June 2024 NAIC Meeting Update

NAIC Valuation of Securities Task Force

The Valuation of Securities Task Force (VOSTF) of the National Association of Insurance Commissioners (NAIC) held a virtual meeting on June 18, 2024. The following updates pertain to investment accounting.

Adopted Items

Permit NAIC Designations for Short-term ABS

This item adds guidance to the Securities Valuation Office P&P Manual, Part One, paragraph 128, to exclude asset-backed securities from the scope of short-term investments exempt from reporting to the SVO. This follows changes adopted by the SAPWG to SSAP No. 2R paragraph 6 and 14 specifying ABS within the scope of SSAP No. 43R are not allowed to be reported as short-term investments, effective January 1, 2025.

Add Spain to the List of Foreign (Non-U.S.) Jurisdictions Eligible for Netting for Purposes of Determining Exposures to Counterparties for Schedule DB, Part D, Section 1

This originates from Banco Bilbao Vizcaya Argentaria “BBVA,” a bank in Spain that requested to add Spain to the SVO P&P Manual’s list of jurisdictions eligible for counterparty close-out netting. This allows the netting of offsetting liabilities with a counterparty in Schedule DB, Part D, Section 1 if there is a master agreement that provides for such netting and if there is adequate legal certainty that netting would be enforced upon default of the counterparty. BBVA provided a legal opinion on the validity and enforceability of close-out netting provisions under Spanish law. The opinion was commissioned by the International Swaps and Derivatives Association (ISDA) in part through the development of standardized documentation.  

It adds Spain to the list of jurisdictions eligible for counterparty exposure netting assuming that master agreement provisions are consistent with the parameters explained in the netting opinion.

Change the Effective Date for the Implementation of CLO Modeling

The VOSTF agreed to the effective date change request from the Structured Securities Group (SSG) for the financial modeling of collateralized loan obligations (CLOs) to year-end 2025 from year-end 2024 at the 2024 Spring National Meeting. It will allow the SSG to improve the modeling methodology and allow better alignment with the approach of other NAIC workstreams, e.g. RBCIREWG. 

It changes the effective year in SVO P&P Manual Part Four, paragraph 24.

Clarify Permitting Insurers to Self-assign an NAIC Designation 6*

This item originates from a request for the SVO to review the instructions for insurers’ self-assignment of NAIC Designation 6*. An NAIC 6* can be self-assigned when appropriate documentation does not exist and the requirements for NAIC Designation 5* are not met, or the security is in or near default and payment of interest, principal, or both is not expected to be paid per the terms and conditions.  

It emphasizes NAIC 6* can be self-assigned by the insurers in SVO P&P Manual Part Two, paragraphs 30 and 31.

Make the List of SVO Processes Current

This item updates the list of processes (e.g. the qualified U.S. financial institutions process, the funds process, the credit ratings eligible for translation to NAIC designations process, the sovereign NAIC designation equivalent process, the RSAT index process, and any other mandated SVO processes ) performed by the SVO in the SVO P&P Manual Part Two, paragraph 3, and corrects the name of the list of counterparties designated by the SVO for Schedule DB Part D, in paragraph 143.

Exposed Items with Comment Deadline of July 18, 2024

Revised Proposed Amendment to the SVO P&P Manual to Update the Definition of an NAIC Designation

As the definition of an NAIC Designation is currently in both Parts One and Two of the SVO P&P Manual, it proposes removing the entire NAIC Designation definition guidance from Part Two as the definition of an NAIC designation is completely a policy and should appear in Part One only. The reformatting of the SVO P&P Manual in 2018 aimed to simplify the manual, but it led to some confusion that NAIC Designation has two different definitions. This proposal aims to clarify that there is only one definition of an NAIC Designation, which applies to all security types and includes additional clarifications to address questions and concerns raised about the purpose of NAIC Designation versus credit ratings.  

The SVO incorporated the actionable comments from regulators and industry into this proposal. It emphasizes that NAIC Designation focuses on the likelihood that an insurer will receive full and timely principal and expected interest. NAIC Designation is used to measure investment risk, differentiated from credit risk, which focuses on the ability of an issuer to make payments per the contractual terms. It proposes clarifying that the objective of the VOSTF is to support regulators in the assessment of the insurer’s ability to maintain financial solvency, removing the current regulatory assumption that debt instruments pay scheduled interest and principal at maturity, and removing the application of subscript S for other non-payment risks. Any remaining SVO P&P Manual references to subscript S would be removed in a subsequent amendment once this proposal is adopted.

