SSAP 97: Accounting for Subsidiary & Affiliate Investments

Statement of Statutory Accounting Principles (SSAP) 97 provides a specialized accounting framework for insurance companies preparing statutory financial statements for state regulators. It governs how they must value investments in their Subsidiary, Controlled, and Affiliated (SCA) entities. This standard, from the National Association of Insurance Commissioners (NAIC), creates a consistent and conservative valuation method. The rules ensure the reported value of these investments reflects assets that are readily available to pay claims, prioritizing solvency and policyholder protection.

Scope and Key Definitions

SSAP 97 applies to an insurer’s investments in entities where it has a significant ownership interest, categorized as Subsidiary, Controlled, and Affiliated (SCA) entities. A “subsidiary” is an entity where the insurer holds control, which is presumed with the ownership of a majority of the outstanding voting securities. Control gives the insurer the power to govern the financial and operating policies of the entity.

An “affiliated” entity is any business that is part of the same holding company system as the insurer. This includes entities that control the insurer, are controlled by the insurer, or are under common control with the insurer. The standard establishes that the substance of the relationship, not just the legal form, dictates the accounting treatment, meaning control is the primary determinant.

Admitted Asset Valuation Methods

SSAP 97 provides a framework for valuing SCA investments, ensuring only “admitted assets” available to meet policyholder obligations are recognized. For an SCA investment to be admitted, its financial statements must be audited. The standard outlines three valuation methods.

The Market Value Method is required for publicly traded SCA entities. The investment’s carrying value is adjusted to its fair market value at the end of the reporting period, with any change recorded as an unrealized gain or loss.

A more common approach for non-public entities is the U.S. GAAP Equity Method. The insurer records the investment at cost, then adjusts the carrying value to reflect its share of the SCA’s net income or loss under U.S. GAAP. Dividends received reduce the investment’s carrying value.

SSAP 97 also permits the Audited U.S. Statutory Equity Method for SCA entities that are themselves insurance companies. This approach adjusts the investment value based on the insurer’s share of the SCA’s statutory net income or loss.

The Look-Through Approach

A distinct feature of SSAP 97 is the “look-through” approach. This rule applies when an SCA entity holds assets that would be considered “non-admitted” if the parent insurance company held them directly. Non-admitted assets are those not easily convertible to cash, such as goodwill or furniture.

The look-through process requires the insurer to analyze the SCA’s underlying assets. If the SCA’s balance sheet includes non-admitted assets, the insurer must reduce its carrying value of the investment by its proportionate share of those assets.

For example, an insurer owns a subsidiary valued at $10 million. If that subsidiary holds $1 million in non-admitted goodwill, the insurer must reduce the carrying value of its investment by that $1 million. This results in an admitted asset value of $9 million on its statutory financial statements.

Impairment of Investments

SSAP 97 requires insurers to regularly assess their SCA investments for impairment. An impairment loss must be recognized when the fair value of an investment declines below its carrying value and that decline is determined to be “other-than-temporary” (OTTI). This assessment is a separate process from the annual valuation adjustments.

Determining if an impairment is other-than-temporary requires considering factors like the duration of the decline, the SCA’s financial condition, and the insurer’s ability to hold the investment for a recovery. A sustained decline, not a temporary market fluctuation, would trigger an OTTI.

If an OTTI occurs, the insurer must write down the investment’s carrying value to its current fair value. This write-down is a realized loss impacting net income and surplus. The new, lower value becomes the investment’s cost basis and cannot be written back up, even if the fair value later recovers.

Key Differences from U.S. GAAP

The accounting for subsidiary investments under SSAP 97 differs from U.S. Generally Accepted Accounting Principles (GAAP), guided by standards like ASC 323. The primary distinction is the concept of “admitted assets,” which is central to statutory accounting but has no equivalent in GAAP. GAAP focuses on a comprehensive economic picture, whereas statutory accounting prioritizes assets available to pay policyholder claims.

This difference in purpose leads to the “look-through” approach required by SSAP 97, a process not found in GAAP. Under GAAP, a parent company uses the equity method without adjusting for the nature of the subsidiary’s underlying assets. SSAP 97’s mandate to remove the value of non-admitted assets from the investment carrying value is a conservative statutory requirement.

The impairment models also differ. The OTTI model in statutory accounting has specific guidance that can lead to different timing and amounts of impairment losses compared to GAAP. The valuation options also present a distinction, as SSAP 97’s allowance for a statutory equity method is specific to the insurance industry.