accounting principles for income recognition and policy

reserves for all contracts classified as life contracts defined in SSAP No. 50—Classifications of Insurance

or Managed Care Contracts, except for credit insurance contracts which are discussed in SSAP No. 59—

Credit Life and Accident and Health Insurance Contracts and separate account products which are

discussed in SSAP No. 56—Separate Accounts.

SUMMARY CONCLUSION

Types of Premiums

2. The gross premium is the amount charged to the policyholder and taken into operations as

premium income.

3. The net premium is the amount calculated on the basis of the interest and mortality table used to

calculate the reporting entity’s statutory policy reserves.

4. The difference between the gross premium and the net premium is referred to as “loading.”

Loading generally includes allowances for acquisition costs and other expenses but also includes the

differences in mortality and interest assumptions utilized for pricing and statutory reserving purposes.

Premium Income Recognition

5. Premiums shall be recognized as income on the gross basis (amount charged to the policyholder)

when due from policyholders under the terms of the insurance contract. As a result, premium income shall

include first year and renewal premiums, as well as any related premium adjustments (i.e., retrospective

premium contracts which are discussed in SSAP No. 66—Retrospectively Rated Contracts) provided for

by the contract. The contractual due date shall be established through the predetermined billing procedure

agreed to by the parties. In addition, premium income shall include single and flexible premium amounts

when received from the policyholder. Further, the recognition of premium income and the change in

loading shall be consistent with the assumptions made in calculating the related policy reserve.

6. Premium income shall include dividends, coupons, guaranteed annual pure endowments, and

similar benefits provided by the insurance contract when such amounts are applied by the terms of the

contract to provide additional paid-up insurance, annuities, or to shorten the endowment or premium-

paying period. Premiums and considerations waived by the reporting entity under disability provisions

contained in its policies and contracts, and reported in operations as a disability benefit, are included in

premium income.

7. Premium income shall exclude premiums that have been received by the reporting entity prior to

the reporting date but which are due on or after the next policy anniversary date (i.e., advance premiums

as discussed in paragraph 27).

8. Premium income shall be reduced for premiums returned and allowances to industrial

policyholders for the direct payment of premiums.

9. Premium income shall be increased by reinsurance premiums assumed and reduced by

reinsurance premiums ceded. Reinsurance premiums assumed and ceded are defined and addressed in

SSAP No. 61R—Life, Deposit-Type and Accident and Health Reinsurance.


51R–6

10. Death or other benefits used to fund new policies shall be accounted for as a benefit payment and

as a new premium, another type of income, or a liability, as appropriate.

Premium Adjustments

11. In the summary of operations, the change in gross deferred and uncollected premiums is recorded

as premium income. Deferred premiums are further discussed in paragraphs 23-25. Since only the net

premiums are included in the computation of reserves and reported as an asset, it is necessary to adjust the

gross premium for an amount representing the change in loading on deferred and uncollected premiums.

The change in loading is included as an expense in the summary of operations and is not shown as a

reduction to premium income.

Uncollected Premium Balances

12. Gross premiums that are due and unpaid as of the reporting date, net of loading, shall be

classified as uncollected premiums. Uncollected premium balances which are less than 90 days past due

meet the definition of an asset, as defined in SSAP No. 4—Assets and Nonadmitted Assets, and are

admitted assets to the extent they conform to the requirements of this statement.

Other Considerations Received

13. Considerations for supplementary contracts, dividends left on deposit to accumulate interest, and

amounts deposited and accumulated for guaranteed interest and group annuity contracts shall be

recognized as deposit-type funds or considerations for supplemental contracts, as appropriate. These

amounts are further discussed in SSAP No. 52—Deposit-Type Contracts.(INT 00-03)

Waiver of Monthly Deductions for Flexible Premium Universal Life Insurance Policies

14. Flexible premium universal life insurance policies do not require specified premiums as

traditional policies do. The “waiver” benefit entities offer is a “waiver of monthly deductions” benefit as

opposed to a “waiver of premium” benefit. The difference being specific premiums may or may not be

required under the policy regardless of whether the insured is disabled or not. Waiver of a deduction is

not to be considered revenue nor a benefit paid, therefore a calculation of the amount of the deduction

need not be made for flexible premium universal life insurance policies.

Policy Reserves

15. Statutory policy reserves shall be established for all unmatured contractual obligations of the

reporting entity arising out of the provisions of the insurance contract. Where separate benefits are

included in a contract, a reserve for each benefit shall be established as required in Appendix A-820.

These statutory policy reserves have historically been are generally calculated as the excess of the present

value of future benefits to be paid to or on behalf of policyholders less the present value of future net

premiums. For policies issued on or after the operative date of the Valuation Manual, these formulaic

calculations will be supplemented for some policies with more advanced deterministic and stochastic

reserve methodologies to better reflect company experience, possible economic conditions and inherent

policy risks. Statutory policy reserves meet the definition of liabilities as defined in SSAP No. 5R—

Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R). The actuarial methodologies

referred to in the following paragraph meet the criteria required for reasonable estimates in SSAP No. 5R.

16. The reserving methodologies and assumptions used in computation of policy reserves shall meet

the provisions of Appendices A-820 and A-822. and Policies written prior to the operative of the

Valuation Manual shall additionally follow the actuarial guidelines found in Appendix C of this Manual.

Policies written on or after operative of the Valuation Manual shall additionally follow the Valuation



Manual and be subject to the actuarial guidelines referenced therein. Further, policy reserves shall be in

compliance with those Actuarial Standards of Practice promulgated by the Actuarial Standards Board.

Staff Drafting Notes: Because Asset Adequacy testing under Model 822 has not changed no changes are

recommended for Appendix A-822 at this time.

17. The preceding two paragraphs summarize the general reserve requirements for all types of life

contracts. Paragraphs 18-21 provide additional detail for specific products for policies that are issued

prior to the operative data of the Valuation Manual or otherwise not subject to the Valuation Manual.

17.18. In addition to these general reserve requirements, Appendix A-820 provides additional guidance

with respect to certain types of accumulation annuities that have flexible features (e.g., guaranteed

nonforfeiture benefits such as interest guarantees, annuitization options, bailout features, partial

withdrawals) which can create varying benefit streams if elected by the policyholder. Specific policies

with such flexible features include most individual and some group annuity contracts, but exclude any

disability and accidental death benefits in these contracts. For benefits under these contracts, reserves

shall be established according to the Commissioners’ Annuity Reserve Valuation Method (CARVM).

Generally under CARVM, the difference between all possible future guaranteed benefits streams,

including guaranteed nonforfeiture benefits, over the future considerations is computed as of the end of

each contract year. Each of these differences is discounted to the reporting date at the applicable valuation

interest rate. A reserve is then recorded based on the greatest present value difference of each of the

contract year calculations.

18.19. Unlike traditional life insurance contracts, flexible premium universal life-type contracts do not

have guaranteed premiums and some assumption as to future premiums is required. Appendix A-585

establishes a minimum reserving method for universal life-type contracts by providing guidance on how

to estimate future premiums on flexible premium universal life-type contracts so that traditional valuation

methodologies can be used. Alternative minimum reserves shall be required, if applicable, for flexible

premium universal life-type contracts if the guaranteed maturity premium is less than the valuation net

premium. Appendix A-585 shall be used in establishing reserves for flexible premium universal life-type

contracts.

19.20. Policy reserves for fixed premium universal life-type contracts shall also follow guidance in

Appendix A-585. Certain fixed premium products offer the policyholder a secondary guarantee. A

secondary guarantee provides the policyholder a guaranteed set of cash values, death benefits, and

maturity benefits that will be provided regardless of the performance of the policy value. Appendix A-585

requires all guarantees to be considered when establishing policy reserves and shall be followed in

establishing reserves for fixed premium universal life-type contracts.

20.21. Statutory policy reserves for those group annuity contracts or other contracts that, in whole or in

part, establish the insurer’s obligations by reference to a segregated portfolio of assets not owned by the

insurer shall be established in accordance with the guidance in Appendix A-695. Statutory policy reserves

for those contracts with nonlevel premiums or benefits, or contracts with secondary guarantees shall be

established in accordance with the guidance in Appendix A-830. Statutory policy reserves for those group

life contracts utilizing a separate account that meet the requirements outlined in paragraph 1 of Appendix

A-200 shall be computed in accordance with the guidance in that appendix.

22. For life and annuity policies issued on or after the operative date of the Valuation Manual,

reserves shall use the requirements of the Valuation Manual. As required by Appendix A-820, reserves

are required to be determined using the methodologies and processes described in the Valuation Manual.

For policies unable to meet the Valuation Manual criteria for exemption from deterministic or stochastic

reserves, the valuation manual supplements formulaic life insurance policy reserve methodologies with


51R–8

more advanced deterministic and stochastic reserve methodologies to produce reserves that better reflect

company experience, possible economic conditions and inherent policy risks.

Staff Drafting Note: Under PBR, the deferred premium asset concept remains the same.

Valuation (Reserve) Method and Deferred Premiums

21.23. Reserves shall be established for all benefits guaranteed under the terms of the policy as of the

reporting date using appropriate valuation methods, interest rates, mortality and morbidity rates, as

applicable. However, as a practical expedient, reserves have been generally calculated as of the policy

anniversary date (i.e., terminal reserves), not the reporting date. As a result, it is necessary to adjust the

terminal reserve back to the reporting date. The components used to compute a terminal reserve shall

consist ofinclude an interest rate, lapse rates, a mortality and/or morbidity table, and a valuation method

(e.g., net level, full preliminary term, Commissioners’ Reserve Valuation Method (CRVM), or CARVM).

A terminal reserve is based on the assumption that all net premiums have been received, all interest

earned, and all benefits paid to the end of the policy year.

22.24. Since terminal reserves are computed as of the end of a policy year and not the reporting date, the

terminal reserve as of policy anniversaries immediately prior and subsequent to the reporting date are

adjusted to reflect that portion of the net premium that is unearned at the reporting date. This is generally

accomplished using either the mean reserve method or the mid-terminal method as discussed in the next

four paragraphs. Other appropriate methods, including an exact reserve valuation, may also be used.

Mean Reserve Method

23.25. Under the mean reserve method, the policy reserve equals the average of the terminal reserve at

the end of the policy year and the initial reserve (the initial reserve is equal to the previous year’s terminal

reserve plus the net annual valuation premium for the current policy year). When reserves are calculated

on the mean reserve basis, it is assumed that the net premium for a policy is collected annually at the

beginning of the policy year and that policies are issued ratably over the calendar year.

24.26. However, as premiums are often received in installments more frequently than annually and since

the calculation of mean reserves assumes payment of the current policy year’s entire net annual premium,

the policy reserve is overstated by the amount of net modal premiums not yet received for the current

policy year as of the valuation date. As a result, it is necessary to compute and report a special asset to

offset the overstatement of the policy reserve.

25.27. This special asset is termed “deferred premiums.” Deferred premiums are computed by taking the

gross premium (or premiums) extending from (and including) the modal (monthly, quarterly, semiannual)

premium due date or dates following the valuation date to the next policy anniversary date and subtracting

any such deferred premiums that have actually been collected. Deferred premium assets shall also be

reduced by loading. Since the calculation of mean reserves assumes payment of the current policy year’s

entire net annual premium, deferred premium assets are considered admitted assets to compensate for the

overstatement of the policy reserve. For policies subject to the Valuation Manual requirements, the

deferred premium asset will continue to be calculated for the net premium reserve component of the total

principle-based reserve.

Mid-Terminal Method

26.28. Under the mid-terminal method, the policy reserves are calculated as the average of the terminal

reserves on the previous and the next policy anniversaries. These reserves shall be accompanied by an

unearned premium reserve consisting of the portion of valuation premiums paid or due covering the

period from the valuation date to the next policy anniversary date. For policies subject to the Valuation



Manual requirements, the adjustment to the unearned premium reserve will continue to be calculated for

the net premium reserve component of the total principle-based reserve.

Advance Premiums

27.29. Advance premiums are those premiums that have been received by the reporting entity prior to

the valuation date but which are due on or after the next policy anniversary date. The policyholder may

remit one or more premiums in advance of specific due dates. Where premiums are remitted sufficiently

far in advance, the premiums charged to the policyholder may be reduced or discounted to reflect the time

value of money. The difference between the gross and discounted premium is ratably charged as interest

in the summary of operations from the date of payment to the premium due date. At the premium due

date, the amount received from the policyholder plus the accumulated interest equals the gross premium

necessary to fund the policy. The total amount of such advance premiums, less any discount as of the

valuation date, is reported as a liability in the statutory financial statement and is not considered premium

income until due. The gross premium, not the net valuation premium, is recorded as the advance premium

in recognition of the reporting entity’s liability to refund such premiums in the event the policy is

terminated.

Staff Drafting Note: No changes recommended to the dividend liability section, but an amendment

proposal regarding VM 20 section 7C paragraph 6 has been forwarded to the LATF to provide a minor

technical edit to delete “declared but” so that the language in the VM is consistent with the concepts

below.

Policyholder Dividend Liability

28.30. A reporting entity shall accrue, as applicable, the following items relating to participating

policies. They are dividends due and unpaid, dividends apportioned (or not yet apportioned) for payment

in the following twelve months, and dividends left on deposit to accumulate interest.

29.31. Dividends due and unpaid represent dividends payable to the policyholder in the current year but

which have not been disbursed or otherwise applied at the reporting date.

30.32. Dividends payable in the following calendar year represent the estimated amount of all dividends

declared by a reporting entity’s board of directors prior to the end of the statement year which are not yet

paid or due at the end of the year (dividends apportioned for payment) as well as all dividends payable in

the following calendar year that have not been declared (dividends not yet apportioned for payment). For

individual insurance the amount of this liability shall be equal to the aggregate amount of the dividends

estimated to be payable in the following calendar year whether or not declared or apportioned. For group

insurance and pensions, the amount of liability is generally equal to the portion of the dividend payable in

the following calendar year which has been earned in the current calendar year.

31.33. Dividends left on deposit with the reporting entity shall be recorded in the amount of the deposit

and accrued interest thereon. At the balance sheet date, the interest accrued but not yet credited to the

policyholders’ accounts shall be established as part of this liability.

Coupons

32.34. Some entities issue policies that guarantee an annual return, usually evidenced by a coupon that is

part of the policy and matures on the policy’s anniversary. This return represents an annual pure

endowment and is essentially a return of premium previously paid by the policyholder. For matured

coupons that have been left to accumulate, the liability is determined in the same way as the liability for

dividend accumulations. Interest accrued is calculated for each coupon from the date each matures. The


51R–10

liability for unmatured policyholder coupons shall be the face value of the coupon, discounted at interest

and mortality.

Reserve Recognition

33.35. The difference between the policy reserves for life contracts at the beginning and end of the

reporting period shall be reflected as the change in reserves in the summary of operations, except for any

difference due to a change in valuation basis.

Staff Drafting Note: Change in Valuation Basis will be discussed in a separate agenda item as the

Working Group is charged with coordinating with the Life Actuarial (A) Task Force on this topic.

Change In Valuation Basis

34.36. A change in valuation basis shall be defined as a change in the interest rate, mortality assumption,

or reserving method (e.g., net level, preliminary term, etc.) or other factors affecting the reserve

computation of policies in force and meets the definition of an accounting change as defined in SSAP

No. 3—Accounting Changes and Corrections of Errors (SSAP No. 3). Consistent with SSAP No. 3, any

increase (strengthening) or decrease (destrengthening) in actuarial reserves resulting from such a change

in valuation basis shall be recorded directly to surplus rather than as a part of the reserve change

recognized in the summary of operations. The impact on surplus is based on the difference between the

reserve under the old and new methods as of the beginning of the year. This difference shall not be graded

in over time unless an actuarial guideline adopted by the NAIC prescribes a new method and a specific

transition that allows for grading.

Supplemental Benefits

35.37. In addition to the basic policy benefit, the insurance contract may provide supplemental benefits.

Supplemental benefits include, but are not limited to, accidental death benefits and waiver of premium

benefits. If the terms of the contract provide for these benefits, appropriate reserves shall be established in

accordance with the applicable standards within the Accounting Practices and Procedures Manual.

Unearned Income

36.38. Amounts assessed that represent compensation to the reporting entity for services to be provided

in future periods and which are required to be refunded upon policy termination are not earned in the

period assessed. Such amounts, if not already considered in the policy reserve, shall be reported as

unearned income, a liability, and recognized as income as the related services are provided.

Accelerated Benefits

37.39. Accelerated benefits are benefits payable under a life insurance contract to a policyholder or

certificateholder during the lifetime of the insured, in anticipation of death or upon the occurrence of

specified life-threatening or catastrophic conditions as defined by the policy or rider. These benefits

reduce the death benefit otherwise payable under the life insurance contract and are payable upon the

occurrence of a single qualifying event which results in the payment of a benefit amount fixed at the time

of acceleration. When benefits are provided through the acceleration of benefits under group or individual

life policies or riders to such policies, policy reserves shall be determined in accordance with Appendices

A-820 and A-620. Reserves for such benefits in the aggregate shall be sufficient to cover policies upon

which no claim has yet arisen as well as policies upon which an accelerated claim has arisen. Accounting

guidance for accelerated benefit payments made in the form of a loan are addressed in SSAP No. 49—

Policy Loans. In addition, accelerated benefit payments, for those accelerated benefits that reduce the



policy, shall not be deferred but shall be charged to the summary of operations as a benefit expense when

paid to the policyholder.

Additional Reserves Not Included Elsewhere

38.40. Additional actuarial liabilities are commonly held for such items as:

a. Provision for either nondeduction of deferred fractional premiums or return of premiums

at death of the insured; and

b. Surrender values in excess of reserves otherwise required or carried.

Disclosures

39.41. For life and annuity reserves the financial statements shall disclose the following:

a. A description of reserve practices concerning the following:

i. Waiver of deduction of deferred fractional premiums upon death of insured;

ii. Return of portion of final premium for periods beyond the date of death; and

iii. Amount of any surrender value promised in excess of the reserve as legally

computed;

b. The methods employed in the valuation of substandard policies;

c. The amount of insurance, if any, for which the gross premiums are less than the net

premiums according to the valuation standards;

d. The method used to determine tabular interest, tabular less actual reserves released, and

tabular cost (by formula or from the basic data for such items); and

e. The nature of significant other reserve changes.

40.42. Disclose the amount of annuity actuarial reserves and deposit liabilities by withdrawal

characteristics for the categories of general account, separate account with guarantees, separate account

nonguaranteed and the total as follows:

a. Subject to discretionary withdrawal:

i. With market value adjustment, where withdrawal of funds is payable at all times,

or prior to specified maturity dates where such dates are more than one year after

the statement date and;

(a) In a lump sum with adjustments to reflect general changes in interest

rates, or asset values since receipt of funds by the insurer;

(b) In installments over five years or more, with or without a reduction in the

interest rate during the installment period;

ii. At book value less current surrender charge, where the withdrawal of funds is

payable at all times, or at any time within one year from the statement date in a

lump sum subject to a current fixed surrender charge of 5% or more and it does

not contain a meaningful bail out rate as described in paragraph 40.v.(d);


51R–12

iii. At fair value, where the withdrawal of funds is payable at current fair value of the

assets supporting the liabilities, the assets are stated at current fair value, and the

liabilities are stated at the current fair value or per unit value of the assets

supporting the liabilities. These liabilities are for contracts where the customer

bears the entire investment risk;

iv. Total with adjustment or at fair value;

v. At book value without adjustment (minimal or no charge or adjustment), where

the withdrawal of funds is either payable at all times, or at any time (including a

withdrawal on a scheduled payment date) within one year from the statement

date and:

(a) In a lump sum without adjustment;

(b) In installments over less than five years, with or without a reduction in

interest rate during the installment period;

(c) In a lump sum subject to a fixed surrender charge of less than 5%;

(d) In a lump sum subject to surrender charge, but such charge is waived if

the credited rate falls below a specified “bail out” rate and the “bail out”

rate is more than the maximum statutory valuation rate for life insurance

policies for more than 20 years for new issues;

b. Not subject to discretionary withdrawal;

c. Total gross;

d. Reinsurance ceded;

e. Total net.

41.43. If the reporting entity has reported life insurance premiums and annuity considerations deferred

and uncollected on policies in force as of the financial statement date, disclose separately the amounts and

the loading excluded for each of the following lines of business:

a. Industrial business;

b. Ordinary new business;

c. Ordinary renewal;

d. Credit life;

e. Group life;

f. Group annuity.

42.44. Disclose the aggregate amount of direct premiums written through managing general agents or

third party administrators. For purposes of this disclosure, a managing general agent means the same as in

Appendix A-225. If this amount is equal to or greater than 5% of surplus, provide the following

information for each managing general agent and third party administrator:



a. Name and address of managing general agent or third party administrator;

b. Federal Employer Identification Number;

c. Whether such person holds an exclusive contract;

d. Types of business written;

e. Type of authority granted (i.e., underwriting, claims payment, etc.);

f. Total premium written.

43.45. Reporting entities shall disclose the relative percentage of participating insurance, the method of

accounting for policyholder dividends, the amount of dividends, and the amount of any additional income

allocated to participating policyholders in the financial statements.

44.46. Reporting entities shall disclose if the reserve amount calculated on the state prescribed or

permitted valuation basis is materially different from the reserve amount calculated on the A-820

valuation basis1. Although the A-820 standard is viewed as a minimum one, it represents the baseline

from which deviations are measured. The determination of whether difference meets the standard of

materiality is subjective. Refer to the Preamble regarding further guidance on the criterion of materiality.

45.47. Refer to the preamble for further discussion regarding disclosure requirements.

Relevant Literature

46.48. This statement incorporates the requirements of Appendices A-225, A-235, A-585, A-620, A-

641, A-695, A-812, A-815, A-817, A-820, A-821, A-822, A-830, the Actuarial Standards Board

Actuarial Standards of Practice, and the actuarial guidelines found in Appendix C of this Manual.

47.49. This statement rejects FASB Statement No. 60, Accounting and Reporting by Insurance

Enterprises, FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain

Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, FASB

Statement 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance

Enterprises for Certain Long-Duration Participating Contracts, AICPA Practice Bulletin No. 8,

Application of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain

Long-Duration Contracts and for Realized Gains and Losses From the Sale of Investments, to Insurance

Enterprises, the AICPA Audit and Accounting Guide—Audits of Stock Life Insurance Companies, AICPA

Statement of Position 95-1, Accounting for Certain Activities of Mutual Life Insurance Enterprises

relating to accounting and reporting for policy reserves for short and long duration contracts, and FASB

Interpretation No. 40, Applicability of Generally Accepted Accounting Principles to Mutual Life

Insurance and Other Enterprises, an interpretation of FASB Statements No. 12, 60, 97, and 113.

1 This issue applies to contracts issued January 1, 2001, and thereafter.


51R–14


50. This statement is effective for years beginning January 1, 2001. Contracts issued prior to

January 1, 2001 shall be accounted for based on the laws and regulations of the domiciliary state. State

laws and regulations shall be understood to include anything considered authoritative by the domiciliary

state under the individual state’s statutory authority and due process procedures. A change resulting from

the adoption of this statement shall be accounted for as a change in accounting principle in accordance

with SSAP No. 3. The guidance in paragraph 14 was originally contained within INT 00-30: Application

of SSAP No. 51 Paragraph 6 to Waiver of Deduction on Flexible Premium Universal Life Insurance

Policies and was effective December 4, 2000. The guidance in paragraph 44 was originally contained

within INT 01-26: SSAP No. 51 and Reserve Minimum or Required Amount and was effective January 1,

2001.

48.51. Substantive changes that reference the Valuation Manual in this statement are effective for

January 1, 2017 and thereafter. However, the Valuation Manual provides for a 3-year period, starting

from the operative date, during which companies are able to continue using the current reserve

methodologies, as described in paragraphs 18-21.

REFERENCES

Other

NAIC Financial Condition Examiners Handbook

Actuarial Standards Board Actuarial Standards of Practice

Relevant Issue Papers

Issue Paper No. 51—Life Contracts

Issue Paper No. 56—Universal Life-Type Contracts, Policyholder Dividends, and Coupons

Issue Paper No. 110—Life Contracts, Deposit-Type Contracts and Separate Accounts, Amendments

to SSAP No. 51—Life Contracts, SSAP No. 52—Deposit-Type Contracts, and SSAP No. 56—Separate

Accounts

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Spring\NM Exposures\Updated\15-47 attach PBR 051_CC ED

4-5-16.docx

Attachment 15

Ref #2016-07




Form A

Issue: ASU 2015-17 – Balance Sheet Classification of Deferred Taxes


P/C Life Health


New Issue or SSAP

Interpretation


Under current GAAP (ASC 740-10), an entity is required to separate deferred income tax liabilities (DTLs) and

deferred tax assets (DTAs) into current and noncurrent amounts in their statement of financial position.

Stakeholders informed the Board that the requirement results in little or no benefit to users of financial statements

because the current/noncurrent classification does not generally align with the period in which the recognized

deferred tax amounts are expected to be recovered or settled. In addition, there are costs incurred by an entity to

separate deferred income tax liabilities and assets into current and noncurrent amounts.

