2017 Statutory Accounting Updates - Investments

1 2017 National association of Insurance Commissioners All Rights Reserved1 2017 National association of Insurance Commissioners2017 Statutory Accounting Updates -Investments2017 Statutory Accounting Updates -InvestmentsJulie Gann, Senior Manager II Accounting and ReportingFatima Sediqzad, SCA Valuation and Accounting Policy AdvisorRobin Marcotte, Senior Manager II AccountingJake Stultz, Senior Accounting and Reinsurance Policy Advisor 2017 National association of Insurance CommissionersThis presentation is pre-qualified for NAIC Designation Renewal Credits (DRCs). If you currently hold an NAIC APIR, PIR, or SPIR designation and are pursuing continuing education credit to maintain it, you may be awarded credits for your participation. To receive credit, you must be in attendance for the duration of the APIR, PIR, or SPIR 2017 National association of Insurance Commissioners All Rights Reserved2 2017 National association of Insurance CommissionersLearning Objectives1.

2 Key Investment Changes in Statutory Accounting2. Investment Issues Under DiscussionObjectives: Identify new and revised Statutory Accounting guidance pertaining to Investments Accounting and reporting. Identify the hot topics involving Investments currently being considered by the Statutory Accounting Principles (E) Working Group. 2017 National association of Insurance CommissionersJulie GannNAIC Senior Manager II Accounting & Reporting Supports Statutory Accounting Principles (E) Working Group Supports Restricted Asset (E) Subgroup Supports Reinsurance Investment Security (E) Subgroup Provides technical & advisory services in the areas of SAP, GAAP & IFRSJ oined NAIC in February 2001. Prior Positions Include: NAIC Financial Examination Manager NAIC International Insurance Accountant Public accountant and insurance examiner consultantCPA, FLMI, ARA and AIRC; Member of AICPA & MSCPA4 2017 National association of Insurance Commissioners All Rights Reserved3 2017 National association of Insurance CommissionersRobin Marcotte Senior Manager II Accounting Supports Accounting Practices and Procedures Task Force Supports Statutory Accounting Principles Working Group Supports Risk Limiting Contracts Working Group Provides technical & advisory services in SAP, GAAP & IFRSJ oined the NAIC in August 2000 Prior to joining the NAIC employed at a Dept.

3 Of InsuranceCPA, CFE, Associate in Reinsurance, CISA Member of AICPA, MSCPA, and SOFE 2017 National association of Insurance CommissionersFatima Sediqzad SCA Valuation and Statutory Accounting Policy Advisor Supports Statutory Accounting Principles Working Group Reviews subsidiary, controlled and affiliated entity filings Provides technical & advisory services in SCA s, SAP andGAAPJ oined the NAIC in January 2016 Prior to joining the NAIC employed in public Accounting and a private financial services firmCPA 2017 National association of Insurance Commissioners All Rights Reserved4 2017 National association of Insurance CommissionersJake Stultz Senior Accounting Policy Advisor Supports SAPWG Supports Reinsurance Task Force Provides technical & advisory services in SAP, GAAP &ReinsuranceJoined the NAIC in February 2017 Prior to joining the NAIC employed in public Accounting , realestate and insurance 2017 National association of Insurance CommissionersTopics SSAP No.

4 2 Cash, Drafts and Short-term Investments SSAP No. 26R Bonds SSAP No. 37 Mortgage Loans SSAP No. 86 Derivatives SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities 2017 National association of Insurance Commissioners All Rights Reserved5 2017 National association of Insurance CommissionersSSAP No. 2R - MMMF Agenda Item 2016-18, Effective Dec. 31, 2017 Reclassifies money market mutual funds from short-term Investments to cash equivalents. Agenda Item 2016-35, Effective Dec. 31, 2017 Requires all money market mutual funds be reported at fair value (allowing NAV as a practical expedient). Agenda Item 2016-05, Prior to Dec. 31, 2017 Eliminates concept of Class 1 and clarifies money market mutual funds as short-term Investments with reported measurement based on the underlying Statement (SSAP No.)

