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Statutory Accounting Principles Working Group Additional Handouts June 13, 2009 1. Comment letter from Interested parties 2. Separate Account Subgroup Update and Referral 3. Principles Based Reserving Update 4. Ref # 2009-11 Accounting Practices and Procedures Manual Content Changes Additional Handout 1 - IP Comment Letter D. Keith Bell, CPA Rose Albrizio, CPA Senior Vice President Vice President Accounting Policy Accounting Practices Corporate Finance AXA Financial, Inc. The Travelers Companies, Inc. 212-314-5630; FAX 212-314-5662 860-277-0537; FAX 860-954-3708 Email: email@example.com Email: firstname.lastname@example.org 20010,ne Mr. Joe Fritsch, Chairman Statutory Accounting Principles Working Group National Association of Insurance Commissioners 2301 McGee Street, Suite 800 Kansas City, MO 64108-2604 RE: Comments on Other Than Temporary Impairments of Loan-backed and Structured Securities Dear Mr. Fritsch, We offer the following comments on Other Than Temporary Impairments of Loan- backed and Structured Securities, which represent the views of the interested parties included in the attached sign on list. Many companies (primarily property/casualty companies or P&C companies) prefer to make no change to statutory accounting. These differing views result from the current differences in statutory accounting rules for life companies eligible for IMR and AVR reporting, HMO, stand-alone health and P&C companies not eligible for AVR and IMR reporting as well P&C companies’ concerns about the added complexity involved in bifurcating credit and non credit losses. Background SSAP No. 43 Prior to the adoption of SSAP No. 98, the statutory accounting rules for other than temporary impairment (OTTI) of loan-backed and structured securities were governed by SSAP No. 43. Under SSAP No. 43, an OTTI is considered to have occurred if the undiscounted estimated cash flows are less than the current book value of the investment. If an OTTI has occurred, the cost basis of the security is written down to the undiscounted estimated future cash flows and the amount of the write-down is accounted for as a realized loss. The accounting for the entire amount of the realized loss is recorded to AVR (for life companies) in accordance with SSAP No. 7, AVR and IMR and the Annual Statement Instructions. INT 06-07 During 2006, the NAIC Emerging Accounting Issues Working Group issued Interpretation 06-07 – Definition of Phrase “Other Than Temporary” (INT 06-07), in order to provide consistent guidance to all applicable SSAPs as to determining when an 1 Additional Handout 1 - IP Comment Letter SAPWG May 4, 2009 Page 2 investment is considered other than temporarily impaired. INT 06-07 incorporated much of the U.S. GAAP guidance surrounding impairment considerations, including severity/duration, financial condition/prospects of the issuer, ability/intent to hold for recovery, etc. INT 06-07 also incorporated “statutory-specific” guidance for interest related and credit related impairments in paragraph 5, summarized as follows: • An interest related impairment is considered other than temporary when an investor has the intent to sell an investment at the reporting date prior to recovery of the cost of the investment. “Interest related” includes a decline in value due to both increases in the risk free interest rate and general credit spread widening, which can occur for a variety of reasons, including supply/demand imbalances in the marketplace, or perceived risk of an entire sector. If the declining value is caused in whole or in part due to credit spreads widening, but not due to fundamental credit problems of the issuer, the change in credit spreads is deemed to be interest related. • Fundamental credit problems exist with the issuer when there is evidence of financial difficulty that may result in the issuer being unable to pay principal or interest when due. For securities in the scope of SSAP No. 43 (prior to the adoption of SSAP No. 98), fundamental credit problems were deemed to exist if the revaluation based on new currently estimated cash flows results in a negative yield (i.e., undiscounted estimated future cash flows are less than the current book value). For impairments considered other than temporary, INT 06-07 indicates that the carrying value of the asset should be written down to reflect its value in accordance with the relevant SSAP. For securities in the scope of SSAP No. 43 (prior to the adoption of SSAP No. 98), an other than temporary impaired security would be written down to the undiscounted estimated future cash flows as described above. SSAP No. 98 During 2008, the NAIC issued SSAP 98 – “Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, an Amendment of SSAP No. 43”. SSAP No. 98 changed both the trigger and measurement of impairments of loan-backed and structured securities. The revised trigger incorporated the guidance in INT 06-07 as to determining when a security is other than temporarily impaired and, more importantly, revised the measurement of the impairment to require a write down to fair value (instead of undiscounted cash flows). SSAP No. 98 also indicated that credit related OTTI losses should be recorded through the AVR while interest related OTTI losses should be recorded through the IMR. SSAP No. 98 was originally to be effective January 1, 2009, with early adoption permitted and encouraged. During April 2009, in response to newly issued U.S. GAAP 2 Additional Handout 1 - IP Comment Letter SAPWG May 4, 2009 Page 3 guidance on impairments of debt securities, the NAIC elected to defer the required implementation of SSAP No. 98 until the quarter ending September 30, 2009. GAAP OTTI Until recently, under U.S. GAAP, (specifically FAS 115 and EITF 99-20), structured securities were considered OTTI when there was an adverse change in expected cash flows (expected credit loss) or a company could not assert its ability and intent to hold the security for an anticipated recovery. If an OTTI was