United States

NAIC 2014 summer update

Affordable Care Act 3 R’s exposure draft anticipated soon


This e-alert summarizes information discussed by the Statutory Accounting Principles Working Group (SAPWG) at the NAIC Summer 2014 National Meeting held in Louisville, KY, Aug. 16-19, 2014.

The impact of the Affordable Care Act (ACA) on statutory accounting continued to be the focus of discussion by SAPWG. Unlike the last meeting where discussions were contentious, discussions at this meeting focused on what information would be available and when risk scores used in determining the risk adjustment would be considered credible enough to be used in the calculation. 

In May, 2014, SAPWG exposed Issue Paper (2014-12), which recommended the accounting for three components of the ACA program (risk adjustment, reinsurance and risk corridors). The Issue Paper proposed the non-admittance of any net receivable in excess of payables for the risk adjustment and the risk corridor program. The Issue Paper was intended to gather information and not intended to indicate that the positions articulated were supported by SAPWG. 

During the comment period, many organizations, including The Department of Health and Human Services, American Academy of Actuaries, interested parties and various coops, submitted comments regarding the positions articulated in the Issue Paper. Most of the comments focused on the similarities between the way one would develop an accrual for the risk adjustment and risk corridor programs compared to various other accruals currently made in preparing statutory financial statements.

After limited discussion, SAPWG voted to redraft the Issue Paper with modifications to allow for SAPWG review and to re-expose. The modifications centered around:

  • Knowledge of the state-specific marketplace
  • Sufficiency of data to estimate an accrual
  • Not allowing for unsettled balances to be admitted (if an amount not received remains under protest)
  • Following government 90-day rule to be admitted (SSAP 84)
  • Offsetting nature of risk adjustment and risk corridor
  • Removal of HHS note from exposure draft

The revised exposure draft is expected to allow for admitting receivables if the company possesses sufficient data to estimate the accrual. The revised exposure draft should be available in mid-September, and will be exposed with a 30-day comment period. SAPWG hopes to hold an interim call before the fall meeting to discuss comments, which should enable them to have a final exposure draft to vote on at the fall meeting, which will be held from Nov. 16-19, 2014.

In addition to the ACA discussion, SAPWG acted upon various other matters which are summarized here.

For more information, please contact McGladrey partner, Jay Golonka, at 919.645.6809 or email him at jay.golonka@mcgladrey.com.

Related Content

During the SAPWG, the following additional items were discussed and noted action taken:

Ref #2013-36: Investment Classification Project

SAWPG discussed the previously exposed “Investment Matrix,” which outlined the various security types that could possibly be covered by the upcoming investment classification project. NAIC staff exposed a listing/prioritization of possible discussion topics. This was followed by discussion of the underlying process and the purpose of exposing such a list. After explaining specific items, SAPWG voted to expose the list and requested comment letters on the listing/ prioritization so that NAIC staff could refine the scope and order of the project.

Ref #2014-06: SSAP No. 57, Title Insurance Premium Classifications

On June 12, 2014, SAPWG exposed non-substantive revisions to SSAP No. 57, Title Insurance. These revisions deleted the existing disclosure of Gross All Inclusive Premiums and Gross Risk Rate Premiums. Based on comments received, two minor other changes were proposed to the wording. Due to these minor terminology changes, SAPWG voted to re-expose the changes to paragraph 6 of SSAP No. 57.

Ref #2014-11: SSAP No. 86, Derivatives – Schedule DB Agreement to Balance Sheet

On June 2, 2014, SAPWG exposed this item to clarify the reporting of derivatives between Schedule DB and the Balance Sheet. This revision agrees the derivative transaction to the Balance Sheet with identification of “offsetting”, if a valid right to offset exists under SSAP No. 64. This item was adopted with modifications to capture the fact the amounts were meant to agree “after netting”. 

