Statutory Accounting Principles Working Group s1

Ref #2015-52 Statutory Accounting Principles Working Group Maintenance Agenda Submission Form Form A

Issue: Clarification of Permitted Practice Disclosure

Check (applicable entity): P/C Life Health Modification of existing SSAP New Issue or SSAP

Description of Issue: The permitted practice disclosure requirement in SSAP No. 1 is intended to encompass all permitted and prescribed practices. Although staff believes there is general compliance with this disclosure requirement, it has been identified that the language in SSAP No. 1 could be interpreted to only require disclosure when there is a surplus or RBC impact. This agenda item proposes minor revisions to SSAP No. 1 to ensure disclosure for all permitted and prescribed practices. (As an example of items that could currently be excluded, permitted practices that would allow net reporting - instead of gross - may not necessarily impact surplus or RBC, but could impact the presentation of financial statements, impacting consistency assessments, and should be communicated in the disclosure.)

Additionally, pursuant to the new charge expected from the Financial Condition (E) Committee, this agenda item proposes minor revisions in the disclosure to capture the SSAP, financial statement page, and financial statement line, impacted through permitted or prescribed practices. These revisions intend to improve the ability for the Working Group to receive aggregated information to assist in in their review pursuant to the following expected charge:

Obtain, analyze, and review information on permitted practices, prescribed practices, or other accounting treatments suggesting that issues or trends occurring within the industry may threaten the consistency and uniformity of the U.S. solvency framework. – Essential

The following definitions identify permitted and prescribed practices subject to the disclosure. (These definitions are included in the Preamble Q/A on the Permitted Practice Advance Notification Requirement.)

Permitted Practice – Accounting practices specifically requested by an insurer that depart from NAIC Statutory Accounting Principles (SAP) and state prescribed accounting practices, and have received approval from the insurer’s domiciliary state.

Prescribed Practice – Accounting practices incorporated directly or by reference by state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state.

Existing Authoritative Literature:

SSAP No. 1—Accounting Policies, Risks and Other Disclosures

7 NAIC statutory accounting practices and procedures are those that are set forth in the Accounting Practices and Procedures Manual. If a reporting entity employs accounting practices that depart from the NAIC accounting practices and procedures, disclosure of the following information about those accounting practices that affect statutory surplus or risk-based capital shall be made at the date each financial statement is presented:

a. A description of the accounting practice;

b. A statement that the accounting practice differs from NAIC statutory accounting practices and procedures; and

c. The monetary effect on net income and statutory surplus of using an accounting practice which differs from NAIC statutory accounting practices and procedures.

© 2015 National Association of Insurance Commissioners 1 d. If an insurance enterprise’s risk-based capital would have triggered a regulatory event had it not used a prescribed or permitted practice, that fact should be disclosed in the financial statements.

These disclosures shall be disclosed in Note 1 as illustrated in Appendix A-205. Additionally, a reference to Note 1 shall be included in the individual notes to financial statements impacted by the prescribed or permitted practices as applicable.

Appendix A-205 – Illustrative Disclosure of Differences Between NAIC Statutory Accounting Practices and Procedures and Accounting Practices Prescribed or Permitted by the State of Domicile.

Appendix A-205 includes an example reconciliation to the company’s net income and capital and surplus and practices prescribed and permitted by the state:

2002 2001

Net Income, ABC state basis $3,200,000 $2,900,000

State Prescribed Practices:

Depreciation of fixed assets 100,000 110,000

State Permitted Practices: Depreciation, home office property 120,000 103,000

Net Income, NAIC SAP $3,420,000 $3,113,000

Statutory Surplus, ABC state basis $30,000,000 $27,900,000

State Prescribed Practices: Goodwill, net 3,000,000 2,700,000 Fixed Assets, net (850,000) (950,000)

State Permitted Practices: Home Office Property (2,500,000) (2,300,000)

Statutory Surplus, NAIC SAP $29,650,000 $27,350,000

Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): Information regarding permitted or prescribed practices is a key item relied upon when highlighting the benefits of statutory accounting principles. As statutory accounting does not preempt state legislature and regulatory authority, receiving information on permitted or prescribed practices allows for consistent assessments across insurers on the basis of NAIC SAP.