determined, the security was written down to its fair value with a corresponding charge recorded to earnings. In April 2009, the FASB issued FSP FAS 115-2 which included significant changes to the trigger and measurement of other than temporary impairments under U.S. GAAP. Key provisions include: • If a company intends to sell, or is more likely than not required to sell, a security that is “underwater”, then an OTTI has been triggered and the security should be written down to fair value • If the above is not the case, but a company does not expect to recover the amortized cost of the security (i.e. there is a expected credit loss), then an OTTI has been triggered; however, in this case, the impairment is bifurcated between the credit loss and the non-credit loss portion of the unrealized loss – only the credit loss is reflected in earnings, while the non-credit loss remains in unrealized losses within “other comprehensive income”. The credit loss portion is determined as the difference between amortized cost and recoverable value (NPV of expected cash flows, discounted at effective interest rate) • As noted above, in light of the recent changes to U.S. GAAP, the NAIC deferred the adoption of SSAP No. 98 from 1/1/09 to the quarter ending September 30, 2009. This deferral will allow the NAIC time to consider if, and how, it should react to this updated U.S. GAAP guidance for purposes of statutory accounting. Our Views and Recommendation We embrace the FASB’s issuance of FSP FAS 115-2 as a positive step in accounting rule-making. It portrays an economic view of losses that should be recognized in earnings, i.e., only expected credit losses, We also believe that regulatory capital for insurance companies should reflect the realized loss associated with the credit loss portion of the impairment, but should not reflect a detriment for the remaining unrealized loss (down to fair value) if it is not expected to be realized. Lastly, we believe that it is beneficial to have consistency among U.S. GAAP and Statutory Accounting regimes where it fits within the overarching principles of each regime, consistent with the initial proposed movement to SSAP No. 98 when it reflected U.S. GAAP.. 3 Additional Handout 1 - IP Comment Letter SAPWG May 4, 2009 Page 4 As such, we recommend that for determining other than temporary impairments for structured securities, the NAIC should not adopt SSAP No. 98 in its current form, but instead should incorporate GAAP’s FSP FAS 115-2 into all relevant statutory accounting for investment impairments so that a company would: • Bifurcate the credit/noncredit portions of loss; • Measure the credit loss component consistent with GAAP (FSP FAS 115-2) • Include the credit loss as realized loss in operations; • Disclose the non-credit loss portion of loss (which would not be recognized in either operations or surplus) • Carry the investment at “adjusted amortized cost” (i.e. amortized cost, less the credit loss impairment) This proposal is appropriate because it: a. Reflects the economic viewpoint, whereby only the expected credit loss is recognized in operations, and reflects an insurance company’s long-term buy and hold intentions since the non-credit loss component is expected to be recovered through the expected cash flows. This is particularly important in cases where the fair value of a structured security indicates a significant liquidity discount when only a small loss of principal is expected. b. Promotes consistency among GAAP and STAT for credit losses associated with structured securities, and also promotes operational ease with respect to the control environment. c. Promotes more consistency with respect to capital among insurers and banks, as banks exclude unrealized gains/losses from their calculation of Tier 1 capital and other key ratios. d. Is consistent with INT 06-07 in that: i) OTTI is triggered by a credit loss, and ii) not recognizing realized losses for declines in value that are due to interest rates / general credit spread widening (unless there is an intent to sell) is consistent with the OTTI trigger provisions of INT 06-07 e. Is consistent with reporting bonds (rated above NAIC 6) at amortized cost for statutory purposes for companies that maintain an AVR and above NAIC 3 at amortized cost for companies who do not maintain an AVR, except when there is an impairment and for which writing it down only for the credit loss retains the amortized cost concept. Similarly, this would ensure that interest rate changes (including those due to liquidity) do not cause significant fluctuations in statutory surplus. f. Does not require accretion of “impairment discount”, which can be distortive to operating results and requires additional controls/infrastructure to implement, We believe the implementation of this approach should be effective January 1, 2010 to provide for a consistent approach for reporting 2009 results (versus a portion of the year 4 Additional Handout 1 - IP Comment Letter SAPWG May 4, 2009 Page 5 under one standard and the rest of the year under a different standard). This would also provide sufficient time for pre-implementation planning activities. In addition to the cumulative effect adjustment which should be permitted for adoption of GAAP’s FSP FAS 115-2, we also believe that a cumulative effect adjustment should be permitted to allow the early adopters of SSAP No. 98 to “undo” the effects of early adoption, since some early adopters did so in 2008 on the basis of a required January 1, 2009 effective date. This would ensure consistency with other insurers who did not early adopt and appropriately reflect the accounting proposed under the above recommendation. * * * * * Thank you for considering our comments. We look forward to working with you, Mr. Armstrong, and the Working Group at the NAIC Summer meeting in Minneapolis, Minnesota. If you have any questions in the interim, please do not hesitate to contact either one of us. Sincerely, Sincerely, Keelthbrizio cc: Mr. James Armstrong, Iowa DOI Robin Marcotte, NAIC