Exposed Items with Comment Deadline of July 26, 2024

Revised Proposed Amendment to the SVO P&P Manual to Authorize the Procedures for the SVO’s Discretion Over NAIC Designations Assigned Through the Filing Exemption Process

The SVO incorporated the actionable comments from regulators and industry into this proposal. It proposes creating an SVO Credit Committee (SCC), which comprises of an SVO Director and the SVO Managers, to place the security “under review” once the SCC determines it agrees with the SVO analyst’s discovery on CRP rating that contains unreasonable assessment of investment risk. Information requests will then be sent through VISION to insurers that hold the security in their VISION portfolio and statutory financial statements and the SVO administrative symbol of “UR” will be assigned to identify those securities under review in both VISION and AVS+ applications. SVO analysts will perform a full analysis of the security and coordinate with the insurers upon receipt of all necessary documentation or will contact the domiciliary chief financial regulator if the insurers don’t respond to the information request. During the SVO’s review, the SVO will discuss with the insurers any questions or issues the SVO may have and let the insurers know about the SVO’s analysis. It is supposed to be an open communication between the SVO and the insurers. If the SCC determines to proceed with the CRP rating removal request as the FE NAIC Designation is three or more notches different than their opinion, it will invite the domiciliary regulators of the insurers and parties requested by the insurers to join the meeting with the sub-group of the VOSTF. The purpose of this joint meeting is to determine if the CRP rating should be removed from the FE process after the SVO and the insurers present their analysis to the group. The Investment Analysis Office “IAO” will communicate the decision to the insurers once the VOSTF’s sub-group determines if it agrees with the SCC’s recommendation to remove the CRP rating(s) from the FE process. SCC may request an alternative CRP rating which will then be incorporated into the FE process, or the questioned CRP rating will be removed upon approval by the VOSTF sub-group. The SVO administrative symbol of “ER” will be assigned to identify those securities that have CRP ratings being excluded from the FE process when determining the NAIC designation. For transparency, an anonymized summary of each unique issue or situation will be published on the SVO website or some other insurer-accessible location and the SVO director will present FE discretion actions taken during the preceding year at the spring national meeting.   

As this proposal requires enhancements to NAIC’s VISION and AVS+ applications and hiring more compliance and analytical review staff, it could take one to two years before it can be fully implemented. The NAIC fees will likely be increased to recover the initial and ongoing expenses related to this proposal. It proposes the effective date to be January 1, 2026, and subject to change.

Discussed Items

Updates on the Proposed Collateralized Loan Obligation (CLO) Modeling Methodology and Ad-hoc Working Group

Eric Kolchinsky, the Structured Securities Group Director, said his team would start running ten scenarios the following week and would share the updates at the summer national meeting. They have also been working with the American Academy of Actuaries the “Academy” on RBC factors for CLOs.

Life-Risk Based Capital Working Group

The Life-Risk Based Capital Working Group of the NAIC held a virtual meeting on June 18, 2024. The following updates pertain to investment accounting.

Adopted Item

Update RBC report LR008 and LR009 for collateral loans backed by mortgages in 2024 (2024-15-L).

The ACLI proposes excluding collateral loans backed by mortgages from line 50 “Schedule BA Collateral Loans” on LR008 and adding them to line 20 on LR009 and having a capital charge between 0.14% and 13% depending on the quality of the loans. Collateral loans that are not backed by mortgages will continue to be reported in line 50 on LR008 and have a capital charge of 6.8%. During the discussions on eliminating the non-registered private funds category from Schedule BA last fall, the NAIC found out some insurers have been reporting warehouse mortgage loans as non-registered private funds on Schedule BA. The NAIC asked the insurers to report them as collateral loans on Schedule BA for the 2024 year-end as those warehouse mortgage loans are not non-registered private funds. The purpose of this proposal is to provide an interim solution to prevent adverse RBC impact on those collateral loans backed by mortgages.  

Iowa regulators supported the ACLI’s proposal and stated that real estate and equity investments currently have specific RBC frameworks that would allow look-through treatment. The expansion of look-through treatment to collateral loans would result in a meaningful improvement to the alignment of risk and capital for collateral loans as well. They foresee more collateral loans that are backed by real estate or equity would also be allowed for look-through treatment in 2026 once the new reporting lines were made to collateral loans on Schedule BA.