Ref #2014-14: ASU 2014-10: Development Stage Entities

ASU 2014-10: Development Stage Entities (ASU 2014-10) was issued in June 2014 to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements for development stage entities. The ASU revisions remove the definition of a “development stage entity” from the master glossary of the Accounting Standards Codification, which removes the financial reporting distinction between development stage entities and other reporting entities under U.S. GAAP. The ASU revisions eliminate the requirements for development stage entities to: 1) present inception-to-date information, 2) label the financial statements as those of a development stage entity, 3) disclose description of the development stage activities in which the entity is engaged, and 4) disclose in the first year in which the entity is no longer a development stage entity.

GAAP Definition of a Development Stage Entity: (deleted from the glossary per the ASU) An entity devoting substantially all of its efforts to establishing a new business and for which either of the following conditions exists:

a.     Planned principal operations have not commenced.

b.     Planned principal operations have commenced, but there has been no significant revenue.

SAPWG recommended this item be moved to the non-substantive active listing and expose non-substantive revisions to Issue Paper No. 99—Nonapplicable GAAP Pronouncements to reject ASU 2013-12 as not applicable to statutory accounting.

Ref #2014-15: ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures

ASU 2014-11: Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures (ASU 2014-11) was issued in June 2014 to respond to accounting and disclosure concerns for repurchase agreements and other similar transactions. ASU 2014-11 incorporates two accounting changes: 1) amendments change the accounting for repurchase-to-maturity transactions to secured borrowing accounting, and 2) for repurchase-financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing for the repurchase agreement.

 The ASU also requires disclosures for certain transactions comprising: 1) a transfer of a financial asset accounted for as a sale, and 2) an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. For those transactions outstanding at the reporting date, the transferor is required to disclose the following by type of transaction (repurchase agreements, securities lending agreements, and a sale with a total return swap.). ASU 2014-11 also requires disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings:

1.     A disaggregation of the gross obligation by the class of collateral pledged

2.     Remaining contractual tenor of the agreements

3.     Discussion of the potential risks associated with the agreements and the related collateral pledged, including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed

The accounting changes in ASU 2014-11 will expand secured borrowing accounting for certain repurchase agreements. By requiring these transactions to be accounted for as secured borrowings, the FASB notes it will result in greater consistency for those transactions when compared with accounting treatment for other repurchase agreements.

SAPWG moved this item to substantive active listing and referred the item to the Restricted Asset (E) Subgroup to develop a recommendation on ASU 2014-11. This included a discussion that this item was considered a substantive matter as it may result in modifying existing statutory principles. 

Ref #2014-16: Restricted Assets Clarification

Through the NAIC review of statutory financial statements, it was noted that some reporting entities did not complete the new “restricted” note disclosure (5H) for all items within the disclosure categories. In response to NAIC quality assurance letters, responses were received noting that the reporting entity did not consider the asset “restricted” as the asset met admittance requirements. (For assets pledged, the INT 01-31: Assets Pledged as Collateral (INT 01-31) requirements – including substitutability – were met).

This agenda item proposes to clarify that the terms “admitted asset” and “restricted asset” are not interchangeable. It is possible for both admitted and nonadmitted assets to be restricted. Determining that an asset is admitted (such as when admittance requirements are met for assets pledged as collateral under INT 01-31) does not preclude it being considered and reported as “restricted.” On the other hand, restrictions can be to the degree that they preclude full ownership rights, in which case the restriction can cause an asset to be non-admitted. This agenda item proposes revisions to clarify the guidance.

SAPWG moved this item to the non-substantive active listing and exposed non-substantive revisions to SSAP No. 4 to incorporate specific guidance for restricted assets. This proposed guidance would clarify that asset restrictions may be a factor in determining the admissibility of an asset under a respective SSAP; however, if a restricted asset is determined to be an admitted asset, the admitted asset determination does not eliminate the requirement to document and identify the restricted asset within all the applicable statutory disclosures and schedules. This would also result in revisions to SSAP No. 1 to clarify that all “restricted” assets shall be included within the disclosures. 

Ref #2014-17: ASU 2014-12: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period

ASU 2014-12 was issued in June 2014. This ASU was issued to address diversity in practice for sharebased payment situations in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period.