staff Inteeasties 5 Additional Handout 1 - IP Comment Letter The Interested Parties, as noted below, for the Statutory Accounting Principles Working Group agree with the comments contained in this letter: Organization Name Phone E-Mail Address Number AAA Life Insurance Phil Bybee 734-779-2085 PBybee@aaalife.com Company AEGON Stephanie sphelpPhelegonusa.com Allstate Randy Moreau 847-402-2910 email@example.com American Council of Life Mike Monahan 202-624-2324 firstname.lastname@example.org Insurers (356 members) American Fidelity Bob Brearton 405-416-8554 Robert.Brearton@af-group.com Corporation Ameriprise Financial, IncKip Kirkpatrick email@example.com BlueCross BlueShield Joe Zolecki 312-297-5766 firstname.lastname@example.org Association CIGNA Nancy Na Ruffino ncy.Ruffino@CIGNA.com Conning Asset David Chellgren 860-299-2112 David_Chellgren@conning.com Management Company CUNA Mutual Joe Bauer Joe.Bauer@cunamutual.com Genworth Financial Milum Livesay 804-662-2687 Milum.Livesay@genworth.com HSBC Insurance John H. Moran 908-203-2620 email@example.com Liberty Mutual Ken Copman 617-654-3350 firstname.lastname@example.org Lincoln Financial Group Kristine Toscano 484-583-1748 email@example.com MassMutual Financial Rich Barnhart 413-744-7955 RBarnhart@MassMutual.com Group MetLife Bob 21a257k8-7180 firstname.lastname@example.org Nationwide Insurance Jason T. Fehlner 614-249-1077 FEHLNEJ@nationwide.com IP FSP 115_2 s 6 Additional Handout 1 - IP Comment Letter Pacific Life Insurance John Torell 949-219-1735 John.Torell@PacificLife.com Company Principal Financial Group Angie Sanders Sanders.Angie@principal.com Protective Life Charles D. Evers, 205-268-3596 email@example.com Corporation Jr. Prudential John MjcPh.firstname.lastname@example.org Sagicor Life Insurance Bart Catmull 480-425-5100 email@example.com Company SBLI Robert Damante firstname.lastname@example.org StanCorp Financial Robert Erickson 971-321-6530 email@example.com Group The Baltimore Life Rick Spencer 410-581-6662 firstname.lastname@example.org Insurance Company The Hartford Rich Poniatowski 860-547-7749 richard.poniatowski@thehartford .com TIAA-CREF Linda S. 704-988-4187 email@example.com Dougherty UNIFI insurance Chris Lutz CLutz@unioncentral.com companies Western & Southern Wade Fugate 513-629-1402 firstname.lastname@example.org Financial Group m IP FSP 115_2 s 2 7 This page intentionally left blank. 8 Additional Handout 2 - SA Subgroup Update and Referral Request To : Statutory Accounting Principles (E) Working Group From: Doug Stolte, Chair of the Separate Account Subgroup Date: Ma 28,09 RE: Separate Account Subgroup Update and Referral Request to the Financial Condition (E) Committee The Separate Account Subgroup was formed during the 2007 Winter National Meeting to consider SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). The initial charges assigned to this Subgroup were to: 1) Review and consider SOP 03-1 to potentially revise/supersede SSAP No. 56—Separate Accounts (SSAP No. 56), through consideration of the restricting conditions included within SOP 03-1 and other elements proposed by the Subgroup. This activity will require consideration of revised or enhanc ed guidance on accounting for the insurance enterprise’s interest in separate accounts (seed money), transfers to separate accounts, and the valuation of liabilities in separate accounts. 2) Consider whether disclosures or restrictions should be established to prevent separa te account transactions that establish preferred classes of policyholders. Since formation in 2007, the Separate Account Subgroup has conducted several conference calls to discuss SOP 03-1 and consider whether this GAAP guidance should be adopted for stat utory accounting. In accordance with these discussions, the Subgroup has determined that SOP 03-1 should not be adopted for statutory accounting purposes. In making this decision, the Subgroup has elected not to establish st atutory accounting parameters, similar to SOP 03-1, that determine the separate account classification of products. The Subgroup determined that the establishment of such parameters would contradict state authority as the classification of an insurer’s products is determined by enacted model laws and/or guidelines of the domiciliary state. Although the Subgroup does not in tend to propose parameters governing the separate account classification of products, the Subgroup believes that enhanced disclosures should be included within both the general and separate account annual statements. The Subgroup believes such disclosures would assist regulators in understanding each reporting entity’s separate account programs, the products captured with in the separate account annual statement, as well as any potential impact the separate account program could have on the general account. The Subgroup is in the process of finalizing proposed disclosure revisions to SSAP No. 56 and illustrative disclosures for both the general and separate account annual statements. It is anticipated that the Subgroup will provide a final recommendation to the Working Group shortly after the 2009 Summer National Meeting. The Subgroup requests that upon the receipt of the proposed revi sions, the Working Group consider an interi m exposure in order to allow discussion and potential adoption at the 2009 Fall National Meeting. Additionally, the Subgroup noted that current regulatory guid ance lacks any requirements to establish risk charges for individual separate account products that are guaranteed by the general account. The Subgroup believes this to be a very concerning matter that needs to be addressed with some urgency. However, the Subgroup acknowledges that the NAIC Accounting Practices and Procedures Manual is not the appropriate place to address such concerns. Therefore, the Subgroup requests that the Working Group submit a referral to the Financial Condition (E) Committee. This referral should request that the Committee take action to establish or revise Model Laws, or other regulatory guidance, to ensure that appropriate risk charges for individual separate account pr oducts are required in order to compen sate the general account for risks taken through the guarantee of separate account prod ucts. The Subgroup is concerned that the lack of risk charges, combined with the current market environment, may be significantly increasing the solvency risk for insurers. 