SSAP 48: Accounting for Joint Ventures, Partnerships & LLCs

Statutory Accounting Principles, or SAP, form the financial reporting foundation for insurance companies in the United States. These principles are designed to ensure that an insurer’s financial statements accurately reflect its ability to meet obligations to policyholders. Statement of Statutory Accounting Principles (SSAP) No. 48 provides specific accounting guidance for an insurer’s investments in joint ventures, partnerships, and limited liability companies (LLCs). This guidance is distinct from Generally Accepted Accounting Principles (GAAP) and prioritizes a conservative valuation of assets to demonstrate solvency.

Scope of the Statement

The applicability of SSAP No. 48 is determined by the investment’s legal structure. A joint venture under this statement is an arrangement where two or more parties undertake an economic activity subject to joint control, meaning decisions require the consent of all parties sharing control. Partnerships, including both general and limited structures, are also explicitly covered.

Limited liability companies (LLCs) fall within the scope of SSAP No. 48 if they are not considered a subsidiary, controlled, or affiliated (SCA) entity or do not qualify for bond treatment. The statement applies to investments in LLCs that are structured similarly to partnerships or joint ventures. For reporting purposes, such as on Schedule BA, these investments must be categorized based on the characteristics of their underlying assets. For instance, an LLC that exclusively holds collateral loans should be reported in the collateral loan category.

The National Association of Insurance Commissioners (NAIC) requires that investments, including those in non-registered private funds, be reported based on their underlying characteristics. This approach is meant to create more consistent reporting for all investments reported on Schedule BA of the statutory financial statements.

Valuation and Accounting Methods

SSAP No. 48 primarily prescribes the equity method for valuing investments in joint ventures, partnerships, and LLCs. Under this method, the investment is initially recorded at its cost. Subsequently, the carrying value of the investment is adjusted to reflect the insurer’s proportionate share of the entity’s net income or loss. For example, if an insurer owns 30% of a joint venture that earns $1 million, the insurer increases the carrying value of its investment by $300,000.

Distributions received from the investee are treated as a return of capital and reduce the investment’s carrying value on the insurer’s books. This approach differs from simply recording dividend income; instead, it reflects the change in the underlying equity of the investee. The equity method is required for all investments that fall within the scope of SSAP No. 48 unless a specific alternative is permitted.

An alternative allowed by the statement is the use of audited U.S. GAAP equity. If an investee entity prepares complete financial statements in accordance with U.S. GAAP that are audited by an independent certified public accountant, the insurer may elect to use the equity from those statements as the basis for its valuation. The insurer would still adjust this audited equity amount for any unamortized goodwill or other specific statutory adjustments. This option is often preferred when available because it relies on an independently verified framework.

Impairment Considerations

Insurers must regularly evaluate their investments under SSAP No. 48 for potential impairment. An impairment loss must be recognized when the fair value of the investment declines below its carrying value and that decline is determined to be “other-than-temporary” (OTTI). This assessment requires an analysis of the severity and duration of the decline, as well as the underlying reasons for the decrease in value.

The process begins with a comparison of the investment’s fair value to its carrying amount. If the fair value is lower, the insurer must then assess whether it has the intent to sell the security or if it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, an OTTI has occurred. The insurer must also consider evidence that would contradict the likelihood of recovery, such as the investee’s financial distress or adverse industry trends.

When an OTTI is recognized, the insurer must write down the carrying value of the investment to its fair value, with the amount of the write-down recorded as a realized loss. This action permanently reduces the investment’s basis. For example, if an investment with a carrying value of $5 million has a fair value of $3 million and the decline is deemed other-than-temporary, the insurer must record a $2 million realized loss. This conservative approach ensures the insurer’s surplus is not overstated by carrying assets at values that are no longer recoverable.

Required Financial Statement Disclosures

Insurers are required to provide specific disclosures in the notes to their statutory financial statements to provide a clear understanding of their investments in joint ventures, partnerships, and LLCs. The required information includes a description of each investment and the accounting method being used.

Insurers must also report the following for each investment:

• The carrying value
• The amount of ownership interest
• Any unfunded commitments to the investee entities
• Summarized financial information of the investee entities, such as assets, liabilities, and net income

This level of transparency allows for a review of the nature and performance of these investments. The disclosures present the results of applying the valuation methods, offering a complete picture of the insurer’s exposure through these structures.