Comments to Statutory Accounting Principles Working Group

Comments to Statutory Accounting Principles Working Group

December 7, 2016

Page | 2

D. Keith Bell, CPA
Senior Vice President
Accounting Policy
Corporate Finance
The Travelers Companies, Inc.
860-277-0537; FAX 860-954-3708
Email: / Rose Albrizio, CPA
Vice President
Accounting Practices
AXA Equitable.
201-743-7221
Email:

December 7, 2016

Mr. Dale Bruggeman, Chairman

Statutory Accounting Principles Working Group

National Association of Insurance Commissioners

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

RE: Interested Parties Comments on Items Exposed for Comment by the Statutory Accounting Principles (E) Working Group with Comments due December 7

Dear Mr. Bruggeman:

Interested parties appreciate the opportunity to provide comments on the items that were exposed by the Statutory Accounting Principles (E) Working Group (the “Working Group”) with comments due December 7th. We offer the following comments:

Ref 2013-36: Investment Classification Review

On October 25, 2016, the Working Group exposed an issue paper proposing substantive revisions to SSAP No. 26—Bonds. Key elements included in this issue paper include:

1.  Removes SVO-Identified instruments (as defined in the SSAP) from the definition of a bond, and provides guidance for these instruments separately from bonds. Within this explicit section, specific guidance for SVO-identified instruments is provided, which includes a requirement for these instruments to be reported at fair value (using net asset value (NAV) as a practical expedient), unless the investment qualifies for, and the reporting entity elects, use of a documented systematic value approach.

2.  Incorporates the definition of “security” within the definition of a bond, as well as definitions for non-bond, fixed-income instruments captured in the scope of SSAP No. 26. These changes include removal of the term “bank participations” with inclusion of guidance to reflect bank loans acquired through a participation, assignment or syndication.

Interested parties offer the following comments on the guidance in paragraphs 23-29 for SVO Identified Investments:

Eligibility for Systemic Value Approach

The proposed guidance in paragraph 25a would allow insurers to use the systemic value approach for the measurement of SVO-eligible investments if they have a rating of NAIC 1-5 (for AVR filers) or NAIC 1-2 (for non-AVR filers). The guidance in paragraph 25c states: “If an investment no longer qualifies because the NAIC designation has declined, then the security must be subsequently reported at the lower of “systematic value” or fair value”. We agree with the intent of this language but believe the measurement requirements in paragraphs 25c should be combined with 25a so the guidance is clearer.

We also note the guidance in paragraph 25c is contradictory, as it indicates SVO-eligible investments are not eligible for the systematic value approach, yet still requires insurers to calculate systematic value each period, to measure the ETF at the lower of systematic value or fair value. We recommend that securities not eligible for the systematic value approach be reported at fair value, rather than the lower of fair value or systemic value. Otherwise, an insurer would still be required to calculate the systematic value each period as long as they own the investment, even though fair value would likely be the prevailing of the two measurement methods.

Based on these comments, we offer the following modifications to paragraphs 25a and 25c:

1. Systematic value is only permitted to be designated as the measurement method for AVR filers acquiring qualifying investments that have an NAIC designation of 1 to 5, and for non-AVR filers acquiring qualifying investments with an NAIC designation of 1 or 2. Qualifying investments that have an NAIC designation of 6 for AVR filers or 3-6 for non AVR filers shall be measured at fair value.

c.  Once designated for a particular investment, the systematic value measurement method must be retained as long as the qualifying investment is held by the reporting entity and the investment remains within scope of this statement with an allowable NAIC designation per paragraph 25a. Subsequent purchases of anthe same SVO-identified investment (same CUSIP) must follow the election previously made by the reporting entity. If an investment no longer qualifies for a systematic value measurement because the NAIC designation has declined, then the security must be subsequently reported at the lower of “systematic value” or fair value. If the security has been removed from the SVO-identified listings, and is no longer in scope of this statement, then the security shall be measured and reported in accordance with the applicable SSAP.

