In response to COVID-19, the NAIC’s Financial Condition (E) Committee (the parent committee of all the solvency policymaking task forces and working groups of the NAIC) issued guidance on March 27, 2020 to all U.S. insurers in an effort to encourage insurers to work with borrowers who are or may become unable to meet their contractual payment obligations because of the effects of COVID-19. The Committee expressed support for the use of prudent loan modifications to mitigate the impact of COVID-19. In the discussion that follows, we refer to any loan modification or similar measure mandated by congressional, federal or state banking regulator, loan investor or government loan guarantor action, or voluntarily agreed between an insurer and a borrower, as a “COVID-19 Loan Modification.”
In addition, on April 15, 2020, the NAIC’s Statutory Accounting Principles (E) Working Group (the “SAP Working Group”) issued interpretive guidance relating to several Statements of Statutory Accounting Principles (“SSAPs”). The interpretive guidance recognizes that insurers’ balance sheets are highly exposed to the recent governmental and regulatory responses to COVID-19, such as mandated loan repayment moratoriums, extended grace periods for overdue premium payments and moratoriums on policy cancellations for non-payment of premiums.1 The interpretive guidance, discussed further below, provides temporary relief from certain accounting requirements that would otherwise require insurers to write down assets, non-admit assets or impose other adverse balance sheet consequences as a result of these governmental and regulatory actions.
Statutory Carrying Value Requirements
The SAP Working Group issued interpretive guidance on several SSAPs to grant insurers temporary relief from writing down the statutory carrying value of mortgage investments and bank loans that are subject to COVID-19 Loan Modifications.2 The types of investments to which the interpretation is applicable are:
- mortgage loans
- SEC-registered investments with underlying mortgage loans (such as mortgage-backed mutual funds)
- loan-backed and structured securities (such as RMBS, CMBS and credit risk transfers issued through government-sponsored enterprises)
- joint ventures, partnerships and limited liability company investments that have underlying characteristics of mortgage loans (such as private equity mortgage loan funds)
- bank loans (which were added to the list in the final version of the interpretive guidance)
The interpretive guidance provides that for a COVID-19 Loan Modification program designed to provide temporary relief for borrowers that were current as of December 31, 2019, the insurer may presume that the borrower is current on payments and not experiencing financial difficulties at the time of the modification for purposes of determining impairment status, and thus no further impairment analysis is required for each loan modification in the program. The interpretive guidance does not apply if the insurer believes that an other-than-temporary-impairment is required under applicable accounting guidance for reasons other than the COVID-19 Loan Modification (for example, in the case of mortgage loan-backed or structured security, if the insurer decides to sell the security).
The relief applies only for insurers’ March 31, 2020 and June 30, 2020 statutory financial statements. However, the final version of the interpretive guidance clarifies that after a COVID 19 Loan Modification within the scope of this interpretation has occurred, future assessments of impairment are to be based on the modified loan terms rather than the original terms.
Temporary Changes to RBC Treatment and NAIC Designations
The NAIC Financial Condition Committee’s March 27, 2020 guidance includes several changes to the capital treatment of mortgage investments subject to COVID-19 Loan Modifications. These changes apply only with respect to insurers’ March 31, 2020 and June 30, 2020 statutory financial statements.
- In the case of direct mortgages and mortgage investments listed on Schedule BA of the financial statement, for purposes of any RBC calculations prepared by insurers for March 31 and June 30, all such mortgages for which any required principal and interest payments have been deferred in accordance with a COVID-19 Loan Modification are not required to be reclassified to a different RBC category (e.g., will not affect the origination date, valued date, and net operating income or be treated as delinquent) than was utilized during the December 31, 2019 RBC filing and which may have otherwise required a higher capital charge for such a mortgage.
- In the case of residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS), for purposes of reporting NAIC designations in the financial statements prepared for March 31 and June 30 or any RBC calculations prepared for March 31 and June 30, all such securities that were modeled by the NAIC for year-end 2019 and for which any required principal and interest payments have been deferred in accordance with a COVID-19 Loan Modification may be reported with the same NAIC designation as used for year-end 2019 and are not required to receive an updated NAIC designation despite the fact that payments may have been so deferred.
