September 7, 2023
NAIC Adopts INT 23-01, a Temporary Accounting Change for Net Negative (Disallowed) IMR
In the Summer 2023 meeting, the National Association of Insurance Commissioners (NAIC) voted to adopt INT 23-01 Net Negative (Disallowed) Interest Maintenance Reserve for life insurance companies as developed by the Statutory Accounting Principles Working Group (SAPWG).
The Interest Maintenance Reserve (IMR), as defined in SSAP No. 7—Asset Valuation Reserve and Interest Maintenance Reserve (SSAP 7) for life, accident, and health insurance companies, provides a mechanism to defer the recognition of realized capital gains and losses resulting from changes in the general level of interest rates. These deferred gains and losses are then amortized into investment income over time. A positive IMR is generated by net realized interest gains and results in the recognition of a liability; while a negative IMR is generated by net realized interest losses and results in the recognition of an asset, which, prior to adoption of this interpretation, was required to be nonadmitted.
In October 2022, the SAPWG received a request to reassess its position on the nonadmitted asset guidance for net negative IMR, claiming adverse effects for life insurers including:
- While rising interest rates are generally favorable to the insurance industry and policyholders, the negative IMR creates the perception of decreased financial strength by reducing surplus and risk-based capital (RBC) due to the nonadmitted IMR asset recognition.
- Nonadmitted IMR asset recognition could adversely affect the investment strategy of impacted insurers, distracting them from the primary focus on asset and liability matching.
Following discussion, INT 23-01 was proposed and adopted as a solution, providing limited-time, optional guidance as an exception to current guidance in SSAP 7 and the annual statement instructions. The interpretation provides relief to life insurers by allowing them to admit negative IMR subject to certain provisions as follows:
- The insurer must have a RBC that is greater than 300% authorized control level (ACL), after adjustment to total adjusted capital (TAC) for the removal of net positive goodwill, EDP equipment and operating system software, net deferred tax assets, and admitted net negative IMR.
- The amount admitted is limited to 10% of general account capital and surplus, after adjustment for the removal of net positive goodwill, EDP equipment and operating system software, net deferred tax assets, and admitted net negative IMR.
Additional provisions provide further guidance for the treatment of losses from derivatives and reporting treatment for separate accounts, as applicable.
Insurers that qualify to admit the net negative IMR based on the above provisions should record both of the following:
- An asset titled “Admitted Disallowed IMR”, included as an aggregate write-in to miscellaneous other-than-invested assets (line 25), and
- A capital and surplus account titled “Admitted Disallowed IMR”, included as an aggregate write-in for separate surplus funds (line 34), in an amount equal to the admitted asset.
The capital and surplus account is reported separately from unassigned funds to prevent the ability of negative IMR to be included in funds available for dividends. Any remaining net negative IMR in excess of the 10% limitation should continue to be nonadmitted.
Additional disclosure requirements will apply for the admission of the net negative IMR including the amount admitted, the calculation of adjusted capital and surplus for the 10% limitation, and net negative IMR as a percentage of adjusted capital and surplus. Insurers must also attest that the investments generating the IMR losses are in accordance with the entity’s investment or liability management policies and that the underlying sales did not result from liquidity pressures.
Following adoption on August 13, 2023, these optional provisions are effective immediately and permitted until December 31, 2025, with nullification on January 1, 2026. The SAPWG will continue to discuss establishing further statutory guidance applicable to net negative IMR, which may result in adjustment to the timeline outlined above. In the meantime, the interpretation provides requested relief for life insurers from the adverse impacts of reporting a nonadmitted asset for net negative IMR.
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