To simplify the presentation of deferred income taxes, FASB issued ASU 2015-17, which revised the guidance to

require that DTAs and DTLs be classified as noncurrent in the statement of financial position for all entities. The

requirement that DTLs and DTAs of a tax-paying component of an entity be offset and presented as a single

amount is not affected by the amendments in this Update. Under SSAP No. 101—Income Taxes, paragraph 8,

DTAs and DTLs shall be offset and presented as a single amount on the statement of financial position.


SSAP No. 101—Income Taxes

8. Changes in DTAs and DTLs, including changes attributable to changes in tax rates and changes in tax status, if any, shall be recognized as a separate component of gains and losses in unassigned funds (surplus). Admitted adjusted gross DTAs and DTLs shall be offset and presented as a single amount on the statement of financial position


FASB, other State Departments of Insurance or other NAIC groups): None





nonsubstantive, and expose revisions to SSAP No. 101 to reject ASU 2015-17 and maintain the current

reporting of Deferred Tax Assets and Deferred Tax Liabilities as prescribed in that statement.

Proposed Revisions to SSAP No. 101

Attachment 15

Ref #2016-07


31. This statement rejects ASU 2015-17 Balance Sheet Classification of Deferred Taxes, FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods…an interpretation of APB Opinion No. 28 and FIN 48: Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.


Fatima Sediqzad, NAIC Staff

February 2016

Status:


and exposed revisions to SSAP No. 101, as illustrated above, to reject ASU 2015-17 for statutory accounting.

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\15 - 16-07 - Balance Sheet Classification of Deferred Taxes.docx

Attachment 16

Ref #2016-08




Form A

Issue: Method for Applying Discount Rates to Measure Net Periodic Benefit Cost


P/C Life Health


New Issue or SSAP

Interpretation


Currently, as permitted under ASC 715-30-35-45, the most commonly used approach for pension plans is to

develop a single weighted-average discount rate, which is determined at the pension plan measurement date based

on the projected future benefit payments used in determining the pension obligation. (This is also referred to as

the aggregated approach, which is the constant annual rate used to discount future benefit payments related to past

service.) In 2015, representatives of the Big Four accounting firms met with SEC staff to discuss the possibility of

applying an alternative approach for using discount rates to measure the service cost and interest cost components

of net periodic cost for a defined benefit retirement plan obligation (both pensions and other postretirement

obligations) under ASC 715. The alternative approach (also referred to as the “Spot Rate” or disaggregated

approach) measures the service cost and interest cost components of net periodic benefit cost by using individual

(disaggregated) duration-specific spot (discount) rates derived from an acceptable high-quality corporate bond

yield curve and matched with separate cash flows for each future year. (Staff note: This alternative approach

would apply to the measurement under both SSAP No. 92—Postretirement Benefits Other than Pensions and

SSAP No. 102—Pensions).

With regards to the Spot Rate approach, the following key issues were addressed in discussions held by the SEC

staff with the Big Four accounting firms:

Is the Spot Rate approach an acceptable measurement method for the service cost and interest cost

components of net periodic cost?

o SEC staff indicated that it would not object to the use of the Spot Rate approach in circumstances

when a company uses a yield curve approach to determine discount rates (rather than bond-

matching or other approach), but has historically used the aggregated approach. Companies may

continue to use the weighted-average discount rate as ASC 715 permits this method as a practical

expedient. Additionally, if a company changes to the spot rate approach, it should apply this

approach consistently to all defined benefit plans and to the measurement of both service and

interest cost. Once changed to the Spot Rate approached, a company should not change back to

the single weighted-average discount rate in future periods.

Is a change to the Spot Rate approach accounted for as a change in accounting principle, a change in

estimate or a change in accounting estimate that is inseparable from the effect of a related change in

accounting principle?

o SEC staff indicated that it would not object to a registrant accounting for the change as either a

change in estimate or as a change in estimate inseparable from a change in accounting principle.

What is the impact to disclosures?

Attachment 16

Ref #2016-08


o SEC staff stressed that it is important for registrants that change to the Spot Rate approach to

provide appropriate disclosures, specifically, that they must comply with the disclosure

requirements in ASC 250-10-50-4, ASC 715-20-50-1(k) and ASC 715-20-50-1(r) (supplemented

by ASC 715-30-35-45).

It shall be noted, that the SEC has not and does not plan to issue formal guidance indicating the allowance of the

Spot Rate method. In response to these developments (as detailed above), the Big 4 accounting firms

issued publications which discuss the SEC staff comments, describes the alternative method for measuring service

cost and interest cost and identifies key issues that need to be considered by an entity before electing to use this

alternative approach. For reference, staff has provided the links to the publically available publications within

Appendix A of this agenda item. In addition to the information published by the accounting firms, the following

informal comments have been communicated to staff:

For year-end 2015, approximately 150 public companies announced adoption of the Spot Rate approach

for GAAP. In addition, several entities have indicated that they are seriously considering this approach for

2017.

Until Fall 2015, the Spot Rate approach was considered an exotic methodology, but appears that it has

clearly become more mainstream and may become the norm in the near future for the measurement of

service and interest cost.

It is staff’s interpretation that this alternative method for calculating the service cost and interest cost components

of net periodic benefit cost would be appropriate for statutory accounting, as the Spot Rate approach provides for

a more precise estimate and measurement of the cost. Upon review of the current guidance in the FASB

Codification and SSAP No. 102—Pensions (literature adopted from FAS 87), it was identified that two paragraphs

from the Basis of Conclusions of FAS 87 related to the use of weighted average discount rates. These paragraphs

were subsequently incorporated into the FASB Codification - ASC 715-30-35-45 and 715-30-35-46 - but were not

adopted in SSAP No. 102 as this FASB guidance was originally within the Basis of Conclusions (paragraphs 199-

200) and not within the FAS 87 adopted standard. These paragraphs state:

199. Interest rates vary depending on the duration of investments; for example, U.S. Treasury bills, 7-year bonds, and 30-year bonds have different interest rates. Thus, the weighted-average discount rate (interest rate) inherent in the prices of annuities (or a dedicated bond portfolio) will vary depending on the length of time remaining until individual benefit payment dates. A plan covering only retired employees would be expected to have significantly different discount rates from one covering a work force of 30-year-olds. The disclosures required by this Statement regarding components of the pension benefit obligation will be more representationally faithful if individual discount rates applicable to various benefit deferral periods are selected. A properly weighted average rate can be used for aggregate computations such as the interest cost component of net pension cost for the period. (Adopted in ASC 715-30-35-45)

200. An insurance company deciding on the price of an annuity contract will consider the rates of return available to it for investing the premium received and the rates of return expected to be available to it for reinvestment of future cash flows from the initial investment during the period until benefits are payable. That consideration is indicative of a relationship between rates inherent in the prices of annuity contracts and rates available in investment markets. The Board concluded that it would be appropriate for employers to consider that relationship and information about investment rates in estimating the discount rates required for application of this statement. (Adopted in ASC 715-30-35-46)


SSAP No. 92—Postretirement Benefits Other than Pension and SSAP No. 102—Pensions


FASB, other State Departments of Insurance or other NAIC groups): None.

Attachment 16

Ref #2016-08


Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None.




nonsubstantive, and expose revisions to SSAPs Nos. 92 and 102 as outlined in the “Spring 2016 National

Meeting – Proposed Revisions” section of the agenda item. These revisions incorporate the missing FAS 87

paragraphs (with minor modifications) into SSAP No. 102 (reflected as paragraphs 36 and 38 below), with

additional amendments to both SSAP No. 102 and SSAP No. 92 to reflect the allowance of the Spot Rate

approach for measuring service cost and interest cost components of net periodic benefit cost.


Josh Arpin, NAIC Staff — February 2016

Status:


and exposed revisions to SSAP Nos. 92 and 102 as shown below:

SSAP No. 102—Pensions (Revision to add new paragraphs 36-38, with paragraph references being updated as applicable.)

36. Interest rates vary depending on the duration of investments; for example, U.S. Treasury bills, 7-year bonds, and 30-year bonds have different interest rates. Thus, the weighted-average discount rate (interest rate) inherent in the prices of annuities (or a dedicated bond portfolio) will vary depending on the length of time remaining until individual benefit payment dates. A plan covering only retired employees would be expected to have significantly different discount rates from one covering a work force of 30-year-olds. A properly weighted average rate can be used for aggregate computations such as the service cost and interest cost component of net pension cost for the period. 37. In addition to a properly weighted average rate, as stated in paragraph 36, an entity may elect to measure the service cost and interest cost components of net periodic benefit cost by using individual spot rates derived from an acceptable high-quality corporate bond yield curve and matched with separate cash flows for each future year (also known as the spot rate approach). If the election is made to switch from a weighted-average approach to the spot rate approach, this approach shall be consistently applied to all defined benefit plans and to the measurement of both service and interest cost. This change shall be reflected as a change in estimate as prescribed in SSAP No. 3 and once changed; the company should not revert back to the weighted-average discount rate in future periods. This change in estimate shall be appropriately disclosed in accordance with this statement, SSAP No. 3 and the Preamble.

38. An insurance company deciding on the price of an annuity contract will consider the rates of return available to it for investing the premium received and the rates of return expected to be available to it for reinvestment of future cash flows from the initial investment during the period until benefits are payable. That consideration is indicative of a relationship between rates inherent in the prices of annuity contracts and rates available in investment markets. It would be appropriate for employers to consider that relationship and information about investment rates in estimating the discount rates required for application of this statement.

SSAP No. 92—Postretirement Benefits Other than Pensions Staff Note – No revisions to the guidance are proposed with the exception of the new footnote.

Measurement of Cost and Obligations1

15. Measuring the net periodic postretirement benefit cost and accumulated postretirement benefit obligation based on best estimates is superior to implying, by a failure to accrue, that no cost or obligation

Attachment 16

Ref #2016-08


exists prior to the payment of benefits. This statement requires the use of explicit assumptions, each of which individually represents the best estimate of a particular future event, to measure the expected postretirement benefit obligation

1. A portion of that expected postretirement benefit obligation is attributed

to each period of an employee's service associated with earning the postretirement benefits, and that amount is accrued as service cost for that period.

16. The service cost component of postretirement benefit cost, any prior service cost, and the accumulated postretirement benefit obligation are measured using actuarial assumptions and present value techniques to calculate the actuarial present value of the expected future benefits attributed to periods of employee service. Each assumption used shall reflect the best estimate solely with respect to that individual assumption. All assumptions shall presume that the plan will continue in effect in the absence of evidence that it will not continue. Principal actuarial assumptions include the time value of money (discount rates); participation rates (for contributory plans); retirement age; factors affecting the amount and timing of future benefit payments, which for postretirement health care benefits consider past and present per capita claims cost by age, health care cost trend rates, Medicare reimbursement rates, and so forth; salary progression (for pay-related plans); and the probability of payment (turnover, dependency status, mortality, and so forth). 17. Assumed discount rates shall reflect the time value of money as of the measurement date in determining the present value of future cash outflows currently expected to be required to satisfy the postretirement benefit obligation. In making that assumption, employers shall look to rates of return on high-quality fixed-income investments currently available whose cash flows match the timing and amount of expected benefit payments. If settlement of the obligation with third-party insurers is possible (for example, the purchase of nonparticipating life insurance contracts to provide death benefits), the interest rates inherent in the amount at which the postretirement benefit obligation could be settled are relevant in determining the assumed discount rates. Assumed discount rates are used in measurements of the expected and accumulated postretirement benefit obligations and the service cost and interest cost components of net periodic postretirement benefit cost.

18. Pursuant to paragraph 17, an employer shall look to rates of return on high-quality fixed-income investments in determining assumed discount rates. The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the postretirement benefits when due. Notionally, that single amount, the accumulated postretirement benefit obligation, would equal the current fair value of a portfolio of high-quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of the expected future benefit payments. Because cash inflows would equal cash outflows in timing and amount, there would be no reinvestment risk in the yields to maturity of the portfolio. However, in other than a zero coupon portfolio, such as a portfolio of long-term debt instruments that pay semiannual interest payments or whose maturities do not extend far enough into the future to meet expected benefit payments, the assumed discount rates (the yield to maturity) need to incorporate expected reinvestment rates available in the future. Those rates shall be extrapolated from the existing yield curve at the measurement date. The determination of the assumed discount rate is separate from the determination of the expected rate of return on plan assets whenever the actual portfolio differs from the hypothetical portfolio described above. Assumed discount rates shall be reevaluated at each measurement date. If the general level of interest rates rises or declines, the assumed discount rates shall change in a similar manner. 20. The service cost component of net periodic postretirement benefit cost and the expected and accumulated postretirement benefit obligations shall reflect future compensation levels to the extent the postretirement benefit formula defines the benefits wholly or partially as a function of future compensation levels. For pay-related plans, assumed compensation levels shall reflect the best estimate of the actual future compensation levels of the individual employees involved, including future changes attributed to general price levels, productivity, seniority, promotion, and other factors. All assumptions shall be consistent to the extent that each reflects expectations about the same future economic conditions, such as future rates of inflation. Measuring service cost and the expected and accumulated postretirement benefit obligations based on estimated future compensation levels entails considering any indirect effects, such as benefit limitations, that would affect benefits provided by the plan.

Attachment 16

Ref #2016-08


Footnote 1 – In addition to a properly weighted average rate, an entity may elect to measure the service cost and interest cost components of net periodic benefit cost by using individual spot rates derived from an acceptable high-quality corporate bond yield curve and matched with separate cash flows for each future year (also known as the spot rate approach). If the election is made to switch from a weighted-average approach to the spot rate approach, this approach shall be consistently applied to all defined benefit plans and to the measurement of both service and interest cost. This change shall be reflected as a change in estimate as prescribed in SSAP No. 3 and once changed; the company should not revert back to the weighted-average discount rate in future periods. This change in estimate shall be appropriately disclosed in accordance with this statement, SSAP No. 3 and the Preamble.

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Discount Rates to Measure Benefit Costs.docx

Attachment 16

Ref #2016-08


Appendix A

In response to these developments (as detailed above), the Big 4 accounting firms issued publications which

discuss the SEC staff comments, describes the alternative method for measuring service cost and interest cost

and identifies key issues that need to be considered by an entity before electing to use this alternative approach.

For reference, staff has provided the links to the publically available publications below

EY

http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB3053_DiscountRates_30Septe

mber2015/$FILE/TothePoint_BB3053_DiscountRates_30September2015.pdf

http://www.ey.com/Publication/vwLUAssetsAL/AICPACompendium_CC0433_15December2

015/$FILE/AICPACompendium_CC0433_15December2015.pdf

To access this information, regulators will have to first register for free

at http://www.ey.com/US/Accountinglink.

PWC

http://www.pwc.com/us/en/hr-management/newsletters/hrs-insights/update-on-using-multiple-

discount-rates.html

KPMG

http://www.kpmg-institutes.com/institutes/financial-reporting-

network/articles/2016/03/alternative-approaches-calculating-service-interest-cost.html

DELOITTE

http://www2.deloitte.com/us/en/pages/audit/articles/fra-financial-reporting-considerations-

related-to-pension-and-other-postretirement-benefits.html

SEC https://www.sec.gov/news/speech/remarks-at-2015-aicpa-conference-wright.html

http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB3053_DiscountRates_30September2015/$FILE/TothePoint_BB3053_DiscountRates_30September2015.pdf

http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB3053_DiscountRates_30September2015/$FILE/TothePoint_BB3053_DiscountRates_30September2015.pdf

http://www.ey.com/Publication/vwLUAssetsAL/AICPACompendium_CC0433_15December2015/$FILE/AICPACompendium_CC0433_15December2015.pdf

http://www.ey.com/Publication/vwLUAssetsAL/AICPACompendium_CC0433_15December2015/$FILE/AICPACompendium_CC0433_15December2015.pdf

http://www.ey.com/US/Accountinglink

http://www.pwc.com/us/en/hr-management/newsletters/hrs-insights/update-on-using-multiple-discount-rates.html

http://www.pwc.com/us/en/hr-management/newsletters/hrs-insights/update-on-using-multiple-discount-rates.html

http://www.kpmg-institutes.com/institutes/financial-reporting-network/articles/2016/03/alternative-approaches-calculating-service-interest-cost.html

http://www.kpmg-institutes.com/institutes/financial-reporting-network/articles/2016/03/alternative-approaches-calculating-service-interest-cost.html

http://www2.deloitte.com/us/en/pages/audit/articles/fra-financial-reporting-considerations-related-to-pension-and-other-postretirement-benefits.html

http://www2.deloitte.com/us/en/pages/audit/articles/fra-financial-reporting-considerations-related-to-pension-and-other-postretirement-benefits.html

https://www.sec.gov/news/speech/remarks-at-2015-aicpa-conference-wright.html

Ref #2016-10




Form A

Issue: Changes to A-820 Standard Valuation Law for Principle-based Reserving


P/C Life Health


New Issue or SSAP

Interpretation

Description of Issue: In 2009, the Life and Health Actuarial (A) Task Force adopted amendments to Model 820-Standard Valuation

Law (SVL). The amendments to the SVL incorporate language that references the Valuation Manual, which

provides detailed principle-based reserving (PBR) requirements. PBR implementation is a complex process that

will affect many facets of the regulatory framework. The SVL is the primary legal change for implementing PBR.

The purpose of this agenda item is to incorporate relevant aspects of the 2009 SVL amendments into Appendix A-

820 - Minimum Life and Annuity Standards.

The Valuation Manual also contains companywide exemptions, based on premium thresholds and other criteria.

In some instances, these exemptions allow a reporting entity to continue to use prior formulaic methods.

Therefore, it is important to keep in mind that not all companies will be applying the same reserving methodology

under PBR. The annual statement reporting proposals that are in development will assist with identifying the

reserve methodology being applied.


The existing A--820 Minimum Life and Annuity Standards is incorporated by referenced in the following

statements:

SSAP No. 51—Life Contracts,

SSAP No. 52—Deposit-Type Contracts,

SSAP No. 54— Individual and Group Accident and Health Contracts,

SSAP No. 56—Separate Accounts,

SSAP No. 59—Credit Life and Accident and Health Insurance Contracts and

A commissioners' annuity reserve valuation method adjustment is noted in SSAP No. 97—Investments in

Subsidiary, Controlled and Affiliated Entities.

The redline version of the SVL is shown as Exhibit B to this agenda item.


FASB, other State Departments of Insurance or other NAIC groups): The 2009 amendments to the SVL were adopted by the Life Insurance (A) Committee and subsequently by the

NAIC Executive (EX) and Plenary in the third quarter of 2009. The 2009 SVL changes have been adopted up by

several states and it is anticipated that the thresholds specified in Section 11 of Model 820 for the Valuation

Manual to be operative will be met prior to July 1, 2016. If the specified thresholds including, among other things,

that a minimum number jurisdictions have adopted the SVL by July 1, 2016, then the Valuation Manual will

become effective on January 1, 2017.

The Principle-Based Reserving Implementation (EX) Task Force has been charged to serve as the coordinating

body with all NAIC technical groups (e.g., Life Actuarial (A) Task Force) involved with projects related to the

principle-based reserving (PBR) initiative for life and health policies.

Ref# 2016-10



This agenda item is related to agenda item 2015-47: Principles Based Reserving SSAP and is one of several

changes needed to implement PBR.

Convergence with International Financial Reporting Standards (IFRS): Not applicable.


Staff recommends that the Working Group move this item to the active listing, categorized as nonsubstantive, and

expose revisions to Appendix A-820, which incorporate relevant aspects of the SVL as shown in Exhibit A of the

agenda item. The recommended language was developed based on input from an informal drafting group

composed of industry, regulators and various stakeholders. Note that additional changes to A-10 Minimum

Reserve Standards for Individual and Group Health Insurance Contracts are pending from the Health Actuarial

(A) Task Force, which will be addressed in a subsequent agenda item.

The proposed effective date of these revisions is January 1, 2017. The Principle-Based Reserving Implementation

(EX) Task Force has adopted the Plan to Evaluate Substantially Similar Terms and Provisions to Determine the

Valuation Manual Operative Date and is tracking the thresholds specified in Section 11 of the SVL that must be

met for the Valuation Manual to be operative. It is anticipated that the effective date for this agenda item would be

updated, if necessary, prior to Working Group adoption. Any updates would be based on the Principle-Based

Reserving Implementation (EX) Task Force evaluation. It should be noted that once the Valuation Manual

becomes effective, there is a three-year period before PBR would be required, which would begin 2020.

Companies can implement PBR any year during the three-year period, including the year the Valuation Manual

becomes effective.

Note that consistent with other changes to Accounting Practices and Procedures Manual Appendix A, Excerpts of

Model Laws, the proposed changes focus on incorporating the parts of the SVL that are relevant to the financial

statements, therefore some aspects of the model were not previously incorporated into Appendix A-820 and the

existing differences were generally maintained.

In some cases wording from the model has been recommended to be changed for various drafting reasons. In

those cases, differences from the model have been tracked in Exhibit B. Staff drafting notes in the exposure are to

facilitate ease of review are not anticipated to be incorporated into the published Appendix A-820. This exposure

has not incorporated Section 14 Confidentiality, Section 15 Single State Exemption and Section 16 Effective Date

from the amended SVL.


Robin Marcotte, NAIC Staff

February 2016

Status:


and exposed revisions to Appendix A-820, which incorporate relevant aspects of the Standard Valuation Law as

shown in Exhibit A below. The proposed effective date is January 1, 2017, but this is subject to the determination

of the operative of the valuation manual as described above.

Ref #2016-10

Exhibit A


Staff Drafting Note: Only portions of the SVL are reflected in the current A-820. For ease of review, portions of

A-820 which are different than the Model have been highlighted in Exhibit A to illustrate this difference. Staff

drafting notes will not be in the final publication.

Appendix A-820

Minimum Life and Annuity Reserve Standards

Definitions

1. For the purposes of this Act Appendix the following definitions shall apply on or after the operative date

of the valuation manual:

a. The term “accident and health insurance” means contracts that incorporate morbidity risk and

provide protection against economic loss resulting from accident, sickness, or medical conditions

and as may be specified in the valuation manual.

b. The term “appointed actuary” means a qualified actuary who is appointed in accordance with the

valuation manual to prepare the actuarial opinion required in Section 3B of this Act.

c. The term “company” means an entity, which (a) has written, issued, or reinsured life insurance

contracts, accident and health insurance contracts, or deposit-type contracts in this State a U.S.

State, district or territory and has at least one such policy in force or on claim or (b) has written,

issued, or reinsured life insurance contracts, accident and health insurance contracts, or deposit-

type contracts in any U.S. State, district or territorystate and is required to hold a certificate of

authority to write life insurance, accident and health insurance, or deposit-type contracts in thisa

U.S. State, district or territoryState.

d. The term “deposit-type contract” means contracts that do not incorporate mortality or morbidity

risks and as may be specified in the valuation manual.

e. The term “life insurance” means contracts that incorporate mortality risk, including annuity and

pure endowment contracts, and as may be specified in the valuation manual.

f. The term “NAIC” means the National Association of Insurance Commissioners.

g. The term “policyholder behavior” means any action a policyholder, contract holder or any other

person with the right to elect options, such as a certificate holder, may take under a policy or

contract subject to this ActAppendix including, but not limited to, lapse, withdrawal, transfer,

deposit, premium payment, loan, annuitization, or benefit elections prescribed by the policy or

contract but excluding events of mortality or morbidity that result in benefits prescribed in their

essential aspects by the terms of the policy or contract.

h. The term “principle-based valuation” means a reserve valuation that uses one or more methods or

one or more assumptions determined by the insurer and is required to comply with Section

12paragraphs 25-27 of this ActAppendix as specified in the valuation manual.

i. The term “qualified actuary” means an individual who is qualified to sign the applicable

statement of actuarial opinion in accordance with the American Academy of Actuaries

qualification standards for actuaries signing such statements and who meets the requirements

specified in the valuation manual.

Ref# 2016-10

Exhibit A


j. The term “tail risk” means a risk that occurs either where the frequency of low probability events

is higher than expected under a normal probability distribution or where there are observed events

of very significant size or magnitude.

a.k. The term “valuation manual” means the manual of valuation instructions adopted by the NAIC as

specified in this ActAppendix or as subsequently amended.

1. A “qualified actuary” is an individual who:

a. Is a member in good standing of the American Academy of Actuaries;

b. Is qualified to sign statements of actuarial opinion for life and health insurance company annual

statements in accordance with the American Academy of Actuaries qualification standards for

actuaries signing such statements;

c. Is familiar with the valuation requirements applicable to life and health insurance companies;

d. Has not been found by the Commissioner (or if so found has subsequently been reinstated as a

qualified actuary), following appropriate notice and hearing to have:

i. Violated any provision of, or any obligation imposed by, the Insurance Law or other law in

the course of his or her dealings as a qualified actuary;

ii. Been found guilty of fraudulent or dishonest practices;

iii. Demonstrated his or her incompetence, lack of cooperation, or untrustworthiness to act as a

qualified actuary;

iv. Submitted to the Commissioner during the past five (5) years, pursuant to this regulation, an

actuarial opinion or memorandum that the Commissioner rejected because it did not meet the

provisions of this regulation including standards set by the Actuarial Standards Board; or

v. Resigned or been removed as an actuary within the past five (5) years as a result of acts or

omissions indicated in any adverse report on examination or as a result of failure to adhere to

generally acceptable actuarial standards; and

e. Has not failed to notify the Commissioner of any action taken by any Commissioner of any other

state similar to that under subparagraph d. above.

