Loss Discount Factor Update (P&C)
The IRS recently released Rev. Proc. 2019-30 and 2019-31 that provide updates for property and casualty insurance company loss discount factors. The main provisions include:
- Rev Proc 2019-30 clarifies that a Form 3115 does not need to be completed by any 1120-PC filer to adopt a change in accounting for treatment of loss discount factors.
- Rev Proc 2019-31 includes revised Tax Year 2018 loss discount factors. As this IRS release occurred in July 2019, many 2018 tax returns were already filed or substantially completed. The IRS clarified that the revised factors can be used for the 2018 return or a transition adjustment can be utilized on the 2019 return if the original 2018 factors were utilized.
- Rev Proc 2019-31 also includes discount factors for the 2019 accident year.
Please consult with your SB engagement team if you have any questions regarding the impact on your 2018 tax return or your 2019 tax provisions.
NAIC Adopted Revisions to the Accounting Practices and Procedures Manual
At the August 2019 NAIC meeting, the Accounting Principles (E) Working Group made the following revisions most significant to our client base:
- SSAP No. 22R – Leases and Issue Paper No. 161 – revisions effective January 1, 2020, incorporate guidance from ASU 2016-01, Leases, but rejects the ASU for statutory accounting and retains operating lease treatment of all leases.
- Issue Paper No. 162 – Reinsurance Risk Transfer for Short Duration Contracts – effective immediately, the revisions document, for historical purposes, the revisions adopted to SSAP No. 62 – Property and Casualty Reinsurance from the Fall National Meeting.
- SSAP No. 43R – Loan-Backed and Structured Securities – revisions require securities with differing NAIC designations by lot to be reported in aggregate at the worst NAIC designation or separately by lot.
- Multiple SSAPs – Affiliated Transactions – revisions effective immediately clarify the application of SSAP No. 25, as well as related party classification, when a transaction is, in substance, a related party transaction.
- SSAP No. 101 – Income Taxes – revisions effective December 31, 2019, to the Implementation Q&A update examples and guidance in response to the federal Tax Cuts and Jobs Act (TCJA) and to clarify the admittance of deferred tax assets that can be offset by deferred tax liabilities, noting that scheduling is only required when reversal patterns of deferred tax items are used in determining the valuation allowance.
- SSAP No. 62R – Property and Casualty Reinsurance – revisions clarify the effective date of the reinsurance credit guidance noting that application should be to contracts in effects as of January 1, 2019.
- SSAP No. 103 – Repurchase Disclosure – revisions to reduce disclosures by eliminating the minimum and average daily balance disclosures and information regarding counterparties and defaults.
Statutory Accounting Principles (E) Working Group Exposure Drafts
At the August meeting, the NAIC (E) Working Group issued a number of exposure drafts. The comment deadline on these exposure drafts is October 11, 2019. The exposure drafts can be seen at the NAIC’s website under the Exposure Drafts tab: https://naic-cms.org/cmte_e_app_sapwg.htm
Structured Securities (All Insurers)
Structured notes are debt securities where the coupon and/or principal payments can vary based on such things as an index, an equity security, or interest rates. The return (interest or principal) is linked to the performance of a reference asset or index. The CUSIP and book value of structured notes, along with whether the structured note is a mortgage-referenced security, was a required disclosure in 2018. Effective 12/31/2019, this disclosure is no longer required.
Effective 12/31/19, structured notes where the ultimate repayment of principal may be at risk (other than credit risk) shall be reported as a derivative under SSAP No. 86. There is an exception for mortgage-referenced government sponsored notes, which will continue to be reported under SSAP No. 43R.
Structured notes where the principal amount is not at risk (other than credit risk), often referred to as having ‘principal protection,’ shall continue to be reported as bonds under SSAP No. 26R. Securities with a non-leveraged floating rate coupon linked to an interest rate index (such as LIBOR or the prime rate) and those that have the potential for increased principal repayments (such as TIPS bonds), shall also continue to be reported as bonds under SSAP No. 26.
To put it simply, if you may lose some or all of the principal of the note, and it isn’t backed by the government, it should now be reflected as a derivative on Schedule DB.
Other Investment/Schedule D Changes (All Insurers)
There are a host of smaller changes required for annual statement preparation related to investments as follows:
- Schedule D, Part 2, Section 2, Schedule DL, Part 1 and Part 2, and Summary Investment Schedule – added two new categories (unit investment trusts and closed-end funds) to the common stock categories and modify the definition of "mutual fund."
- Schedule D, Part 2, Section 2 and Schedule D, Part 3 and Part 4 – added new NAIC designation column for use with mutual funds and updated the instructions accordingly.
- Investment Schedules – updated General Instructions affecting mortgage-referenced securities including categorization, deleted Note 5.O. Structured Notes, and modified the bond characteristics definition for Schedule D, Part 1.
- Schedule D, Parts 4 and 5 instructions – updates for called bonds where consideration received is less than par.
- Schedule D, Part 2, Section 2, Column 3 – added new code for foreign mutual funds. Also added Investment Schedules General Instruction to include foreign open-end investment funds as mutual funds.
- Supplemental Investment Risks Interrogatories – updated instructions to 1) exclude diversified foreign mutual funds from question two; and 2) add disclosure of top 10 fund managers.
Strohm Ballweg 20th Anniversary Celebration!!
On Thursday, August 22nd, we hosted an awesome get-together to celebrate 20 years of providing outstanding service to the insurance industry as Strohm Ballweg, LLP. We were so grateful for the wonderful expressions of good wishes from our many clients, business associates, and friends. An extremely heart-warming afternoon of fun, fellowship, and food, punctuated by great conversation and reminiscing about the past 20 years. We so appreciate the confidence we have been shown by those we serve in so many different capacities, which will drive us over the next twenty years! A big thanks also to our employees for all of their efforts in arranging the event, as well as the commitment to serving our clients with passion, dedication, and pride!
Strohm Ballweg New Employees and Promotions
We’d like to welcome (back) three new employees to Strohm Ballweg that may look familiar to you. In September, two previous interns, Hannah Langworthy (UW-Whitewater) and Ashley Mathis (Madison Edgewood College), will be joining the SB team. In addition, previous intern Payton Wright (UW-La Crosse) will also be joining Strohm Ballweg in January. Welcome back Hannah, Ashley, and Payton!
Effective September 1st, the following employees earned promotions at SB: Jacob Salzmann was promoted to Manager, and Kyle Kagerbauer and Kelsi Hau were promoted to Supervisor (pictured below, left to right). Congratulations to all for being promoted, which recognizes and rewards their dedicated and capable service to our clients!