9 Additional Handout 2 - SA Subgroup Update and Referral Request To : Financial Condition (E) Committee From: Joe Fritsch, Chair of the Statutory Accounting Principles Working Group Date: June 13, 2009 RE: Referral: Risk Charges for Individual Separate Account Products The Statutory Accounting Principles Working Group, with th e assistance of a specially designated Separate Account Subgroup, has been reviewing SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1) for statutory accounting. In accordance with the review of this GAAP guidance, it was noted that there is no current regulat ory guidance that requires the establishment of risk charges for individual separate account products that are guaranteed by the general account. Pursuant to the discussions of separate account products and characteristics, the Separate Account Subgroup identified this to be a very concerning matter for solvency regulation. (Model Regulation 200, Separate Accounts Funding – Guaranteed Minimum Benefits Under Group Contracts, is limited to group contracts, thus guidance does not exist for individual contracts.) Since the inclusion of product requirements within the NAIC Accounting Practices and Procedures Manual is beyond the scope of accounting guidance included within this manual, the Statutory Accounting Principles Working Group requests that the Financial Condition (E) Committee consider establishing regulatory guidance requiring risk charges for individual separate account products. The Statutory Accounting Principles Wo rking Group recognizes that insurers are required to hold reserves within their general accounting for guarantees of sepa rate account products, but believe it is equally important that the general account be compensated for such guarantees through the requirement of a risk charge. The Working Group believes the current economic downturn demonstrates the significance these guarantees can have on the general account, and a requirement for a corresponding risk charge is deemed important and necessa ry. The Statutory Accounting Principles Working Group requests consideration of th e following components if the Committee ag rees to pursue the establishment of such guidance: Risk charges for individual separate account products should adequately compensate the general account for risks taken through the guarantee of separate account products. Risk charges should be appropriate in accordance with the nature of the guaranteed contract liabilities, losses experienced in connection with separate account contracts and other pricing factors. Risk charges should be reviewed and opined upon by an appropriate actuary. Please accept this memorandum as a request from the Statutory Accounting Principles Working Group to have the Financial Condition (E) Committee review and consider establishing guidance requiring risk charges for individual separate account products. If you should have any additional questions, please contact NAIC staff Julie Gann. cc Robin Marcotte, John Tittle, Julie Gann, JoeFritsch, Doug Stolte, Todd Sells, Al Gross 10 Additional Handout 3 - PBR Update PBR Update as of June 15, 2009 Principle-based reserves (PBR), the enabling Standard Valuation Law (SVL) changes, and the details in the Valuation Manual are believed to be on track for product issues on and after 1/1/2012. Plans include a process change where the Accounting Practices and Procedures Manual (APPM) will refer to the reserve requirements in the Valuation Manual (VM) for products issued on and after the VM operative date. Relationship of APPM Appendix A & C to the Valuation Manual: For products issued before the VM operative date the APPM will provide reserve requirements with its Appendix A & C. For products issued on and after this operative date the VM will provide the state reserve requirements as enabled by the SVL and the APPM will refer to those reserve requirements for accounting purposes. The VM will provide PBR reserves and initially will use appropriate APPM Appendix A & C requirements for non-PBR reserves. The VM currently has a list of the APPM Appendix A & C requirements to be used on the VM operative date. The Draft SSAP: To enable the APPM to refer to VM reserve requirements an approach of using a single SSAP was discussed when the American Academy of Actuaries’ was developing the initial draft Valuation Manual for LHATF use. Dave Christensen and Milum Livesay provided a start to this draft SSAP to explore the viability of this approach. However, completion of this or a similar approach is dependent on the scope being set for life insurance PBR. This scope is still being discussed. Scope of PBR for Life Insurance: Discussions at various levels have included competitive term and universal life insurance with secondary guarantees. The net premium approach being developed by the ACLI may also have an influence on setting this scope. The American Academy of Actuaries is currently working on developing information to help with the determination of scope once the net premium approach is completed. It may be possible to further develop the SSAP approach by assuming an initial scope but this would be up to SAPWG. Maintenance Process With SAPWG in VM-0: A maintenance process between SAPWG and LHATF was drafted into VM-0 to support the same timing of reserve requirements for both the APPM and VM. This maintenance process is found in the Introduction of VM-0 under the section titled, “Process for Updating Valuation Manual”. The exposed VM-0 is found on the LHATF portion of the NAIC website. The rest of the VM can be found there as well. Reinsurance Issues: Reinsurance has been discussed extensively in VM-20 which