Add an RBC factor of 0.68% to the new line 2 on LR009 Schedule BA Mortgages (2024-17-L).

The CADTF adopted 2024-05-L in April 2024 to add a new line 2 (Affiliated Mortgages in good standing – Residential – All Other) to LR009 to address line 44 of the Asset Valuation Reserve (AVR) Equity Component that was accidentally omitted from the mortgage methodology change that was made in 2013. The LRBCWG received a comment letter from the ACLI on February 26 and incorporated their proposed RBC factor of 0.68% in this proposal.

NAIC Risk-Based Capital Investment Risk and Evaluation Working Group

The Risk-Based Capital Investment Risk and Evaluation Working Group of the National Association of Investment Commissioners (NAIC) held a virtual meeting on June 21, 2024. The following update pertains to investment accounting. 

Residual Factor for Life Insurers (2024-19-I)

It is proposed by some insurers to reduce the interim RBC factors from 45% to 30% for residual tranches backed by certain collateral. The IREWG adopted an RBC factor of 45% for residual tranches for life insurers last year effective 2024 year-end and said changes might be considered if detailed research was provided to the IREWG.

The meeting lasted for two hours and resulted in the action to retain the 45% factor for all residual tranches for year-end 2024. This proposal passed with nine affirmative votes and six opposing votes by the members present.

Other Item

Referral sent from the SAPWG regarding Investments in Tax Credit Structures

The SAPWG adopted 2022-14 at the 2024 Spring National Meeting to replace Low-Income Housing Tax Credit “LIHTC” Property Investments with Investments in Tax Credit Structures in SSAP No. 93 effective January 1, 2025. The BWG currently exposes 2024-11BWG for the reporting line changes with a comment deadline of July 8, 2024. It proposes removing the reporting line for federally guaranteed programs as these types of investments were substantially eliminated by an Internal Revenue Court decision in 2012. The remaining existing lines are proposed to be renamed from LIHTC to include any type of state or federal tax credit program if the investment meets the criteria described in SSAP No. 93R paragraph 2.  

Referrals were sent to both the CADTF and LRBCWG as the current RBC factors are real estate-based and may need to be updated.

NAIC Capital Adequacy Task Force

The Capital Adequacy Task Force of the NAIC held a virtual meeting on June 28, 2024. The following updates pertain to investment accounting.

Adopted Items for 2024 year-end

Receivable for Securities Factors (2024-13-CA)

RBC factors are increased from 1.5% to 1.6% for life insurers and from 2% to 2.5% for property and casualty insurers. It remains unchanged at 2.4% for the health insurers. The new RBC factors are effective for 2024 year-end.

Collateral Loans (2024-15-L)

Certain mortgage-type investments are required to be reported as collateral loans on Schedule BA in 2024. To keep the RBC factor unchanged, it updates instructions to exclude them from line 50 on LR008 Other Long-Term Assets and include them in line 20 on LR009 Schedule BA Mortgages.  

There was one comment received from the Iowa Department of Insurance and it is supportive of this proposal. Iowa also supports extending look-through treatment to collateral loans that are secured by real estate and equity investments in 2026.

BA Mortgages Omitted AVR Line Factor (2024-17-L)

The CADTF adopted 2024-05-L to add line 2 “Affiliated Mortgages – Residential – All Other” to address line 44 of the Asset Valuation Reserve “AVR”, which was not included in the LR009 when changes were made with the mortgage methodology change in 2013. It updates the RBC factor to 0.68%.

Residual Factor for P&C and Health (2024-18-CA)

The CADTF adopted 2024-02-CA to add a new line for residual tranches with the RBC factor to be determined on April 30, 2024.

It adopts an RBC factor of 20% for both P&C and Health until the Academy completes its study on RBC factors for structured securities including residual tranches.

The NAIC training for the Principles-Based Bond Project is now available to everyone.

• There is no charge to the public during 2024.

• Begin any Monday starting on Monday, July 15, 2024. 

• You will have one week to complete this self-paced course. 

• There are 7 modules and should take about 3-4 hours to complete. 

• The training is not CPE eligible for CPAs. 

The following is a course syllabus.

Click on the following link to register EDU 350-118: Principles-Based Bond Project Training (cvent.com) 

Click here to talk to Clearwater’s Professional Services team if you have any questions on the bond project.