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None

Recommendation: It is recommended that the Working Group move this item to the nonsubstantive active listing and expose proposed revisions to SSAP No. 1 and A-205 to clarify the guidance and reporting requirements for permitted and prescribed practices. A corresponding blanks proposal would be submitted to incorporate the reporting changes.

Proposed Disclosure: Ref #2015-52

2015 Fall NM Exposure: SSAP No. 1—Accounting Policies, Risks and Other Disclosures

7 NAIC statutory accounting practices and procedures are those that are set forth in the Accounting Practices and Procedures Manual. If a reporting entity employs accounting practices that depart from the NAIC accounting practices and procedures, disclosure of the following information about those accounting practices that affect statutory surplus or risk-based capital shall be made at the date each financial statement is presented:

a. A description of the accounting practice;

b. A statement that the accounting practice differs from NAIC statutory accounting practices and procedures1; and

c. The monetary effect on net income and statutory surplus of using an accounting practice which differs from NAIC statutory accounting practices and procedures.

d. If an insurance enterprise’s risk-based capital would have triggered a regulatory event had it not used a prescribed or permitted practice, that fact should be disclosed in the financial statements.

These disclosures shall be disclosed in Note 1 as illustrated in Appendix A-205. Additionally, a reference to Note 1 shall be included in the individual notes to financial statements impacted by the prescribed or permitted practices as applicable.

2015 Fall NM Exposure: Proposed Revisions to A/S Illustration & A-205:

This following illustration incorporates a column for reporting entities to enter the related SSAP impacted by the permitted or prescribed practice, as well as the page of the financial statements and related line number on that page impacted by the permitted or prescribed practice.

C2 - SSAP - Enter the SSAP number to which the permitted or prescribed practice primarily pertains. (For permitted practices from state regulations, enter “00”).

C3 - F/S Page – Enter the number corresponding to the key financial statement page primarily impacted by the permitted or prescribed practice. (Only one of the following pages should be referenced. Permitted or prescribed practices that do not impact the following financial statements pages should be entered as N/A.)

2 – Assets 3 – Liabilities, Surplus and Other Funds 4 – Statement of Income 5 – Cash Flow

C4 - F/S Line – Enter the F/S reporting line of the key financial statement page primarily impacted by the permitted or prescribed practice. (References to the F/S reporting line for net income or statutory surplus should be avoided. The intent is to capture the F/S line reflecting the practice which ultimately impacts net income or statutory surplus.) If N/A was entered for C3, Enter N/A for C4.

Description (C1) SSAP # F/S Page F/S Line # (C2) (C3) (C4) Current Period Prior Year

1 This disclosure shall identify whether the practice is a departure from NAIC SSAP or from a state prescribed practice and include the financial statement reporting line predominantly impacted by the permitted or prescribed practice. (Although most practices impact net income or surplus, direct reference to those lines should be avoided. The intent is to capture the financial statement line reflecting the practice which ultimately impacts net income or statutory surplus.) © 2015 National Association of Insurance Commissioners 3 (1) Net Income – State Basis 3,200,000 2,900,000 (2) State Prescribed Practices Depreciation of Fixed Assets 19 4 4 100,000 110,000 (3) State Permitted Practices Depreciation – Home Office Property 40R 4 4 120,000 103,000 (4) Net Income, NAIC SAP 3,420,000 3,113,000 (1-2-3=4)

(5) Statutory Surplus – State Basis 30,000,000 27,900,000 (6) State Prescribed Practices Goodwill, Net 68 2 8 3,000,000 2,700,000 Fixed Assets, Net 19 2 21 (850,000) (950,000) (7) State Permitted Practices Home Office Property 40R 2 4.1 (2,500,000) (2,300,000) (8) Statutory Income, NAIC SAP 29,265,000 27,350,000

Staff Review Completed by: Julie Gann – October 2015

Status: On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 1, A-205 and the Annual Statement Instructions, as illustrated above, to clarify the guidance and reporting requirements for permitted and prescribed practices. D:\Docs\2017-12-16\01184065898f3ca7a4d7225b47d2a53f.doc