Example: Situations in which employees are eligible to retire or terminate employment before the end of the period in which a performance target could be achieved (i.e., initial public offering) and still be eligible to vest in the award if and when the performance target is reached.

The amendments in the ASU require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the fair value of the award at the grant date. Compensation cost shall be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If it is probable that the performance target will be achieved before the end of the requisite service period, the remaining unrecognized compensation cost for which requisite service has yet not been rendered shall be recognized prospectively over the remaining requisite service period. The total compensation cost recognized during and after the requisite service period shall reflect the number of awards that are expected to vest and shall be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period.

The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after Dec. 15, 2015, with earlier adoption permitted. The effective date is the same for all entities. Entities may apply the amendments either (a) prospectively to all awards granted or modified after the effective date, or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect at the beginning of the annual period presented in the financial statements should be recognized as an adjustment to the opening retained earning balance at that date. Additionally, with retrospective transition, an entity may use hindsight in measuring and recognizing the compensation cost.

SAPWG moved this item to non-substantive active listing and exposed non-substantive revisions to SSAP No. 104R to adopt ASU 2014-12, effective January 1, 2016, with early adoption permitted. This amendment is consistent with the adoption provisions of GAAP guidance, thus minimizing potential differences between statutory and GAAP, as it is expected entities impacted by this change will be minimal. 

Ref #2014-18: Clarification in Separate Accounts Disclosures

SSAP No. 51—Life Contracts (SSAP No. 51) contains a disclosure of contracts by withdrawal characteristics (which also includes separate accounts) that is reported in life annual statement note 32. The life annual statement disclosure in note 34 for SSAP No. 56—Separate Accounts (SSAP No. 56) includes the same categories of withdrawal characteristics as note 32; however, note 34 captures information specific to separate account. It has been noted that the disclosure requirements in note 34 need to be clarified. This agenda item proposes changes to make the annual statement note and the SSAP guidance consistent. It is recommended that a blanks proposal be forwarded to the Blanks (E) Working Group to incorporate the revisions needed to the annual statement blanks and instructions.

SAPWG moved this item to non-substantive active listing and exposed non-substantive revisions to SSAP No. 56 to detail the disclosure aspects currently captured within note 34. SAPWG also referred a blanks proposal to the Blanks (E) Working Group requesting modification to Note 32 and Note 34, and the corresponding illustrations. These modifications are not expected to change what is currently being reported. In addition, if approved, it is expected this will be effective for 2015.

Ref #2014-19: Clarification of interpretations incorporated into SSAP No. 55

This agenda item proposes to add clarifying language to SSAP No. 55–Unpaid Claims, Losses, and Loss Adjustment Expenses (SSAP No. 55) to address language incorporated from INT 02-21: Accounting for Prepaid Loss Adjustment Expenses and Claim Adjustment Expenses (INT 02-21) and INT 03-17: Classification of Liabilities from Extra Contractual Obligation Lawsuits (INT 03-17). When both interpretations were nullified and the guidance incorporated SSAP No. 55, some of the detail and nuances were not fully integrated into the statement. Clarifications to SSAP No. 55, paragraph 5, are recommended to be consistent with the intent of INT 02-21. Language is proposed to be incorporated to SSAP No. 55, which is consistent with paragraph 5.b. of INT 03-17, regarding claims-related losses for extra contractual obligations and bad faith lawsuits.

SAPWG moved this item to non-substantive listing and exposes non-substantive revisions to SSAP No. 55 to include guidance from INT 03-17 that claims related expenses for extra contractual obligations lawsuits and bad faith lawsuits are included in losses. In addition, amendments to paragraph 5 and 22 were exposed to reflect the intent and effective dates of INT 02-21.

Ref #2014-20: Clarification of Income Tax Footnote

Questions have risen related to footnote 3 of SSAP No. 101–Income Taxes (SSAP No. 101) and whether the meaning of “December 31 Risk-Based Capital ratio (RBC)” means the statement currently in the process of being filed, or the prior year’s RBC ratio. This agenda item proposes to clarify that the intent is for reporting entities to utilize the RBC ratio of the current reporting period annual statement. (For example, for Dec. 31, 2014 financial statements, the RBC ratio applied would be the calculation for Dec. 31, 2014.)