Staff Drafting Note: VM -30 includes many aspects of the prior definition of qualified actuary that was in A-820.

Valuation Requirements

1.2. Reserves reported in the financial statements shall:

a. Be computed in accordance with presently accepted actuarial standards.

b. Be based on actuarial assumptions that produce reserves at least as great as those called for in any

contract provision as to reserve basis and method, and are in accordance with all other contract

provisions. The reported reserves and related actuarial items held in support of the policies and

contracts specified by the commissioner by regulationwhen considered in light of the assets held

by the company with respect to the reserves and related actuarial items, including but not limited

to the investment earnings on the assets and the considerations anticipated to be received and

retained under the policies and contracts, make adequate provision for the company’s obligations

under the policies and contracts, including but not limited to the benefits under and expenses

associated with the policies and contracts.

Ref# 2016-10

Exhibit A


c. Be computed on the basis of assumptions consistent with those used in computing the

corresponding items in the annual statement of the preceding year-end with any exceptions

disclosed in the notes to the financial statements, and

d. Include provision for all actuarial reserves and related statement items which ought to be

established.

Policies and Contracts Issued On or After the Operative Date of the Valuation Manual

3. The provisions set forth in paragraphs 23-27 Sections 11 and 12 of this ActAppendix shall apply to all

policies and contracts issued on or after the January 1, 2017 operative date of the valuation manual.

Policies and Contracts Issued Prior to the Operative Date of the Valuation Manual

2.4. The provisions set forth in Sections 4, 4a, 4b, 5, 5a, 6, 7, 8, 9, and 10 paragraphs 5-22 of this

ActAppendix shall apply to all policies and contracts, as appropriate, subject to this ActAppendix [insert the

original effective date of the Standard Valuation Law in this State] and prior to the January 1, 2017 operative date

of the valuation manual and the provisions set forth in paragraphs 23-27Sections 11 and 12 of this ActAppendix

shall not apply to any such policies and contracts.

Staff Drafting Note: The model 820 has more specific references to model 817 (nonforfeiture), but staff suggests

that the existing general references that were in A-820 are sufficient.) As a side note, A-820 does not include

references to all of the tables that were in effect prior to 2000.

Computation of Minimum Standard for Life Insurance and Endowment Benefits- Policies and Contracts

Issued Prior to the Operative Date of the Valuation Manual

5. 3. The minimum standard for the valuation of all life insurance and endowment policies and

contracts shall be the commissioners reserve valuation methods defined in paragraphs 9-1111-13, valuation

interest rates provided in paragraphs 5-87-10, and the following tables:

a. For all ordinary policies of life insurance issued on the standard basis on or after January 1, 2004,

excluding preneed policies (which follow Appendix A-817), any disability and accidental death

benefits in the policies:

i. The Commissioners 2001 Standard Ordinary Mortality Table;

ii. At the election of the company for any one or more specified plans of life insurance, the

Commissioners 2001 Standard Ordinary Mortality Table with 25-Year Select Mortality

Factors; or

iii. Any ordinary mortality table adopted subsequently by the National Association of

Insurance CommissionersNAIC for use in determining the minimum standard for

valuation for such policies;

b. For all ordinary policies of life insurance issued on the standard basis, prior to January 1, 2004,

excluding any disability and accidental death benefits in the policies and including preneed

policies issued on or after January 1, 2012 (see A-817):

i. The Commissioners 1980 Standard Ordinary Mortality Table;

Ref# 2016-10

Exhibit A


ii. At the election of the company for any one or more specified plans of life insurance, the

Commissioners 1980 Standard Ordinary Mortality Table with Ten-Year Select Mortality

Factors;

c. For all industrial life insurance policies issued on the standard basis, excluding any disability and

accidental death benefits in the policies, the Commissioners 1961 Standard Industrial Mortality

Table or any industrial mortality table adopted after 1980 by the National Association of

Insurance CommissionersNAIC for use in determining the minimum standard of valuation for the

policies;

d. For total and permanent disability benefits in or supplementary to ordinary policies or contracts,

the tables of Period 2 disablement rates and the 1930 to 1950 termination rates of the 1952

Disability Study of the Society of Actuaries, with due regard to the type of benefit or any tables

of disablement rates and termination rates adopted after 1980 by the National Association of

Insurance CommissionersNAIC, for use in determining the minimum standard of valuation for

those policies. Any such table shall, for active lives, be combined with a mortality table permitted

for calculating the reserves for life insurance policies;

e. For accidental death benefits in or supplementary to policies, the 1959 Accidental Death Benefits

Table or any accidental death benefits table adopted after 1980 by the National Association of

Insurance CommissionersNAIC for use in determining the minimum standard of valuation for

those policies. The table shall be combined with a mortality table for calculating the reserves for

life insurance policies; and

f. For group life insurance, life insurance issued on the substandard basis and other special benefits:

tables which provide for an adequate reserve.

Computation of Minimum Standard for Annuities

6. 4. The minimum standard for theof valuation of allfor individual annuity and pure endowment

contracts and for all annuities and pure endowments purchased under group annuity and pure endowment

contracts, shall be the commissioners annuity reserve valuation methods defined in paragraphs 12 14 and 1315,

valuation interest rates provided in paragraphs 5-87-10, and the tables defined in Appendix A-821.

Staff Drafting Note: SVL Model 820 sections 4a and 4b have several existing paragraphs following the above

paragraph which relate to tables that were effective prior to the AP&P Manual which are currently excluded

from A-820. This existing difference has been maintained.

Computation of Minimum Standard Valuation Interest Rates by Calendar Year of Issue - All Business

3.7. 5. The interest rates used in determining the minimum standard for the valuation of policies issued

on or after the effective date of the Codification shall be the calendar year statutory valuation interest rates as

defined below:

a. Calendar Year Statutory Valuation Interest Rates

i. The calendar year statutory valuation interest rates, I, shall be determined as follows and

the results rounded to the nearer one-quarter of one percent (1/4 of 1%):

(a) For life insurance:

I = .03 + W(R1 - .03) + W (R

2 - .09);

2

Ref# 2016-10

Exhibit A


Staff Drafting Note: Model 820 (Section 4b letter B (1) (a) has some tracked changes to the formula, but they are

formatting edits.

(b) For single premium immediate annuities and for annuity benefits involving life

contingencies arising from other annuities with cash settlement options and from

guaranteed interest contracts with cash settlement options:

a. I = .03 + W(R - .03)

b. where Where R1 is the lesser of R and .09,

c. R2 is the greater of R and .09,

d. R is the reference interest rate defined in paragraph 79,

e. and W is the weighting factor defined in paragraph 68;

(c) For other annuities with cash settlement options and guaranteed interest contracts

with cash settlement options, valued on an issue year basis, except as stated in

subparagraph (b) above, the formula for life insurance stated in subparagraph (a)

above shall apply to annuities and guaranteed interest contracts with guarantee

durations in excess of ten (10) years and the formula for single premium

immediate annuities stated in subparagraph (b) above shall apply to annuities and

guaranteed interest contracts with guarantee duration of ten (10) years or less;

(d) For other annuities with no cash settlement options and for guaranteed interest

contracts with no cash settlement options, the formula for single premium

immediate annuities stated in subparagraph (b) above shall apply.

(e) For other annuities with cash settlement options and guaranteed interest contracts

with cash settlement options, valued on a change in fund basis, the formula for

single premium immediate annuities stated in subparagraph (b) above shall

apply.

ii. However, if the calendar year statutory valuation interest rate for a life insurance policy

issued in any calendar year determined without reference to this sentence differs from the

corresponding actual rate for similar policies issued in the immediately preceding

calendar year by less than one-half of one percent (1/2 of 1%), the calendar year statutory

valuation interest rate for the life insurance policies shall be equal to the corresponding

actual rate for the immediately preceding calendar year.

Weighting Factors

4.8. 6. The weighting factors referred to in the formulas stated above are given in the following tables:

a. Weighting Factors for Life Insurance:

Guarantee

Duration Weighting

(Years) Factors

10 or less .50

More than 10, but not more

than 20 .45

More than 20 .35

Ref# 2016-10

Exhibit A


For life insurance, the guarantee duration is the maximum number of years the life insurance can

remain in force on a basis guaranteed in the policy or under options to convert to plans of life

insurance with premium rates or nonforfeiture values or both which are guaranteed in the original

policy;

b. Weighting factor for single premium immediate annuities and for annuity benefits involving life

contingencies arising from other annuities with cash settlement options and guaranteed interest

contracts with cash settlement options:

.80

c. Weighting factors for other annuities and for guaranteed interest contracts, except as stated in

subparagraph (b) above, shall be as specified in Items items i., ii. and iii. below, according to the

rules and definitions in items iv., v. and vi. below:

i. For annuities and guaranteed interest contracts valued on an issue year basis:

Guarantee

Duration

Weighting Factor

for Plan Type

(Years) A B C

5 or less: .80 .60 .50

More than 5, but not more than 10: .75 .60 .50

More than 10, but not more than 20: .65 .50 .45

More than 20: .45 .35 .35

Plan Type

A B C

ii. For annuities and guaranteed

interest contracts valued on a

change in fund basis, the factors

shown in Item item i. above

increased by:

.15

.25

.05

Plan Type

iii. For annuities and guaranteed

interest contracts valued on an issue

year basis (other than those with no

cash settlement options) that do not

guarantee interest on considerations

received more than one year after

issue or purchase and for annuities

and guaranteed interest contracts

valued on a change in fund basis

that do not guarantee interest rates

on considerations received more

A

B

C

Ref# 2016-10

Exhibit A


than twelve (12) months beyond the

valuation date, the factors shown in

Item item i. or derived in Item item

ii. increased by:

.05

.05

.05

iv. For other annuities with cash settlement options and guaranteed interest contracts with

cash settlement options, the guarantee duration is the number of years for which the

contract guarantees interest rates in excess of the calendar year statutory valuation

interest rate for life insurance policies with guarantee duration in excess of twenty (20)

years. For other annuities with no cash settlement options and for guaranteed interest

contracts with no cash settlement options, the guaranteed duration is the number of years

from the date of issue or date of purchase to the date annuity benefits are scheduled to

commence.

v. Plan type as used in the above tables is defined as follows:

(a) Plan Type A: At any time policyholder may withdraw funds only (l) with an

adjustment to reflect changes in interest rates or asset values since receipt of the

funds by the insurance company, or (2) without an adjustment but installments

over five years or more, or (3) as an immediate life annuity, or (4) no withdrawal

permitted.

(b) Plan Type B: Before expiration of the interest rate guarantee, policyholder may

withdraw funds only (1) with an adjustment to reflect changes in interest rates or

asset values since receipt of the funds by the insurance company, or (2) without

an adjustment but in installments over five years or more, or (3) no withdrawal

permitted. At the end of interest rate guarantee, funds may be withdrawn without

an adjustment in a single sum or installments over less than five years.

(c) Plan Type C: Policyholder may withdraw funds before expiration of interest rate

guarantee in a single sum or installments over less than five years either (1)

without adjustment to reflect changes in interest rates or asset values since receipt

of the funds by the insurance company, or (2) subject only to a fixed surrender

charge stipulated in the contract as a percentage of the fund.

vi. A company may elect to value guaranteed interest contracts with cash settlement options

and annuities with cash settlement options on either an issue year basis or on a change in

fund basis. Guaranteed interest contracts with no cash settlement options and other

annuities with no cash settlement options must be valued on an issue year basis. An issue

year basis of valuation refers to a valuation basis under which the interest rate used to

determine the minimum valuation standard for the entire duration of the annuity or

guaranteed interest contract is the calendar year valuation interest rate for the year of

issue or year of purchase of the annuity or guaranteed interest contract, and the change in

fund basis of valuation refers to a valuation basis under which the interest rate used to

determine the minimum valuation standard applicable to each change in the fund held

under the annuity or guaranteed interest contract is the calendar year valuation interest

rate for the year of the change in the fund.

Reference Interest Rate

9. 7. The reference interest rate referred to in paragraph 5 7 of this Appendix shall be defined as

follows:

Ref# 2016-10

Exhibit A


a. For all life insurance, the lesser of the average over a period of thirty-six (36) months and the

average over a period of twelve (l2) months, ending on June 30 of the calendar year preceding the

year of issue, of the monthly average of the composite yield on seasoned corporate bonds, as

published by Moody’s Investors Service, Inc.;

b. For single premium immediate annuities and for annuity benefits involving life contingencies

arising from other annuities with cash settlement options and guaranteed interest contracts with

cash settlement options, the average over a period of twelve (12) months, ending on June 30 of

the calendar year of issue or year of purchase, of the monthly average of the composite yield on

seasoned corporate bonds, as published by Moody’s Investors Service, Inc.;

c. For other annuities with cash settlement options and guaranteed interest contracts with cash

settlement options, valued on a year of issue basis, except as stated in subparagraph (b) above,

with guarantee duration in excess of ten (10) years, the lesser of the average over a period of

thirty-six (36) months and the average over a period of twelve (12) months, ending on June 30 of

the calendar year of issue or purchase, of the monthly average of the composite yield on seasoned

corporate bonds, as published by Moody’s Investors Service, Inc.;

d. For other annuities with cash settlement options and guaranteed interest contracts with cash

settlement options, valued on a year of issue basis, except as stated in subparagraph (b) above,

with guarantee duration of ten (10) years or less, the average over a period of twelve (12) months,

ending on June 30 of the calendar year of issue or purchase, of the monthly average of the

composite yield on seasoned corporate bonds, as published by Moody’s Investors Service, Inc.;

e. For other annuities with no cash settlement options and for guaranteed interest contracts with no

cash settlement options, the average over a period of twelve (12) months, ending on June 30 of

the calendar year of issue or purchase, of the monthly average of the composite yield on seasoned

corporate bonds, as published by Moody’s Investors Service, Inc.;

f. For other annuities with cash settlement options and guaranteed interest contracts with cash

settlement options, valued on a change in fund basis, except as stated in subparagraph b. above,

the average over a period of twelve (12) months, ending on June 30 of the calendar year of the

change in the fund, of the monthly average of the composite yield on seasoned corporate bonds,

as published by Moody’s Investors Service, Inc.

5.10. 8. Alternative Method for Determining Reference Interest Rates. In the event that the monthly

average of the composite yield on seasoned corporate bonds is no longer published by Moody’s Investors Service,

Inc. or in the event that the National Association of Insurance CommissionersNAIC determines that the monthly

average of the composite yield on seasoned corporate bonds as published by Moody’s Investors Service, Inc. is no

longer appropriate for the determination of the reference interest rate, then an alternative method for

determination of the reference interest rate adopted by the National Association of Insurance

CommissionersNAIC may be substituted.

Reserve Valuation Method—Life Insurance and Endowment Benefits

6.11. 9. Except as otherwise provided in this Appendix, reserves according to the commissioners reserve

valuation method, for the life insurance and endowment benefits of policies providing for a uniform amount of

insurance and requiring the payment of uniform premiums shall be the excess, if any, of the present value, at the

date of valuation, of the future guaranteed benefits provided for by those policies, over the then present value of

any future modified net premiums therefore. The modified net premiums for a policy shall be the uniform

percentage of the respective contract the premiums for the benefits such that the present value, at the date of issue

of the policy, of all modified net premiums shall be equal to the sum of the then present value of the benefits

provided for by the policy and the excess of a. over b., as follows:

Ref# 2016-10

Exhibit A


a. A net level annual premium equal to the present value, at the date of issue, of the benefits

provided for after the first policy year, divided by the present value, at the date of issue, of an

annuity of one per annum payable on the first and each subsequent anniversary of the policy on

which a premium falls due. However, the net level annual premium shall not exceed the net level

annual premium on the nineteen-year premium whole life plan for insurance of the same amount

at an age one year higher than the age at issue of the policy.

b. A net one-year term premium for the benefits provided for in the first policy year.

12. 10. For a life insurance policy for which the contract premium in the first policy year exceeds that of

the second year and for which no comparable additional benefit is provided in the first year for the excess and

which provides an endowment benefit or a cash surrender value or a combination in an amount greater than the

excess premium, the reserve according to the commissioners reserve valuation method as of any policy

anniversary occurring on or before the assumed ending date defined herein as the first policy anniversary on

which the sum of any endowment benefit and any cash surrender value then available is greater than the excess

premium shall, except as otherwise provided in paragraphs 17 19 and 1820, be the greater of the reserve as of the

policy anniversary calculated as described in the preceding paragraph and the reserve as of the policy anniversary

calculated as described in those paragraphs, but with (i) the value defined in that paragraph being reduced by

fifteen percent (15%) of the amount of such excess first year premium, (ii) all present values of benefits and

premiums being determined without reference to premiums or benefits provided for by the policy after the

assumed ending date, (iii) the policy being assumed to mature on that date as an endowment, and (iv) the cash

surrender value provided on that date being considered as an endowment benefit. In making the above comparison

the mortality stated in paragraph 3 5 and interest bases stated in paragraphs 5-87-10 shall be used.

7.13. 11. Reserves according to the commissioners reserve valuation method shall be calculated by a

method consistent with the principles of paragraphs 9 11 and 10 12 for:

a. Life insurance policies providing for a varying amount of insurance or requiring the payment of

varying premiums;

b. Group annuity and pure endowment contracts purchased under a retirement plan or plan of

deferred compensation, established or maintained by an employer (including a partnership or sole

proprietorship) or by an employee organization, or by both, other than a plan providing individual

retirement accounts or individual retirement annuities under Section 408 of the Internal Revenue

Code, as now or hereafter amended;

c. Disability and accidental death benefits in all policies and contracts; and

d. All other benefits, except life insurance and endowment benefits in life insurance policies and

benefits provided by all other annuity and pure endowment contracts.

Reserve Valuation Method—Annuity and Pure Endowment Benefits

8.14. 12. Paragraph 13 15 shall apply to all annuity and pure endowment contracts other than group

annuity and pure endowment contracts purchased under a retirement plan or plan of deferred compensation,

established or maintained by an employer (including a partnership or sole proprietorship) or by an employee

organization, or by both, other than a plan providing individual retirement accounts or individual retirement

annuities under Section 408 of the Internal Revenue Code, as now or hereafter amended.

15. 13. Reserves according to the commissioners annuity reserve method for benefits under annuity or

pure endowment contracts, excluding any disability and accidental death benefits in the contracts, shall be the

greatest of the respective excesses of the present values, at the date of valuation, of the future guaranteed benefits,

including guaranteed nonforfeiture benefits, provided for by the contracts at the end of each respective contract

Ref# 2016-10

Exhibit A


year, over the present value, at the date of valuation, of any future valuation considerations derived from future

gross considerations, required by the terms of the contract, that become payable prior to the end of the respective

contract year. The future guaranteed benefits shall be determined by using the mortality table, if any, and the

interest rate, or rates, specified in the contracts for determining guaranteed benefits. The valuation considerations

are the portions of the respective gross considerations applied under the terms of the contracts to determine

nonforfeiture values.

Minimum Reserves

16. 14. In no event shall a company’s aggregate reserves for all life insurance policies, excluding

disability and accidental death benefits be less than the aggregate reserves calculated in accordance with the

methods set forth in paragraphs 9-11, 12-1311-15 and 19-21 17-18 and 19 and the mortality table or tables and

rate or rates of interest used in calculating nonforfeiture benefits for the policies.

Staff Drafting Note: Section 6, paragraph B and Section 7 paragraph A are not in Appendix A-820 and this

existing difference has been maintained.

Optional Reserve Calculation

17. 15. Reserves for any category of policies, contracts or benefits, may be calculated, at the option of the

company, according to any standards that produce greater aggregate reserves for the category than those

calculated according to the minimum standard provided herein, but the rate or rates of interest used for policies

and contracts, other than annuity and pure endowment contracts, shall not be higher greater than the

corresponding rate or rates of interest used in calculating any nonforfeiture benefits provided therein the policies

or contracts.

9.18. 16. A company that shall have adoptedwhich adopts at any time a standard of valuation producing

greater aggregate reserves than those calculated according to the minimum standard provided herein may, adopt a

lower standard of valuation, but not lower than the minimum provided herein; provided that the holding of

additional reserves previously determined by a the appointed qualified actuary shall not be deemed to be the

adoption of a higher standard of valuation.

Reserve Calculation—Valuation Net Premium Exceeding the Gross Premium Charged

19. 17. If in any contract year the gross premium charged by a life insurance company on a policy or

contract is less than the valuation net premium for the policy or contract calculated by the method used in

calculating the reserve but using the minimum valuation standards of mortality and rate of interest, the minimum

reserve required for the policy or contract shall be the greater of either the reserve calculated according to the

mortality table, rate of interest, and method actually used for the policy or contract, or the reserve calculated by

the method actually used for the policy or contract but using the minimum valuation standards of mortality and

rate of interest and replacing the valuation net premium by the actual gross premium in each contract year for

which the valuation net premium exceeds the actual gross premium. The minimum valuation standards of

mortality and rate of interest to be used are those standards stated in paragraph 3 5 and paragraphs 5-87-10 of this

Appendix.

20. 18. For a life insurance policy for which the gross premium in the first policy year exceeds that of the

second year and for which no comparable additional benefit is provided in the first year for the excess and which

provides an endowment benefit or a cash surrender value or a combination in an amount greater than the excess

premium, the provisions of paragraphs 17 19 and 18 20 shall be applied as if the method actually used in

calculating the reserve for the policy were the method described in paragraph 911. The minimum reserve at each

policy anniversary of such a policy shall be the greater of the minimum reserve calculated in accordance with

paragraphs 9 and 10 and the minimum reserve calculated in accordance with paragraphs 17 19 and 1820.

Ref# 2016-10

Exhibit A


Reserve Calculation—Indeterminate Premium Plans

10.21. 19. In the case of a plan of life insurance that provides for future premium determination, the

amounts of which are to be determined by the insurance company based on then estimates of future experience, or

in the case of a plan of life insurance or annuity that is of such a nature that the minimum reserves cannot be

determined by the methods described above, the reserves that are held under the plan shall:

a. Be appropriate in relation to the benefits and the pattern of premiums for that plan; and

b. Be computed by a method that is consistent with the principles of this Appendix and which

produce a good and sufficient reserve.

Staff Drafting Notes: Appendix A-820 does not include health guidance additional changes regarding A-10 will

be addressed in a subsequent agenda item.

Minimum Standard for Accident and Health Insurance Contracts On or After the Operative Date of the

Valuation Manual

22. For accident and health insurance contracts issued on or after the operative date of the valuation manual,

the standard prescribed in the valuation manual is the minimum standard of valuation required under Section

2Bparagraph 3. For [disability, accident and sickness, accident and health] insurance contracts issued on or after

[insert the original effective date of the Standard Valuation Law in the State] January 1, 2017 and prior to the

operative date of the valuation manual the minimum standard of valuation is the standard adopted by the

commissioner by regulation.

Valuation Manual for Policies Issued On or After the Operative Date of the Valuation Manual

23. For policies issued on or after the operative date of the valuation manual, the standard prescribed in the

valuation manual is the minimum standard of valuation required under Section 2B paragraph 3,except as provided

under Paragraphs E or G of this section.

24. The valuation manual must specify all of the following:

a. Minimum valuation standards for and definitions of the policies or contracts subject to Section

2Bparagraph 3. Such minimum valuation standards shall be:

i. The commissioners reserve valuation method for life insurance contracts, other than

annuity contracts, subject to paragraph 3Section 2B;

ii. The commissioners annuity reserve valuation method for annuity contracts subject to

paragraph 3Section 2B; and

iii. Minimum reserves for all other policies or contracts subject to paragraph 3Section 2B.

b. Which policies or contracts or types of policies or contracts that are subject to the requirements of

a principle-based valuation in paragraph 25 Section 12A and the minimum valuation standards

consistent with those requirements;

c. For policies and contracts subject to a principle-based valuation under paragraphs 25-27Section

12:

Ref# 2016-10

Exhibit A


i. Requirements for the format of reports to the commissioner under paragraph 26c.Section

12B(3) and which shall include information necessary to determine if the valuation is

appropriate and in compliance with this ActAppendix;

ii. Assumptions shall be prescribed for risks over which the company does not have

significant control or influence.

iii. Procedures for corporate governance and oversight of the actuarial function, and a

process for appropriate waiver or modification of such procedures.

d. For policies not subject to a principle-based valuation under paragraphs 25-27Section 12 the

minimum valuation standard shall either

i. Be consistent with the minimum standard of valuation prior to the operative date of the

valuation manual; or

ii. Develop reserves that quantify the benefits and guarantees, and the funding, associated

with the contracts and their risks at a level of conservatism that reflects conditions that

include unfavorable events that have a reasonable probability of occurring.

