With insurers working to close out year-end 2024 and prepare their annual filings, NAIC-related activity was minimal and not directly financial related. Accordingly, this seems to be a good opportunity to review some of the reporting issues facing those preparing (or reviewing) the annual filings and also to summarize reporting challenges for the first quarter of 2025.
The good news is the regulators have been so busy with the bond definition project, accounting, and reporting, that not a lot of other changes were adopted.
Year-End Statutory Accounting Principles Working Group (SAPWG) Memorandum to the Blanks Working Group (BWG)
Usually, there is SAPWG activity occurring after the NAIC’s Annual Statement Instructions (Instructions) have been finalized that requires additional statement disclosures. A memorandum is then sent to BWG summarizing those additions so those preparing or reviewing annual statements won’t miss disclosure requirements. Unfortunately, as of January 27, no memorandum has been posted to the BWG webpage.
However, there has been a series of memorandums issued and posted to the BWG webpage covering a variety of topics that companies may have overlooked.
- Residuals in preferred and common stock structures are to be reported as other invested assets in Schedule BA. This wording was actually adopted for 2023 reporting but was overlooked in the preparation of the 2024 Instructions.
- Collateral loans backed by mortgage loans are allowed to flow through the Asset Valuation Reserve (Life/Fraternal statement) as an “Other Invested Asset with Underlying Characteristics of Mortgage Loans.” This was done to accommodate an adoption by the Life Risk-Based Capital (RBC) Working Group allowing a bifurcation of collateral loans in the Life RBC formula. Please note, this is considered an interim provision for 2024 and may change as SAPWG continues its discussion on collateral loans.
- The reporting of reinsurance ceded to Lloyds of London syndicates may change for some reporting entities. During 2024, Lloyds deactivated several syndicates, transferring their assumed risk to other syndicates. That results in new syndicate numbers to be reported on the statement reinsurance schedules. Companies can determine if this will affect their reporting by performing a web search for the “Lloyds reinsurance to close report.” The listing can be downloaded and indicates which syndicates were deactivated and which syndicates took over those risks.
Each year, there are usually format reporting changes to the statements. Those changes, however, may involve more than just getting the numbers in the correct fields. Many who prepare, review, or analyze statement information use spreadsheets or other tools to import or export statement information. Statement revisions often mean revisions to those other resources are needed. For example, the year-end 2024 Property/Casualty Annual Statement Schedule P now requires 10 years of reporting for all lines of business. Most likely, that means a lot of resources also needed to be revised.
Notes to Financial Statements
If not marked differently, the following apply to all insurer types.
- Notes to Financials (Note) #5S requires the listing of collateral types supporting collateral loans. The information provided will allow regulators, and others, to determine if the underlying collateral is sufficient to cover the outstanding loan amount, as well as if the underlying collateral qualifies as an admitted asset.
Collateral Type | Aggregate Collateral Loan | Admitted | Nonadmitted | |
---|---|---|---|---|
(1) | Cash, Cash Equivalent & ST Investments | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(2) | Bonds | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(3) | Loan-Backed and Structured | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(4) | Preferred Stocks | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(5) | Common Stocks | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(6) | Real Estate | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(7) | Mortgage Loans | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(8) | Joint Ventures, Partnerships, LLC | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(9) | Other Qualifying Investments | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | _____________ | _____________ | _____________ | |
(10) | Collateral Does not Qualify as an Investment | |||
a. Affiliated | _____________ | _____________ | _____________ | |
b. Unaffiliated | ||||
(11) | Total |
The “Other Qualifying Investments” category is only to be used for collateral in the form of contract loans, derivatives, other invested assets not separately reported, receivables for securities, securities lending, and any investment that would qualify as a write-in for invested assets.
Statement of Statutory Accounting Principle (SSAP) No. 21 – Other Admitted Assets requires that not only must the underlying collateral be a qualifying asset, but it also must qualify as an admitted asset. For example, joint ventures, partnerships, limited liability companies, or subsidiaries, controlled, and affiliate investments used as collateral must be supported by an audit as required in SSAP No. 48 or No. 97. Any underlying collateral that does not qualify as an investment results in the collateral loan being nonadmitted, unless admission is supported by a prescribed or permitted practice disclosure.
In addition, the fair value of the collateral must be sufficient to cover the outstanding loan balance, or the collateral loan is nonadmitted. Insurers must be able to support the fair value for state regulators or their audit firms. Please note: SSAP No. 21 only requires the outstanding value of the loan to be covered by the fair value of the collateral. Some states have a different benchmark in place. For example, a state may require the fair value of the collateral be 105% of the outstanding loan balance. Insurers reporting collateral loans should check their state of domicile for exact collateral fair value requirements.