SAPWG moved this item to non-substantive active listing and exposed non-substantive revisions to SSAP No. 101. The proposed language changes are underlined below.

The December 31 Risk-Based Capital ratio is calculated based on the Authorized Control Level RBC for the current reporting period, which is in the process of being filed with the state of domicile, and computed without net deferred tax assets (ExDTA ACL RBC). The interim period (March 31, June 30, and September 30) ExDTA ACL RBC ratio numerator shall use the Total Adjusted Capital (TAC) with current quarter surplus ExDTA and current quarter TAC adjustments. The interim period denominator shall use the Authorized Control Level RBC as filed for the most recent calendar year.

Ref #2014-21: Updates to Allow the 2012 Group Long-Term Disability Table

The Health Actuarial (B) Task Force has adopted updates to the Model Law on Minimum Reserve Standards for Individual and Group Health Insurance Contracts (Model Law 10). The changes to Model Law 10 are primarily to incorporate references, which require use of the 2012 Group Long-Term Disability Valuation Table beginning in October 2016. Prior to 2016, the standard permits the optional use of the table beginning in October 2014. In addition, updates to this model allow the optional use of the 2012 GLTD for claims incurred prior to the effective date the reporting entity has chosen. This election must apply to all prior claims. If the 2012 GLTD is applied, it is required on a going forward basis. This agenda item proposes corresponding updates to Appendix A-010 to incorporate the changes to Model 10.

The actuarial guideline adopted by the Health Actuarial (B) Task Force is unusual in that rather than interpreting a model law, it includes specific adjustments to the 2012 Group Long Term Disability Table, referenced in Model No. 10, that a company must make based on its own claim termination experience to produce minimum reserves. It is unusual for a model to refer to an actuarial guideline as opposed to a regulation. Staff has inserted the proposed actuarial guideline number XLVII into the draft.

The Accounting Practices and Procedures Manual has historically implemented a specified effective date. This was to allow for completion of notes to the annual statutory financial statements regarding use of prescribed and permitted differences from the Accounting Practices and Procedures Manual basis of accounting.

The group-long-term disability table effective date changes adopted by HATF in Model Law 10 are summarized as follows:

1. Application of the 2012 GLTD table is required for claims incurred on or after 10-1-2016.

2. Application of the 2012 GLTD is optional for claims incurred on or after 10-1-2014.

3. Application of the 2012 GLTD is optional for claims incurred prior to the effective date the reporting entity has chosen above (either 10-1-2014 or 10-1-2016). This election must apply to all prior claims (i.e. both those incurred prior to 2005/2007 and after the change to the AP&P Manual). If the 2012 GLTD is applied, it is required on a going forward basis.

SAPWG moved this item to non-substantive active listing and exposed changes to Appendix – A – 010 to incorporate the use of the 2012 Group Long-Term Disability Valuation Table. The proposed effective date is January 1, 2016, with early adoption permitted.

Ref #2014-22: Health Actuarial Guideline XLVII

The Health Actuarial (B) Task Force has adopted a new actuarial guideline titled Application of Company Experience in the Calculation of Claim Reserves Under the 2012 Group Long-Term Disability Valuation Table. This actuarial guideline provides both the 2012 Group Long-Term Disability valuation table (2012 GLTD) and implementation guidance for the updates to the Model Law on Minimum Reserve Standards for Individual and Group Health Insurance Contracts (Model Law 10). The new actuarial guideline provides implementation guidance and is recommended for incorporation in Appendix C of the Accounting Practices and Procedures Manual (Appendix C).

In addition, this agenda item recommends updates to the introduction section of Appendix C to reflect the Health Actuarial (B) Task Force. Previously, the Life and Health Actuarial (A &B) Task Force was two separate Task Forces, and therefore the Health Actuarial (B) Task Force name should be referenced in the introduction along with the Life Actuarial (A) Task Force.

