Statutory Accounting Principles Working Group



Statutory Accounting Principles (E) Working GroupMaintenance Agenda Submission FormForm AIssue: Reporting NAIC Designations as Weighted Averages Under 43RCheck (applicable entity):P/CLifeHealthModification of existing SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX New Issue or SSAP FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Interpretation FORMCHECKBOX FORMCHECKBOX FORMCHECKBOX Description of Issue: This agenda item has been drafted to clarify accounting and reporting guidance for securities acquired in lots under SSAP No. 43R—Loan-backed and Structured Securities. Particularly, this agenda item addresses whether securities acquired at different purchase prices, can report NAIC designations under a “weighted average” method under the “financial modeling” or “modified filing exempt” process. This item intends to clarify the guidance in SSAP No. 43R in response to questions received after the “clean-up” revisions adopted in agenda item 2017-22: (The following revisions were adopted on October 12, 2017. These paragraphs were reflected as Q/A issues 17 and 19, but were renumbered as 8 and 10 with the revisions.)8.Question – Do RMBS LBSS purchased in different lots result in a different NAIC designation for the same CUSIP? Can reporting entities use a weighted average method determined on a legal entity basis?8.1SSAP No. 43R and several other statements of statutory accounting principle require use of the scientific (constant yield) method of amortization. In addition to purchase price, the purchase date is an inherent part of this method and will typically result in different amortization values for different lots. Therefore, RMBS LBSS in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. Specific to the RMBS proposal only, for year-end 2009 and until an alternative long-term solution is developed, if companies' accounting and reporting systems do not accommodate this approach, a weighted-average method on a legal entity basis can be used. To the extent that a different accounting method applies to a legal entity's general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account.10.Question - For companies that have separate accounts, can the NAIC designation be assigned based upon the total legal entity or whether it needs to be calculated separately for the general account and the total separate account?10.1The answer to this question is identical to the answer for question 17. SSAP No. 43R and several other statements of statutory accounting principle require use of the scientific (constant yield) method of amortization. In addition to purchase price, the purchase date is an inherent part of this method and will typically result in different amortization values for different lots. Therefore, RMBS LBSS in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. Specific to the RMBS proposal only, for year-end 2009 and until an alternative long-term solution is developed, if companies' accounting and reporting systems do not accommodate this approach, a weighted-average method on a legal entity basis can be used. To the extent that a different accounting method applies to a legal entity's general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account.As the calculation of RBC for these securities is an automatic pull from the investment schedules, there is no current mechanism to allow reporting entities to change the NAIC designation for RBC purposes to reflect an NAIC 1 or NAIC 3 for a particular lot. Rather, the weighted-average (NAIC 2) is used to determine RBC for the entire investment. As an example scenario (identical CUSIP assuming equal division): Acquired at a discount. The MFE approach (based on price points) results with NAIC 1 designation.Acquired at premium. The MFE approach (based on price points) results with NAIC 3 designation.Weighted average approach results with a reported NAIC 2 designation on Schedule D-1. The NAIC 2 designation is currently used for RBC purposes for the entire investment. Existing Authoritative Literature: The statutory accounting guidance does not generally prescribe whether securities shall be reported in aggregate or by lot in the investment schedules. Reporting guidance is detailed in the A/S instructions. AVR/IMR instructions require reporting entities to track different lots separately: AVR Instruction Excerpt: Determination of AVR gain/(loss) on multiple lots of the same fixed income securities should follow the underlying accounting treatment in determining gain/(loss). Thus, the designation, on a purchase lot basis, should be compared to the designation at the end of the holding period to determine IMR or AVR gain or loss. Other-than-temporary impairment write-downs are treated as credit-related (losses) and recorded through the AVR, except for other-than-temporary impairments taken on interest-related declines in value, as described in INT 06-07, Definition of Phrase “OtherThanTemporary.” Interestrelated otherthantemporary impairments are treated as interest-related losses and recorded through the IMR. IMR Instruction Excerpts: All realized capital gains/(losses), due to interest rate changes on fixed income investments, net of related capital gains tax, should be captured in the IMR and amortized into income (Column 2, Lines 1 through 31) according to Table 1 or the seriatim method. Realized capital gains/(losses) must be classified as either interest (IMR) or credit (AVR) related, not a combination except as specified in SSAP No. 43R—Loan-Backed and Structured Securities. Purchase lots with the same CUSIP are treated as individual assets for IMR and AVR purposes.Determination of IMR gain/(loss) on multiple lots