provides the PBR reserve requirements for life insurance. Discussions have involved the ability of PBR to support ceding less than all material risks. However, it has been determined that the VM should reflect only reinsurance which meets current risk transfer requirements. Discussions on 11 Additional Handout 3 - PBR Update reinsurance involving less than all material risks will continue and consideration and coordination with SAPWG will be required. PBR Impact to Blanks: ACLI accepted a request from the LHATF PBR Process & Coordination Subgroup on work to further draft a subgroup proposal which was developed from earlier work of the American Academy of Actuaries. The subgroup requested that ACLI provide a recommendation for the analysis of increase in reserves during the year, any PBR changes due to Actuarial Guideline 43, input regarding the draft Exhibit 5a instructions, and any additional comments which ACLI may have on the proposal. The draft proposal currently contains the following: • Exhibit 5A instructions for PBR. • New Exhibit 5B containing details of PBR reserves by type of product. • Page 3 PBR amount. • Exhibit 5 PBR amounts (higher level than new Exhibit 5B) • Page 7 Analysis of Increase in Reserves During the Year. • Interest Sensitive analysis of reserve increases (similar to page 7). Notes: The analysis of increase in reserves has been problematic to date as PBR does not have the type of retrospective development that works well with such analysis. The current proposal simply provides places to enter PBR amounts to then tie with total reserves elsewhere in the statement. The net premium floor being developed by the ACLI may help with this analysis. The Exhibit 5a instructions in the current proposal address those PBR reserve changes that should not impact gain. These instructions may need greater specificity. A separate consideration needing additional discussion has been a suggestion of providing actual to expected PBR disclosure. Such disclosure may work best in comparing actual to expected experience assumptions as opposed to actual to expected reserves. However, a number of these assumptions may not be appropriate for the annual statement. VM-31 is the confidential document which would detail the assumptions and experience or other support for these assumptions. The concept of any additional actual to expected disclosure will be discussed further. 12 Additional Handout 4 - AP&P Manual Changes Ref #2009-11 Statutory Accounting Principles Working Group Maintenance Agenda Submission Form Form A Issue: Accounting Practices and Procedures Manual Content Changes Check (applicable entity): P/C Life Health Modification of existing SSAP New Issue or SSAP Description of Issue: Several issues are in process which will necessitate changing some of the format of the NAIC Accounting Practices and Procedures Manual . The FASB Accounting Standards Codification is planned to go into effect on July 1, 2009. After final approval of the FASB only one level of authoritative GAAP will exist (other than SEC guidance). While the FASB codification is designed to make it easier to research accounting issues, it is changing the formatting and referencing of FASB accounting standards. To be simplistic, the GAAP standards are being codified on a topic based format, rather than a statement based format. Future amendments will be on this format also. This and other issues such as the Principles Based Reserving project, the need to have guidance adopted by Plenary before its effective date and the NAIC changing to a three National Meeting format have raised the questions about the need for some appendices, policy statements and general formatting of the Accounting Practices and Procedures Manual to be updated. In addition, staff has some other proposals regarding the structure and general formatting of the manual Existing Authoritative Literature: The hierarchy in the preamble, the policy statements in appendix F and some of the appendices. Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): Staff has previously updated the Working Group ab out the FASB Accounting Standards Codification project and noted that this may necessitate changes to the statutory hierarchy and how relevant GAAP is referenced in the statutory accounting guidance. Information or issues (included in Description of Issue ) not previously contemplated by the SAPWG: Staff Recommended Conclusion or Future Action on Issue: Staff has some tentative plans for addressing the ch anges from FASB Accounting Standards Codification and has already begun a project to update Appendix D - GAAP Cross Reference to Statutory Accounting Principles. However, staff recommends that as several changes are being contem plated, that they should be reviewed in their totality so that decisions remain part of a consistent framework. Staff recommends that the Working Group move this item to the Nonsubstantive active listing and form a subgroup, that will provide input to staff on proposed changes to the hierarchy, the policy statements, and structure of the manual. Changes will be recommended to the Working Group for public exposure. Recommending Party: Robin Marcotte, NAIC Staff - June 2009 G:\DATA\Stat Acctg\1. Statutory\A. Maintenance\a. Form A\1. Active Form A's\09-11 APP format.doc © 2009 National Association of Insurance Commissioners 1 This page intentionally left blank. Statutory Accounting Principles Working Group Meeting Agenda Summer 2009 1. Consideration of Maintenance Agenda – PENDING LIST (Page 1 of Attachment A) • 2009-07: FSP FAS 115-2 and 124-2, Recognition a nd Presentation of Other-Then-Temporary Impairments (FSP 115-2 and 124-2) (Attachment B) Summary: FASB Statement of Position FAS 115-2 and 124-2: Recognition and Presentation of Other-Than- Temporary Impairments (FSP FAS 115-2 and 124-2), issued April 9, 2009, amends the existing GAAP guidance for other-than-temporary debt securities to make the guidance more operational and to improve the presentation and disclosure of other-t han-temporary impairments