Ready for Christmas? Almost? Cool!
Ready for year-end? Not so much? Not so cool!
Year-end 2021 is here and companies don’t usually appreciate surprises to that process. How prepared is your company to handle statutory accounting and reporting changes?
The below discussion is focused on reporting changes and, where applicable, accounting adoptions that accompanied the reporting revisions, or sometimes even caused the reporting change. Just for good measure, there are a few accounting items included where the reporting change may not be quite so apparent. A summary of all accounting revisions applicable for this year-end is beyond the scope of this article but should be reviewed by each company for applicability.
The Preamble of the Accounting Practices and Procedures Manual (AP&P Manual) was amended to strengthen the concept that an entity’s statutory statement is to be prepared on its state of domicile basis, including prescribed practices if there are any. Any state in which an insurer is licensed can have required prescribed practices covering financial statement accounting/reporting. To prevent insurers from having to file financial statements or reports prepared on a different basis of accounting with different states, the practices prescribed or permitted by the domiciliary state will be accepted by all states. If a state requires accounting practices that differ from the AP&P Manual for its nondomiciliary companies, it can require supplemental financial information to be filed with it. A great example of that already occurring is the filing of the New York Supplement by insurers doing business in New York but not domiciled there.
Last year (2020) could easily be called the year of the interpretation. But did you realize some of those INTs were extended through year-end 2021? Which ones?
INT 20-03 – Troubled Debt Restructuring Due to COVID-19
INT 20-06 – Participation in the 2020 TALF Program
INT 20-07 – Troubled Debt Restructuring of Certain Debt
INTs 20-01 and 20-09 regarding the LIBOR transition are still in place and will be for a while.
During 2021, two INTs (to date) were adopted and will still be effective for year-end reporting. INT 21-01 – Accounting for Cryptocurrencies affirms that direct investments in cryptocurrencies are nonadmitted assets. Note, however, that a company can indirectly invest in cryptocurrencies, say through a mutual fund, and the fund can be an admitted asset. INT 2021-02 – Extension of Ninety-Day Rule for the Impact of Hurricane Ida, expiring January 24, 2022, also can be used for year-end reporting.
Complete INT information can be found on the Statutory Accounting Principles Working Group (SAPWG) website, under the Documents tab. Please review each INT carefully for effective dates and details.
Reporting Revisions Applicable to All Statement Types
The good news is this is the biggest batch of statement changes. The bad news is this is the biggest batch of statement changes. The presentation below isn’t quite in statement order, as we have tried to group related items together.
The existing General Interrogatory #8 asking if the reporting company is a subsidiary of a bank holding company has been revised to ask if the reporting company is a subsidiary of a depository institution holding company (DIHC), or a DIHC itself. If the response is “yes,” additional disclosure is required in the interrogatory. The new language resulted from the work being done in developing the new Group Capital Calculation.
A new General Interrogatory #24, inserted in the financial subsection, asks if the insurer uses third parties to pay agent commissions, where the amounts advanced by the third party are not settled in full by the insurer within 90 days. A “yes” response requires identification of the third party. Remember, under SSAP No. 71 – Policy Acquisition Costs and Commissions (SSAP No. 71), the use of third parties to pay commissions is allowed even if not repaid within 90 days, if the appropriate accounting is followed—that is:
- Acquisition costs, including commissions, are expensed when incurred regardless of when payment is made to the third party.
- The use of a third-party arrangement requires establishing a liability.
Although revisions to SSAP No. 71 were adopted in March 2021 as nonsubstantive changes, which are usually effective upon adoption, compliance was deferred until December 31, 2021. To be truthful, the adopted revisions to SSAP No. 71 do not change the original accounting of these third-party arrangements but instead emphasize the correct accounting.
Notes to Financial Statements
SAPWG has invested a lot of time in the discussion of goodwill and subsidiary, controlled, and affiliated (SCA) entities. This has led to various new disclosures throughout the statements. The instructions to Note #3A – Business Combinations and Goodwill – Statutory Purchase Method were modified to require information on the original amount of goodwill at acquisition, each SCA’s recorded amortization of goodwill during the reporting period, admitted goodwill of each SCA at the reporting date, total admitted goodwill as of the reporting date, and admitted goodwill as a percentage of the SCA’s book adjusted carrying value. The information will be data-captured. The reporting format is shown below.