of the same securities should follow the underlying accounting treatment in determining the gain/(loss). Thus, the designation, on a purchase lot basis, should be compared to the designation at the end of the holding period to determine IMR or AVR gain or loss.SAP guidelines do not preclude an entity from reporting a security more than once on an investment schedule. Guidance in the A/S instructions identifies that a reporting entity would only be required to break down information to a lower-level of detail if the information was inaccurate if reported in the aggregate: The information included in the investment schedules shall be broken down to the level of detail as required when all columns and rows are considered together unless otherwise addressed in specific instructions. For example, on Schedule D Part 4, a reporting entity is required to list the CUSIP book adjusted carrying value, among other things. The reporting entity would only be required to break this information down to a lower level of detail if the information was inaccurate if reported in the aggregate. Thus, the reporting entity would not be required to break the information down by lot (information for each individual purchase) and could utilize the information for book/adjusted carrying value using an average cost basis, or some other method, provided the underlying data reported in that cell was calculated in accordance with the Accounting Practices and Procedures Manual. However, reporting entities are not precluded from reporting the information at a more detailed level (by lot) if not opposed by their domiciliary commissioner.Activity to Date (issues previously addressed by the Working Group, Emerging Accounting Issues (E) Working Group, SEC, FASB, other State Departments of Insurance or other NAIC groups): On Oct. 12, 2017, the Working Group incorporated several “clean-up” revisions to SSAP No. 43R. These revisions removed outdated effective date and transition guidance, as well as addressed elements in the implementation guide. With the clean-up revisions, the guidance regarding the reporting of “lots” as a weighted average was deleted. After this deletion, questions from industry has identified that the 2009 guidance was still being applied as the “reporting in lots” issue had not been clarified. Information or issues (included in Description of Issue) not previously contemplated by the Working Group: None. Staff Recommendation: NAIC staff recommends that the Working Group move this item to the active listing, classified as nonsubstantive, and incorporate revisions to clarify that if a SSAP No. 43R security has different NAIC designations by lot, then the reporting entity shall either 1) report the entire investment in a single reporting line at the lowest NAIC designation that would apply to a lot or 2) report the investment separately by purchase lot in the investment schedule. If a commissioner opposes the separate reporting by lot, then the reporting entity would default to reporting the entire investment at the lowest applicable NAIC designation (lowest lot that would be reported if separately reporting). From information gathered by NAIC staff, investment software already captures information on the granular detail for each acquisition (by lot). As such, information is already available regarding the purchase lot detail that can be used for separate reporting. Furthermore, NAIC staff received information that it is not unusual for reporting entities to separately report by lot, particularly if the lots would have different NAIC designations.This recommendation is consistent with the existing annual statement instructions in which lower-level reporting is required if the information reported in the aggregate would be inaccurate. As the NAIC designation impacts the overall RBC charge, and regulators often assess overall investment quality through review of NAIC designations, use of a weighted average NAIC designation results with inaccurate aggregate information. Upon adoption, a blanks proposal would be sponsored to further expand the guidance in the annual statement instructions to reflect the guidance incorporated into SSAP No. 43R.Proposed Revisions to SSAP No. 43R: 8.Question – Do LBSS purchased in different lots result in a different NAIC designation for the same CUSIP? Can reporting entities use a weighted average method determined on a legal entity basis?8.1SSAP No. 43R and several other statements of statutory accounting principle require use of the scientific (constant yield) method of amortization. In addition to purchase price, the purchase date is an inherent part of this method and will typically result in different amortization values for different lots. Therefore, LBSS in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. If a SSAP No. 43R security (by CUSIP) has different NAIC designations by lot, the reporting entity shall either 1) report the aggregate investment with the lowest applicable NAIC designation or 2) report the investment separately by purchase lot on the investment schedule. If reporting separately, the investment may be aggregated by NAIC designation. (For example, all acquisitions of the identical CUSIP resulting with an NAIC 1 designation may be aggregated, and all acquisitions of the identical CUSIP resulting with an NAIC 3 designation may be aggregated.) To the extent that a different accounting method applies to a legal entity's general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account.10.Question - For companies that have separate accounts, can the NAIC designation be assigned based upon the total legal entity or whether it needs to be calculated separately for the general account and the total