on debt and equity securities in the financial statements. This FSP do es not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. • 2009-08: FSP SOP 94-3-1 and AAG HCO-1, Omnibus Changes to Consolidation and Equity Method Guidance for Not-for-Profit Organizations (Attachment C) Summary: FASB Statement of Position SOP 94-3-1 and AAG HCO-1, Omnibus Changes to Consolidation and Equity Method of Guidance for Not-for-Profit Organizations (FSP SOP 94-3-1 and AAG HCO-1), issued May 2009, makes several changes to guida nce on consolidation and the equity method of accounting in AICPA Statement of Position 94-3, Reporti ng of Related Entities by Not-for-Profit Organizations (SOP 94-3), and the AICPA Audit and Accounting Guide, Health Care Organizations (AAH HCO). Statutory accounting has previously rejected GAAP guidance pertaining to consolidation as well as GAAP guidance specific for not-for-profit orga nizations. All impacted GAAP pronouncements identified within this FSP have previously been rejected, or deemed not applicable, for statutory accounting: • 2009-09: Disclosures for Financial Guarantee Insurance Contracts (Attachment D) Summary: During the Spring 2009 National Meeting, the Statutory Accounting Principles Working Group considered comments received on the exposed Issue Paper No. 136—Accounting for Financial Guarantee Contracts (Issue Paper No. 136). This Issue Paper proposed adoption, with modification, of FAS 163, Accounting for Financial Guarantee Contracts (FAS 163). After considering the comments received, the Working Group formed a Subgroup comprised of New York, Maryland and Wisconsin. This Financial Guarantee Subgroup was then direct ed to 1) prioritize adopting enhanced financial guarantee disclosures effective for the 2009 reporting pe riod, 2) coordinate with the Financial Guaranty Insurance Guideline Working Group, and 3) co nduct conference calls to address the technical comments received from the initial exposure of Issue Paper No. 136. This agenda submission form is in response to the Subgroup’s priority of adopting enhanced financial guarantee disclosures effective for the 2009 reporting period. The Subgroup has requested that this item be exposed for public comment during the 2009 Summer National Meeting. As illustrated, this agenda submission form proposes the incorporation of sever al disclosures within SSAP No. 60. The Subgroup © 2009 National Association of Insurance Commissioners 1 believes these disclosures are necessary as SSAP No. 60 does not currently have any disclosure requirements specific to financial guarantee insurers. (Current disclosure requirements within SSAP No. 60 are simply limited to disclosures required by other statements within the Accounting Practices and Procedures Manual.) The Subgroup agreed to propose disclosures that are applicable under current statutory accounting guidance, but that are similar to the intent of disclosures within FAS 163. It is anticipated that disclosures adopted from the issuance of this new agenda submission form will be modified in the event that statutory guidance on financial guarantee contracts is revised in accordance with FAS 163. However, as it is uncertain whether revisions to mirror FAS 163 guidance would be adopted, the Subgroup believes the Working Group should proceed with adopting disclosure requirements that reflect the current statutory guidance to enable users to assess the financial condition of financial guarantee insurers and understand the factors affecting the present and future recognition and measurement of financial guarantee insurance contracts. • 2009-10: Deferred Premium Asset and the Unearned Premium Reserve (Attachment E) Summary: This agenda item was submitted by the ACLI related to the deferred premium asset, unearned premium reserve issue and handed out at the 2009 Spring Na tional Meeting. It proposes some retroactive changes, but primarily makes prospective recommenda tions for policies issued on or after 1/1/2010 to the reinsurance guidance in SSAP No. 61—Life, Deposit-Type and Accident and Health Reinsurance . Staff is working on scheduling a joint call with the Li fe and Health Actuarial Task Force to discuss this topic and the examples provided by the ACLI in June or July 2009. • 2009-11: Impact of FASB Codification on the AP&P Manual (Attachment to be provided as a National Meeting Handout) 2. Consideration of Maintenance Agenda – SUBSTANTIVE ACTIVE LIST (Page 2 of Attachment A) • 2003-12: FIN 45: Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others, and Interp retation of FASB Statement Nos. 5, 57, and 107 and Rescission of FIN No. 34 (FIN 45) (Attachment F) Summary: During the 2009 Spring National Meeting, the Statutory Accounting Principles Working Group directed staff to modify Issue Paper 135 —FIN 45: Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebt edness of Others, an interpretation of FASB Statements No. 5, 57, 107 and rescission of FASB Interpretation No. 35 (Issue Paper No. 135) to prominently include related party guarantees provide d within the body of the accounting guidance. In addition, interested parties agreed to provide input on valuation of guarantees between related parties. FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guar antee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specifi ed triggering events or conditions occur. The objective of the initial measur ement of that liability is the fair value of the guarantee at its inception. The FASB believes that , in current practice, many entities may not be recognizing a liability for a guarantee because the recognition requirements in FAS 5 (pertaining to loss contingencies) have not been met at the inception of the guarantee and the premium for the guarantee was not separately identified because it was em bedded in purchase or sales agreements, service contracts, joint venture agreements, or other commercial agreements © 2009 National Association of Insurance Commissioners 2 Interested Parties Comments: The Working Group exposed a