Regulatory Approval/Disallowance

Paragraph 25d indicates that prior approval by the domiciliary state is not required, but that the domiciliary state has the ability to disallow or require modifications to the approach. If a regulator has the ability to subsequently disallow the systematic value approach, this has the effect of forcing insurers to review the method and getting approval from the domiciliary state prior to using it in their financial statements. Since it appears the intent of this proposal is not to require regulatory approval, we suggest removal of the following sentence: “Unless domiciliary state rules/regulations requires otherwise, the documented approach is not required to be approved by the domiciliary state before initial application, but must be made available for review upon request, be reviewable with the domiciliary state having the ability to disallow, or require modifications to the approach.”

We also note that state regulators would already have the ability to ask for support around the systematic value approach during a financial analysis or financial examination or upon request so this wording would be unnecessary.

Other Comments

Paragraph 24 – We recommend clarifying that investments reported at fair value would have changes in fair value recorded as unrealized gains or losses. “Subsequently, SVO-identified investments shall be reported at fair value (with changes in fair value recorded as unrealized gains or losses) unless the reporting entity has elected use of a documented systematic approach to amortize or accrete the investment in a manner that represents the expected cash flows from the underlying bond holdings.”

Paragraph 26 – Interest income should be reported when earned, not received, consistent with the guidance for other types of investments.

Paragraph 29 – Consistent with prior comments, we recommend requiring an SVO-identified investment that has been impaired to subsequently be reported at fair value. We also note this paragraph as written would require impaired investments to be recorded at the lower of systematic value or fair value, even if the insurer didn’t elect to use the systematic value in the first place. We offer the following suggested changes: “Upon recognition of an other-than-temporary impairment of any SVO-identified investment (regardless of whether the investment is reported at systematic value or fair value), the reporting entity shall subsequently report the investment at the lower of systematic value or fair value.”

IMR/AVR

Interested parties believe the existing guidance on IMR/AVR for bonds that is based on changes in NAIC designation while the investment is held is sufficient.

Effective Date

Interested parties support a January 1, 2018 effective date with early adoption permitted. This will allow enough time for investment systems to be modified in order to accommodate the changes.

Ref 2016-38: Guaranty Fund Credits for Short-Duration Contracts

On November 16, 2016, the Working Group by email vote moved this item to the active listing characterized as substantive and exposed the revisions with a proposed effective date of January 1, 2017. The proposed language would result in a more comparable asset between writers of long duration products and writers of short duration products subject to similar retrospective guaranty assessments for long duration products. The accelerated timeline is intended to provide certainty for industry preparers. The Working Group noted the intent to draft amendments to Issue Paper No. 143, after review of comments on the exposed changes to the SSAP No. 35R.

Interested parties agree with the intent of the proposed changes and recommend that the wording in paragraphs 10.b.i and 17d be modified as following for better clarity (in edit marks below):

10.b.i For retrospective-premium-based and loss-based assessments, to the extent that it is probable that accrued liability assessments will result in a recoverable amount in a future period from business currently in-force considering appropriate persistency rates for long-duration contracts, an asset shall be recognized at the time the liability is recorded. In-force policies do not include expected renewals of short-term contracts except in cases when retrospective-premium-based assessments are imposed on short-duration contracts for the insolvencies of insurers that wrote long- duration contracts (e.g., long-term care policies). In which case, appropriate renewals rates based on persistency for the in-force short- duration contracts shall be taken into consideration when recognizing the asset.

17.d Guidance within ASC 405-30 pertaining to accrual of an asset based on future renewals of premium is modified to allow accrual of the asset based on in-force short-duration contract renewals in instances when retrospective-premium-based assessments are imposed on short-duration contracts for losses the insolvencies of insurers that wrote on long- duration contracts (e.g., long-term care policies).

* * * *

Thank you for considering interested parties’ comments. We look forward to working with you and the Working Group on these topics. If you have any questions in the interim, please do not hesitate to contact either one of us.

Sincerely,

D. Keith Bell Rose Albrizio

cc: Julie Gann, NAIC staff

Robin Marcotte, NAIC staff

Interested parties