SAPWG moved this item to non-substantive active listing and exposed the proposed changes to the cover page of Appendix C to note the Health Actuarial (B) Task Force and incorporates the new Actuarial Guideline number XLVII, which provides the 2012 GLTD and implementation guidance for Model 10 related changes.

Ref #2014-23: Treatment of Non-Cash Items in the Cash-Flow Statements

NAIC staff has received information that the guidance for the statutory accounting cash flow statement is unclear regarding the inclusion / exclusion of non-cash items. The following points highlight the inconsistencies with the existing cash flow guidance:

1. SSAP No. 69—Statement of Cash Flow (SSAP No. 69) identifies that the cash flow statement shall include cash, cash equivalents and short-term investments. From this direction, non-cash exchanges (outside of short-term investments) should be excluded.

2. Annual Statement Instructions/Worksheets imply that non-cash items are captured within the cash flow statement. (Examples include intercompany exchanges of non-cash assets or liabilities for other noncash assets or liabilities and situations when non-cash assets (e.g., bonds) are used to settle intercompany ceded premiums and/or commissions.) However, the Worksheets also indicate that they are “provided to facilitate completion” of the Cash Flow Statement, and that “reporting entities need to make adjustments to various lines consistent with their operations.”

3. The differences/inconsistencies between the statutory accounting guidance and the annual statement instructions regarding the inclusion of cash/non-cash items, were noted when SSAP No. 69 was initially developed (per Issue Paper No. 92), and were subsequently identified with additional revisions per agenda item 2002-01.

4. SSAP No. 69 includes disclosures for transactions considered to be investing and financing that affect recognized assets and liabilities, but do not result in cash receipts or cash payments in the period. As the disclosure excludes non-cash items that pertain to operating activities, without inclusion of these non-cash items in the cash flow statement, there is no current requirement to document these activities. As an example, since reinsurance would generally be considered an “operating” activity, under the existing guidance, bonds transferred in a reinsurance agreement would not be captured in the disclosure.

After some discussion, this item was moved to substantive active listing, with an exposure of the intent to clarify the guidance in SSAP No. 69 and/ or the Annual Statement Instructions. At this point, explicit revisions have not been proposed, because NAIC staff would first like to receive comments from regulators and interested parties on what they would prefer to have reflected in (and what currently is reflected in) the “Statement of Cash Flow”. 

Ref #2014-24: ASU 2014-01: Accounting for Investments in Qualified Affordable Housing Projects

ASU 2014-01: Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01) was issued by FASB as amendments to the accounting standards codification in January 2014.

Proportional Amortization Method Replaces Effective Yield Method
Prior to ASU 2014-01, GAAP permitted three different accounting methods for these types of investments. The effective yield method was optional for entities that met the strict GAAP criteria. Entities that met the effective yield criteria, but chose not to apply it, or those that did not qualify, were required to apply either an amortized cost method or an equity method.

Pursuant to ASU 2014-01, the cost method and equity methods remain, but the proportional amortization method will replace the current effective yield method. Both proportional amortization method and the prior effective yield method are optional. Current use of the effective yield method is limited under GAAP because of strict criteria, including that the availability of the tax credits is guaranteed by a creditworthy entity. ASU 2014-01 modifies the guaranteed criteria to require an assessment that receipt of the tax credits is probable.

Qualifying Investments have the Election of Gross or Net Presentation
The proportional amortization method guidance in ASU 2014-01 will allow an investor that meets certain criteria the option of amortizing the cost of its investment, in proportion to the tax credits and other tax benefits it receives, and to present the amortization of the investment and the tax benefits as a component of income tax expense. That is, both the pretax effects and related tax benefits of such investments are reported as a component of income taxes (“net” within income tax expense.)

Investors that do not qualify for “net” presentation under the new guidance will continue to account for such investments under the equity method or cost method, which results in losses recognized in pretax income and tax benefits recognized in income taxes (“gross” presentation of investment results). ASU 2014-01 also makes changes to the proportional amortization calculation by adding tax benefits as an addition to the existing amount for tax credits to the calculation.