A Note #3E – Business Combinations and Goodwill – Subcomponents and Calculation of Adjusted Surplus and Total Admitted Goodwill also has been added. This reporting requirement provides the subcomponents and calculation of adjusted surplus and total admitted goodwill as a percentage of adjusted surplus, as shown below.
Along with the above Note #3 changes, related changes were made to Schedule D – Part 6 – Sections 1 and 2. The reporting format for both sections was changed to require the reporting of goodwill amounts instead of the amount of reported intangible assets. The revised reporting format for Section 1 is shown below (changes are highlighted), but similar changes also were made to Section 2.
The above Note #3 and Schedule D – Part 6 revisions result from revisions to SSAP No. 68 – Business Combinations and Goodwill and SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities. Both SSAPs’ revisions should be reviewed carefully.
As a result of SAPWG revisions to SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, Note 17B – Sale, Transfer and Servicing of Financial Assets and Extinguishments of Liabilities has new requirements for reporting the transfer and servicing of financial assets where an entity has transferred (or sold) assets but retains an economic interest. The new reporting format includes information identifying the transaction, the value prior to transfer, the original reporting schedule of the transferred assets, the amount derecognized from the sale transaction, the amount that continues to be recognized in the Statement of Financial Position, the value of acquired interests in transferred assets, the reporting schedule of acquired interests, and the percentage of interests of a reporting entity’s transferred assets acquired by affiliated entities.
In Note #22A – Subsequent Events, the requirement for the Affordable Care Act (ACA) Section 9010 Assessment disclosure has been deleted, as the assessment was repealed effective January 1, 2021.
There will most likely be some last-minute Note disclosures added in December. This would be normal and reflects ongoing SAPWG activity. SAPWG is scheduled to meet on December 11, at which time it will probably approve documentation of additional Notes disclosures expected for year-end. Normally, the additional disclosures are not data-captured within the statement software.
Instructions for the reporting of NAIC designation categories in Schedule BA have been expanded to indicate that when reporting unaffiliated working capital finance investments on line 4599999, the NAIC designation category is required.
The reporting of bond mutual funds as identified by the Securities Valuation Office (SVO) has been removed from bond reporting. Instead, the funds will now be reported as common stocks. The addition of the NAIC designation category column to Schedule D – Part 2 – Section 2 last year made this reclassification possible.
The reclassification applies to several investment schedules where bond reporting is done, as well as resulting in revisions to the format of Schedule D – Part 1A – Section 1.
Revisions to SSAP No. 26R – Bonds (SSAP No. 26R) provided some new guidance for the reporting of perpetual bonds. Revisions clarify that these bonds do fall under SSAP No. 26R. Further, perpetual bonds with an effective call option can be reported at amortized cost (dependent upon its NAIC designation treatment) and amortized under the yield-to-worst concept. Those that do not have or no longer have a call feature are to be carried at fair value.
The scope of SSAP No. 43R – Loan-Backed and Structured Securities (SSAP No. 43R) was modified to indicate that Freddie Mac Structured Agency Credit Risk (STACR) and Fannie Mac Connecticut Avenue Securities (CAS) programs remain under SSAP No. 43R accounting when issued through a real estate mortgage investment conduit trust structure.
Speaking of revisions to SSAP No. 43R, a reminder that effective January 1 of this year, principal protected securities (PPS) no longer qualify for filing exemption (FE). All PPS are required to be filed with the SVO, including those that had qualified as FE previous to January 1, 2021.
In November, language was added to SSAP No. 43R indicating the correct handling of residual tranches of securitizations. The revisions indicate that entities that have been reporting these tranches on Schedule D – Part 1 may leave them there for year-end 2021. However, they must be reported as an NAIC designation 6 and valued at fair value. They cannot be reported or valued as 5GI securities. Entities that have reported the tranches on Schedule BA are to value them at the lower of amortized cost or fair value. Beginning in 2022, all residual tranches will be reported only on Schedule BA. Companies may early adopt the 2022 requirements by moving the tranches from Schedule D – Part 1 to Schedule BA – Part 1. Complete recording guidance can be found on the Blanks Working Group website, under the Documents tab.
Within Schedule D – Part 1, the reporting for Column 26 – Collateral Type has been expanded. Previously, only residential mortgage-backed securities (RMBS) or commercial mortgage-backed securities (CMBS) reported in the Industrial and Miscellaneous bond category required completion of Column 26. This has now changed. All RMBS/CMBS reported in any of the bond reporting categories are to have collateral information provided.