Treatment of Troubled Debt Restructurings
SSAP No. 36 – Troubled Debt Restructuring provides guidance for determining whether a debt restructuring is considered a troubled debt restructuring (“TDR”) and also provides accounting and disclosure guidance when a TDR has been deemed to occur, such as when an investment needs to be written down, thus realizing a capital loss. The SAP Working Group issued interpretive guidance applicable to determining whether a COVID-19 Loan Modification constitutes a TDR for purposes of SSAP No. 36. The guidance directs insurers to follow the provisions in the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (as revised on April 7, 2020 to reflect the CARES Act)”3 for such purpose.4 As adopted, the interpretation applies to bank loans as well as mortgage loans.
Consistent with the CARES Act, this interpretation is only applicable for the term of the loan modification, but solely with respect to any modification (including a forbearance arrangement, interest rate modification, repayment plan or other similar arrangement) that defers or delays the payment of principal or interest for a loan that was not more than 30 days past due as of December 31, 2019. This interpretation is applicable only for the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, or the date that is 60 days after the date on which the national emergency concerning COVID–19 declared by President Trump on March 13, 2020 terminates.
Extension of Ninety-day Rule for Overdue Premiums and Similar Assets
Insurers generally are required to treat premiums and similar receivables as non-admitted assets if they are uncollected for more than 90 days.5 The SAP Working Group adopted a one-time optional extension of the 90-day rule for uncollected premium balances, bills receivable for premiums, amounts due from agents and policyholders, amounts due from policyholders for high deductible policies and amounts due from non-government uninsured (ASO) plans. For policies in effect and current prior to March 13, 2020 (the date the federal government declared a state of emergency) and for policies written or renewed after that date, the 90-day rule will be extended so that insurers can continue to treat the asset as admitted for purposes of their March 31, 2020 and June 30, 2020 statutory financial statements.6 This temporary relief will automatically expire on September 29, 2020.
Potential Future Initiatives
Two topics that were raised by industry participants at the SAP Working Group’s April 15, 2020 meeting will likely be addressed by the SAP Working Group in the future. Industry representatives urged the SAP Working Group to extend the same treatment that INT 20-04T provides for mortgage loans and mortgage-related securities to also apply to other debt instruments, including private placement debt securities, that become the subject of COVID-19 Loan Modifications. The SAP Working Group was unwilling to make that addition to INT 20-04T at the April 15, 2020 meeting, but indicated that NAIC staff would study the issue. Another topic raised by industry at that meeting was a request for guidance on how insurers should account for premium refunds that are being made, either voluntarily or in response to requests from regulators – for example, should they be treated as reductions in premium income or increases in underwriting expenses? This topic was also remanded to the NAIC staff for study and future recommendations.
Federal and Bank Regulator Initiatives Related to COVID-19 Loan Modifications
The NAIC’s recent actions are set against the backdrop of federal and state governmental action with regard to mortgage loans in response to COVID-19. Congress and federal and state banking regulators have mandated forbearance arrangements for certain residential mortgage loan borrowers experiencing hardships related to COVID-19, and are expected to consider further such mandates, including additional forbearances, interest rate, payment and term modifications, repayment plans and other arrangements to defer, delay or forgive the payment of principal or interest. Currently, the federally-mandated forbearance programs apply only to government-backed residential mortgage loans (i.e., residential mortgage loans held by Fannie Mae and Freddie Mac or insured by the Federal Housing Authority, the US Department of Veterans Affairs or the US Department of Agriculture). Some states (such as New York), however, have mandated forbearance for residential mortgage loans regardless of the owner of the loan. A number of additional forbearance and loan modification programs are being considered at the federal and state level in response to COVID-19, which may result in additional programs that mandate or incentivize forbearances and other loan modifications on a broader array of mortgage loans.
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1 Please see Mayer Brown’s COVID-19 Insurance Regulatory Department Updates for a full inventory of state insurance regulatory actions in response to COVID-19.
2 See INT 20-04T, Mortgage Loan Impairment Assessment Due to COVID-19 (April 15, 2020). The Statements of Statutory Accounting Principles covered by INT 20-04T are SSAP Nos. 26R, 30, 37, 43R and 48, of which SSAP No. 30 pertains to mortgage loans.
3 The agencies that issued the interagency statements are The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and applicable state banking agencies.
4 See INT 20-03T, Troubled Debt Restructuring Due to COVID-19 (April 15, 2020).
5 See SSAP No. 6 (non-life insurance premiums), SSAP No. 47 (uncollected uninsured plan receivables, excluding Medicare and similar government plans), SSAP No. 51 (life insurance premium) and SSAP No. 65 (premiums for high deductible policies).
6 See INT 20-02T, Extension of Ninety-Day Rule for the Impact of COVID-19 (April 15, 2020).