ASU 2014-01 contains impairment criteria and new disclosures to enable users of its financial statements to understand the nature of its investments in qualified affordable housing projects, the effect of the measurement of its investments in qualified affordable housing projects, and the related tax credits and other tax benefits on its financial position and results of operations.

Existing Statutory Accounting Guidance Rejects the Elective of Net Presentation.
SSAP No. 93—Accounting for Low Income Housing Tax Credit Property Investments
(SSAP No. 93) does not permit the optional effective yield method, which is being replaced by ASU 2014-01 with the optional proportional amortization method. Instead, SSAP No. 93 requires a modified amortized cost method for all (guaranteed or non-guaranteed) state and federal programs within the scope of SSAP No. 93. SSAP No. 93 adopted modifications to the GAAP amortized cost methodology.

The current SSAP No. 93 amortized cost method determines the amortization calculation with a statutory accounting modification to include federal tax benefits during the holding period. A reporting entity investor amortizes any excess of the carrying amount of the investment over its estimated residual value during the periods in which federal tax credits are allocated to the investor. Annual amortization is based on the proportion of federal tax credits and other tax benefits received in the current year to total estimated federal tax credits to be allocated to the investor. On initial review, the amortization calculation is very similar to the amortization calculation ASU 2014-01 for the proportional amortization method, as it requires.

(Initial Cost of Investment - Expected Residual Value) × Actual Current Tax Credits and Other Tax Benefits/ Total Estimated Tax Credits and Other Tax Benefits

SSAP No. 93 requires a gross presentation because income or losses from the qualified affordable housing project, and the amortization of the investment, are in investment income, while the tax benefits are reported in income tax expense.

SSAP No. 93 does not currently permit an elective net presentation method (effective yield or proportional amortization) and does not incorporate the qualifying criteria for the elective application of a net presentation, which ASU 2014-01 updates. In addition, statutory accounting typically tries to avoid the use of optional accounting to preserve comparability.

SSAP No. 93 eliminates electives by explicitly requiring a gross presentation for all state and federal programs that qualify under the law. The modified amortized cost method of gross presentation in SSAP No. 93 recognizes the amortization of the investment and any income earned in investment income and separately recognizes the tax credits and benefits as a component of income tax expense.

Staff is unaware of any existing invested asset category, which is amortized directly into income tax expense, and notes that doing so would be a substantive change in the treatment of amortization for invested assets. Such a change would have several ripple effects particularly for reporting entities, which are subject to AVR and IMR.

Note that these investments typically generate only a negligible amount of income, and there are existing disclosures on unexpired tax credits. Amortizing an invested asset into income taxes does not provide additional transparency.

With the changes in ASU 2014-01, the GAAP asset amortization calculation moves closer to the guidance in SSAP No. 93 by including tax credits and benefits.

As such, staff recommends that the Working Group move this item to the non-substantive active listing, and directs staff to prepare guidance to reflect the following:

1) SSAP No. 93 guidance for investment calculation should incorporate the ASU 2014-01 GAAP amortization to prevent a GAAP/SAP difference in the amount and timing of the recognition of amortization for these assets.

2) Guidance from ASU 2014-01 will be modified to require:

a. Continued application of a modified amortized cost methodology for insurer reporting entities (no optionality).

b. A gross presentation in the income statement - With this approach, which is consistent with current guidance in SSAP No. 93, the amortization will be reflected as a component of investment income, and the use of the tax credits and other benefits will continue to be reflected as a decrease to income tax expense.

In accordance with the above recommendations, consideration should be given as to whether the additional GAAP disclosures could be adopted for statutory accounting, whether the illustration in SSAP No. 93 should be updated, and whether guidance to identify the elements of ASU 2014-01 should be adopted, adopted with modification or rejected for statutory accounting.