Drafting Note: The wording of 11D(4)(b) does not preclude, for policies with significant tail risk, reflecting in the reserve conditions appropriately adverse to quantify the tail risk.

e. Other requirements, including, but not limited to, those relating to reserve methods, models for

measuring risk, generation of economic scenarios, assumptions, margins, use of company

experience, risk measurement, disclosure, certifications, reports, actuarial opinions and

memorandums, transition rules and internal controls; and

f. The data and form of the data required under paragraph 28Section 13, with whom the data must

be submitted, and may specify other requirements including data analyses and reporting of

analyses.

Requirements of a Principle-Based Valuation

25. A company must establish reserves using a principle-based valuation that meets the following

conditions for policies or contracts as specified in the valuation manual:

a. Quantify the benefits and guarantees, and the funding, associated with the contracts and their

risks at a level of conservatism that reflects conditions that include unfavorable events that have a

reasonable probability of occurring during the lifetime of the contracts. For polices or contracts

with significant tail risk, reflects conditions appropriately adverse to quantify the tail risk.

b. Incorporate assumptions, risk analysis methods and financial models and management techniques

that are consistent with, but not necessarily identical to, those utilized within the company’s

overall risk assessment process, while recognizing potential differences in financial reporting

structures and any prescribed assumptions or methods.

c. Incorporate assumptions that are derived in one of the following manners:

i. The assumption is prescribed in the valuation manual.

ii. For assumptions that are not prescribed, the assumptions shall:

Ref# 2016-10

Exhibit A


(a) Be established utilizing the company’s available experience, to the extent it is

relevant and statistically credible; or

(b) To the extent that company data is not available, relevant, or statistically

credible, be established utilizing other relevant, statistically credible experience.

d. Provide margins for uncertainty including adverse deviation and estimation error, such that the

greater the uncertainty the larger the margin and resulting reserve.

26. A company using a principle-based valuation for one or more policies or contracts subject to this

sectionparagraphs 25-27 as specified in the valuation manual shall:

a. Establish procedures for corporate governance and oversight of the actuarial valuation function

consistent with those described in the valuation manual.

b. Provide to the commissioner and the board of directors an annual certification of the effectiveness

of the internal controls with respect to the principle-based valuation. Such controls shall be

designed to assure that all material risks inherent in the liabilities and associated assets subject to

such valuation are included in the valuation, and that valuations are made in accordance with the

valuation manual. The certification shall be based on the controls in place as of the end of the

preceding calendar year.

c. Develop, and file with the commissioner upon request, a principle-based valuation report that

complies with standards prescribed in the valuation manual.

27. A principle-based valuation may include a prescribed formulaic reserve component.

Experience Reporting for Policies In Force On or After the Operative Date of the Valuation Manual

28. A company shall submit mortality, morbidity, policyholder behavior, or expense experience and other

data as prescribed in the valuation manual.

Staff Drafting Note: The informal drafting group’s recommendation is that Section 14 Confidentiality, Section 15

Single State Exemption and Section 16 Effective Date do not need to be in the AP&P Appendix A-820.

Ref #2016-10

Exhibit B


Staff Drafting Note: Only portions of the SVL are reflected in the current A-820. For ease of review, portions of

the SVL which were not incorporated into the exposure in Exhibit A have been highlighted. Staff drafting notes

will not be in the final publication.

STANDARD VALUATION LAW

Table of Contents

Section 1. Title and Definitions

Section 2. Reserve Valuation

Section 3. Actuarial Opinion of Reserves

Section 4. Computation of Minimum Standard

Section 4a. Computation of Minimum Standard for Annuities

Section 4b. Computation of Minimum Standard by Calendar Year of Issue

Section 5. Reserve Valuation Method—Life Insurance and Endowment Benefits

Section 5a. Reserve Valuation Method—Annuity and Pure Endowment Benefits

Section 6. Minimum Reserves

Section 7. Optional Reserve Calculation

Section 8. Reserve Calculation—Valuation Net Premium Exceeding the Gross

Premium Charged

Section 9. Reserve Calculation—Indeterminate Premium Plans

Section 10. Minimum StandardsStandard for Health [Disability, Accident and Sickness] PlansHealth

Insurance Contracts

Section 11. Valuation Manual for Policies Issued On or After the Operative Date of the Valuation Manual

Section 12. Requirements of a Principle-Based Valuation

Section 13. Experience Reporting for Policies In Force On or After the Operative Date of the Valuation

Manual

Section 14. Confidentiality

[Section 15. Single State Exemption (optional)]

Section 15

or 16. Effective Date

Section 1. Title and Definitions

A. This Act shall be known as the Standard Valuation Law.

B. For the purposes of this Act the following definitions shall apply on or after the operative date of

the valuation manual:

(1) The term “accident and health insurance” means contracts that incorporate morbidity risk

and provide protection against economic loss resulting from accident, sickness, or

medical conditions and as may be specified in the valuation manual.

(2) The term “appointed actuary” means a qualified actuary who is appointed in accordance

with the valuation manual to prepare the actuarial opinion required in Section 3B of this

Act.

(3) The term “company” means an entity, which (a) has written, issued, or reinsured life

insurance contracts, accident and health insurance contracts, or deposit-type contracts in

this State and has at least one such policy in force or on claim or (b) has written, issued,

or reinsured life insurance contracts, accident and health insurance contracts, or deposit-

Ref #2016-10

Exhibit B


type contracts in any state and is required to hold a certificate of authority to write life

insurance, accident and health insurance, or deposit-type contracts in this State.

(4) The term “deposit-type contract” means contracts that do not incorporate mortality or

morbidity risks and as may be specified in the valuation manual.

(5) The term “life insurance” means contracts that incorporate mortality risk, including

annuity and pure endowment contracts, and as may be specified in the valuation manual.

(6) The term “NAIC” means the National Association of Insurance Commissioners.

(7) The term “policyholder behavior” means any action a policyholder, contract holder or

any other person with the right to elect options, such as a certificate holder, may take

under a policy or contract subject to this Act including, but not limited to, lapse,

withdrawal, transfer, deposit, premium payment, loan, annuitization, or benefit elections

prescribed by the policy or contract but excluding events of mortality or morbidity that

result in benefits prescribed in their essential aspects by the terms of the policy or

contract.

(8) The term “principle-based valuation” means a reserve valuation that uses one or more

methods or one or more assumptions determined by the insurer and is required to comply

with Section 12 of this Act as specified in the valuation manual.

(9) The term “qualified actuary” means an individual who is qualified to sign the applicable

statement of actuarial opinion in accordance with the American Academy of Actuaries

qualification standards for actuaries signing such statements and who meets the

requirements specified in the valuation manual.

(10) The term “tail risk” means a risk that occurs either where the frequency of low

probability events is higher than expected under a normal probability distribution or

where there are observed events of very significant size or magnitude.

(11) The term “valuation manual” means the manual of valuation instructions adopted by the

NAIC as specified in this Act or as subsequently amended.

Drafting Note: The term commissioner means the insurance supervisory official of a State or jurisdiction of the United States and therefore, the term

commissioner should be replaced with the appropriate title in the adopting State or jurisdiction. In addition, the term State should be replaced with the appropriate term for the adopting jurisdiction.

Drafting Note: It is critical that each state retain the terms “accident and health”, “deposit-type contract”, and “life insurance” in this section because the terms are specifically defined for purposes of the standard valuation law and applicability of the valuation manual standards for such contracts issued on or

after the operative date of the valuation manual.

Section 2. Reserve Valuation

A. Policies and Contracts Issued Prior to the Operative Date of the Valuation Manual

(1) The commissioner shall annually value, or cause to be valued, the reserve liabilities

(hereinafter called reserves) for all outstanding life insurance policies and annuity and

pure endowment contracts of every life insurance company doing business in this state,

and may certifyState issued on or after [insert the amountoriginal effective date of

reserves, specifying the mortality table or tables, rate or rates of interest, and methods

(net level premium method or other) usedStandard Valuation Law in this State] and prior

Ref #2016-10

Exhibit B


to the calculationoperative date of the reservesvaluation manual. In calculating reserves,

the commissioner may use group methods and approximate averages for fractions of a

year or otherwise. In lieu of the valuation of the reserves required of a foreign or alien

company, the commissioner may accept a valuation made, or caused to be made, by the

insurance supervisory official of any State or other jurisdiction when the valuation

complies with the minimum standard provided in this Act.

(2) The provisions set forth in Sections 4, 4a, 4b, 5, 5a, 6, 7, 8, 9, and 10 of this Act shall

apply to all policies and contracts, as appropriate, subject to this Act issued on or after

[insert the original effective date of the Standard Valuation Law in this State] and prior to

the operative date of the valuation manual and the provisions set forth in Sections 11 and

12 of this Act shall not apply to any such policies and contracts.

(3) The minimum standard for the valuation of policies and contracts issued prior to [insert

the original effective date of the Standard Valuation Law in this State] shall be that

provided by the laws in effect immediately prior to that date.

Drafting Note: The Standard Valuation Law prior to the operative date of the valuation manual applies to deposit-type contracts. There is no intent to change the valuation standards for deposit-type contracts.

Drafting Note: The dates inserted should remain unchanged from those appearing in the State’s existing Standard Valuation Law.

B. Policies and Contracts Issued On or After the Operative Date of the Valuation Manual

(1) The commissioner shall annually value, or cause to be valued, the reserve liabilities

(hereinafter called reserves) for all outstanding life insurance contracts, annuity and pure

endowment contracts, accident and health contracts, and deposit-type contracts of every

company issued on or after the operative date of the valuation manual. In lieu of the

valuation of the reserves required of a foreign or alien company, the commissioner may

accept a valuation made, or caused to be made, by the insurance supervisory official of

any stateState or other jurisdiction when the valuation complies with the minimum

standard provided here and if the official of that state or jurisdiction accepts as sufficient

and for all valid legal purposes the certificate of valuation of the commissioner when the

certificate states the valuation to have been made in a specified manner according to

which the aggregate reserves would be at least as large as if they had been computed in

the manner prescribed by the law of that state or jurisdictionin this Act.

(2) The provisions set forth in Sections 11 and 12 of this Act shall apply to all policies and

contracts issued on or after the operative date of the valuation manual.

Section 3. Actuarial Opinion of Reserves

This section shall become operative at the end of the first full calendar year following the year of enactment.

A.A. Actuarial Opinion Prior to the Operative Date of the Valuation Manual

(1) General

Every life insurance company doing business in this state shall annually submit the

opinion of a qualified actuary as to whether the reserves and related actuarial items held

in support of the policies and contracts specified by the commissioner by regulation are

computed appropriately, are based on assumptions that satisfy contractual provisions, are

consistent with prior reported amounts and comply with applicable laws of this state. The

Ref #2016-10

Exhibit B


commissioner shall define by regulation the specifics of this opinion and add any other

items deemed to be necessary to its scope.

B.(2) Actuarial Analysis of Reserves and Assets Supporting Reserves

(1a) Every life insurance company , except as exempted by regulation , shall also

annually include in the opinion required by Subsection A(1) of this section, an

opinion of the same qualified actuary as to whether the reserves and related

actuarial items held in support of the policies and contracts specified by the

commissioner by regulation, when considered in light of the assets held by the

company with respect to the reserves and related actuarial items, including but

not limited to the investment earnings on the assets and the considerations

anticipated to be received and retained under the policies and contracts, make

adequate provision for the company’s obligations under the policies and

contracts, including but not limited to the benefits under and expenses associated

with the policies and contracts.

(2b) The commissioner may provide by regulation for a transition period for

establishing any higher reserves that the qualified actuary may deem necessary in

order to render the opinion required by this section.

C.(3) Requirement for Opinion Under BSection 3A(2)

Each opinion required by Subsection B(2) shall be governed by the following provisions:

(1a) A memorandum, in form and substance acceptable to the commissioner as

specified by regulation, shall be prepared to support each actuarial opinion.

(2b) If the insurance company fails to provide a supporting memorandum at the

request of the commissioner within a period specified by regulation or the

commissioner determines that the supporting memorandum provided by the

insurance company fails to meet the standards prescribed by the regulations or is

otherwise unacceptable to the commissioner, the commissioner may engage a

qualified actuary at the expense of the company to review the opinion and the

basis for the opinion and prepare the supporting memorandum required by the

commissioner.

D.(4) Requirement for All Opinions Subject to Section 3A

Every opinion required by Section 3B shall be governed by the following provisions:

(a) (1) The opinion shall be submitted with the annual statement reflecting the

valuation of such reserve liabilities for each year ending on or after December

31, 19[ ].

(2Drafting Note: The date inserted should remain unchanged from the one appearing in the State’s existing Standard Valuation Law.

(b) The opinion shall apply to all business in force including individual and group

health insurance plans, in form and substance acceptable to the commissioner as

specified by regulation.

Ref #2016-10

Exhibit B


(3c) The opinion shall be based on standards adopted from time to time by the

Actuarial Standards Board and on such additional standards as the commissioner

may by regulation prescribe.

(4d) In the case of an opinion required to be submitted by a foreign or alien company,

the commissioner may accept the opinion filed by that company with the

insurance supervisory official of another state if the commissioner determines

that the opinion reasonably meets the requirements applicable to a company

domiciled in this state.

(5e) For the purposes of this section, “qualified actuary” means a member in good

standing of the American Academy of Actuaries who meets the requirements set

forth in the regulation.

(6f) Except in cases of fraud or willful misconduct, the qualified actuary shall not be

liable for damages to any person (other than the insurance company and the

commissioner) for any act, error, omission, decision or conduct with respect to

the actuary’s opinion.

(7g) Disciplinary action by the commissioner against the company or the qualified

actuary shall be defined in regulations by the commissioner.

(8h) Except as provided in Paragraphs (12), (13l), (m) and (14n), documents,

materials or other information in the possession or control of the Department of

Insurance that are a memorandum in support of the opinion, and any other

material provided by the company to the commissioner in connection with the

memorandum, shall be confidential by law and privileged, shall not be subject to

[insert open records, freedom of information, sunshine or other appropriate

phrase], shall not be subject to subpoena, and shall not be subject to discovery or

admissible in evidence in any private civil action. However, the commissioner is

authorized to use the documents, materials or other information in the furtherance

of any regulatory or legal action brought as a part of the commissioner’s official

duties.

(9i) Neither the commissioner nor any person who received documents, materials or

other information while acting under the authority of the commissioner shall be

permitted or required to testify in any private civil action concerning any

confidential documents, materials or information subject to Paragraph (8h).

(j

(10) In order to assist in the performance of the commissioner’s duties, the

commissioner:

(ai) May share documents, materials or other information, including the

confidential and privileged documents, materials or information subject

to Paragraph (8h) with other state, federal and international regulatory

agencies, with the National Association of Insurance Commissioners and

its affiliates and subsidiaries, and with state, federal and international law

enforcement authorities, provided that the recipient agrees to maintain

the confidentiality and privileged status of the document, material or

other information;

Ref #2016-10

Exhibit B


(bii) May receive documents, materials or information, including otherwise

confidential and privileged documents, materials or information, from

the National Association of Insurance Commissioners and its affiliates

and subsidiaries, and from regulatory and law enforcement officials of

other foreign or domestic jurisdictions, and shall maintain as confidential

or privileged any document, material or information received with notice

or the understanding that it is confidential or privileged under the laws of

the jurisdiction that is the source of the document, material or

information; and

(ciii) [Optional provision] May enter into agreements governing sharing and

use of information consistent with Paragraphs (8h) to (10j).

Drafting Note: The language in Paragraph (10)(aparagraph (j)(i) assumes the recipient has the authority to protect the applicable confidentiality or

privilege, but does not address the verification of that authority, which would presumably occur in the context of a broader information sharing agreement.

(11k) No waiver of any applicable privilege or claim of confidentiality in the

documents, materials or information shall occur as a result of disclosure to the

commissioner under this section or as a result of sharing as authorized in

Paragraph (10j).

(12l) A memorandum in support of the opinion, and any other material provided by the

company to the commissioner in connection with the memorandum, may be

subject to subpoenaforsubpoena for the purpose of defending an action seeking

damages from the actuary submitting the memorandum by reason of an action

required by this section or by regulations promulgated hereunder.

(13m) The memorandum or other material may otherwise be released by the

commissioner with the written consent of the company or to the American

Academy of Actuaries upon request stating that the memorandum or other

material is required for the purpose of professional disciplinary proceedings and

setting forth procedures satisfactory to the commissioner for preserving the

confidentiality of the memorandum or other material.

(14n) Once any portion of the confidential memorandum is cited by the company in its

marketing or is cited before a governmental agency other than a state insurance

department or is released by the company to the news media, all portions of the

confidential memorandum shall be no longer confidential.

B. Actuarial Opinion of Reserves after the Operative Date of the Valuation Manual

(1) General

Every company with outstanding life insurance contracts, accident and health insurance

contracts or deposit-type contracts in this State and subject to regulation by the

commissioner shall annually submit the opinion of the appointed actuary as to whether

the reserves and related actuarial items held in support of the policies and contracts are

computed appropriately, are based on assumptions that satisfy contractual provisions, are

consistent with prior reported amounts and comply with applicable laws of this State. The

valuation manual will prescribe the specifics of this opinion including any items deemed

to be necessary to its scope.

Ref #2016-10

Exhibit B


(2) Actuarial Analysis of Reserves and Assets Supporting Reserves

Every company with outstanding life insurance contracts, accident and health insurance

contracts or deposit-type contracts in this state and subject to regulation by the

commissioner, except as exempted in the valuation manual, shall also annually include in

the opinion required by Subsection (1) of this section, an opinion of the same appointed

actuary as to whether the reserves and related actuarial items held in support of the

policies and contracts specified in the valuation manual, when considered in light of the

assets held by the company with respect to the reserves and related actuarial items,

including but not limited to the investment earnings on the assets and the considerations

anticipated to be received and retained under the policies and contracts, make adequate

provision for the company’s obligations under the policies and contracts, including but

not limited to the benefits under and expenses associated with the policies and contracts.

(3) Requirements for Opinions Subject to Section 3B(2)

Each opinion required by Subsection 3B shall be governed by the following provisions:

(a) A memorandum, in form and substance as specified in the valuation manual, and

acceptable to the commissioner, shall be prepared to support each actuarial

opinion.

(b) If the insurance company fails to provide a supporting memorandum at the

request of the commissioner within a period specified in the valuation manual or

the commissioner determines that the supporting memorandum provided by the

insurance company fails to meet the standards prescribed by the valuation

manual or is otherwise unacceptable to the commissioner, the commissioner may

engage a qualified actuary at the expense of the company to review the opinion

and the basis for the opinion and prepare the supporting memorandum required

by the commissioner.

(4) Requirement for All Opinions Subject to Section 3B

Every opinion shall be governed by the following provisions:

(a) The opinion shall be in form and substance as specified in the valuation manual

and acceptable to the commissioner.

(b) The opinion shall be submitted with the annual statement reflecting the

valuation of such reserve liabilities for each year ending on or after the operative

date of the valuation manual.

(c) The opinion shall apply to all policies and contracts subject to Section 3B(2),

plus other actuarial liabilities as may be specified in the valuation manual.

(d) The opinion shall be based on standards adopted from time to time by the

Actuarial Standards Board or its successor, and on such additional standards as

may be prescribed in the valuation manual.

(e) In the case of an opinion required to be submitted by a foreign or alien company,

the commissioner may accept the opinion filed by that company with the

insurance supervisory official of another State if the commissioner determines

Ref #2016-10

Exhibit B


that the opinion reasonably meets the requirements applicable to a company

domiciled in this State.

(f) Except in cases of fraud or willful misconduct, the appointed actuary shall not be

liable for damages to any person (other than the insurance company and the

commissioner) for any act, error, omission, decision or conduct with respect to

the appointed actuary’s opinion.

(g) Disciplinary action by the commissioner against the company or the appointed

actuary shall be defined in regulations by the commissioner.

Drafting Note: States may need to adopt regulations to address disciplinary action.

Section 4. Computation of Minimum Standard

Except as otherwise provided in Sections 4a, 4b and 10, the minimum standard for the valuation of all policies

and contracts issued prior to the effective date of this Act shall be that provided by the laws in effect immediately

prior to that date. Except as otherwise provided in Sections 4a, 4b and 10, the minimum standard for the

valuation of all policies and contracts issued on or after the [insert original effective date of the Standard

Valuation Law in this ActState] shall be the commissioners reserve valuation methods defined in Sections 5,

5a, 8 and 10, three and one-half percent (3 1/2%) interest, or in the case of life insurance policies and contracts,

other than annuity and pure endowment contracts, issued on or after [insert effective date of 1972 NAIC

amendments to the Standard Valuation Law], four percent (4%) interest for policies issued prior to [insert

effective date of 1976 NAIC amendments to the Standard Valuation Law], five and one-half percent (5 1/2%)

interest for single premium life insurance policies and four and one-half percent (4 1/2%) interest for all other

policies issued on and after [insert effective date of 1976 NAIC amendments to the Standard Valuation Law], and

the following tables:

A. For all ordinary policies of life insurance issued on the standard basis, excluding any disability

and accidental death benefits in the policies: the Commissioners 1941 Standard Ordinary

Mortality Table for policies issued prior to the operative date of Section 5a of the Standard

Nonforfeiture Law for Life Insurance as amended, the Commissioners 1958 Standard Ordinary

Mortality Table for policies issued on or after the operative date of Section 5a of the Standard

Nonforfeiture Law for Life Insurance as amended and prior to the operative date of Section 5c of

the Standard Nonforfeiture Law for Life Insurance as amended, provided that for any category of

policies issued on female risks, all modified net premiums and present values referred to in this

Act may be calculated according to an age not more than six (6) years younger than the actual age

of the insured; and for policies issued on or after the operative date of Section 5c of the Standard

Nonforfeiture Law for Life Insurance as amended:

(a1) The Commissioners 1980 Standard Ordinary Mortality Table;

(b2) At the election of the company for any one or more specified plans of life insurance, the

Commissioners 1980 Standard Ordinary Mortality Table with Ten-Year Select Mortality

Factors; or

(c3) Any ordinary mortality table, adopted after 1980 by the National Association of

Insurance Commissioners, thatNAIC, which is approved by regulation promulgated by

the commissioner for use in determining the minimum standard of valuation for such

policies;

B. For all industrial life insurance policies issued on the standard basis, excluding any disability and

accidental death benefits in the policies: the 1941 Standard Industrial Mortality Table for policies

Ref #2016-10

Exhibit B


issued prior to the operative date of Section 5b of the Standard Nonforfeiture Law for Life

Insurance as amended, and for policies issued on or after the operative date of Section 5b, the

Commissioners 1961 Standard Industrial Mortality Table or any industrial mortality table adopted

after 1980 by the National Association of Insurance CommissionersNAIC that is approved by

regulation promulgated by the commissioner for use in determining the minimum standard of

valuation for the policies;

C. For individual annuity and pure endowment contracts, excluding any disability and accidental

death benefits in the policies: the 1937 Standard Annuity Mortality Table, or at the option of the

company, the Annuity Mortality Table for 1949, Ultimate, or any modification of either of these

tables approved by the commissioner;

D. For group annuity and pure endowment contracts, excluding any disability and accidental death

benefits in the policies: the Group Annuity Mortality Table for 1951, a modification of the table

approved by the commissioner, or at the option of the company, any of the tables or modifications

of tables specified for individual annuity and pure endowment contracts;

E. For total and permanent disability benefits in or supplementary to ordinary policies or contracts:

for policies or contracts issued on or after January 1, 1966, the tables of Period 2 disablement

rates and the 1930 to 1950 termination rates of the 1952 Disability Study of the Society of

Actuaries, with due regard to the type of benefit or any tables of disablement rates and

termination rates adopted after 1980 by the National Association of Insurance

CommissionersNAIC, that are approved by regulation promulgated by the commissioner for use

in determining the minimum standard of valuation for those policies; for policies or contracts

issued on or after January 1, 1961 and prior to January 1, 1966, either those tables or, at the

option of the company, the Class (3) Disability Table (1926); and for policies issued prior to

January 1, 1961, the Class (3) Disability Table (1926). Any such table shall, for active lives, be

combined with a mortality table permitted for calculating the reserves for life insurance policies;

F. For accidental death benefits in or supplementary to policies issued on or after January 1, 1966:

the 1959 Accidental Death Benefits Table or any accidental death benefits table adopted after

1980 by the National Association of Insurance CommissionersNAIC that is approved by

regulation promulgated by the commissioner for use in determining the minimum standard of

valuation for those policies, for policies issued on or after January 1, 1961 and prior to January 1,

1966, either that table or, at the option of the company, the Inter-Company Double Indemnity

Mortality Table; and for policies issued prior to January 1, 1961, the Inter-Company Double

Indemnity Mortality Table. Either table shall be combined with a mortality table for calculating

the reserves for life insurance policies; and

G. For group life insurance, life insurance issued on the substandard basis and other special benefits:

tables approved by the commissioner.