5 26 or SSAP No. 30). 2017 National association of Insurance CommissionersSSAP No. 2: Removal of Class 1 SVO removed Class 1 Money Market Mutual Fund listing as a result of changes in SEC Regulations. 2016 and Interim 2017 Reporting: All MMMFs are short-term Investments under SSAP No. 2R and reported on Schedule DA-Short-Term Investments . MMMFs on the SVO exempt listing will be reported under the measurement method of SSAP No. 26 and receive a 0% RBC charge. All other MMMFs shall be reported with a fair value measurement with a .03% or .04% RBC Charge. 2017 Year-End Reporting: all MMMFs are cash equivalents under SSAP No. 2R and reported on Schedule E-2. No Change in RBC. 2017 National association of Insurance Commissioners All Rights Reserved6 2017 National association of Insurance CommissionersSSAP No.

6 26R Bonds Investment Classification Project Agenda Item 2013-36 / Effective Dec. 31, 2017 Substantive revisions to SSAP No. 26: Definition of Bond Inclusion of Non-Bond Instruments Fixed-Income Instruments SVO-Identified Investments Accounting for SVO-Identified Investments 2017 National association of Insurance CommissionersSSAP No. 26R Bonds Investment Classification Project Bond Definition: Incorporates definition of security in bond definition. Adopts the GAAP definition of a security as it is used in FASB Codification Topic 320 and 860: Security: A share, participation, or other interest in property or in an entity of the issuer or an obligation of the issuer that has specific characteristics. 2017 National association of Insurance Commissioners All Rights Reserved7 2017 National association of Insurance CommissionersSSAP No.

7 26R Bonds Investment Classification Project Non-Bond Items in Scope Removes non-bond items from bond examples Identifies specific fixed-income instruments: Bank Loans Acquired Certification of Deposit (maturity date over 1 year) Hybrid Securities Debt instruments in CAPCO 2017 National association of Insurance CommissionersSSAP No. 26R Bonds Investment Classification Project Non-Bond Items in Scope Specifically identifies that equity/fund Investments are not within the definition of bond, but identifies SVO-Identified Investments that receive special Accounting treatment in scope of SSAP No. 26R: SVO-Identified Exchange Traded Funds (ETFs) SVO Identified Bond Mutual Funds 2017 National association of Insurance Commissioners All Rights Reserved8 2017 National association of Insurance CommissionersSSAP No.

8 26R Bonds Investment Classification Project Accounting for SVO-Identified Investments Required at Fair Value (NAV as expedient)Unless Investment Qualifies AND Company Elects Systematic Value Systematic value is an approach to amortize or accrete the investment in a manner that represents expected cash flows from the underlying bond holdings. 2017 National association of Insurance CommissionersInvestment ClassificationProvisions for Systematic Value: Qualifying NAIC designation Irrevocable election by CUSIP Measurement method can change with full sale, if reacquired after 90-days from the sale. Must follow established Systematic Approach Specific OTTI provisions OTTI assessed on whether the net present value of projected cash flows have materially declined. 2017 National association of Insurance Commissioners All Rights Reserved9 2017 National association of Insurance CommissionersSSAP No.

9 26R Bonds Investment Classification Project Effective Date Dec. 31, 2017 Fair value unless designated for systematic value. If designated for systematic value, identify investment with code in the investment schedules, and continue prior measurement method for year-end 2017. Begin systematic value as of Jan. 1, 2018. Specific transition guidance in SSAP No. 26R. 2017 National association of Insurance CommissionersSSAP No. 26R Bonds Bank Loans Agenda Item 2016-10/ Hot Topic Bank loans replaced bank participations Definition added in SSAP and glossary:Bank loan - Fixed-income instruments, representing indebtedness of a borrower, made by a financial institution and acquired by a reporting entity through an assignment, participation or syndication. 2017 National association of Insurance Commissioners All Rights Reserved10 2017 National association of Insurance CommissionersSSAP No.

10 26R Bonds Bank Loans Consider Directly Issued Bank Loans Bank loan terms do not depend on who originates. Terms are similar to bond, including transferability. Agenda item exposed with a request for comments. Possibly allow bank loans issued by an insurer (which qualifies as a financial institution) to be reported as bonds within SSAP No. 26R. 2017 National association of Insurance CommissionersSSAP No. 37 Mortgage LoansMultiple Lenders Agenda Item 2016-39/ Hot Topic Clarifies guidance when a reporting entity is a participant in a mortgage loan Exposure: In addition to mortgage loans directly originated, also includes mortgages acquired through assignment, syndication, or participations. Investments that reflect participating mortgages, mortgage loan fund, or the securitization of assets are excluded from SSAP No.