Ref #2014-25: Holders of Surplus Notes

Questions have been received on the current guidance for the holders of surplus notes within paragraph 10 of SSAP No. 41—Surplus Notes. This agenda item proposes to clarify this guidance for consistency purposes. Particularly, this agenda item proposes to clarify the application of the guidance in paragraph 10a and 10b to the paragraph 10 “hanging paragraph” guidance. In addition, it asks questions regarding whether the valuation method used for surplus notes designated at NAIC 1 for holders of surplus notes should always be amortized cost, or if the hanging paragraph which introduces a “lessor of value” threshold was intended to possibly reduce amortized cost if the outstanding face value is less. Questions have arisen as to what aspects of paragraph 10 this guidance is intended to apply. In reviewing older guidance (and Issue Paper No. 41—Surplus Notes), the placement of this paragraph has not changed and it appears to be applicable to the entire paragraph 10 (not just paragraph 10.b.). In discussing the hanging paragraph issue, questions were raised on whether the threshold guidance in paragraph 10b is still applicable and if it should be reconsidered.

Hanging Paragraph to Paragraph 10:

Capital or surplus debenture(s) must not be valued in excess of the lesser of the value determined above or amortized cost and are to be reported as other invested assets. If the notes are issued by an entity which is subject to any order of liquidation, conservation, rehabilitation or any company action level event based on its risk-based capital, then the valuation is at zero, notwithstanding any previous payments of interest and/or principal. The admitted asset value of a capital or surplus note shall not exceed the amount that would be admitted if the instrument was considered an equity instrument and added to any other equity investments in the issuer held directly or indirectly by the holder of the capital or surplus note. If the calculated value (after application of paragraph 10.b.i.(b)) is less than the outstanding face value, then that amount shall be accounted for as a non-admitted asset.

SAPWG voted to move this item to the non-substantive active listing and requested comments on various pieces of the proposal related to the above referenced hanging paragraph.

Ref #2014-26: Compilation of Rejected GAAP

The listings of rejected GAAP guidance are bifurcated within two locations in the AP&P Manual:

1.     Issue Paper No. 99—Nonapplicable GAAP Pronouncements (IP No. 99). This issue paper includes items that were considered by the SAPWG and deemed non-applicable for any of the following reasons: (a) pronouncement does not related to the insurance industry; (b) pronouncement is not within the objectives of statutory accounting; (c) pronouncement would not add a substantive amount of guidance to statutory accounting due to the narrow scope of the topic; (d) pronouncement relates to transition of a previously issued GAAP pronouncement.

2.     INT 99-00: Compilation of Rejected EITFs (INT 99-00). This INT includes references to EITFs that have been rejected for the following reasons: (a) rejected as not applicable to statutory accounting; (b) rejected without providing additional statutory guidance; (c) rejected on the basis of issues rejected in a SSAP. This INT includes items were considered by the EAIWG:

The ASU’s in INT 99-00 reflect decision of the FASB EITF. However, the SAPWG is currently considering all ASUs; therefore subsequent decisions of the FASB EITF rejected for statutory accounting would be reflected in IP No. 99. With the current FASB process to issue ASUs for all revisions, there should be no new FASB standards that would be rejected in INT 99-00. New additions to INT 99-00 would only be expected if older EITFs that are still pending SAPWG review are rejected for statutory accounting.

In order to improve the format and usability of the Manual, this item proposes to consolidate all GAAP guidance rejected as “not applicable” for statutory accounting into one location within the AP&P Manual. (GAAP guidance that is rejected explicitly in an SSAP is not included within these listings.)

SAPWG moved this item to the non-substantive active listing and expose the intent to consolidate all GAAP rejected as non-applicable in IP No. 99. 

Ref #2014-27: Medicare Advantage and Medicare Part D Risk Adjustment Premium Receivables and Payables

Questions have been received regarding the appropriate lines of the annual statement to report Medicare risk adjustment receivables and payables. This is because of different interpretations regarding the annual statement instructions and the statutory accounting guidance. In addition, this agenda item asks questions regarding whether the current reporting indicated in the statement of statutory accounting principles is the reporting that is desired by the regulators. Depending upon the interpretation of the reader, an argument can be made that Medicare Risk Adjustment Receivables can be reported in the Asset (page 2), lines 15.1, 15.2, 15.3, 24 or 25. Note that the Assets page in the various annual statement types is the same.