Speaking of RMBS and CMBS, let’s look at the changes being implemented in the valuation and reporting of these securities at this year-end. These securities are now divided into two different groups: legacy and nonlegacy.
Legacy RMBS/CMBS are those financially modeled securities that closed prior to January 1, 2013. The legacy securities will continue to use price breakpoints supplied by the Structured Securities Group (SSG) through the modeling process to produce an NAIC designation. “Zero-loss” legacy securities will be mapped to a designation category of 1A. Other legacy RMBS/CMBS will be mapped to the midpoint of each designation, as shown below.
Zero-loss ⇒ 1A
Designation 1 ⇒ 1D
Designation 2 ⇒ 2B
Designation 3 ⇒ 3B
Designation 4 ⇒ 4B
Designation 5 ⇒ 5B
Designation 6 ⇒ 6
The designation category will be followed with the FM administrative symbol; for example, 1DFM. Within the Valuation of Securities products, legacy RMBS subject to modeling will be indicated as FMR. Legacy CMBS subject to modeling will be indicated with FMC. In both instances, the security will be reported in the statement using the FM administrative symbol and does not qualify as FE.
Nonlegacy RMBS/CMBS are those financially modeled securities that closed on or after January 1, 2013. They will not use price breakpoints as has been done in the past. Instead, the designation category will be assigned by the SSG. The securities are not FE securities; companies must use the designation category assigned by the SSG. When reporting the designation category, no FM administrative suffix is to be used. That field in the statement software will be left empty.
Companies owning modeled RMBS/CMBS should have already received two different files from the SSG, one for legacy securities and another for nonlegacy securities.
Clarification was added to both SSAP No. 30R – Unaffiliated Common Stock and SSAP No. 32R – Unaffiliated Preferred Stock indicating that publicly traded stock warrants are not to be reported as derivatives in Schedule DB. Instead, preferred stock warrants are to be reported in Schedule D – Part 2 – Section 1, while common stock warrants are reported in Schedule D – Part 2 – Section 2.
Although new treatment for qualified cash pools, covered under SSAP No. 2R – Cash, Cash Equivalents and Short-Term Investments, was officially adopted for year-end 2020 reporting, not all of the reporting format changes were incorporated into the 2020 statement. This year, everything is in place. Under SSAP No. 2R, a specific type of qualified cash pool can be reported in Schedule E – Part 2 as cash equivalents. A line reporting category was missing for this reporting last year but has been put into place this year; Line 8799999. In addition, a new disclosure in Notes to Financials #5 is required to indicate the makeup of the pool. Companies are required to furnish the following information, using this exact format:
Be sure to review the qualifications for qualified cash pools established in SSAP No. 2R.
Schedule Y – Part 3
Schedule Y has been expanded this year with the addition of a Part 3.
The purpose of Part 3 is to identify all entities in the holding company with 10 percent or more ownership of insurers, the ultimate controlling parties of those owners, and other entities that the ultimate controlling party controls. In particular, the reporting calls for disclosure of whether there has been a disclaimer of control granted either by the owning party or the ultimate controlling party. Remember, the ultimate controlling party can be a person; it is not limited to companies or boards of directors. Be sure to check out SSAP No. 25 – Affiliates and Other Related Parties for associated changes, including the definition of a related party.
Supplemental Exhibits & Schedules Interrogatories
Those completing these interrogatories will notice one missing from the annual statement. The question asking about the filing of the Communication of Internal Control Related Matters Noted in Audit report has been moved and appears only in the quarterly statements beginning with the first quarter of 2022. Since the report is not due until August 1 of each year, it was decided the interrogatory would be better addressed in the second-quarter statement.
Supplements for All
Big changes are being implemented for the Accident and Health Policy Experience Exhibit (AHPEE). The new reporting is being phased-in over two years. First, an entirely new reporting format is being used—the same format for both of the phase-in years. For 2021 year-end, the AHPEE will be completed and filed on an aggregate basis, the same basis as has been used in the past. Then, beginning with the 2022 filing, the report will not only be filed in the aggregate but also be required on a state basis. Implementation of the state reporting was delayed one year to allow industry time to update its systems to accommodate the reporting. Companies that have not taken a look at the new reporting may find themselves scrambling to generate the information needed for this year-end. The filing deadline remains April 1.
