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Date                   March 4, 2010                                                    
Author              Connie Jasper Woodroof
Email                connie.woodroof@stoneriver.com

NAIC Kicks Off New Season

Hopefully, most everyone is breathing a little easier with the year-end season officially over for most companies. Now we can slide into the “let’s get caught up” mode and first quarter reporting. The NAIC is also beginning its new season with the first 2010 National Meeting to be held in Denver, March 25 – 28. I thought this might be a good time to review changes you will encounter for your first quarter reporting, remind you about some changes occurring during 2010, and look at some items the NAIC will be tackling this year. First, however, a gentle reminder about a new 2009 filing many of you will be completing shortly.

Climate Risk Disclosure Survey

This new report is due for the first time during 2010. The report for year-end 2009 is due May 1, 2010, and applies to all insurer types–but only to certain sized companies. For the year-end 2009 filing, companies with premiums greater than $500m (direct plus assumed) will need to complete the survey. However the NAIC is asking that other companies voluntarily file the survey. For the following years, companies with premiums greater than $300m will need to complete the survey and, again, the NAIC encourages all other companies to voluntarily provide the survey information. The survey consists of eight open-ended questions and will be published as public information on the NAIC website. For more information on this filing requirement, including what the questions are, refer to http://www.naic.org/committees_ex_climate.htm.

2010 Quarterly Statement Changes

A new line has been added to both the Assets page and the Liabilities page for the reporting of derivative instruments. Previously, derivatives were reported as write-in items on both pages, depending upon whether there was a debit balance or a credit balance for the investments. Derivatives are gaining in popularity within the industry, with large enough dollar amounts being reported to earn their own line on the balance sheet. Of course that also means that if you have any internal systems that reference line numbers on the balance sheet, you will need to review those processes for possible changes.

To accompany the new balance sheet reporting, you will find various parts of Schedule DB (including the verifications) completely reformatted, both in the quarterly statement and in the annual statement this year. Review all the new reporting formats and new instructions carefully.

The Cash Flow page in all of the statements has had an additional column added; Column 2, Prior Year to Date. The Prior Year Ended column is now Column 3. 

Instructional changes for the quarterly General Interrogatories attempt to clarify the time frame to be considered in answering the questions. Where questions ask if there have been changes (e.g. the charter, by-laws, articles of incorporation or deed of settlement), the reporting entity should report changes since the prior year-end, unless a different time frame is specifically mentioned. Those changes would continue to be reported in subsequent quarters for that year. For interrogatories not referring to a change from a prior reporting period, but that are asking for information as of a point in time, the reporting entity should answer the question as of the current quarter unless a different time frame is specifically indicated.

The P&C, LAH, Health and Fraternal statements all have a new general interrogatory asking for certain A&H operating percentages. Remember, the percentages are only for A&H business.

The Investment Schedules General Instructions have been revised to indicate the correct reporting of Rabbi Trusts. In Schedule BA, instructions now emphasize that reverse mortgages are to be reported within the “Any Other Type of Assets” category.  Instructional clarification was added to all appropriate parts of Schedule D regarding the use of the electronic column indicating the applicable state for each investment listed in certain Schedule D reporting categories. The instructions now state that the two-digit postal abbreviation should be entered, indicating the state where the security was issued. For those securities that are issued by a Federal agency, US should be inserted into this column.

For LAH companies, new AVR/IMR instructional changes discuss the correct treatment for OTTIs of loan-backed and structured securities. In accordance with SSAP No. 43R, if the reporting entity wrote down the loan-backed or structured security to fair value due to the intent to sell or because the company does not have the intent and ability to retain the security for a period of time sufficient to recover the amortized cost basis, the non-interest related portion of the OTTI is to be recorded through the AVR; the interest related other-than-temporary impairment losses are to be recorded through the IMR. This new approach supersedes the previous determination process that used changes in the rating of the security.

New NAIC Meeting Schedule

As a reminder, the NAIC is implementing a new meeting schedule this year. Instead of the four quarterly meetings that have occurred in the past, the NAIC reduced their schedule to three meetings per year. The March meeting is quickly approaching and the plan for the future is to always have a meeting in March. The second meeting each year will occur in August; this year August 14 – 17. The final meeting each will be in the October/November timeframe. For 2010, the meeting is scheduled for October 18 – 21. This schedule change results in an adjustment to the timing of adopting changes, as well as the implementation of those changes. For those of us that follow the “NAIC circuit” it also means a likely increase in the amount of activity accomplished via conference calls. For industry as a whole, it will probably become more difficult to keep up-to-date on what is happening via the conference calls and possible interim meetings.

Complete agendas for the upcoming March meeting are not available yet.  However, I have some comments on a few things that are likely to be discussed in March or at least sometime during 2010 that I would like to share with you.

The Blanks Working Group

To operate within the new meeting schedule, the Blanks Working Group has adopted a new set of procedures for implementing statement and instructional changes. Theoretically, at the upcoming March meeting all remaining changes for the 2010 annual statement will be adopted. At the August meeting, the final items to be implemented in the 2011 quarterly statements should be adopted.

Just a few items are scheduled to be considered for 2010 statement adoption. However, I hear there are several items that the proposal presenters want considered for 2010 adoption via a June conference call. In the next edition of the NAIC Focus, we will bring you up to speed on what was adopted and if anything will be considered for 2010 adoption via a special conference call.

The Valuation of Securities Task Force

During the December 2009 meeting, Residential Mortgage-backed Securities (RMBSs) were placed under official regulatory review and remain in that status at this time. Therefore, they are subject to a special valuation process. There have been a couple of conference calls discussing how the valuation of these securities will be addressed moving forward, especially into the first quarter but so far there has been no definitive decision. Hopefully a decision will be put into place at the March meeting. From the conference calls, it looks like the valuation process will stay the same for first quarter reporting and a new report similar to the one produced by PIMCO at year-end will be run and made available for use in June. The next type of securities to probably undergo treatment similar to the RMBSs is the CMBSs (Commercial Mortgage-Backed Securities). I highly recommend you put the SVO’s RMBS website on your watch list and check it often for updated information. The website is http://www.rmbs.naic.org/. We are likely to see a lot of activity with structured and loan-back securities until the SVO runs out of securities to review or the economy recovers, which ever occurs first.

Deferred Tax Assets

Let’s discuss adopted revisions to SSAP No. 10R regarding the admission of deferred tax assets. Did you realize that the amendments that were adopted in 2009 cover only year-end 2009 and year-end 2010? After that time, unless the Statutory Accounting Principles Working Group (SAPWG) comes up with a Plan B, everything reverts back to the original guidelines in SSAP No. 10. Never fear, however. The industry interested parties group has been hard at work drafting suggestions for a solution to present to regulators. Then hopefully SAPWG will adopt a permanent solution prior to 2011.

There will be a lot of other activity occurring throughout the year and the NAIC Focus is the place to bookmark for current information. In April, we will bring you up-to-date on the March meeting activities.  Until then ---

Live long and prosper!

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