Section 4a. Computation of Minimum Standard for Annuities

A. Except as provided in Section 4b, the minimum standard for theof valuation of allfor individual

annuity and pure endowment contracts issued on or after the operative date of this Section 4a

and for all annuities and pure endowments purchased on or after the operative date under group

annuity and pure endowment contracts, shall be the commissioners reserve valuation methods

defined in Sections 5 and 5a and the following tables and interest rates:

Ref #2016-10

Exhibit B


(1) For individual annuity and pure endowment contracts issued prior to [insert effective date

of 1976 NAIC amendments to the Standard Valuation Law], excluding any disability and

accidental death benefits in those contracts: the 1971 Individual Annuity Mortality Table,

or any modification of this table approved by the commissioner, and six percent (6%)

interest for single premium immediate annuity contracts and four percent (4%) interest

for all other individual annuity and pure endowment contracts;

(2) For individual single premium immediate annuity contracts issued on or after [insert

effective date of 1976 NAIC amendments to the Standard Valuation Law], excluding

any disability and accidental death benefits in those contracts: the 1971 Individual

Annuity Mortality Table or any individual annuity mortality table adopted after 1980 by

the National Association of Insurance CommissionersNAIC that is approved by

regulation promulgated by the commissioner for use in determining the minimum

standard of valuation for these contracts, or any modification of these tables approved

by the commissioner, and seven and one-half percent (7 1/2%) interest;

(3) For individual annuity and pure endowment contracts issued on or after [insert effective

date of 1976 NAIC amendments to the Standard Valuation Law], other than single

premium immediate annuity contracts, excluding any disability and accidental death

benefits in those contracts: the 1971 Individual Annuity Mortality Table or any individual

annuity mortality table adopted after 1980 by the National Association of Insurance

CommissionersNAIC, that is approved by regulation promulgated by the commissioner

for use in determining the minimum standard of valuation for those contracts, or any

modification of these tables approved by the commissioner, and five and one-half percent

(5 1/2%) interest for single premium deferred annuity and pure endowment contracts and

four and one-half percent (4 1/2%) interest for all other individual annuity and pure

endowment contracts;

(4) For all annuities and pure endowments purchased prior to [insert effective date of 1976

NAIC amendments to the Standard Valuation Law] under group annuity and pure

endowment contracts, excluding any disability and accidental death benefits purchased

under those contracts: the 1971 Group Annuity Mortality Table or any modification of

this table approved by the commissioner, and six percent (6%) interest; and

(5) For all annuities and pure endowments purchased on or after [insert effective date of

1976 NAIC amendments to the Standard Valuation Law] under group annuity and pure

endowment contracts, excluding any disability and accidental death benefits purchased

under those contracts: the 1971 Group Annuity Mortality Table, or any group annuity

mortality table adopted after 1980 by the National Association of Insurance

CommissionersNAIC that is approved by regulation promulgated by the commissioner

for use in determining the minimum standard of valuation for annuities and pure

endowments, or any modification of these tables approved by the commissioner, and

seven and one-half percent (7 1/2%) interest;

B. After [insert effective date of 1972 NAIC amendments to the Standard Valuation Law], any

company may file with the commissioner a written notice of its election to comply with the

provisions of this section after a specified date before January 1, 1979, which shall be the

operative date of this section for that company. If a company makes no election, the operative

date of this section for that company shall be January 1, 1979.


Section 4b. Computation of Minimum Standard by Calendar Year of Issue

Ref #2016-10

Exhibit B


A. The interest rates used in determining the minimum standard for the valuation of the following

shall be the calendar year statutory valuation interest rates as defined in this section:

(1) All lifeLife insurance policies issued in a particular calendar year, on or after the

operative date of Section 5c of the Standard Nonforfeiture Law for Life Insurance as

amended;

(2) All individualIndividual annuity and pure endowment contracts issued in a particular

calendar year on or after January 1, 19[ ] [insert the calendar year next following the

effective year of passage of this amendatory Actdate of the 1980 NAIC amendments to

the Standard Valuation Law];

(3) All annuitiesAnnuities and pure endowments purchased in a particular calendar year on

or after January 1, 19[ ] [insert the calendar year next following the effective year of

passage of this amendatory Actdate of the 1980 NAIC amendments to the Standard

Valuation Law] under group annuity and pure endowment contracts; and

(4) The net increase, if any, in a particular calendar year after January 1, 19[ ] [insert the

calendar year next following the effective year of passage of this amendatory Actdate of

the 1980 NAIC amendments to the Standard Valuation Law], in amounts held under

guaranteed interest contracts.

Staff Drafting Note: The above paragraphs section 4 b A (1) thru (4) are not in A-820 and this existing difference

has been maintained.


B. Calendar Year Statutory Valuation Interest Rates

(1) The calendar year statutory valuation interest rates, I, shall be determined as follows and

the results rounded to the nearer one-quarter of one percent: (1/4 of 1%):

(a) For life insurance:

I = .03 + W(R1 - .03) + W (R2 - .09);

2

)09.(2

)03.(03. 21 RW

RWI


contingencies arising from other annuities with cash settlement options and from

guaranteed interest contracts with cash settlement options:

I = .03 + W(R - .03)

where R1 )03.(03. RWI

Where 1R is the lesser of RR and .09,

R2 2R is the greater of RR and .09,

R R is the reference interest rate defined in this section,

Ref #2016-10

Exhibit B


and W W is the weighting factor defined in this section;


with cash settlement options, valued on an issue year basis, except as stated in

Subparagraph (b) above, the formula for life insurance stated in Subparagraph (a)

above shall apply to annuities and guaranteed interest contracts with guarantee

durations in excess of ten (10) years and the formula for single premium

immediate annuities stated in Subparagraph (b) above shall apply to annuities

and guaranteed interest contracts with guarantee duration of ten (10) years or

less;

(d) For other annuities with no cash settlement options and for guaranteed interest

contracts with no cash settlement options, the formula for single premium

immediate annuities stated in Subparagraph (b) above shall apply.

(e) For other annuities with cash settlement options and guaranteed interest contracts

with cash settlement options, valued on a change in fund basis, the formula for

single premium immediate annuities stated in Subparagraph (b) above shall

apply.

(2) However, if the calendar year statutory valuation interest rate for a life insurance policy

issued in any calendar year determined without reference to this sentence differs from the

corresponding actual rate for similar policies issued in the immediately preceding

calendar year by less than one-half of one percent (1/2 of 1%), the calendar year statutory

valuation interest rate for the life insurance policies shall be equal to the corresponding

actual rate for the immediately preceding calendar year. For purposes of applying the

immediately preceding sentence, the calendar year statutory valuation interest rate for life

insurance policies issued in a calendar year shall be determined for 1980 (using the

reference interest rate defined in 1979) and shall be determined for each subsequent

calendar year regardless of when Section 5c of the Standard Nonforfeiture Law for Life

Insurance as amended becomes operative.

C. Weighting Factors

(1) The weighting factors referred to in the formulas stated above are given in the following

tables:

(a) Weighting Factors for Life Insurance:

Guarantee

Duration Weighting

(Years) Factors

10 or less .50

More than 10, but not more

than 20

.45

More than 20 .35

For life insurance, the guarantee duration is the maximum number of years the life

insurance can remain in force on a basis guaranteed in the policy or under options to

convert to plans of life insurance with premium rates or nonforfeiture values or both

which are guaranteed in the original policy;

Ref #2016-10

Exhibit B


(b) Weighting factor for single premium immediate annuities and for annuity

benefits involving life contingencies arising from other annuities with cash

settlement options and guaranteed interest contracts with cash settlement options:

.80

(c) Weighting factors for other annuities and for guaranteed interest contracts, except

as stated in Subparagraph (b) above, shall be as specified in Itemsitems (i), (ii)

and (iii) below, according to the rules and definitions in Itemsitems (iv), (v) and

(vi) below:

(i) For annuities and guaranteed interest contracts valued on an issue year basis:

Guarantee

Duration

Weighting Factor

for Plan Type

(Years) A B C

5 or less: .80 .60 .50

More than 5, but not more than 10:

.75

.60

.50

More than 10, but not more than 20:

.65

.50

.45

More than 20: .45 .35 .35

Plan Type

A B C

(ii) For annuities and guaranteed

interest contracts valued on a

change in fund basis, the factors

shown in Itemitem (i) above

increased by:

.15

.25

.05

Ref #2016-10

Exhibit B


Plan Type

(iii) For annuities and guaranteed interest

contracts valued on an issue year

basis (other than those with no cash

settlement options) that do not

guarantee interest on considerations

received more than one year after

issue or purchase and for annuities

and guaranteed interest contracts

valued on a change in fund basis that

do not guarantee interest rates on

considerations received more than

twelve (12) months beyond the

valuation date, the factors shown in

Itemitem (i) or derived in Itemitem

(ii) increased by:

A

.05

B

.05

C

.05

(iv) For other annuities with cash settlement options and guaranteed interest

contracts with cash settlement options, the guarantee duration is the number

of years for which the contract guarantees interest rates in excess of the

calendar year statutory valuation interest rate for life insurance policies with

guarantee duration in excess of twenty (20) years. For other annuities with

no cash settlement options and for guaranteed interest contracts with no

cash settlement options, the guaranteed duration is the number of years from

the date of issue or date of purchase to the date annuity benefits are

scheduled to commence.

(v) Plan type as used in the above tables is defined as follows:

Plan Type A: At any time policyholder may withdraw funds only (l)

with an adjustment to reflect changes in interest rates or

asset values since receipt of the funds by the insurance

company, or (2) without an adjustment but installments

over five years or more, or (3) as an immediate life

annuity, or (4) no withdrawal permitted.

Plan Type B: Before expiration of the interest rate guarantee,

policyholder may withdraw funds only (1) with an

adjustment to reflect changes in interest rates or asset

values since receipt of the funds by the insurance

company, or (2) without an adjustment but in

installments over five years or more, or (3) no

withdrawal permitted. At the end of interest rate

guarantee, funds may be withdrawn without an

adjustment in a single sum or installments over less than

five years.

Plan Type C: Policyholder may withdraw funds before expiration of

interest rate guarantee in a single sum or installments

over less than five years either (1) without adjustment to

Ref #2016-10

Exhibit B


reflect changes in interest rates or asset values since

receipt of the funds by the insurance company, or (2)

subject only to a fixed surrender charge stipulated in the

contract as a percentage of the fund.

(vi) A company may elect to value guaranteed interest contracts with cash

settlement options and annuities with cash settlement options on either an

issue year basis or on a change in fund basis. Guaranteed interest contracts

with no cash settlement options and other annuities with no cash settlement

options must be valued on an issue year basis. As used in this section, an

issue year basis of valuation refers to a valuation basis under which the

interest rate used to determine the minimum valuation standard for the

entire duration of the annuity or guaranteed interest contract is the calendar

year valuation interest rate for the year of issue or year of purchase of the

annuity or guaranteed interest contract, and the change in fund basis of

valuation refers to a valuation basis under which the interest rate used to

determine the minimum valuation standard applicable to each change in the

fund held under the annuity or guaranteed interest contract is the calendar

year valuation interest rate for the year of the change in the fund.

D. Reference Interest Rate

(1) The reference interest rate referred to in subsection B of this section shall be defined as

follows:

(a) For all life insurance, the lesser of the average over a period of thirty-six (36)

months and the average over a period of twelve (l212) months, ending on June 30

of the calendar year preceding the year of issue, of the monthly average of the

composite yield on seasoned corporate bonds, as published by Moody’s Investors

Service, Inc.


contingencies arising from other annuities with cash settlement options and

guaranteed interest contracts with cash settlement options, the average over a

period of twelve (12) months, ending on June 30 of the calendar year of issue

or year of purchase, of the monthly average of the composite yield on seasoned

corporate bonds, as published by Moody’s Investors Service, Inc.


with cash settlement options, valued on a year of issue basis, except as stated in

Subparagraph (b) above, with guarantee duration in excess of ten (10) years, the

lesser of the average over a period of thirty-six (36) months and the average over

a period of twelve (12) months, ending on June 30 of the calendar year of issue

or purchase, of the monthly average of the composite yield on seasoned corporate

bonds, as published by Moody’s Investors Service, Inc.

(d) For other annuities with cash settlement options and guaranteed interest contracts

with cash settlement options, valued on a year of issue basis, except as stated in

Subparagraph (b) above, with guarantee duration of ten (10) years or less, the

average over a period of twelve (12) months, ending on June 30 of the calendar

year of issue or purchase, of the monthly average of the composite yield on

seasoned corporate bonds, as published by Moody’s Investors Service, Inc.

Ref #2016-10

Exhibit B


(e) For other annuities with no cash settlement options and for guaranteed interest

contracts with no cash settlement options, the average over a period of twelve

(12) months, ending on June 30 of the calendar year of issue or purchase, of the

monthly average of the composite yield on seasoned corporate bonds, as

published by Moody’s Investors Service, Inc.

(f) For other annuities with cash settlement options and guaranteed interest contracts

with cash settlement options, valued on a change in fund basis, except as stated in

Subparagraph (b) above, the average over a period of twelve (12) months, ending

on June 30 of the calendar year of the change in the fund, of the monthly

average of the composite yield on seasoned corporate bonds, as published by

Moody’s Investors Service, Inc.

E. Alternative Method for Determining Reference Interest Rates. In the event that the monthly

average of the composite yield on seasoned corporate bonds is no longer published by Moody’s

Investors Service, Inc. or in the event that the National Association of Insurance

CommissionersNAIC determines that the monthly average of the composite yield on seasoned

corporate bonds as published by Moody’s Investors Service, Inc. is no longer appropriate for the

determination of the reference interest rate, then an alternative method for determination of the

reference interest rate adopted by the National Association of Insurance CommissionersNAIC

and approved by regulation promulgated by the commissioner may be substituted.

Section 5. Reserve Valuation Method—Life Insurance and Endowment Benefits

A. Except as otherwise provided in Sections 5a, 8 and 10, reserves according to the commissioners

reserve valuation method, for the life insurance and endowment benefits of policies providing for

a uniform amount of insurance and requiring the payment of uniform premiums shall be the

excess, if any, of the present value, at the date of valuation, of the future guaranteed benefits

provided for by those policies, over the then present value of any future modified net premiums

therefor. The modified net premiums for a policy shall be the uniform percentage of the

respective contract the premiums for the benefits such that the present value, at the date of issue

of the policy, of all modified net premiums shall be equal to the sum of the then present value of

the benefits provided for by the policy and the excess of (1) over (2), as follows:

(1) A net level annual premium equal to the present value, at the date of issue, of the

benefits provided for after the first policy year, divided by the present value, at the date

of issue, of an annuity of one per annum payable on the first and each subsequent

anniversary of the policy on which a premium falls due. However, the net level annual

premium shall not exceed the net level annual premium on the nineteen-year premium

whole life plan for insurance of the same amount at an age one year higher than the age at

issue of the policy.

(2) A net one-year term premium for the benefits provided for in the first policy year.

B. For a life insurance policy issued on or after January 1, 19[ ] [insert the fourth calendar year

commencing after the effective date of this amendatory Actthe 1980 NAIC amendments to the

Standard Valuation Law] for which the contract premium in the first policy year exceeds that of

the second year and for which no comparable additional benefit is provided in the first year for

the excess and which provides an endowment benefit or a cash surrender value or a combination

in an amount greater than the excess premium, the reserve according to the commissioners

reserve valuation method as of any policy anniversary occurring on or before the assumed ending

Ref #2016-10

Exhibit B


date defined herein as the first policy anniversary on which the sum of any endowment benefit

and any cash surrender value then available is greater than the excess premium shall, except as

otherwise provided in Section 8, be the greater of the reserve as of the policy anniversary

calculated as described in the preceding paragraph and the reserve as of the policy anniversary

calculated as described in that paragraph, but with (i) the value defined in Subsectionsubsection A

of that paragraph being reduced by fifteen percent (15%) of the amount of such excess first year

premium, (ii) all present values of benefits and premiums being determined without reference to

premiums or benefits provided for by the policy after the assumed ending date, (iii) the policy

being assumed to mature on that date as an endowment, and (iv) the cash surrender value

provided on that date being considered as an endowment benefit. In making the above

comparison the mortality and interest bases stated in Sections 4 and 4b shall be used.

Drafting Note: The date inserted should remain unchanged from the one appearing in the State’s existing Standard Valuation Law.

C. Reserves according to the commissioners reserve valuation method shall be calculated by a

method consistent with the principles of the preceding paragraphs of this section for:

(1) Life insurance policies providing for a varying amount of insurance or requiring the

payment of varying premiums;

(2) Group annuity and pure endowment contracts purchased under a retirement plan or plan

of deferred compensation, established or maintained by an employer (including a

partnership or sole proprietorship) or by an employee organization, or by both, other than

a plan providing individual retirement accounts or individual retirement annuities under

Section 408 of the Internal Revenue Code, as now or hereafter amended;

(3) Disability and accidental death benefits in all policies and contracts; and

(4) All other benefits, except life insurance and endowment benefits in life insurance policies

and benefits provided by all other annuity and pure endowment contracts.

Section 5a. Reserve Valuation Method—Annuity and Pure Endowment Benefits

A. This section shall apply to all annuity and pure endowment contracts other than group annuity

and pure endowment contracts purchased under a retirement plan or plan of deferred

compensation, established or maintained by an employer (including a partnership or sole

proprietorship) or by an employee organization, or by both, other than a plan providing

individual retirement accounts or individual retirement annuities under Section 408 of the

Internal Revenue Code, as now or hereafter amended.

B. Reserves according to the commissioners annuity reserve method for benefits under annuity or

pure endowment contracts, excluding any disability and accidental death benefits in the contracts,

shall be the greatest of the respective excesses of the present values, at the date of valuation, of

the future guaranteed benefits, including guaranteed nonforfeiture benefits, provided for by the

contracts at the end of each respective contract year, over the present value, at the date of

valuation, of any future valuation considerations derived from future gross considerations,

required by the terms of the contract, that become payable prior to the end of the respective

contract year. The future guaranteed benefits shall be determined by using the mortality table, if

any, and the interest rate, or rates, specified in the contracts for determining guaranteed benefits.

The valuation considerations are the portions of the respective gross considerations applied under

the terms of the contracts to determine nonforfeiture values.

Section 6. Minimum Reserves

Ref #2016-10

Exhibit B


A. In no event shall a company’s aggregate reserves for all life insurance policies, excluding

disability and accidental death benefits, issued on or after the [insert original effective date of the

Standard Valuation Law in this Act,State], be less than the aggregate reserves calculated in

accordance with the methods set forth in Sections 5, 5a, 8 and 9 and the mortality table or tables

and rate or rates of interest used in calculating nonforfeiture benefits for the policies.

Staff Drafting Note: Section 6, paragraph B is not in Appendix A -820 and this existing difference has been

maintained.

B. In no event shall the aggregate reserves for all policies, contracts and benefits be less than the

aggregate reserves determined by the qualifiedappointed actuary to be necessary to render the

opinion required by Section 3.


Section 7. Optional Reserve Calculation

A. Reserves for all policies and contracts issued prior to the [insert original effective date of the

Standard Valuation Law in this ActState] may be calculated, at the option of the company,

according to any standards that produce greater aggregate reserves for all such policies and

contracts than the minimum reserves required by the laws in effect immediately prior to that date.

Staff Drafting Note: Section 7 paragraph A is not in Appendix A-820 and this existing difference has been

maintained.

B. Reserves for any category of policies, contracts or benefits established by the commissioner,

issued on or after the [insert original effective date of the Standard Valuation Law in this

Act,State], may be calculated, at the option of the company, according to any standards that

produce greater aggregate reserves for the category than those calculated according to the

minimum standard provided hereherein, but the rate or rates of interest used for policies and

contracts, other than annuity and pure endowment contracts, shall not be highergreater than the

corresponding rate or rates of interest used in calculating any nonforfeiture benefits provided

therein the policies or contracts.

C. A company that shall have adopted, which adopts at any time a standard of valuation producing

greater aggregate reserves than those calculated according to the minimum standard provided

hereunder this Act, may, adopt a lower standard of valuation with the approval of the

commissioner, adopt a lower standard of valuation, but not lower than the minimum provided

hereherein; provided that, for the purposes of this section, the holding of additional reserves

previously determined by a qualifiedthe appointed actuary to be necessary to render the opinion

required by Section 3 shall not be deemed to be the adoption of a higher standard of valuation.


Section 8. Reserve Calculation—Valuation Net Premium Exceeding the Gross Premium Charged

If in any contract year the gross premium charged by a life insurance company on a policy or contract is less than

the valuation net premium for the policy or contract calculated by the method used in calculating the reserve but

using the minimum valuation standards of mortality and rate of interest, the minimum reserve required for the

policy or contract shall be the greater of either the reserve calculated according to the mortality table, rate of

interest, and method actually used for the policy or contract, or the reserve calculated by the method actually used

Ref #2016-10

Exhibit B


for the policy or contract but using the minimum valuation standards of mortality and rate of interest and

replacing the valuation net premium by the actual gross premium in each contract year for which the valuation net

premium exceeds the actual gross premium. The minimum valuation standards of mortality and rate of interest

referred to in this section are those standards stated in Sections 4 and 4b.

For a life insurance policy issued on or after January 1, 19[ ] [insert the fourth calendar year commencing after the

effective date of this amendatory Actthe 1980 NAIC amendments to the Standard Valuation Law] for which the

gross premium in the first policy year exceeds that of the second year and for which no comparable additional

benefit is provided in the first year for the excess and which provides an endowment benefit or a cash surrender

value or a combination in an amount greater than the excess premium, the provisions of this section shall be

applied as if the method actually used in calculating the reserve for the policy were the method described in

Section 5, ignoring the second paragraph of Section 5. The minimum reserve at each policy anniversary of such a

policy shall be the greater of the minimum reserve calculated in accordance with Section 5, including the second

paragraph of that section, and the minimum reserve calculated in accordance with this section.


Section 9. Reserve Calculation—Indeterminate Premium Plans

In the case of a plan of life insurance that provides for future premium determination, the amounts of which are to

be determined by the insurance company based on then estimates of future experience, or in the case of a plan of

life insurance or annuity that is of such a nature that the minimum reserves cannot be determined by the methods

described in Sections 5, 5a and 8, the reserves that are held under the plan shall:

A. Be appropriate in relation to the benefits and the pattern of premiums for that plan; and

B. Be computed by a method that is consistent with the principles of this Standard Valuation Law, as

determined by regulations promulgated by the commissioner.

Drafting Note: If desired the following paragraph may be added.

“Notwithstanding any other provision in the laws of this stateState, a policy, contract or certificate providing life

insurance under such a plan shall be affirmatively approved by the commissioner before it can be marketed,

issued, delivered or used in this stateState.”

If the previous paragraph is enacted in a stateState where prior filing and approval of life insurance policy

forms has not been previously required by statute, this paragraph would mandate such action for plans requiring

approval under Section 9. If the previous paragraph is enacted in a stateState where approval is deemed under

certain circumstances, the deemed provision would be overridden by the terms of this section. In some

statesStates specific reference must be made to any statutory provision that is overridden.

Staff Drafting Notes: Appendix A-820 does not include health guidance additional changes regarding A-10 will

be addressed in a subsequent agenda item.

Section 10. Minimum StandardsStandard for Health [Disability, Accident and Sickness] PlansHealth

Insurance Contracts

The commissioner shall promulgate a regulation containing the minimum standards applicable to the valuation of

health [disability, sickness and accident] plans.

For accident and health insurance contracts issued on or after the operative date of the valuation manual, the

standard prescribed in the valuation manual is the minimum standard of valuation required under Section 2B. For

[disability, accident and sickness, accident and health] insurance contracts issued on or after [insert the original

Ref #2016-10

Exhibit B


effective date of the Standard Valuation Law in the State] and prior to the operative date of the valuation manual

the minimum standard of valuation is the standard adopted by the commissioner by regulation.

Drafting Note: States should substitute their state specific terminology for accident and health contracts in place of the bracketed terms. However, it is

critical that each state retain the terms “accident and health” in the title and first sentence of this section because the term is specifically defined for purposes of the standard valuation law and applicability of the valuation manual standards for such contracts issued on or after the operative date of the valuation

manual.

Section 11. Valuation Manual for Policies Issued On or After the Operative Date of the Valuation

Manual

A. For policies issued on or after the operative date of the valuation manual, the standard prescribed

in the valuation manual is the minimum standard of valuation required under Section 2B, except

as provided under Paragraphs E or G of this section.

B. The operative date of the valuation manual is January 1 of the first calendar year following the

first July 1 as of which all of the following have occurred:

(1) The valuation manual has been adopted by the NAIC by an affirmative vote of at least

forty-two (42) members, or three-fourths of the members voting, whichever is greater.

(2) The Standard Valuation Law, as amended by the NAIC in 2009, or legislation including

substantially similar terms and provisions, has been enacted by States representing

greater than 75% of the direct premiums written as reported in the following annual

statements submitted for 2008: life, accident and health annual statements; health annual

statements; or fraternal annual statements.