During 2020, the Long-Term Care (LTC) supplement was overhauled. As is sometimes the case with material revisions, a few problems were found with the new reporting. Consequently, additional changes were adopted beginning with 2021 reporting. Many of the revisions are focused on Form 5 of the LTC with new validations being added to emphasize the correct flow of information. If your company finds it is kicking out crosschecks this year that did not appear to be a problem last year, the crosscheck is probably new, but it also may indicate your previous reporting did not reflect the reporting the NAIC thinks is appropriate.
Although at first glance it might seem that revisions to the Life, Health and Annuity Guaranty (LHAG) Exhibit apply only to Life companies, that is not true. In many states, those writing Health business are required to belong to the Life, Health and Annuity Guaranty Association and therefore complete the exhibit regardless of how they are licensed. The LHAG has been completely reformatted for this year and now is comprised of a Part 1, which develops gross premium, and a Part 2, which makes allowable state adjustments to the gross premiums. The result of Part 2 is the assessable premium for each state.
Property & Casualty Statement
The Property & Casualty Annual Statement Instructions contains an appendix that provides definitions for the various lines and sublines of business. New definitions have been added for the following sublines:
Premises and Operations
Professional Errors and Omissions Liability
Kidnap & Ransom Liability
Tuition Reimbursement Plans product
In addition, some of the existing definitions were revised.
A new Mortgage Guaranty Insurance Exhibit has been added to this statement. The new supplement has an April 1 due date.
There also was a recent revision to SSAP No. 55 – Unpaid Claims, Losses and Loss Adjustment Expense regarding the handling of salvage and subrogation recoveries. Although the added language is thought to reflect current industry practices, having it in SSAP No. 55 makes it official. The guidance now states that estimated salvage and subrogation recoveries are to be reported as a reduction of losses/claim reserves and/or loss/claim adjusting expense reserves (classified according to the nature of the amounts being recovered). Recovered salvage and subrogation are reported as a reduction of paid losses/claims and/or paid loss/claim adjustment expenses. The SSAP revisions also included an expanded Notes disclosure. Please note that although the concepts of salvage and subrogation are primarily found in the property/casualty industry, SSAP No. 55 applies to all insurers where appropriate. (Accident and Health insurers may have to address subrogation.)
Life & Fraternal Statement
Previous questions 29, 30, 31, and 32 of this statement’s Supplemental Exhibits and Schedules Interrogatories have been eliminated because the information previously required by these questions is now included in the Principles-Based Reserving Actuarial Report.
New accident and health information is being added to the statement in the form of a Health Care Receivable Supplement. The new supplement has two exhibits, with the reporting formats borrowed from the Health statement’s Exhibit 3 and Exhibit 3A. In fact, the health names of the exhibits were kept for this supplement. Exhibit 3 ages the reporting company’s health care receivables, as well as indicates admitted and nonadmitted amounts.
Exhibit 3A analyzes how well the reporting company estimated its health care receivables. This is done by looking at the previous year’s receivable estimate, tracking activity of that amount throughout the year, and then indicating if any of those prior-year receivable amounts are still included in the currently reported receivable amount.
Those that have separate accounts to report will find the reporting of general interrogatories 1.01, 1.01A, 2.5, and 4.3 in the separate accounts statement has been significantly expanded. The reporting format is new, and so is some of the requested information.
The Blanks Working Group has posted some guidance for the 2021 Statement of Actuarial Opinion (SAO) on its website. The guidance indicates the SAO should address the treatment of both actuarial liabilities and actuarial assets. Currently, the Health Annual Statement Instructions are out of sync with Actuarial Standard of Practice No. 28 on the issue of actuarial assets. The 2022 instructions will be updated accordingly.
A slight change has occurred to the reporting categories for Exhibit 3. Instead of offering an “Other Receivables” category, that category now specifies “Other Health Care Receivables.” Another minor change occurred to a columnar heading in Exhibit 3A. The change indicates that columns 1 and 2 should report “Health Care Receivables Collected or Offset During the Year.” Most health companies are probably already reporting in this way for Exhibits 3 and 3A, but the revisions had clarity.
What’s next for those of you involved in the year-end process and the production of the annual statement? There are several avenues you can take, but you might want to consider stocking up on your favorite snacks—chocolate, sweet, salty—whatever works for you. Then stock up on your nonalcoholic beverage of choice. And finally, around December 31, tell the family you will see them again in the vicinity of March 1, 2022. Here’s wishing you a smooth year-end!!
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