recommendation to include an issue paper with footnote disclosure, and has asked interested parties to develop a proposal for determining the fair value of an intercompany or related party guarantee. Interested parties recommend that intercompany or related party guarantees be valued in the same manner as other guarantees in accordance with FIN 45, i.e., fair value, except for certain “unlimited” related party guarantees. In those cases where an intercompany guarantee has been provided in response to a rating agency’s requirement to provide a commitment to support, the amount of the guaranty may be unlimited and, accordingly, there are no observable values to determine the value of the guarantee as it is highly unlikely that a third party would provide an unlimited guarantee. In these limited circumstances, the existence and terms of the guaranty should be disclosed without a requirement to quantify and disclose an amount of the guaranty. With regard to the reference to “fair value” in FIN 45 above, the reference is in the context of FAS 157, Fair Value Measurements. We note that the NAIC Fair Valu e Subgroup has not completed its determination of FAS 157 a nd its conclusions will need to be inco rporated into this item as there is currently no statutory accounting guidance on the determination of fair value of a liability. • 2008-28: Transfer of P&C Run off Portfolios (Attachment G) Summary: During the 2009 Spring National Meeting, the Statutory Accounting Principles Working Group directed Staff to draft an Issue Paper with changes to exclude affiliated transactions. Interested Parties’ Comments Interested parties agree with the proposal to amend SSAP No. 62 and do not believe that it is necessary (or consistent with past practice) to draft an issue paper before amending the SSAP. • Update on the Financial Guaranty Contracts Subgroup (Ref #2008-20: FAS 163, Accounting for Financial Guarantee Insurance Contracts) Summary: A verbal report on the status of this Subgroup will be provided by Joe Fritsch, Subgroup Chair During the 2009 Spring National Meeting, the Statutory Accounting Principles Working Group formed a subgroup to review the comments received on Issue Paper No. 136—Accounting for Financial Guaranty Contracts (Issue Paper No. 136). The Subgroup will: (1) prioritize adopting enhanced financial guarantee disclosures effective for the 2009reporting period; (2) coordinate with Financial Guaranty Insurance Guideline Working Group; and (3) conduct conference calls to address the technical comments. • Update on the Guaranty Fund Subgroup (Ref #2006-14: Modify SSAP No. 35 for Property and Casualty Assessments) Update: A verbal report on the status of this Subgroup will be provided by Steve Johnson, Subgroup Chair The Guaranty Fund Subgroup was formed in June 2006 to consider proposed modifications to SSAP No. 35—Guaranty Fund and Other Assessments for property and casualty assessments. In December 2008, interested parties submitted a proposal to the Subgroup proposing adoption of AICPA Statement of Position 97-3, Accounting by Insurance and Othe r Enterprises for Insur ance Related Assessments (SOP 97-3) with certain exceptions indicated within the proposal. It is anticipated that the Subgroup will resume discussion on this issue during the second quarter of 2009. © 2009 National Association of Insurance Commissioners 3 • Update on Fair Value Subgroup – (Ref #2007-24: Fair Value Measurements - FAS 157) (Attachment H) Summary: A verbal report on the status of this Subgroup will be provided by Ramon Calderon, Subgroup Chair. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. Within FAS 157, a fair value hierarchy is established to increase consistency and comparability in fair value measurements and related disclosures. Duri ng the 2007 Winter National Meeting, the Working Group formed the Fair Value Subgroup to review FAS 157 and other fair value related issues. • Update on Separate Account Subgroup (Ref #2007- 27: Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Dur ation Contracts and for Separate Accounts - SOP 03-1) (Attachment to be provided as a National Meeting Handout) Summary: A verbal report on the status of this Subgroup will be provided by Doug Stolte, Subgroup Chair. SOP 03-1 provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts.During the 2007 Winter National Meeting, the Working Group formed the Separate Account Subgroup to review SOP 03-1. • Update on the Securities Lending Subgroup (Ref #2008-14: Measurement of Sufficient Collateralization for Securities Lending Transactions) Summary: A verbal report on the status of this Subgroup will be provided byDanny Saenz, Subgroup Chair . During the 2009 Spring National Meeting, the Statutory Accounting Principles Working Group formed a subgroup to clarify securities lending in SSAP No . 91R and develop an appendix in SSAP No. 91R with examples. This Subgroup is chaired by Texas, and comprised of California, Connecticut, Iowa, New York and Ohio. 3. Consideration of Maintenance Agenda – NONSUBSTANTIVE ACTIVE LIST (Page 6 of Attachment A) • 2004-27: Fund Demand Disclosure for Institutional Business Summary: During the 2009 Spring National Meeting, the Statutory Accounting Principles Working Group agreed to continue working on developi ng liquidity disclosures. Staff was directed to perform research on existing SEC disclosures and interested parties agreed to provide recommendations 4. Any Other Matters Brought Before the Working Group: • Principles Based Reserving (PBR) Update • International Accounting Update • Re-REMICS © 2009 National Association of Insurance Commissioners4 • Response from VOSTF on Life Settlements (Attachment I) The VOSTF has provided a response to the referral from the Statutory Accounting Principles Working Group on the admissibility of life settlements (Agenda item # 2006-21 SSAP 21 FSP FTB 85-4-1: Accounting for Life Settlement Contracts by Third-Party Investors). Comment deadline for items exposed for comment is August 7, 2009. g:\data\stat acctg\3. national meetings\a. national meeting materials\a. 2009\06-2009\meeting\06-09 meeting_agenda1.doc © 2009 National Association of Insurance Commissioners 5 This page intentionally left blank. Attachment A effoDrtesfetorreredisiathcccoounnfteirns ainnttiecrip2a0t0e8d.