(3) The Standard Valuation Law, as amended by the NAIC in 2009, or legislation including

substantially similar terms and provisions, has been enacted by at least forty-two (42) of

the following fifty-five (55) jurisdictions: The fifty States of the United States, American

Samoa, the American Virgin Islands, the District of Columbia, Guam, and Puerto Rico.

C. Unless a change in the valuation manual specifies a later effective date, changes to the valuation

manual shall be effective on January 1 following the date when [all of the following have

occurred]:

(1) The change to the valuation manual has been adopted by the NAIC by an affirmative vote

representing:

(a) At least three-fourths (3/4) of the members of the NAIC voting, but not less than

a majority of the total membership, and

(b) Members of the NAIC representing jurisdictions totaling greater than 75% of the

direct premiums written as reported in the following annual statements most

recently available prior to the vote in Subsection C(1)(a): life, accident and health

annual statements, health annual statements, or fraternal annual statements.

Drafting Note: The following section is optional:

[(2) The valuation manual becomes effective pursuant to [an order of] [regulation adopted by]

the commissioner.]

D. The valuation manual must specify all of the following:

Ref #2016-10

Exhibit B


(1) Minimum valuation standards for and definitions of the policies or contracts subject to

Section 2B. Such minimum valuation standards shall be:

(a) The commissioners reserve valuation method for life insurance contracts, other

than annuity contracts, subject to Section 2B;

(b) The commissioners annuity reserve valuation method for annuity contracts

subject to Section 2B; and

(c) Minimum reserves for all other policies or contracts subject to Section 2B.

(2) Which policies or contracts or types of policies or contracts that are subject to the

requirements of a principle-based valuation in Section 12A and the minimum valuation

standards consistent with those requirements;

(3) For policies and contracts subject to a principle-based valuation under Section 12:

(a) Requirements for the format of reports to the commissioner under Section 12B(3)

and which shall include information necessary to determine if the valuation is

appropriate and in compliance with this Act;

(b) Assumptions shall be prescribed for risks over which the company does not have

significant control or influence.

(c) Procedures for corporate governance and oversight of the actuarial function, and

a process for appropriate waiver or modification of such procedures.

(4) For policies not subject to a principle-based valuation under Section 12 the minimum

valuation standard shall either

(a) Be consistent with the minimum standard of valuation prior to the operative date

of the valuation manual; or

(b) Develop reserves that quantify the benefits and guarantees, and the funding,

associated with the contracts and their risks at a level of conservatism that

reflects conditions that include unfavorable events that have a reasonable

probability of occurring.

Drafting Note: The wording of 11D(4)(b) does not preclude, for policies with significant tail risk, reflecting in the reserve conditions appropriately adverse to quantify the tail risk.

(5) Other requirements, including, but not limited to, those relating to reserve methods,

models for measuring risk, generation of economic scenarios, assumptions, margins, use

of company experience, risk measurement, disclosure, certifications, reports, actuarial

opinions and memorandums, transition rules and internal controls; and

(6) The data and form of the data required under Section 13, with whom the data must be

submitted, and may specify other requirements including data analyses and reporting of

analyses.

E. In the absence of a specific valuation requirement or if a specific valuation requirement in the

valuation manual is not, in the opinion of the commissioner, in compliance with this Act, then the

Ref #2016-10

Exhibit B


company shall, with respect to such requirements, comply with minimum valuation standards

prescribed by the commissioner by regulation.

F. The commissioner may engage a qualified actuary, at the expense of the company, to perform an

actuarial examination of the company and opine on the appropriateness of any reserve

assumption or method used by the company, or to review and opine on a company’s compliance

with any requirement set forth in this Act. The commissioner may rely upon the opinion,

regarding provisions contained within this Act, of a qualified actuary engaged by the

commissioner of another State, district or territory of the United States. As used in this paragraph,

term “engage” includes employment and contracting.

G. The commissioner may require a company to change any assumption or method that in the

opinion of the commissioner is necessary in order to comply with the requirements of the

valuation manual or this Act; and the company shall adjust the reserves as required by the

commissioner. The commissioner may take other disciplinary action as permitted pursuant to

[insert applicable law].

Drafting Note: This section is intended to conform to the State’s administrative procedures, including notice and due process.

Drafting Note: Section 11 presumes that each State is permitted under their State laws to “adopt” the valuation manual in a manner similar to how the

Accounting Practices and Procedures Manual becomes effective in many States, without a separate regulatory process such as adoption by regulation. It is desirable that all States adopt the valuation manual requirements and that such adoption be achieved without a separate State regulatory process in order to

achieve uniformity of reserve standards in all States. However, to the extent that a State may need to adopt the valuation manual through a formal State

regulatory process, Sections 11B and/or 11C may be amended to reflect any State’s need to adopt the valuation manual through regulation.

Section 12. Requirements of a Principle-Based Valuation

A. A company must establish reserves using a principle-based valuation that meets the following

conditions for policies or contracts as specified in the valuation manual:

(1) Quantify the benefits and guarantees, and the funding, associated with the contracts and

their risks at a level of conservatism that reflects conditions that include unfavorable

events that have a reasonable probability of occurring during the lifetime of the contracts.

For polices or contracts with significant tail risk, reflects conditions appropriately adverse

to quantify the tail risk.

(2) Incorporate assumptions, risk analysis methods and financial models and management

techniques that are consistent with, but not necessarily identical to, those utilized within

the company’s overall risk assessment process, while recognizing potential differences in

financial reporting structures and any prescribed assumptions or methods.

(3) Incorporate assumptions that are derived in one of the following manners:

(a) The assumption is prescribed in the valuation manual.

(b) For assumptions that are not prescribed, the assumptions shall:

(i) Be established utilizing the company’s available experience, to the extent

it is relevant and statistically credible; or

(ii) To the extent that company data is not available, relevant, or statistically

credible, be established utilizing other relevant, statistically credible

experience.

Ref #2016-10

Exhibit B


(4) Provide margins for uncertainty including adverse deviation and estimation error, such

that the greater the uncertainty the larger the margin and resulting reserve.

B. A company using a principle-based valuation for one or more policies or contracts subject to

this section as specified in the valuation manual shall:

(1) Establish procedures for corporate governance and oversight of the actuarial valuation

function consistent with those described in the valuation manual.

(2) Provide to the commissioner and the board of directors an annual certification of the

effectiveness of the internal controls with respect to the principle-based valuation. Such

controls shall be designed to assure that all material risks inherent in the liabilities and

associated assets subject to such valuation are included in the valuation, and that

valuations are made in accordance with the valuation manual. The certification shall be

based on the controls in place as of the end of the preceding calendar year.

(3) Develop, and file with the commissioner upon request, a principle-based valuation report

that complies with standards prescribed in the valuation manual.

C. A principle-based valuation may include a prescribed formulaic reserve component.

Section 13. Experience Reporting for Policies In Force On or After the Operative Date of the Valuation

Manual

A company shall submit mortality, morbidity, policyholder behavior, or expense experience

and other data as prescribed in the valuation manual.

Staff Drafting Note: Informal drafting group recommendation is that, Section 14 Confidentiality, Section 15

Single State Exemption and Section 16 Effective Date do not need to be in the AP&P Appendix A-820.

Section 14. Confidentiality

A. For purposes of this Section 14, “Confidential Information” shall mean:

(1) A memorandum in support of an opinion submitted under Section 3 of this Act and any

other documents, materials and other information, including, but not limited to, all

working papers, and copies thereof, created, produced or obtained by or disclosed to the

commissioner or any other person in connection with such memorandum;

(2) All documents, materials and other information, including, but not limited to, all working

papers, and copies thereof, created, produced or obtained by or disclosed to the

commissioner or any other person in the course of an examination made under Section

11F of this Act; provided, however, that if an examination report or other material

prepared in connection with an examination made under the [insert reference to

examination law] is not held as private and confidential information under the [insert

reference to examination law], an examination report or other material prepared in

connection with an examination made under Section 11F of this Act shall not be

“Confidential Information” to the same extent as if such examination report or other

material had been prepared under the [insert reference to examination law];

Ref #2016-10

Exhibit B


(3) Any reports, documents, materials and other information developed by a company in

support of, or in connection with, an annual certification by the company under Section

12B(2) of this Act evaluating the effectiveness of the company’s internal controls with

respect to a principle-based valuation and any other documents, materials and other

information, including, but not limited to, all working papers, and copies thereof, created,

produced or obtained by or disclosed to the commissioner or any other person in

connection with such reports, documents, materials and other information;

(4) Any principle-based valuation report developed under Section 12B(3) of this Act and any

other documents, materials and other information, including, but not limited to, all

working papers, and copies thereof, created, produced or obtained by or disclosed to the

commissioner or any other person in connection with such report; and

(5) Any documents, materials, data and other information submitted by a company under

Section 13 of this Act (collectively, “experience data”) and any other documents,

materials, data and other information, including, but not limited to, all working papers,

and copies thereof, created or produced in connection with such experience data, in each

case that include any potentially company-identifying or personally identifiable

information, that is provided to or obtained by the commissioner (together with any

“experience data”, the “experience materials”) and any other documents, materials, data

and other information, including, but not limited to, all working papers, and copies

thereof, created, produced or obtained by or disclosed to the commissioner or any other

person in connection with such experience materials.

B. Privilege for, and Confidentiality of, Confidential Information

(1) Except as provided in this Section 14, a company’s Confidential Information is

confidential by law and privileged, and shall not be subject to [insert open records,

freedom of information, sunshine or other appropriate phrase], shall not be subject to

subpoena and shall not be subject to discovery or admissible in evidence in any private

civil action; provided, however, that the commissioner is authorized to use the

Confidential Information in the furtherance of any regulatory or legal action brought

against the company as a part of the commissioner’s official duties.

(2) Neither the commissioner nor any person who received Confidential Information while

acting under the authority of the commissioner shall be permitted or required to testify in

any private civil action concerning any Confidential Information.

(3) In order to assist in the performance of the commissioner’s duties, the commissioner may

share Confidential Information (a) with other state, federal and international regulatory

agencies and with the NAIC and its affiliates and subsidiaries and (b) in the case of

Confidential Information specified in Sections 14A(1) and 14A(4) only, with the

Actuarial Board for Counseling and Discipline or its successor upon request stating that

the Confidential Information is required for the purpose of professional disciplinary

proceedings and with state, federal and international law enforcement officials; in the

case of (a) and (b), provided that such recipient agrees, and has the legal authority to

agree, to maintain the confidentiality and privileged status of such documents, materials,

data and other information in the same manner and to the same extent as required for the

commissioner.

Drafting Note: Subsection B(3) assumes the recipient has the authority to protect the applicable confidentiality or privilege, but does not address the

verification of that authority, which would presumably occur in the context of a broader information sharing agreement.

Ref #2016-10

Exhibit B


(4) The commissioner may receive documents, materials, data and other information,

including otherwise confidential and privileged documents, materials, data or

information, from the NAIC and its affiliates and subsidiaries, from regulatory or law

enforcement officials of other foreign or domestic jurisdictions and from the Actuarial

Board for Counseling and Discipline or its successor and shall maintain as confidential or

privileged any document, material, data or other information received with notice or the

understanding that it is confidential or privileged under the laws of the jurisdiction that is

the source of the document, material or other information.

(5) The commissioner may enter into agreements governing sharing and use of information

consistent with this Section 14B.

(6) No waiver of any applicable privilege or claim of confidentiality in the Confidential

Information shall occur as a result of disclosure to the commissioner under this section or

as a result of sharing as authorized in Section 14B(3).

(7) A privilege established under the law of any state or jurisdiction that is substantially

similar to the privilege established under this Section 14B shall be available and enforced

in any proceeding in, and in any court of, this State.

(8) In this Section 14 “regulatory agency,” “law enforcement agency” and the “NAIC”

include, but are not limited to, their employees, agents, consultants and contractors.

C. Notwithstanding Section 14B, any Confidential Information specified in Sections 14A(1) and

14A(4):

(1) May be subject to subpoena for the purpose of defending an action seeking damages from

the appointed actuary submitting the related memorandum in support of an opinion

submitted under Section 3 of this Act or principle-based valuation report developed under

Section 12B(3) of this Act by reason of an action required by this Act or by regulations

promulgated hereunder;

(2) May otherwise be released by the commissioner with the written consent of the company;

and

(3) Once any portion of a memorandum in support of an opinion submitted under Section 3

of this Act or a principle-based valuation report developed under Section 12B(3) of this

Act is cited by the company in its marketing or is publicly volunteered to or before a

governmental agency other than a state insurance department or is released by the

company to the news media, all portions of such memorandum or report shall no longer

be confidential.

Drafting Note: The following section is optional:

[Section 15. Single State Exemption

A. The commissioner may exempt specific product forms or product lines of a domestic company

that is licensed and doing business only in [Name of State] from the requirements of Section 11

provided:

(1) The commissioner has issued an exemption in writing to the company and has not

subsequently revoked the exemption in writing; and

Ref #2016-10

Exhibit B


(2) The company computes reserves using assumptions and methods used prior to the

operative date of the valuation manual in addition to any requirements established by the

commissioner and promulgated by regulation.

B. For any company granted an exemption under this section, Sections 3, 4, 4a, 4b, 5, 5a, 6, 7, 8, 9

and 10 shall be applicable. With respect to any company applying this exemption, any reference

to Section 11 found in Sections 3, 4, 4a, 4b, 5, 5a, 6, 7, 8, 9 and 10 shall not be applicable.]

Section [15 or16]. Effective Date

All acts and parts of acts inconsistent with the provision of this Act are hereby repealed as of the [insert original

effective date of the Standard Valuation Law in this Act.State]. This Act shall take effect January 1, 1944.[insert

original effective date of the Standard Valuation Law in this State].

G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2016\Interim Meetings\June 2016\Attachments\17 - 16-10 - A-820 SVL updates

for PBR3-8-16.docx

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 20, 2016

Mr. Dale Bruggeman, Chairman




Kansas City, MO 64106-2197

RE: Interested Parties Comments on Items Exposed by the Statutory Accounting Principles

Working Group (Working Group) for Comment during the April meeting in New

Orleans.

Dear Mr. Bruggeman:

Interested parties appreciate the opportunity to provide comments on the items that were

exposed for comment during the April meeting in New Orleans. We offer the following

comments for your consideration.

Ref# 2015-02: Short Sales

Issue Paper No 152 proposes accounting guidance in SSAP No. 103 for short sales as well as

guidance for secured borrowing transactions when the insurer is the transferee (and not the

transferor). A brief overview of the proposed guidance is as follows:

Short Sales – Reporting entities selling securities short shall reflect the obligations as a

contra-asset, at fair value, in the respective investment schedule.

Secured Borrowing – A transferee that sells borrowed securities shall recognize the

proceeds from the sale of the securities and an obligation, at fair value, to return the

borrowed securities to the transferor. A reporting entity that borrows securities to settle

a short sale shall eliminate the contra-asset recognized under the short sale, and

recognize an obligation at fair value to return the borrowed securities.

The Working Group concurrently exposed a revised Issue Paper No. 152, reflecting several

comments received from interested parties from the previous exposure in November 2015, and

a substantively revised SSAP No. 103R—Transfers and Servicing of Financial Assets and

Extinguishments of Liabilities.

We previously provided feedback on the Issue Paper and appreciate your consideration of our

Attachment 18

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May 20, 2016

Page 2

comments. We continue to believe that updates to the guidance are needed to accurately reflect

the mechanics of a short sale when a security is borrowed to cover the short position. Therefore,

we offer the following suggested edit to SSAP No. 103R:

95. A reporting entity transferee that borrows securities captured under this section (sale

criteria is not met) and uses the borrowed securities to settle a short sale transaction shall

eliminate the contra-asset recognized under the short sale (paragraph 83) and establish a liability

to return the borrowed security. The liability to return the borrowed security shall remain on the

books until the reporting entity acquires the security to return to the transferor.

Illustration - Short Sale Settled with Securities Borrowed Under a Secured Borrowing

Agreement

5. The following example illustrates the accounting for a securities borrowing transaction

treated as a secured borrowing, in which the insurer borrows securities and delivers the

borrowed securities to a different counterparty to settle a short sale transaction.

Cash


To recognize the cash received and the obligation to deliver securities under a short-sale

Receivable Under Securities Loan Agreement (Borrow Securities)

Cash

To recognize transfer of cash under the security borrowing agreement, with recognition of a

receivable for the return. The actual securities borrowed under the agreement (as sale

accounting criteria is not met) shall not be recognized on the financial statements.

Borrowed Asset (“Proceeds” of selling asset)

Obligation to return Securities Borrowed

To recognize the use of the borrowed security to settle a short-sale transaction. This transaction

would be similar to receiving “proceeds” from the sale of a borrowed security – but instead of

“cash” recognition of the actual borrowed asset, with an obligation to return the borrowed

securities.


Cash Borrowed Asset

To recognize the acquisition of securities to return under a short sale.

Close out the short sale by delivering the asset to the counterparty

Obligation to Return Securities Borrowed

Borrowed Asset Cash

To recognize the return of the asset borrowed under the securities borrowing arrangement.

Attachment 18

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May 20, 2016

Page 3

Eliminate the liability to return the borrowed asset by purchasing the asset and re-establishing

it as off-balance sheet collateral for the securities borrowing transaction.

Cash

Receivable Under Securities Loan Agreement

To recognize the return of cash collateral from the transferor and the unwinding of the

securities borrowing agreement.

Ref #2015-21: SSAP 55 - Clarification of Accounting Treatment for Fees Incurred for

Salvage/Subrogation Recoveries

This item proposes to clarify the reporting of the fees paid/incurred by insurers to collect

salvage and subrogation recoveries in the financial statements, regardless of whether or not such

fees are paid to third party administrators (“TPA”) vendors or incurred in-house utilizing

internal resources. In November 2015, this agenda item was re-exposed to solicit more

comments on additional issues prior to developing a revised recommendation. On April 3, 2016,

the Statutory Accounting Principles (E) Working Group exposed the following nonsubstantive

revisions to SSAP No. 55 as recommended by interested parties to clarify the reporting of

salvage and subrogation expenses:

14. If a reporting entity chooses to anticipate salvage and subrogation recoverables

(including amounts recoverable from second injury funds, other governmental agencies, or

quasi-governmental agencies, where applicable), the recoverables shall be estimated in a

manner consistent with paragraphs 10-12 of this statement and. Estimated salvage and

subrogation recoveries (net of associated expenses) shall be deducted from the liability for

unpaid claims or losses. If a reporting entity chooses to anticipate coordination of benefits

(COB) recoverables of Individual and Group Accident and Health Contracts, the

recoverables shall be estimated in a manner consistent with paragraphs 10-12 of this

statement and shall be deducted from the liability for unpaid claims or losses. A separate

receivable shall not be established for these recoverables. In addition, these recoverables are

also subject to the impairment guidelines established in SSAP No. 5R—Liabilities,

Contingencies and Impairments of Assets (SSAP No. 5R) and an entity shall not reduce its

reserves for any recoverables deemed to be impaired.

Interested parties provide one additional clarification for health insurers:

14. If a reporting entity chooses to anticipate salvage and subrogation recoverables

(including amounts recoverable from second injury funds, other governmental agencies,

or quasi-governmental agencies, where applicable), the recoverables shall be estimated

in a manner consistent with paragraphs 10-12 of this statement and. Estimated salvage

and subrogation recoveries (net of associated expenses) shall be deducted from the

liability for unpaid claims or losses. If a reporting entity chooses to anticipate

coordination of benefits (COB) recoverables of Individual and Group Accident and

Health Contracts, the recoverables shall be estimated in a manner consistent with

paragraphs 10-12 of this statement and shall be deducted from the liability for unpaid

claims or losses. A separate receivable shall not be established for these recoverables.

Attachment 18

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May 20, 2016

Page 4

For Individual and Group Accident and Health Contracts, any other benefit recoveries

(net of associated expenses) shall be deducted from the liability for unpaid claims or

losses and reported net of benefit expense on the Statement of Operations. In addition,

all of these recoverables are also subject to the impairment guidelines established in

SSAP No. 5R—Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R) and

an entity shall not reduce its reserves for any recoverables deemed to be impaired.

Ref #2015-23: Prepayment Penalties and Presentation of Callable Bonds – Bifurcation of

Agenda Item 2015-04

At the 2015 Fall National Meeting, the Working Group exposed revisions to various SSAPs and

reporting tools to clarify the appropriate reporting of prepayment penalties within the

investment schedules. After consideration of the comment letter received by interested parties

and work being completed by other NAIC working groups, the Working Group exposed

revisions related to the following:

Revisions to SSAP Nos. 26 and 43R to clarify the amount of investment income and/or

realized capital gains/losses to be reported upon disposal of an investment. In addition to

new paragraphs, these revisions prescribe a new disclosure, which would require the

reporting entity to identify the amount of investment income generated as a result of a

prepayment penalty and/or acceleration fee. These revisions have a proposed effective

date of January 1, 2017.

Revisions to the Annual Statement Blanks and Instructions as a result of the proposed

revisions to SSAP Nos. 26 and 43R.

The Working Group exposed changes to SSAP 26, SSAP 43R and the Annual Statement

Instructions to reflect previous decisions made with respect to the accounting and reporting of

make whole provisions on bonds. The Working Group also exposed new disclosures. We do not

offer any comments on the accounting and reporting changes but do have comments on the

proposed disclosures.

The disclosure asks for the number of CUSIPs and aggregate amount of net investment income

generated from make whole provisions, prepayment penalties and acceleration fees separated

into three separate categories: 1) traditional call features, 2) make whole call provisions, and 3)

other callable features. Interested parties do not understand how to accurately disaggregate

items into these three categories and also believe there could be items that fall into more than

one category. As a result, the categorization would likely be inconsistent among companies and

not result in meaningful information. Therefore, we recommend keeping the disclosure simple

and eliminating the three categories.

We also recommend clarifying that the new guidance is effective on a prospective basis in

paragraph 64 of SSAP No. 43R, to address our previous concerns about the operational

complexity of retrospective adoption.

Ref #2015-25: SSAP No. 97 – Inclusion of Filing Guidance

The Working Group previously exposed revisions to SSAP No. 97 to add a new disclosure in

Attachment 18

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May 20, 2016

Page 5

SSAP No. 97 and incorporate guidance on the filing process for subsidiary, controlled, or

affiliated (SCA) investments from the Purposes and Procedures Manual of the NAIC

Investment Analysis Office. In November 2015, revisions to SSAP No. 97 were adopted to

incorporate a new disclosure detailing the reported value for SCAs, as well as information

received after filing the SCA with the NAIC.

On April 3, 2016, the Working Group exposed proposed revisions to bring in the filing

guidance to a new appendix within SSAP No. 97. If inclusion within SSAP No. 97 is not

desired, consideration could be given to including the filing guidance within a separate

Appendix in the AP&P Manual. With the re-exposure, staff has incorporated revisions to

clarify that all SCA entities (except for domestic SCA insurance company investments

accounted for under 8.b.i) in which the reporting entity has an equity interest (common or

preferred stock) are subject to the filing guidance (i.e., there are no filing exclusions for

nonadmitted or immaterial assets). The revisions also clarify that joint ventures, partnerships

and limited liabilities companies are not subject to the SCA filing guidance. Interested parties

provide the following comments on the proposed revisions:

Interested parties agree with clarifying that Joint Ventures, Partnerships and LLC’s are

excluded from filing requirements.

As stated previously, we have serious concerns with moving filing guidance from the

Purposes and Procedures Manual (“P&P Manual”) to SSAP No. 97, including to an

appendix within SSAP No. 97. The NAIC Accounting Practices and Procedures

Manual (“AP&P Manual”) was developed as the single source for accounting guidance.

The P&P Manual as well as the NAIC Annual Statement Instructions, were developed to

address “how to” instructions to comply with the accounting guidance and to facilitate

preparation of statutory filing requirements. Significant effort was undertaken to update

the P&P Manual and Annual Statement Instructions to eliminate any overlap or

duplication with the AP&P Manual.

Interested parties also do not agree there is value in filing immaterial entities with the

NAIC, especially those with zero carrying value entities. Regulators have not objected

to a thoughtful materiality approach in the past. Interested parties are not clear as to

what has transpired to precipitate a change here and do not believe the benefits outweigh

the costs, especially where zero carrying value entities are formed (and already included

on Schedule D Part 6). As indicated in the filing requirements, “The purpose of a SUB 1

filing is to determine whether the reported SCA investment provides economic value to

the insurance company and whether the value claimed is reasonable in view of the

totality of the transaction and the specifics of the insurance company”. As a result,

filing immaterial or zero value entities does not correspond with the purpose for which

the filing is required.

We did note one additional issue in this proposal. There is one paragraph in the SVO manual

that is in direct conflict with paragraph 18 of SSAP No. 97. The SVO manual uses the phrase

“eliminate the value”, whereas SSAP No. 97 indicates to “reduce the value” (not eliminate) as

follows:

The last page of Ref# 2015-25 (page 24) has the following paragraph:

Attachment 18

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May 20, 2016

Page 6

65. A reporting entity that has direct ownership of shares of an upstream intermediate or

ultimate parent owns an interest in itself and is required to eliminate the value of

those shares from the value of the reporting entity. This is referred to as elimination

of reciprocal ownership.