One of the results of the NAIC’s bond project was the reclassifying of debt securities that no longer qualify for bond reporting on Schedule D. This, in turn, has led to more scrutiny of collateral loans, as the use of that reporting category is expected to expand beginning in 2025. SAPWG is still reviewing the types and use of collateral loans. It is expected that classification, accounting, and reporting of collateral loans will undergo more changes for 2026 and perhaps beyond.
- It is a rare occurrence for something to be deleted from the Notes. But that is what has happened to Note #12(A)18 regarding transition guidance found in SSAP No. 102 – Pensions and SSAP No. 92 – Postretirement Benefits Other Than Pensions. Unfortunately, the removal was not done until December, meaning that the Instructions do not reflect the deletion. It has been posted on the BWG website, however.
- The Life/Fraternal statement has a new Note #21J. Most of this disclosure was actually a requirement for companies admitting negative Interest Maintenance Reserve (IMR) at year-end 2023. However, many companies did not provide that information. For 2024, additional reporting for separate accounts has been added and the entire disclosure will be data captured. Originally adopted as part of Note #5, which is applicable to all insurer types, it was later moved to become Note 21J and is applicable only to the Life/Fraternal statement. (A general interrogatory regarding the admitting of negative IMR also was added; see details below.)
- Aggregate negative (disallowed) IMR allocated between general and separate accounts
Total | General Account | Insulated Separate Account | Non-Insulated Separate Account |
---|---|---|---|
$_____________ | $_____________ | $_____________ | $_____________ |
- Negative (disallowed) IMR admitted allocated between general and separate accounts (although the form looks the same as above, the amounts being reported will most likely not be the same due to the limitation of the admitted amounts)
Total | General Account | Insulated Separate Account | Non-Insulated Separate Account |
---|---|---|---|
$_____________ | $_____________ | $_____________ | $_____________ |
- Calculated adjusted capital and surplus
Total | |
---|---|
Prior Period General Account Capital & Surplus From Prior Period SSAP Financials | $______ |
Net Positive Goodwill (Admitted) | $______ |
EDP Equipment & Operating System Software (Admitted) | $______ |
Net DTAs (Admitted) | $______ |
Net Negative (Disallowed) IMR (Admitted) | $______ |
Adjusted Capital and Surplus | $______ |
- Percentage of adjusted capital and surplus
Total | |
---|---|
Percentage of Total Net Negative (Disallowed) IMR Adjusted in General Account or Recognized in Separate Account to Adjusted Capital and Surplus | $______ |
- Allocated gains/losses to IMR from derivatives
General Account | Gains | Losses | |
---|---|---|---|
1. | Unrecognized Fair Value Derivative Gains & Losses Realized to IMR – Prior Period | $______ | $______ |
2. | Fair Value Derivative Gains & Losses Related to IMR – Added in Current Period | $______ | $______ |
3. | Fair Value Derivative Gains & Losses Amortized Over Current Period | $______ | $______ |
4. | Unamortized Fair Value Derivative Gains & Losses Realized to IMR – Current Period Total | $______ | $______ |
Separate Account – Insulated | Gains | Losses | |
---|---|---|---|
1. | Unrecognized Fair Value Derivative Gains & Losses Realized to IMR – Prior Period | $______ | $______ |
2. | Fair Value Derivative Gains & Losses Related to IMR – Added in Current Period | $______ | $______ |
3. | Fair Value Derivative Gains & Losses Amortized Over Current Period | $______ | $______ |
4. | Unamortized Fair Value Derivative Gains & Losses Realized to IMR – Current Period Total | $______ | $______ |
Separate Account – Non-Insulated | Gains | Losses | |
---|---|---|---|
1. | Unrecognized Fair Value Derivative Gains & Losses Realized to IMR – Prior Period | $______ | $______ |
2. | Fair Value Derivative Gains & Losses Related to IMR – Added in Current Period | $______ | $______ |
3. | Fair Value Derivative Gains & Losses Amortized Over Current Period | $______ | $______ |
4. | Unamortized Fair Value Derivative Gains & Losses Realized to IMR – Current Period Total | $______ | $______ |
General Interrogatories – Part 1
The progression of the NAIC’s bond project over the last few years also has served to call attention to investment reporting of all kinds. The following may or may not be a result of that process, but nonetheless will probably not be the last “tightening” of investment scrutiny that will occur.
- Interrogatory #29, which already exists, underwent a slight change in its reporting requirements. The question now asks for a listing of both primary and sub-advisors who have discretion to make investment decisions. This includes investment advisors, investment managers, broker/dealers, and individuals who have the authority to make investment decisions, whether an employee, affiliated entity, or unaffiliated entity. Sub-advisors were the addition. Upon state financial examinations, it was discovered not all sub-advisors were being listed.