- Discussion in Summer 2009r 2009 A 2/26/2007 8StaAf to prep4/29/2009age f4/29/2009erat5/19/A009w Aor 3/1/20098/2009aith 1 of 7 May 27, 2009 Pending Listing 2009 Maintenance Agenda Statutory Accounting Principles Working Group Askbsalqaunecsetsioonnsgarboouupt tchoenpeotafPrnpetgdt)rsreteasctnaictpayment is less frequent than premium from the insured.ification and other issues ACLI Recommends changes to SSAP No. 61 related to when the reinsurance Subgroup NAIC Staff Recommends forming a subgroup to consider changes to the AP&P Manual GAAP hierarchyGAAP hieRecommends that the Working Group move this item to the substantiver statutory Emerging Accountinglferral Financial Guarantee Title Proposed By Description of Proposed Change Priority Date Added Status balances on group contractsPreIsmenponenotfsO(FthSePr-1T1dp1o2r4aDefPerrerIemmdipuPMamrcaetRnmoueifasueFlmrAvASesBseCtoadnidficthaetioUnnoenartnheedAP&P Ref. Appendix D Ref # 2007-03007-024006, 646-30,2009-07ng of INT 06-07eceivFSP FAS 115-2 and 124-2, Recognition andle, Omnibusal Guaranteemends clarifications to SSAP No. 62, related to when the reinsurance © 2009 National Association of Insurance Commissioners Attachment A Status Discussion expected in Summer 2009. Subgroup wiclloamdm drepens.paurbgesdutaaafnronatrinIvdttshdrcouoeeoaneietrnrpct,irtngeerpln5Iteeeitefniaoaiet4rso-negt1seoeaef5enyglteaioelieefiorhitebg3vdalgh.tdyinqeneaunee.runfhrehrertbetpiaose8eondetiltlrapdoiueddpocesepinirruNuoroWegntated5sr0eti8edtosepnueeatnedodofuu2pl0dd0ab9tee. Active A 12/10A2001 Move6/23/2003nsubstantive lJune 2003 - NAIC staff directed to draft an IP. October 2008 - Staff hassau3/i6lr6S/e1uf2e06od0/u12in0iimeoreouptereetc0svnn.espdIuserasanunndrnoou.Gp1u2oahnetiyllSFbdiscuu.bssgerdouwpi,thnointitnegretshtaetdspuarrvteieysr.esults will 2 of 7 May 27, 2009 Substantive Listing 2008 Maintenance Agenda Statutory Accounting Principles Working Group ProviNonadFmoirsmnssioAnraetnocdthmeP9e.n0dDsaryeerurlael to the VOSTF. ProapcocscoeoucAthenifidAEnnhtFoi.ce8a6/10/2030/120/2003ReinsuSraunbcsetaSlcffndntuibvgercohuapnhgaestobeSeSnAfoNoed. 2a1ndrefeirlrlerdeptoortthteoItnsteGd Assets WG for NAIC Staff EAIWG Nonsubstantive modification to provide computation of Company EAIWG EAIWG toWG Referral SVO WorkiGAAP Hierarchy Review of GAAP pronouncement to determine applicabilityrican SuretyReferral fromral from GAAP Hierarchy Proposes moving the item to the substantive active listing Interested Parties Proposes Modifications to SSAP No 35 for property and Title Proposed By Description of Change Priority Moved to ReinsConrusilsetefort aiptnruccsnoeocnotrrittafeoihnnlceoil4nsmguuidonienrtqoemuaernatnstefoers ofeoryiuAmcsPoolinRg geAtErrornaatnie23eInst.r)asnsceemoennttrsacts by the Insured Reference INT 01-31 and others SSAP No. 62 INT 01-03 & Ref # 2001-32 S2002-120003-S02S10A0P 3-S1S2o. 6P1SSoA . 2P1NoI.n5v,estments in Guaranteed Investment003-16 2003-222004-3I3NT 200036I-0130o0.6_1_4odSifiEPc1t3Fn0P3to-38FaEcxc12sut3dtgiintfSeohSrl-piaosnes5PaafdoyermaPenrntySand Casualty © 2009 National Association of Insurance Commissioners n d Attachment A rketability and d from interested parties to Status Spring 2009 - Exposed SSAP No. 92 and SSAP No. 100 Winter 2008 - ADiscussion expected in Summer 2009. to theiSteum ibngcorneuatsptragptcreovgetir'iscppsidrestuetauadioiusirrieeopIeIenhsu8rs0n0utnidroreag'ioireur0eehtandppo0gftetetafrtIleuectnidecriuerolactesctnuenthiraedrai7foossssifnuosiaaPtdrafgfuSidfor public comment.eecaornss.ideration of the effective date to 2011 and transitionsviatoiassnfedfdetfoIesrsruee Active A 12/11/2006 March 2007 - Working Group requested industry comment on the consideratio 3 of 7 May 27, 2009 Substantive Listing 2008 Maintenance Agenda Statutory Accounting Principles Working Group diremctaiynglansitsaShfuftbotgocrodonruaspfiueeinptgahpeaeiPnusehieopaeonrrdkpiPrnioogsrtGrtoertoieurxeppmoesnutre. GAAP Hierarchy Amend SSAP No. 10 to adopt FIN 48 with modification. GAAP Hierarchy Form A recommendG AsAreA fePrralietoratrhcehyVORSeT0coFm. mends moving to the SubAstantive Active8L/2is2ti/n2g00a6ndeive Referred to Valuation of Securities Task Force for input on ma Title Proposed By Description of Change Priority Moved to Taxes Settlement Contracts by Third-PartyFA InSvee1nsP5telo8,m8ea8pnn,0en6er,snddce1cn2uo(hie)rgSfPoorSsttraeeirneeemndetsntNo. Reference SSA SSPA1P 1 14 Ref # 2006-18 Statement SSAP 10 FIN 48 - Accounting for Uncertainty2006-21ome SSAP 21 FSP FTB 8250-046-1-3:0AccounStSinAgPfo8r9Life © 2009 National Association of Insurance Commissioners s p Attachment A Discussion Discussion planned in Status Discussion expected in Summer 2009 to continue discussion Discussion expected Summer 2009. 157SaSnA vdaPotthheeaeiuetrnptdfgyeecdcruevsestariig.toxuridiciggspetohvuoirdosueteaano2elueeusrbrs0nipcingrerveii0iea0lendexinagfoiurlteS.FPualrtoee2o.r0a0an0ndedegivvifeenodltroeaprtn.ndssi.coxlnoincreePqailrols9ea1ttsiicatihdpoatpetdedininthe(fda1iolg2ictt0d0ievnsepttecoieicnnaoofrrdfoptuoosdsriabflteaenxpIsossuuerePianpeSrummer Active A 12/2/2007 During 20A07 Winter Natio1n2a/l2M /2e0e0t7ing, SuD bgurroinugpAw0a0s7forminetedrtoarte5/31/2008FA eeSting, suIn Summer 207/8/2008 was directed Fall 2008 - Directed staff to draft an Issue Paper proposing substantive revisiontem for comment and directed staff to work with e 4 of 7 May 27, 2009 Substantive Listing 2008 Maintenance Agenda Statutory Accounting Principles Working Group measuring fair value entearnpdrifsoerssfeopracreartetaainccnoounnttrsa.ditionalcollcaotuevrnaatlleiuiriheeeeincfhtitemNsot.cho6an0tltiairanarcatcrgnrtfp.diioteciindosdnoefiroatrhetiionaencailusuenaandetredyefcaougltnhizaescertain AIG Proposes amendments to SSAP No. 91 to clarify that GAAP Hierarchy Provides guidance on accounting and reporting by insuranc