Paragraph 18 of SSAP No. 97 indicates:

18. A reporting entity that owns an interest in itself via direct ownership of shares of an

upstream intermediate or ultimate parent shall reduce the value of such shares for the

reciprocal ownership. If the shares of the parent are owned indirectly by a reporting

entity, via a downstream SCA entity, the directly held entity, which owns the

parent’s shares, shall have its value reduced for the reciprocal ownership.

The SVO manual language should be changed to conform to the language of paragraph 18 of

SSAP No. 97.

Ref #2015-27: Quarterly Reporting of Investment Schedules

On April 3, 2016, the Working Group exposed the following three alternatives received from

interested parties with regards to obtaining more information quarterly on investment holdings:

1. Hire a Consultant to Help NAIC Staff Aggregate Investment Data

2. Expanded Time to Complete the Electronic Only Supplemental Filing

3. Replace Quarterly Acquisition and Disposition Schedules with a Schedule of Owned

Holdings

With this exposure, comments were specifically requested from regulators regarding the third

alternative and whether full Schedule D information on investments held should replace

quarterly acquisition/disposition information. Additionally, comments were requested from

interested parties and regulators on the following staff proposed elements of the third

alternative.

The alternative would only be for Schedule D investments. Other investment schedules

(e.g., Schedule DB) would continue with the quarterly acquisition/disposition activity.

The annual reporting of acquisition/dispositions (Schedule D – Part 3 and Schedule D –

Part 4) would still be required in the annual financial statements.

The Schedule D verification would still be required quarterly.

Schedule D – Part 1B, which shows the acquisition/disposition and non-trading activity

by NAIC designation, and Schedule D – Part 5, which shows items acquired and

disposed in the same quarter, would still be required quarterly.

Attachment 18

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May 20, 2016

Page 7

The Working Group had previously exposed a proposal for a quarterly reporting of electronic-

only data as an NAIC supplemental filing that includes the CUSIP number, Par Value, BACV

and Fair Value for Schedule D investments.

As noted in prior letters, interested parties do not support any additional quarterly investment

reporting, primarily due to the cost/benefit of providing additional information versus what is

currently provided today. We would however like to expand upon the three alternatives from

the April 3, 2016 exposure, with an emphasis on the pros and cons of each alternative.

Hire A Consultant to Help NAIC Staff Aggregate Investment Data

Interested parties continue to believe that this is the best alternative for the aggregation of any

additional investment data. We note that we had first highlighted this alternative in our

February 5, 2016 comment letter but we received no feedback on it. There are many pros

associated with this alternative including

As all data currently resides electronically with the NAIC, any programming needed

would be a “once and done” effort.

The NAIC office in Kansas City has a large information technology (IT) infrastructure.

If there is a desire not to utilize an outside consultant, perhaps current NAIC IT staff can

do the necessary programming.

As all of the macro investment information could be gathered from the NAIC database,

individual effort by every company will be eliminated.

The impact on small and medium sized companies would be minimized. Although large

companies would still have some issues complying, requiring additional quarterly

investment data will have an onerous impact on small and medium sized companies

from both a resource and cost perspective. Small and medium sized companies have

smaller resources (i.e., staff) currently devoted to producing investment data.

Additionally, for those that outsource the production of current required investment data,

any additional requirements will increase the cost.

Expanded Time to Complete the Electronic Only Supplemental Filing

This alternative would only be necessary if any additional investment data is eventually

mandated above and beyond what is currently provided. Interested parties do not support this

option but it would be necessary if additional quarterly investment information is mandated.

The quarterly filing window would need to be expanded, especially for small to medium size

companies, as they would have particular difficulties filing the additional data within the current

45 day window, which would be compounded if outsourcing is utilized to prepare the data.

Replace Quarterly Acquisition and Disposition Schedules with a Schedule of Owned

Holdings

In our February 5th comment letter, interested parties stated that we could support submitting

full Schedule D holdings every quarter and at year end, provided that the current requirement

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for quarterly acquisition/disposition schedules is eliminated. However, in our discussions with

some regulators, it was communicated that this elimination of quarterly acquisition/disposition

schedules could cause additional work on the part of regulators, as current analysis is pulled

from quarterly acquisition/disposition schedules and these would disappear under this

alternative. As such, we don’t believe this alternative, which appears on the surface to be a

reasonable trade off, is as viable as it first appeared.

In summary, interested parties continue to question the cost/benefit of providing additional

investment data on a quarterly basis; furthermore, we believe programming any additional

information required via the NAIC database is the best possible option if additional quarterly

investment data is mandated.

Ref #2015-41: 5*/6* Securities

In November 2015, the Working Group exposed this item requesting comments on whether

revisions are needed to statutory accounting if the SVO no longer provides a designation for 5*

investments after reviewing insurer self-certifications. This process would remove the SVO

from all elements of the designation process for 5* securities (including due-diligence work on

whether the investment should have been filed), and ultimately result with 5* securities being

considered insurer-designated securities with a general interrogatory identifying the self-

designation. (Currently, 5* securities are not considered insurer-designated, and only 6*

securities are considered as such.) The SVO has asked to be removed from providing oversight

to insurer self-certifications and the VOSTF has accepted an industry recommendation that the

alternative of an interrogatory be considered and a referral for this purpose has been made to the

SAPWG.

On April 3, 2016, the Working Group exposed nonsubstantive revisions to SSAP No. 1 to

incorporate a new disclosure to capture current and prior period information on the number of

5* securities and the book adjusted carrying value and fair value for those securities.

Interested Parties have no comment on this item.

Ref #2015-43: EITF 99-02, Weather Derivatives

The Working Group re-exposed this item, which addresses EITF 99-02: Accounting for

Weather Derivatives. This EITF was superseded by Accounting Standards Codification (ASC)

Topic 105, Generally Accepted Accounting Principles and the information was incorporated

into ASC Topic 815-45, Weather Derivatives. Re-exposed revisions incorporate the definition of

a weather derivative, adopt with modification EITF 99-02 to require weather derivatives to be

reported and valued consistently with other derivatives in SSAP No. 86, and reflect additional

language suggested by interested parties Additionally, the Working Group exposed the

illustration detailed in the staff response to interested parties comments identifying the

difference between an insurance contract between an insurer and a policyholder and a weather

derivative.

Interested parties have no additional comments on this item.

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Ref #2015-46: Correction of an Error in SSAP No. 3

It has been identified that some entities are electing not to update their Annual Statements for

discrepancies identified by the NAIC Quality Assurance Function. These discrepancies include,

but are not limited to: formatting, completeness, consistency and data validation (collectively

referred to as “reporting errors”). NAIC staff believes this election is due to an interpretation of

the correction of error guidance in SSAP No. 3—Accounting Changes and Corrections of

Errors, which requires approval of the domiciliary regulator for an entity to file amended

financial statements when material errors are identified.

In November 2015, the Working Group exposed nonsubstantive revisions to SSAP No. 3 to

clarify that amended financial statements shall be filed for material errors unless otherwise

directed by the domiciliary regulator, and that the guidance in SSAP No. 3 shall not preclude

companies from amending their annual or quarterly financial statement filings due to reporting

errors. On April 3, 2016, the Working Group re-exposed (without modification) the proposed

nonsubstantive revisions to SSAP No. 3, along with comments received from interested parties

from the prior exposure and the NAIC staff responses to those comments.

Interested parties continue to believe that these proposed changes to SSAP No. 3 are

unnecessary and will cause confusion and work on the part of both regulators and the industry

as a result of re-filed statements which do not contain accounting errors.

The underlying issue appears to be “reporting errors”, which are described as “formatting,

completeness, consistency and data validation” issues in the Form A, as identified by the

NAIC’s Quality Assurance Function. These discrepancies are neither consistent with nor within

the scope of the definition of “errors” in SSAP No. 3. We believe the introduction of data

quality assurance issues should not be within the scope of an SSAP, which is intended to

address an accounting principle or practice.

We do agree with the staff’s response related to item 2 of the interested parties’ comment letter

on the November 19, 2015 exposure of this item. In that response, the staff notes that “If

regulators desire, NAIC staff can identify issues/validation failures that impact other financial

analysis tools and alert the state regulator of the possible impact an amendment may have on

their analysis. If so directed by regulators, in order to receive faster attention, the crosschecks

that impact the financial analysis tools can be added to the NAIC staff priority list along with

the IRIS ratios.” We believe this approach should be pursued, as it appears to be a reasonable

solution to the issue described in the Form A.

If the Working Group decides to pursue the staff recommended changes to SSAP No. 3, we

recommend that a referral letter be sent to the NAIC/AICPA Working Group so that any audit

issues or any other additional unintended consequences can be identified and discussed prior to

adopting any changes to SSAP No. 3.

Ref #2015-47: Principles Based Reserving SSAP

The NAIC Accounting Practices and Procedures Manual currently references existing model

laws for life and health reserving requirements. Several statements of statutory accounting

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principles will need to be updated to reference the new reserving requirements and the

Valuation Manual for policies that are issued on or after the date the Valuation Manual becomes

operative, which could be as soon as January 1, 2017.

In November 2015, the Working Group directed NAIC staff to: 1) develop an issue paper; 2)

propose substantive amendments to relevant SSAPs or a separate statement as needed to address

PBR; and 3) continue to work with industry representatives and regulators throughout the

development of these items. On April 3, 2016, the Working Group exposed substantive

revisions to SSAP No. 51—Life Contracts to incorporate references to the Valuation Manual

and to facilitate the implementation of principle-based reserving. During the development of

the changes staff noted that it will be more efficient to expose the changes to the SSAPs first

before drafting the issue paper, because several SSAPs will be affected by PBR.

Interested parties support the substantive revisions to SSAP No. 51.

Ref# 2015-52: Clarification of Permitted Practice Disclosure

This agenda item proposes revisions to SSAP No. 1—Accounting Policies, Risks &

Uncertainties and Other Disclosures to ensure disclosure of all permitted and prescribed

practices. The proposed revisions remove the phrase “that affect statutory surplus or risk-based

capital” from the disclosure guidance to ensure that disclosure occurs for all permitted or

prescribed practices. Additionally, revisions are proposed to clarify that the disclosure shall

identify whether the practice is a departure from NAIC SSAP or from a state prescribed

practice, with information on the financial statement reporting page and specific line that was

predominantly impacted by the permitted or prescribed practice.

On April 3, 2016 the Working Group exposed revisions to clarify when permitted or prescribed

practices shall be disclosed. Particularly, these revisions also identify disclosure if the statutory

accounting reporting (e.g., gross or net) has been impacted by the permitted or prescribed

practice.

As proposed footnote 1 states:

This disclosure shall identify whether the practice is a departure from NAIC SSAP or from a

state prescribed practice and include the financial statement reporting line(s) predominantly

impacted by the permitted or prescribed practice. (Although most practices impact net

income or surplus, direct reference to those lines should be avoided. The intent is to capture

the financial statement line(s) reflecting the practice which ultimately impacts net income or

statutory surplus.)

Interested parties request clarification of the meaning of the following sentence from the

paragraph above: “Although most practices impact net income or surplus, direct reference to

those lines should be avoided.”

As stated, the intent of this disclosure is to identify whether the practice is a departure from

NAIC SSAP or from a state prescribed practice and include the financial statement reporting

line(s) predominantly impacted by the permitted or prescribed practice. As a result, proposed

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revisions to the Annual Statement Illustration and Appendix A-205 were made. As this applies

to annual statement disclosures we should specify the guidance applies only to the annual

statement and not the audited statements.

Also, please note that the Form A indicates this issue is a Modification of an existing SSAP for

P/C companies only, but we would expect it impacts all companies.

Ref# 2016-02: ASU 2016-02 – Leases (ASC Topic 842)

In February 2016, the FASB issued ASU 2016-02 – Leases (“ASU 2016-02”), which created

ASC Topic 842 (supersedes ASC Topic 840).

The primary difference between existing GAAP (Topic 840) and new GAAP (Topic 842, which

is effective for reporting periods beginning after December 15, 2018) is the recognition of lease

assets and lease liabilities by lessees for those leases classified as operating leases under

previous GAAP. Lessor accounting for leases did not fundamentally change as a result of ASU

2016-02. For all leases (operating and financing), a company will now recognize in the

statement of financial position, a liability to make leases payments (lease liability) and a right-

of-use asset (lease asset) representing its right to use the underlying asset throughout the lease

term. There is an exception to this guidance for short term leases (12 months or less), in which

a lessee is permitted to make an accounting policy election to not recognize the lease asset or

liability and just recognize the lease expense similarly to operating leases under previous

GAAP.

Currently, SSAP No. 22 – Leases, paragraph 12, prescribes that all leases shall be considered

operating leases. The Working Group previously elected to account for all leases as operating

leases, using the accounting method for leases that qualified for “operating” under FAS 13

(adopted in SSAP No. 22), which was incorporated into the existing GAAP guidance in ASC

Topic 840-20.

At the 2016 Spring National Meeting, the Working Group exposed the agenda item with a

specific request for comments on the three proposed staff options for the accounting of

operating and financial leases under SAP:

1. Maintain existing statutory accounting guidance in SSAP No. 22 – Leases for the

treatment of operating and financing leases, with potential new disclosures to capture

information on lease asset and lease liability that would be required under GAAP.

2. Recognize the lease asset and lease liability, but require nonadmittance of the lease asset

as the right-of-use asset is not available for policyholder obligations pursuant to SSAP

No. 4 – Admitted and Nonadmitted Assets. This would result in adopting ASU 2016-02

with modification.

3. Recognize the lease assets and lease liabilities, for a lessee’s operating and financing

leases. Although this would result in adopting ASU 2016-02 with some modifications,

this option would allow the lease asset to be an admitted asset under SAP.

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Interested parties, in general, believe the current statutory accounting model for leases,

specifically lessees, is not broken and has served regulators well by not grossing up a reporting

entity’s balance sheet yet still providing robust disclosures about entities’ leasing activities and

future lease obligations. In addition, some of the concepts of the ASU – 2016-02 were already

included in statutory guidance. SSAP No. 22, paragraph 8, already utilizes the of “right-of-use”

concept for determining if an arrangement conveys to the lessee the right to control the use of

the underlying property, plant or equipment. Interested parties see no reason to extend this

concept as proposed under ASU 2016 -02. Interested parties do not support staff options 2 and

3 as adoption of the GAAP standard would require substantial administrative work to classify

and capitalize lease transactions. As lease transactions are generally incidental to the operations

of an insurance entity, such transactions are often of a “high volume and low dollar value

nature” (e.g., photocopiers, laptop computers, etc.) and therefore are disproportionately

administratively intensive. These increased administrative costs are not viewed as cost-

beneficial as interested parties see little or no benefit to grossing up the balance sheet, for

solvency purposes, especially when considering the disclosures that are already required under

statutory accounting (see next paragraph). The impact would be especially onerous for the

many small company insurers and mutual company insurers that are not currently required to

also report under U.S. GAAP.

Interested parties support the part of staff option 1 to “maintain existing statutory guidance in

SSAP No. 22 for the treatment of operating and financing leases.” However, interested parties

do not support the second half of staff option 1 which would require “potential new disclosures

to capture information on lease asset and lease liability that would be required under GAAP.”

In addition to the reasons discussed above about why ASU 2016-02 should not be adopted for

statutory reporting, it would be cost prohibitive to require every entity to prepare U.S. GAAP

accounting, just to arrive at U.S. GAAP disclosures, when we have the separate and distinct

accounting regime that currently exists in SSAP No. 22. Current SSAP No. 22 disclosures are

already robust for lessees, including but not limited to, rental expense for each period presented,

basis on which contingent rental payments are determined, the existence and terms of renewal

or purchase options and escalation clauses, future minimum rental payments, etc. Again, the

impact would be especially onerous for the many small company insurers and mutual company

insurers that are not currently required to also report under U.S. GAAP.

Therefore interested parties recommend maintaining SSAP No. 22 and support a modified

version of staff option 1: maintain existing statutory accounting guidance in SSAP No. 22 for

the treatment of operating and financing leases and maintain the existing extensive disclosures

under SSAP No. 22, paragraph 36.

Ref# 2016-04: SSAP No. 97 – Data Captured SCA Disclosure

In November, 2015, the Working Group adopted revisions to SSAP No. 97—Investments in

Subsidiary, Controlled and Affiliated Entities to incorporate a new disclosure detailing the

reported value for SCAs, as well as information received after filing the SCA with the NAIC

(Agenda Item Ref #2015-25). The Working Group also directed staff to prepare a blanks

proposal for the disclosure to be data-captured in the 2016 financial statements.

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On April 3, 2016, the Working Group exposed the proposed data-captured template for the new

SSAP No. 97 disclosure. Proposed revisions to the adopted disclosure include the following: 1)

the company’s ownership percentage of the SCA, 2) inclusion of a code column to assist

companies in completing this disclosure, and 3) removal of the reference that 8b.i entities are

excluded from this disclosure and clarify that SSAP No. 48 entities are not subject to this

disclosure.

We do not believe it is necessary to add insurance SCAs (SSAP No. 97 8b(i) entities) to this

disclosure. Adding insurance SCA’s is duplicative to information already included in Schedule

D, Part 6. In addition, Schedule Y already includes all affiliate investments. Moreover, since

insurance entities also file their own annual statements, it is unclear what is gained from

including insurance SCA’s in this disclosure. Therefore, interested parties do not believe there

is any added benefit of including 8b(i) entities. Interested parties have also made similar

comments to the Blanks Working Group regarding blanks agenda item 2016-16.

Ref# 2016-05: Removal of the Class 1 List from the P&P Manual

Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual (P&P Manual) contains the

NAIC’s Class 1 List, which identifies money market funds that can be reported as bonds by

insurers in part because they are permitted to report stable net asset value (NAV) under US

Securities and Exchange Commission (SEC) regulations. Effective October 14, 2016, under

regulations recently adopted by the SEC, institutional prime money market funds are required to

report a floating net asset value instead of a stable net asset value. Because of the regulations

adopted by the SEC, the money market funds on the Class 1 List fit the SEC definition of

institutional prime funds. Therefore, such money market funds can no longer report stable NAV

and accordingly will no longer be eligible for bond treatment under statutory accounting.

The Working Group exposed revisions to SSAP No. 26—Bonds, SSAP No. 30—Common Stock

and SSAP No. 32—Preferred Stock to reflect the removal of the Class 1 list from the P&P

Manual. In addition, this exposure draft proposes revisions to specifically identify the remaining

“mutual fund lists” found in Part 6, Section 2 of the P&P Manual. With the exposure of this

item, a blanks proposal will be submitted to the Blanks (E) Working Group for concurrent

exposure so that changes needed to remove reference to the “Class 1 List” and reference the

remaining lists can be included for year-end 2016.

Interested parties do not agree with the proposed revisions to SSAP No. 26, SSAP No. 30 and

SSAP No. 32 for the reasons stated in the May 11, 2016 comment letter to the Working Group

from BlackRock, Inc. (BlackRock). However, the interested parties’ position is that money

market funds should be reported and accounted for as cash equivalents.

We see no compelling reason as to why the statutory accounting and reporting of money market

funds that comply with Rule 2a-7 of the Investment Company Act of 1940, as amended, should

differ from the reporting of those instruments under U.S. GAAP. We re-emphasize the point

stated in the May 11, 2016 BlackRock comment letter that the AICPA and each of the Big 4

accounting firms agree with the SEC that U.S. GAAP would not preclude a money market fund

with a floating NAV or the ability to impose fees and gates from being classified as a cash

equivalent. Additionally, we believe that the characteristics of money market funds more

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closely align with definition of cash equivalents in paragraph 3 of SSAP No. 2, Cash, Drafts and

Short-Term Investments because of the near immediate liquidity of these money market funds.

Therefore, we recommend the following changes to paragraph 3 of SSAP No. 2:

Also classified as cash for financial statement purposes, although not falling within the

above definition of cash, are savings accounts and certificates of deposit in banks or other

similar financial institutions with maturity dates within one year or less from the acquisition

date, and cash equivalents. Cash equivalents are short-term, highly liquid investments that

are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that

they present insignificant risk of changes in value because of changes in interest rates. Only

investments with original maturities of three months or less qualify under this definition.

Securities with terms that are reset at predefined dates (e.g., an auction-rate security that has

a long-term maturity and an interest rate that is regularly reset through a Dutch auction) or

have other features an investor may believe results in a different term than the related

contractual maturity shall be accounted for based on the contractual maturity at the date of

acquisition, except where other specific rules within the statutory accounting framework

currently exist. Cash equivalents include U.S. money market mutual funds that are

compliant with Rule 2a-7 of the Investment Company Act of 1940, as amended Money

market mutual funds that are classified as cash equivalents shall be reported at net asset

value.

Along with the above recommendation, interested parties further recommend that the Working

Group consider corresponding changes that would need to be made to the annual and quarterly

statements and related instructions, risk-based capital and any other regulatory tools in order to

facilitate the reporting of money market mutual funds as cash equivalents. Interested parties

will be happy to work with regulators and staff on any such required changes.

Ref# 2016-06: ASU 2016-01 – Financial Instruments

ASU 2016-01, Financial Instruments (ASU 2016-01) was issued in January 2016. This Update

was issued to amend guidance on the classification and measurement of financial instruments as

well as certain disclosure requirements regarding the fair value of financial instruments. Staff is

providing a preliminary recommendation to reject ASU 2016-01 for statutory accounting for the

following reasons:

SAP reporting classifications and valuation requirements differ from GAAP (the

concepts of held-to-maturity, trading and available-for-sale for securities are not

applicable to SAP), thus related updates and disclosures are not applicable to SAP.

SAP requires that securities reported at amortized cost also disclose the fair value while

GAAP allows the option to eliminate this requirement for non-public business entities.

SAP requires that equity investments be measured at fair value while GAAP allows an

entity to choose to measure equity investments without a readily determinable fair value

to be reported at cost minus impairment (if any).

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The Working Group exposed staff’s preliminary recommendation to reject ASU 2016-01 for

statutory accounting and specifically requested comments on whether certain elements of the

ASU should be considered for statutory accounting.

Interested parties have reviewed ASU 2016-01 and agree that most of the guidance should be

rejected. However, there are certain elements we recommend the Working Group consider that

if adopted, could either improve statutory accounting or eliminate unnecessary differences

between statutory accounting and U.S. GAAP. We have detailed these elements below:

Equity Investments Without a Readily Determinable Fair Value - For equity securities

without a readily determinable fair value, U.S. GAAP will allow a measurement alternative.

The measurement alternative applies to all equity securities that do not have readily

determinable fair values, except those that qualify for the NAV practical expedient. This

alternative will allow such securities to be carried at cost minus impairment, if any, plus or

minus changes resulting from observable price changes in orderly transactions for the identical

or a similar investment of the same issuer. The impairment model is a one-step approach where

if an impairment indicator is present, then the asset is written down to fair value.

Currently, there is no explicit statutory accounting guidance for measurement of an equity

security under SSAP 30, Investments in Common Stock, when fair value is not determinable.

Fair Value Disclosures for Deposit Liabilities - Public business entities will be required to use

the exit price notion when measuring the fair value of financial instruments for disclosure

purposes. In addition, the ASU will no longer require deposit liabilities with no defined or

contractual maturities to be included in the fair value disclosures. This category for insurers

includes dividend accumulations, supplementary contracts with life contingencies and retained

asset accounts. Since fair value on these liabilities is generally considered to be equal to the

amount of the deposit, disclosing fair value adds little value to the overall disclosures. The

NAIC should consider excluding these financial liabilities from statutory fair value disclosures.

Disclosure of Fair Value Methods and Assumptions - For public entities, the standard

eliminates the need to disclose fair value methods and assumptions if fair value is only

disclosed versus presented on the balance sheet. The NAIC should consider the usefulness of

the existing fair value disclosures and determine if they should be pared down similar to U.S.

GAAP.

Ref# 2016-07: ASU 2015-17 – Balance Sheet Classification of Deferred Taxes

To simplify the presentation of deferred income taxes, FASB issued ASU 2015-17, which

revised the guidance to require that deferred tax assets (DTAs) and deferred tax liabilities

(DTLs) be classified as noncurrent in the statement of financial position for all entities (rather

than separating DTAs and DTLs into current and noncurrent amounts). The requirement that

DTLs and DTAs of a tax-paying component of an entity be offset and presented as a single

amount is not affected by the amendments in this Update. Under SSAP No. 101—Income Taxes,

paragraph 8, DTAs and DTLs shall be offset and presented as a single amount on the statement

of financial position.

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The Working Group exposed revisions to SSAP No. 101 to reject ASU 2015-17 for statutory

accounting and maintain the current reporting of DTAs and DTLs as prescribed in that

statement.

Interested parties have no comment on this item.