separate account?10.1The answer to this question is identical to the answer for question 17. SSAP No. 43R and several other statements of statutory accounting principle require use of the scientific (constant yield) method of amortization. In addition to Repurchase price, the purchase date is an inherent part of this method and will typically result in different amortization values for different lots. Therefore, LBSS in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. If a SSAP No. 43R security (by CUSIP) has different NAIC designations by lot, the reporting entity shall either 1) report the aggregate investment with the lowest applicable NAIC designation or 2) report the investment separately by purchase lot on the investment schedule. If reporting separately, the investment may be aggregated by NAIC designation. (For example, all acquisitions of the identical CUSIP resulting with an NAIC 1 designation may be aggregated, and all acquisitions of the identical CUSIP resulting with an NAIC 3 designation may be aggregated.) An investment held both in the general account and separate account shall be reported based on the actual investment (by purchase lot) held in those accounts using the same guidelines (lowest NAIC designation or separate line reporting) applicable to the general account. To the extent that a different accounting method applies to a legal entity's general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account.Staff Review Completed by: Julie Gann – October 2017Status:On March 24, 2018, the Statutory Accounting Principles (E) Working Group moved this agenda item to the active listing, categorized as nonsubstantive, and exposed proposed revisions to SSAP No. 43R—Loan-Backed and Structured Securities to clarify that if a loan-backed or structured security has different NAIC designations by lot, then the reporting entity shall either report the entire investment on a single reporting line with the lowest applicable NAIC designation or report separately by purchase lots aggregated by NAIC designation. On August 4, 2018, the Statutory Accounting Principles (E) Working Group deferred discussion of this agenda item until agenda item #2018-19—Elimination of Modified Filing Exempt on the modified filing exempt designation approach has been addressed.On April 6, 2019, the Statutory Accounting Principles (E) Working Group exposed revisions (as shown below) to SSAP No. 43R—Loan-Backed and Structured Securities to require securities with differing NAIC designations by acquisition lot to be reported in aggregate at either the lowest NAIC designation or reported in groupings by differing NAIC designation. These concepts are consistent with the original exposure, but the proposed edits have been revised to reflect the updated guidance after adopting changes to eliminate Modified Filing Exempt (MFE) in agenda item 2018-19. (With the updates to SSAP No. 43R to eliminate MFE, only paragraph 8 of Q&A is proposed to be revised.) April 2019 Exposed Revisions to SSAP No. 43R Q&A 8.Question – Do LBSS purchased in different lots result in a different NAIC designation for the same CUSIP? Can reporting entities use a weighted average method determined on a legal entity basis?8.1Under the financial modeling process (applicable to qualifying RMBS/CMBS reviewed by the NAIC Structured Securities Group), the amortized cost of the security impacts the “final” NAIC designation used for reporting and RBC purposes. As such, securities subject to the financial modeling process acquired in different lots can result in a different NAIC designation for the same CUSIP. In accordance with the current instructions for calculating AVR and IMR, reporting entities are required to keep track of the different lots separately, which means reporting the different designations. For reporting purposes, if a SSAP No. 43R security (by CUSIP) has different NAIC designations by lot, the reporting entity shall either 1) report the aggregate investment with the lowest applicable NAIC designation or 2) report the investment separately by purchase lot on the investment schedule. If reporting separately, the investment may be aggregated by NAIC designation. (For example, all acquisitions of the identical CUSIP resulting with an NAIC 1 designation may be aggregated, and all acquisitions of the identical CUSIP resulting with an NAIC 3 designation may be aggregated.) To the extent that a different accounting method applies to a legal entity's general and separate account, then the weighted average for each account should be calculated separately for the general account and separate account.9.Question – The NAIC Designation process for LBSS subject to the financial modeling process may incorporate loss expectations that differ from the reporting entity’s expectations related to OTTI conclusions. Should the reporting entities be required to incorporate recovery values obtained from data provided by the service provider used for the NAIC Designation process for impairment analysis as required by SSAP No. 43R?9.1In accordance with INT 06-07: Definition of Phrase “Other Than Temporary,” reporting entities are expected to “consider all available evidence” at their disposal, including the information that can be derived from the NAIC designation.10.Question - For companies that have separate accounts, can the NAIC designation be assigned based upon the total legal entity or whether it needs to be calculated separately for the general account and the total separate account?10.1The financial modeling process for qualifying RMBS/CMBS securities is required for applicable securities held in either the general or separate account. 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