NAIC Offers Additional Accounting Guidance for Pandemic-Affected Insurers

The National Association of Insurance Commissioners (NAIC) is continuing to offer statutory accounting guidance to insurers affected by the COVID-19 pandemic. On May 5, the NAIC’s Statutory Accounting Principles Working Group (SAPWG) exposed five pronouncements for public comment. The first four are interpretations of existing Statements of Statutory Accounting Principles (SSAPs), and the last is an agenda item.

The first interpretation^[1] deals with collectability and non-admittance of investment income (the subject of SSAP No. 34). Under the interpretation, for (i) mortgage loans, (ii) bank loans and (iii) investment products with underlying mortgage loans impacted by forbearance or modification, an insurer investing in these kinds of assets may presume that borrowers and investments that were current as of Dec. 31, 2019, were not experiencing financial difficulties at the time of the forbearance or modification for purposes of determining collectability. For these investments, further evaluation of collectability is generally not required for the first and second quarter (June 30, 2020) financial statements.

Reported investment income interest that becomes more than 90 days past due in the first or second quarter may also continue to be admitted in the June 30 financial statements. This exception, however, does not encompass mortgage loans in default.

When a payment holiday is given, either a new effective interest rate could be ascribed that equates the revised remaining cash flows to the carrying amount of the original debt and is applied prospectively for the remaining term, or the insurer could recognize interest income on the loan in accordance with the contractual terms, recognizing no interest income during the payment holiday and resuming recognizing interest income when the payment holiday ends. The interpretation will automatically expire as of Sept. 29, 2020.

The second interpretation^[2] provides guidance for insurers participating in the U.S. government’s Term Asset-Backed Securities Lending Facility (TALF) program. Insurers receiving TALF loans:

• Must report cash received with a corresponding liability
  
  
• Must report asset-backed securities pledged to the TALF program as restricted assets; these are subject to the underlying asset risk-based capital (RBC) charge but are excluded from an additional “restricted asset” RBC charge
  
  
• May continue reporting pledged asset-backed securities as admitted assets in the statutory financial statements if the asset qualified as an admitted asset before it was pledged to the TALF program and the reporting entity has not committed an uncured contract default
  
  
• May admit the assets even if not substitutable, an exception to the ordinary requirement that a pledged asset must be readily substitutable in order to be admitted to surplus
  
  
• May not net the obligation to return the liability and the pledged collateral
  
  
• May not treat the TALF transaction as a repurchase transaction
  
  
• In the event that the insurer commits a contract default, and the pledged collateral is retained under the TALF program, must follow specified guidance in SSAP No. 103R (concerning asset transfers and extinguishment of liabilities) in removing the pledged assets and liability from the statutory financial statements

These provisions are applicable for the duration of the 2020 TALF loan program.

Where the insurer is not the direct borrower under TALF but invests in such a borrower, the insurer must treat such an investment as required either under SSAP No. 48 (joint ventures, partnerships and limited liability companies) or SSAP No. 97 (affiliate investments), as appropriate.

The third interpretation^[3] relates to “concession” guidance in SSAP No. 36, on troubled debt restructurings (TDR). SAPWG had exposed this issue in April and received some interested party comments. Under the May 5 release, no exception is made:

• To the recognition of a TDR where modifications result in non-insignificant concessions to a debtor that is experiencing financial difficulties
  
  
• To the recognition of impairment for debt instruments
  
  
• For TDR determination and impairment assessments for situations in which the reporting entity is a direct, active participant in negotiating debt instrument modifications

For purposes of SSAP No. 36, debt restructuring in response to COVID-19 is considered to be insignificant if the restructuring results in (i) a 10% or less shortfall amount in the contractual amount due or (ii) a one-time six-month or less delay in payment receipts. In addition, a debt security restructuring in response to COVID-19 that solely impact covenant requirements is not considered a TDR.

Modifications that would be considered TDRs, particularly as they provide a non-insignificant concession, may be presented to the regulator for a permitted practice exception, but such exceptions should not be widespread.

This interpretation would be applicable only for the period beginning on March 1, 2020, and ending on the earlier of Dec. 31, 2020, or the date that is 60 days after the termination of the COVID-19 national emergency declared by President Trump under federal law.

The fourth interpretation^[4] provides guidance on how to account for premium refunds on property-casualty policies motivated by COVID-19. Insurers that provide voluntary or jurisdiction-directed refunds that are not required under the policy terms must treat this as a reduction of premium. Reporting entities that provide refunds in accordance with insurance policy terms must follow statutory accounting principles in SSAP No. 53 (concerning property-casualty premiums) or SSAP No. 66 (retrospectively rated premiums) as applicable. This interpretation will be automatically nullified on Jan. 1, 2021.

The fifth document, an SAPWG agenda item^[5], clarifies that if a debt instrument has been modified pursuant to SSAP No. 36 or SSAP No. 103R, subsequent assessments of other-than temporary impairment (OTTI) shall be based on the modified contractual terms of the debt instrument, and not revert back to the original acquisition terms. By contrast, under existing guidance, OTTI assessments are based on the contractual terms of a debt security in effect at the date of acquisition.

Comments on the foregoing five items are due on May 14, with the comments to be discussed on a May 20 SAPWG conference call.

^{[1] INT 20-05: Investment Income Due and Accrued.}

^{[2] INT 20-06: Participation in the 2020 TALF Program.}

^{[3] INT 20-07: Troubled Debt Restructuring for Certain Debt Instruments Due to COVID-19.}

^{[4] INT 20-08: COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends.}

^{[5] Agenda Item 2020-14: Assessment of OTTI Based on Original Contract Terms.}