Ref# 2016-08: Method for Applying Discount Rates to Measure Net Periodic Benefit Cost

The most commonly used approach to measure the service cost and interest cost components of

net periodic cost for a defined benefit retirement plan obligation (both pensions and other

postretirement obligations) under ASC 715 has been to develop a single weighted-average

discount rate, which is determined at the pension plan measurement date based on the projected

future benefit payments used in determining the pension obligation. In 2015, representatives of

the Big Four accounting firms met with SEC staff to discuss the possibility of applying the

“Spot Rate” or disaggregated approach as an alternative for developing discount rates to

measure the service cost and interest cost components of net periodic cost for both pensions and

other postretirement obligations under ASC 715. For year-end 2015, approximately 150 public

companies announced adoption of the “Spot Rate” or disaggregated approach for measuring

service cost and interest cost components of net periodic benefit cost for GAAP reporting.

The Working Group exposed revisions to SSAP No. 92—Postretirement Benefits Other than

Pensions and SSAP No. 102—Pensions to allow use of the Spot Rate approach for statutory

accounting by incorporating the paragraphs not previously adopted by statutory accounting

from ASC 715 related to the use of weighted average discount rates (with minor modifications)

into SSAP No. 102 with additional amendments to both SSAP No. 102 and SSAP No. 92 to

reflect the allowance of the Spot Rate approach for measuring service cost and interest cost

components of net periodic benefit cost.

Interested parties support the proposed revisions in this item.

Ref# 2016-09: Collateral Received

A regulator has brought to the attention of staff that Statutory Accounting Principles currently

do not have guidance or a reporting requirement for the aggregate amount and nature of assets

received as collateral and reported within the insurer’s financial statements. Although a

corresponding liability is generally recognized for the return of this collateral, it was noted that

the location and classification of this liability may not be consistent, making it difficult to

identify within the financial statements. The Working Group exposed revisions to SSAP No.

1—Accounting Policies, Risks & Uncertainties and Other Disclosures to add a disclosure to

capture the amount and nature of any assets received as collateral and the corresponding

liability to return these collateral assets.

The Working Group exposed changes to SSAP 1 to create a new disclosure of the aggregate

amount of collateral received and reported in the insurers’ financial statements, along with the

liability to return those assets. The proposed disclosure would be located below the Restricted

Assets disclosure in Note 5H.

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Interested parties note that most of the information that would be included in this disclosure

would be collateral received under securities lending agreements and cash collateral received on

derivatives. Since both of these items are already disclosed in the financial statements, we do

not see the need for an additional disclosure. However, if there is a desire to move forward with

the disclosure, we would recommend disaggregating the information by the nature of collateral

(securities lending, derivatives, etc.) rather than the annual statement schedule in which the

collateral is located. This would make the disclosure consistent with the Restricted Assets

footnote and in our view, provide more useful information to regulators. We also do not believe

a comparison to total admitted assets is necessary.

Ref# 2016-10: Changes to A-820 Standard Valuation Law for Principle-based Reserving

In 2009, the Life and Health Actuarial (A) Task Force adopted amendments to Model 820 -

Standard Valuation Law (SVL). The amendments to the SVL incorporate language that

references the Valuation Manual, which provides detailed principle-based reserving (PBR)

requirements. The SVL is the primary legal change for implementing PBR. The purpose of this

agenda item is to incorporate relevant aspects of the 2009 SVL amendments into Appendix A-

820 - Minimum Life and Annuity Standards.

The Working Group exposed revisions to Appendix A-820, which incorporate relevant aspects

of the Standard Valuation Law. The proposed effective date is January 1, 2017, subject to the

determination of the operative date of the Valuation Manual.

Interested parties support the proposed changes to Appendix A-820 Standard Valuation Law for

Principle-based Reserving.

Ref# 2016-11: Insurance Linked Securities – Disclosure Data Capture

The Working Group exposed a data-capture disclosure template for 2016 and language

clarifying how disclosure components should be completed for the SSAP No. 1—Accounting

Policies, Risks & Uncertainties and Other Disclosures requirement to identify possible

proceeds for insurance-linked securities (ILS).

Interested parties have concerns regarding the scope of the proposed footnote 1 disclosures that

are included in Ref # 2016-11 as well as exposed by the Blanks Working Group. First, we are

concerned that the wording might be interpreted as requiring a ceding insurer to disclose all ILS

of its reinsurer, including those ILS not associated with the contract(s) between the ceding

insurer and the reinsurer. The ILS disclosure requirements of paragraph 25 of SSAP No. 1,

Accounting Policies, Risks & Uncertainties, and Other Disclosures (SSAP No. 1) relate only to

the ILS associated with the ceded reinsurance for which the reporting entity may receive

possible proceeds. Therefore, we propose wording clarifications to the proposed footnote, as

detailed below.

In addition, we believe the language of the last paragraph of the proposed footnote goes beyond

the scope and intended authority in the statutory hierarchy of the NAIC Annual Statement

Instructions, the purpose of which is to provide instruction for completing the annual and

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quarterly statutory statements and required supplemental filings, including instructions for

completing data capture templates. We recommend deletion of that paragraph:

Footnote 1: In situations in which a reporting entity has ceded risk to a reinsurer, and

the reinsurer has engaged in ILS (either directly or through a broker), the following

should be used by the cedent reporting entity in completing the disclosure

The ceding company shall complete the disclosure with information that they know

regarding the reinsurance entities’ involvement with ILS that would likely be used to

satisfy their reinsurance arrangement. For this disclosure, information shall be provided

that details the maximum possible ILS proceeds as a result of the reinsurer’s ILS activity

associated with the reinsurance arrangement(s) with the reporting entity. If information

is known regarding the number of ILS contracts that information shall also be included.

If specific information is not known by the cedent on the number of ILS contracts

associated with the reinsurance arrangement(s) with the reporting entity, the cedent shall

report the information known (such as whether there is one ILS contract, or more than

one ILS contract, or that the number of ILS contracts is not known). With the cedent

entity reporting what is known (and what is not known), the regulator has needed

information to further inquire with the ceding company.

Additionally, the ceding company should be knowledgeable of their reinsurance

counterparty. As such, the cedent should be aware on whether the reinsurer is following

a traditional approach, or whether the reinsurer is engaging in ILS to satisfy reinsurance

claims.

Ref #2016-12: Revisions to Appendix F – Policy Statement

In November 2015, the Working Group adopted policy statement changes to disband the

Emerging Accounting Issues (E) Working Group (EAIWG) and incorporate the interpretation

process within the SAPWG with a Jan. 1, 2016 effective date (Ref #2015-18). Included with

that original agenda item were a few other proposed policy statement revisions that were

deferred as a result of comments received by the Working Group. With the deferral of those

items, the Working Group directed staff to consider those items in a separate agenda item. One

of the topics included the Proposal for Editorial Revisions process that proposes:

At each meeting of the Working Group, if NAIC staff have identified (or have been

informed by interested parties or regulators) any grammatical errors, reference changes

and/or formatting issues, NAIC staff will present a public memorandum to the Working

Group outlining the proposed amendments to the AP&P Manual. These corrections are

not intended to clarify or revise existing guidance and as such, do not ordinarily warrant

the use of a Form A or addition to the Maintenance Agenda.

After presentation of the memorandum to the Working Group, if no objections are raised

by the Working Group, interested regulators or interested parties, the revisions will be

considered adopted and incorporated into the AP&P Manual, with the revisions being

posted on the Accounting Practices and Procedures Manual Updates secure Web page.

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Under this process, these revisions 1) will not be exposed for a public comment period

and 2) will be shown as tracked changes to the Manual unless otherwise noted.

The proposal stated that the editorial changes should be presented with the meeting materials

and adopted at the meeting. We do not believe that is sufficient time for review given the timing

of the distribution and the depth and breadth of the materials distributed for the National

meeting. We propose that the editorial items be exposed for a public comment period to ensure

there is adequate review time and there are no unintended consequences that may result from

the proposed changes.

* * * *

Thank you for considering interested parties’ comments. We look forward to working with you

and the Working Group on these topics. If you have any questions in the interim, please do not

hesitate to contact either one of us.

Sincerely,

D. Keith Bell Rose Albrizio

cc: Julie Gann, NAIC staff

Robin Marcotte, NAIC staff

Interested parties

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May 11, 2016 Dale Bruggeman, Chairman Statutory Accounting Principles Working Group National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, MO 64108-2604 Re: Removal of the Class 1 List from the P&P Manual; Comments to SSAP 2, 26 and 30 Dear Chairman Bruggeman, BlackRock, Inc. (“BlackRock”) is one of the world’s leading asset management firms. We manage assets on behalf of institutional and individual clients worldwide, across equity, fixed income, liquidity, real estate, alternatives, and multi-asset strategies. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world. BlackRock is pleased to have the opportunity to comment to the Statutory Accounting Principles Working Group of the National Association of Insurance Commissioners (“NAIC”) on the removal of the Class 1 Money Market Fund List (“Class 1 List”) from the Purposes and Procedures Manual (“P&P Manual”) of the NAIC Securities Valuation Office and to comment on SSAP 2, 26 and 30. After years of debate and thoughtful consideration, in 2014, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to Rule 2a-7 (“Rule”) under the Investment Company Act of 1940, as amended (“1940 Act”) which governs the operation of U.S. money market funds (“MMFs”). The amendments to the Rule are designed to improve the resiliency of MMFs during times of stress, and include significant structural changes to this investment vehicle.

The structural changes required by the amendments to the Rule must be implemented by October 2016. As a result of the amendments, prime institutional MMFs will no longer meet the Class 1 List requirements under the NAIC guidelines.

1 As a result of these structural changes

from the Rule, the NAIC has voted to remove the Class 1 List from the P&P Manual, effective September

30, 2016.

Insurance companies currently use and rely upon prime MMFs to assist in the management of claims reserves, premium receipts and other working capital and treasury related functions on a daily basis. By eliminating the Class 1 List, we understand from our insurance clients that prime institutional MMFs will essentially be precluded from being used as a cash management tool by them. Companies using these MMFs for daily cash management needs would be subject to statutory equity limitations; we understand that many insurance companies are already allocating investments to their statutory equity limitations and will be unable to have the large cash balances they use daily in MMFs also count towards these limits. From a yield perspective, prime MMFs have historically provided more yield than government and treasury MMFs by a margin of 10bps

2. With several factors at play now in the short-term

1 The requirements to meet the Class 1 List differ from the new requirements of the Rule; most notably prime institutional

MMFs will no longer have a stable $1.00 net asset value per share and may be subject to redemption gates and liquidity fees in certain circumstances.

2 Crane Data, MMF Yields Double on Fed, Prime Inst Rises First; Voya Goes Gov’t (Dec. 30, 2015), available at

www.cranedata.com.

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http://www.cranedata.com/

markets, we anticipate that this spread between government and treasury MMFs and prime MMFs funds could widen substantially, with industry estimates ranging between 30 and 50bps; today’s spreads sit at over 20bps on average.

3 In this low-yield environment which has plagued

the industry for a number of years, every basis point matters within a cash investment portfolio. Additionally, while BlackRock has observed that prime MMFs are used by both large and small insurance companies, and across life companies, Property & Casualty companies and health companies, we believe small and mid-sized companies predominantly benefit from prime MMFs. These companies may not have their own in-house short-term investment teams able to buy direct money market instruments, and thus rely upon the expertise provided by a third party money market fund manager to provide access to a valuable cash management tool. With the removal of the Class 1 List from the P&P Manual, prime institutional MMFs will be treated in a starkly different manner by the NAIC than the SEC, the Financial Accounting Standards Board and the Internal Revenue Service. Each of these entities continues to treat prime institutional MMFs as cash equivalents.

4 Part 2, Section 9, e) of the P&P Manual states

"mutual funds, including money market funds, are typically classified as common stock and reported in Schedule D - Part 2- Section 2 of the NAIC Financial Statement Blank. The VOS/TF has determined that MMFs that meet the conditions of 17CFR 270. 2a-7 and certain bond mutual funds that are registered with the SEC under the '40 Act and which also meet the conditions set forth in Part Six, Section 2 of the P&P manual, may be reported on Schedule DA - Part 1 and Schedule D - Part 1, respectively, of the NAIC Statement Blank". MMFs meeting these conditions have historically been classified as bonds and captured on one of two lists: the U.S. Direct Obligations/ Full Faith and Credit Exempt List or the Class 1 List. With the removal of the Class 1 List which sits in Part Six, Section 2 of the P&P Manual, Prime Institutional MMFs would no longer meet the conditions set forth in Part 2, Section 9, e) of the P&P Manual and would not be eligible to receive bond treatment, or be treated as Cash or Cash Equivalents on Schedule DA. If a MMF is not treated as a bond, it would be classified as common stock. In our view, the changes made by the SEC to the Rule will only strengthen the quality of the investments of prime institutional MMFs. We believe that the 2014 amendments to the Rule continue the efforts from the 2010 amendments and will help provide additional stability, greater transparency and more diversification to MMFs. Coupled with the increase in stress-testing requirements under the Rule, in our view, MMFs will be more robust than they ever have been. As the Class 1 List is being eliminated, BlackRock proposes another category of MMFs be captured within the Accounting Practices & Procedures Manual (“AP&P Manual”), the P&P Manual, and the Quarterly and Annual Statement Instructions. Our recommendation would be for

3 State Street Global Advisors, 2016 Cash Outlook: A Playbook for the New Cash World (2016), available at:

https://www.ssga.com/cash/ref_doc/trends_doc/2016_Outlookv2.pdf.

4 Internal Revenue Service, 26 CFR § 601.105: Examination of returns and claims for refund, credit or abatement;

determination of correct tax liability, available at https://www.irs.gov/pub/irs-drop/rp-14-45.pdf; Press Release, SEC, SEC Adopts Money Market Fund Reform Rules (July 23, 2014) available at https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542347679 (“SEC July 2014 Statement”); American Institute of Certified Public Accountants, Comment letter, SEC - Money Market Fund Reform; Amendments to Form PF (Sept. 16, 2013), available at https://www.sec.gov/comments/s7-03-13/s70313-137.pdf (“AICPA Comment Letter”); Ernst & Young LLP, Comment Letter, SEC - Money Market Fund Reform; Amendments to Form PF (Sept. 12, 2013), available at https://www.sec.gov/comments/s7-03-13/s70313-110.pdf (“EY Comment Letter”); Deloitte & Touche LLP, Comment Letter, SEC - Money Market Fund Reform; Amendments to Form PF (Sept. 17, 2013), available at https://www.sec.gov/comments/s7-03-13/s70313-159.pdf (“Deloitte & Touche Comment Letter”); KPMG LLP, Comment Letter, SEC - Money Market Fund Reform; Amendments to Form PF (Sept. 17, 2013), available at https://www.sec.gov/comments/s7-03-13/s70313-184.pdf (“KPMG Comment Letter”); PricewaterhouseCoopers LLP, Comment Letter, SEC - Money Market Fund Reform; Amendments to Form PF (Sept. 16, 2013), available at https://www.sec.gov/comments/s7-03-13/s70313-141.pdf (“PWC Comment Letter”).

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https://www.ssga.com/cash/ref_doc/trends_doc/2016_Outlookv2.pdf

https://www.irs.gov/pub/irs-drop/rp-14-45.pdf

https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542347679

https://www.sec.gov/comments/s7-03-13/s70313-137.pdf





a prime institutional MMF to be classified as a Short-term Investment, receive treatment as a bond, and continue to be treated as a cash equivalent.

We would like to address the revisions within SSAP No. 26—Bonds, Excluding Loan-Backed and

Structured Securities, and SSAP No. 30 – Common Stock that would be required to allow prime

institutional MMFs to continue to be an investable product for many insurance companies.5

Additionally, we would like to address SSAP No. 2 – Cash, Drafts and Short-term Investments to clarify treatment of Money Market Funds as Short-term Investments. Please note that excerpted language is set out below from the AP&P Manual with additions or amendments made in red font.

SSAP No. 26—Bonds, Excluding Loan-Backed and Structured Securities

Within the bond definition, we are proposing to expand the definition of a MMF to include all

MMFs that meet the requirements of the Rule under the 1940 Act. Without the addition of the

“Other Money Market Mutual Fund List” language, only Government MMFs would receive

treatment as a bond and Prime Institutional MMFs would be captured under SSAP 30 as

Common Stock:

2. Bonds shall be defined as any securities representing a creditor relationship, whereby there is a

fixed schedule for one or more future payments. This definition includes:…

i. Exchange Traded Funds, which qualify for bond treatment, as designated in Part

Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office;

j. Bond Mutual Funds which qualify for the Bond List, as designated in Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office, and

k. Money Market Funds which meet the requirements of Rule 2a-7 Money Market Funds under the 1940 Act, including those which qualify for the U.S. Direct Obligations / Full Faith and Credit Exempt List and on the Other Money Market Mutual Fund List, as designated in Part Six, Section 2 (b) (i) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office.

… Securities which meet the definition above, but have a maturity date of one year or less from

the date of acquisition are addressed in SSAP No. 2 – Cash, Drafts, and Short-term Investments.

SSAP No. 30 – Common Stock To correspond with our previous recommendation of MMFs receiving classification as a “bond” under SSAP No. 26, we propose the language in SSAP No. 30 be amended to: … 3. Common stocks (excluding investments in affiliates) are securities which represent a residual ownership in a corporation and shall include:

5 Comment letters will be submitted by BlackRock to the Blanks Working Group and the Valuation of Securities Task

Force surrounding the recommendation to introduce language into the Quarterly and Annual Statement Instructions and the P&P Manual to create guidance around a list of Other Money Market Funds.

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d. Shares of mutual funds, regardless of the types or mix of securities owned by the fund (e.g., bonds, stocks, money market instruments, or other types of investments), except for:

i. Bond Mutual Funds which qualify for the Bond List, as designated in Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office;

ii. Money Market Funds which meet the requirements of Rule 2a-7 Money Market Funds under the 1940 Act, including those which qualify for the U.S. Direct Obligations / Full Faith and Credit Exempt List and on the Other Money Market Mutual Fund List, as designated in Part Six, Section 2 (b) (i) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office

e. Exchange Traded Funds, except for those which qualify for bond or preferred stock treatment, as designated in Part Six, Section 2 (d) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office;

SSAP No. 2—Cash, Drafts and Short-Term Investments Money market funds which meet the requirements of the Rule are, by design, short-term investments. To meet the definition of the Rule, prime institutional MMFs must meet the following criteria

6:

a. The Fund’s dollar-weighted average maturity must be less than or equal to 60 days. b. The Fund’s dollar-weighted average life (“WAL”) is limited to 120 days or less. c. A security must have a remaining maturity of 397 days or less from date of

acquisition (with certain exceptions). d. The Fund must have 10% of its total assets in daily liquid assets (except tax-exempt

money market funds) and 30% of its total assets in weekly liquid assets. (Daily liquid assets include cash, U.S. Treasury securities and securities readily convertible to cash within one business day. Weekly liquid assets include daily liquid assets – except convertible to cash within five business days rather than one – as well as U.S. government agency discount notes with remaining maturities of 60 days or less.)

e. A money market fund is limited to investing in a security only if the fund determines that the security presents minimal credit risks after analyzing certain prescribed factors. These prescribed factors must include an analysis of the security issuer’s financial condition; sources of liquidity; ability to react to future market-wide and issuer- or guarantor-specific events, including ability to repay debt in a highly adverse situation; and the strength of the issuer or guarantor’s industry within the economy.

f. The Fund may not invest more than 5% in illiquid securities.

The SEC still considers MMFs to be cash equivalents even after amendments to the Rule. They stated in their release of the final Rule: “the Commission’s position continues to be that, under normal circumstances, an investment in a money market fund that has the ability to impose a fee or gate under rule 2a-7(c)(2) qualifies as a “cash equivalent” for purposes of U.S. GAAP. However, as is currently the case, events may occur that give rise to credit and liquidity issues for money market funds. If such events occur, including the imposition of a fee or gate by a money

6 Characteristics of a 2a-7 MMF include but are not limited those listed. See 17 CFR §270.2a-7. The compliance date for

the new rules is October 14, 2016.

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market fund under rule 2a-7(c)(2), shareholders would need to reassess if their investments in that money market fund continue to meet the definition of a cash equivalent.”

7

Additionally, the American Institute of Certified Public Accountants “AICPA” and each of the “Big Four”

8 accounting firms, stated in their comment letters to the SEC on the Rule amendments that

they agree with the SEC in that U.S. GAAP would not preclude a money market fund with a floating NAV or the ability to impose fees and gates from being classified as a cash equivalent. Current U.S. GAAP defines cash equivalents as “short-term, highly liquid investments that are readily convertible to known amounts of cash and that are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.” U.S. GAAP includes an investment in a money market fund as an example of a cash equivalent. All MMFs should continue to meet the definition of Short-Term Investments under SSAP No. 2 within the AP&P. We propose SSAP No. 2 to be amended as follows to ensure MMFs continue to be treated as short-term investments: Short-Term Investments 10. All investments with remaining maturities (or repurchase dates under repurchase agreements) of one year or less at the time of acquisition (excluding those investments classified as cash equivalents as defined in Paragraph 3) shall be considered short-term investments. Short-term investments include, but are not limited to, bonds, commercial paper, money market instruments, money market mutual funds, repurchase agreements, and collateral and mortgage loans which meet the above criteria. Short term investments shall not include certificates of deposit. 11. All short-term investments shall be accounted for in the same manner as similar long-term investments. Investments in money market funds shall be reported in accordance with the guidance in the Purposes and Procedures Manual of the NAIC Valuation Office. Thank you for your consideration of these comments. If the Statutory Accounting Principles Working Group has any questions about our recommendations, please do not hesitate to contact the undersigned. We remain ready to work with you and your colleagues on these issues. Kind regards, Danielle Nefouse Lisa Shah Director Vice President BlackRock BlackRock

Cc: Kevin Fry, Chairman of Valuation of Securities Task Force Jake Garn, Chairman of Blanks Working Group Robin Marcotte (NAIC) Julie Gann (NAIC)

7 SEC July 2014 Statement.

8 AICPA Comment Letter; EY Comment Letter; Deloitte & Touche Comment Letter; KPMG Comment Letter; PWC

Comment Letter.

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May 18, 2016 Mr. Dale Bruggeman, Chairman Statutory Accounting Principles Working Group Re: BlackRock’s May 11, 2016 Comment Letter – Removal of the Class I List Dear Chairman Bruggeman, I am writing this letter on behalf of Blue Cross and Blue Shield of Alabama (“BCBSAL”) in response to an important issue affecting our company, as an investor in 2a-7 money market funds. Following the U.S. Securities and Exchange Commission’s amendments to Rule 2a-7 of the Investment Company Act of 1940, BCBSAL, along with all of our peers in the insurance industry, is having to rethink our overnight and short-term cash liquidity strategy as a result of the proposed removal of the Class 1 Money Market Fund List effective September 30, 2016. I am in full support of BlackRock’s comment letter to you dated May 11, 2016. Having our 2a-7 money market funds count as common stock has serious implications on the future of our short term cash investment strategy. We, at BCBSAL, carefully manage our cash—season-to-season and day-to-day. We use money market funds as the most flexible way to invest and accumulate cash in anticipation of short-term needs. We thank the NAIC for their consideration and look forward to a definitive response, not only for us, but the entire insurance industry who are all faced with the same scenario. Kind regards, Mary C. Smith Director Treasury Operations Cc: Mr. Kevin Fry, Chairman, Valuation of Valuation Securities Task Force Mr. Jake Garn, Chairman, Banks Working Group Ms. Robin Marcotte, NAIC Ms. Julie Gann, NAIC

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May 18, 2016 Mr. Dale Bruggeman, Chairman Statutory Accounting Principles Working Group Re: BlackRock’s May 11, 2016 Comment Letter – Removal of the Class I List Dear Chairman Bruggeman, I am writing this letter on behalf of our three insurance company’s; BCS Insurance Company, 4 Ever Life Insurance Company, and Plans’ Liability Insurance Company (collectively, the “Company’s”) in response to an important issue affecting our company, as an investor in 2a-7 money market funds. Following the U.S. Securities and Exchange Commission’s amendments to Rule 2a-7 of the Investment Company Act of 1940, our Company’s, along with all of our peers in the insurance industry, are having to rethink our overnight and short-term cash liquidity strategy as a result of the proposed removal of the Class 1 Money Market Fund List effective September 30, 2016. I am in full support of BlackRock’s comment letter to you dated May 11, 2016. Having our 2a-7 money market funds count as common stock has serious implications on the future of our short term cash investment strategy. We carefully manage our cash—season-to-season and day-to-day. We use money market funds as the most flexible way to invest and accumulate cash in anticipation of short-term needs. We thank the NAIC for their consideration and look forward to a definitive response, not only for us, but the entire insurance industry who are all faced with the same scenario. Kindest regards,

Susan A. Pickar Chief Financial Officer & Treasurer BCS Insurance Company 4 Ever Life Insurance Company Plans’ Liability Insurance Company Cc: Mr. Kevin Fry, Chairman, Valuation of Valuation Securities Task Force Mr. Jake Garn, Chairman, Banks Working Group Ms. Robin Marcotte, NAIC Ms. Julie Gann, NAIC

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draft pending adoption · 2016. 6. 2. · julie gann (naic) advised that during the 2015 fall...

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