- Another existing interrogatory, #36, also was revised. The question serves as certification that companies self-designating PLGI securities are doing so correctly. The requirements for self-designating are summarized in the interrogatory but also can be found in detail in the Purposes and Procedures Manual of the NAIC Investment Analysis Office. The NAIC’s Securities Valuation Office found there was inconsistent application of these guidelines and hope by including more detailed wording in the interrogatory, reporting will be clarified.
General Interrogatories – Part 2
For the most part, the questions found in Part 2 are specific to the statement type being completed.
- A new Life/Fraternal interrogatory #9 (other questions were then renumbered) serves as an attestation that an entity admitting negative IMR has done so by following the “rules.” When determining whether to admit negative IMR, these criteria should be carefully reviewed. (A Note disclosure regarding negative IMR also has been added; see details above.)
- The Life/Fraternal statement also has a new, rather lengthy general interrogatory #10. The purpose of this new interrogatory is to provide information for completing the C-2 risk in the Life RBC. Previously, most of the elements used in the C-2 risk came from “company records,” making it impossible to trace amounts from statement reporting into the Life RBC. With this addition, amounts can now be directly pulled from the annual statement into the Life RBC formula.
Heads-Up for 1st Quarter 2025
The regulators that worked on the bond project have done a good job of keeping format changes to a minimum for 2025 quarterly reporting. However, there is still a lot of work that will need to be done for that first quarter (and beyond) in the way of bond versus not bond classifications.
The two main issues to be addressed are determining if securities previously reported on Schedule D will remain there and the new reporting classifications used for Schedule D and Schedule BA reporting. The first logical step is for insurers to review their year-end 2024 Schedule D – Part 1 securities and determine if those securities still meet the definition of a bond. Once that has been determined, securities will need to be classified into the correct reporting subcategories on both schedules. The reclassification is something that cannot be delayed until year-end 2025, as the quarterlies contain details of acquisitions and disposals for both schedules by subcategory. (This is another example of supporting documentation needing to be revised for importing/exporting.)
Just when everyone was learning the definitions of the new reporting categories, SAPWG made things more difficult. In September, SAPWG notified BWG that the already approved 2025 bond reporting category of “Bonds Issued from SEC-Registered Business Development Corps, Closed End Funds & REITS” had been changed to “Debt Securities Issued by Funds Representing Operating Entities” with the definition being updated accordingly. With this revision, the SEC registration is no longer required and debt securities issued by funds should be assessed based on the reason for issuance. Remember, the new statutory guidance specifies that debt securities issued primarily to raise debt capital are not permitted as an issuer creditor obligation.
As could be expected, a disclosure regarding any securities that were moved from Schedule D to Schedule BA must be included in the first quarter statement only. Requiring the disclosure in only the first quarter statement is highly unusual. Also unusual is the fact that no reporting format has been offered by the NAIC, leaving companies to devise their own format. However, information must be included for:
- Aggregate Book/Adjusted Carrying Value (BACV) of items reclassified off Schedule D – Part 1.
- Aggregate BACV after reclassification off Schedule D – Part 1 that resulted in a change of measurement basis. (Those that previously were valued at amortized cost, but now are valued at fair value under the lower of amortized cost or fair value approach.)
- Aggregate surplus impact for securities reclassified off Schedule D – Part 1. (The difference between BACV at December 31, 2024 and BACV after transition.)
Although there is no instruction indicating that entities not having any debt securities transitioning should address the above disclosure, it might be a good idea to include a “no transitions” statement for the first quarter. That way regulators and auditors will not wonder if it was an oversight on the part of the insurer.
With all of the attention going to changes resulting from the bond project, it would be easy to overlook another significant change affecting Schedule BA reporting. SSAP No. 92 and SSAP No. 93 underwent revisions for New Market Tax Credits (NMTC). The SSAPs expanded the definition of NMTC, allowing a broader range of investments to be admitted assets. To support the new accounting, reporting categories for Schedule BA reporting were changed, beginning with the first quarter of 2025.
Added:
- Yield Guaranteed State Tax Credit Investments (unaffiliated/affiliated)
- Qualifying Federal Tax Credit Investments (unaffiliated/affiliated)
- Qualifying State Tax Credit Investments (unaffiliated/affiliated)
- All Other Tax Credit Investments (unaffiliated/affiliated)
Removed:
Guaranteed Federal Low Income Housing Tax CreditNon-Guaranteed Federal Low Income Housing Tax CreditNon-Guaranteed State Low Income Housing Tax CreditAll Other Low Income Housing Tax Credit
If you have any questions or need more information, please reach out to a professional at Forvis Mazars.