15. Premiums and considerations:

15.1 Uncollected premiums and agents’ balances in the course of      collection

15.2 Deferred premiums, agents’ balances and installments booked but deferred and not yet due (including

$………. earned but unbilled premiums) ....................

15.3 Accrued retrospective premiums ................................

24. Health care ($……….) and other amounts receivable .......

25. Aggregate write-ins for other-than-invested assets ............

As with the issue described above for Medicare risk adjustment receivables, annual statement reporting guidance is also subject to misinterpretation for Medicare risk adjustment payables. Medicare risk adjustment payables could be reported on the Health Annual Statement Blank Liabilities page 3, line 4 aggregate policy reserves or line 23 aggregate write-ins for other liabilities, depending upon the interpretation of the reader.

4. Aggregate health policy reserves, including the liability of $........... for medical loss ratio rebate per the Public Health Service Act

23. Aggregate write-ins for other liabilities (including $………. current)

NAIC staff notes that INT 05-05: Accounting for Revenues Under Medicare Part D Coverage (INT 05-05) provides high level guidance for the Medicare Risk Adjustment program which directs the user to either SSAP No. 66 for retrospectively rated contracts (which are loss sensitive) or to SSAP No. 54 for contracts which are not retrospectively rated. Staff’s understanding is that the patient encounter data provides information on health conditions, which are used to determine Medicare Part D and Medicare Advantage risk scores. These scores are used to indicate the likelihood of higher claims. Staff noted that referring to the guidance in SSAP No. 54 is appropriate because the contracts are subject to redetermination. Further SSAP No. 54 explicitly notes:

29. An examination of contract requirements in relation to the rates being charged and the current status of applicable audits (e.g., OPM, Centers for Medicare and Medicaid Services (or such other name that this entity shall be known as) and other Federal, state or government department) is a common method used to estimate such contract redeterminations

30. Accrued premium adjustments shall be recorded as a write-in for other-than invested assets, with a corresponding entry to premiums; accrued return premium adjustments shall be recorded as a liability with a corresponding entry to premiums.

SSAP No. 54 is higher on the statutory hierarchy than the annual statement instructions and, therefore, takes precedence. SSAP No. 54 provides an explicit reference that receivables and payables for contracts subject to redetermination are reported in aggregate write-ins for other than invested assets. In the annual statement, this would require receivable reporting on the assets page, line 25, aggregate write-ins for other-than-invested assets, and implies payable reporting on the liabilities page, line 23, aggregate write ins for other liabilities.

For both receivables and payables, reporting in the aggregate write-in lines highlights the amounts. However, as these amounts directly relate to premium, an argument could be made to consider including these amounts in premium receivables. Possible annual statement lines for future consideration include the option of changing the line and the instructions for assets line 15.3 accrued retrospective premiums to include premium from contracts subject to redetermination.

The reference to SSAP No. 54 is also consistent with the guidance that is in INT 13-04: Accounting for the Risk-Sharing Provisions of the Affordable Care Act (INT 13-04). Note that the risk adjustment program in the Affordable Care Act bears many similarities to the Medicare risk adjustment program.

1.     Reporting- While the required aggregate write-in reporting is clearly indicated in SSAP No. 54, staff requests Working Group discussion on whether that is still the desired reporting of contracts subject to redetermination?

a.     If different reporting is desired given the increasing amounts that will be reported in these lines, the Working Group should move this item to the non-substantive active listing and staff directed to draft additional guidance for SSAP No. 54. In addition, related blanks proposals may need to be developed.

b.     If maintaining the current aggregate written reporting is preferred, it is recommended staff be directed to draft a clarifying blanks proposal for submission to the Blanks (E) Working Group.

2.     More guidance for Medicare

Staff notes that INT 05-05 omits the Medicare part D risk adjustment program from its glossary and recommends that the glossary be updated to add an explicit reference to the program. In addition, other aspects of INT 05-05 could be updated to be more specific.

SAPWG voted to expose this item for comments from both Interested Parties and Regulators to determine how best to report certain items as noted above and to determine if more direction is needed regarding the accounting guidance for Medicare Part D and Medicaid Advantage programs.