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  • November 26, 2015

NAIC Fall 2015 National Meeting Updates

The NAIC Fall 2015 National Meeting took place on November 19 – 22, in National Harbor, Maryland.

Relevant investment accounting items are examined below, including updates on corporate bond factors, CMBS and RMBS modeling, quarterly reporting of investment schedules, the investment classification process, and more. Read this entire post for a full recap, or click below to jump to the section that most interests you.

  1. Valuation of Securities Task Force (VOSTF)
  2. The Investment Risk-Based Capital Working Group (IRBCWG)
  3. The Blanks Working Group (BWG)
  4. The Statutory Accounting Principles Working Group (SAPWG)

Valuation of Securities Task Force (VOSTF)


At year-end 2014, BlackRock Solutions performed year-end CMBS modeling and PIMCO performed year-end RMBS modeling. After the yearly RFP process, BlackRock was named the sole vendor for both RMBS and CMBS modeling for year-end 2015.

As part of the NAIC’s goal to provide transparency on the effects of the new vendor for RMBS modeling assumptions, BlackRock sent affected insurance companies (i.e. those with 2014 RMBS/CMBS filings) a file containing all 2014 securities that had been remodeled using the new assumptions. With this data Industry can compare the 2014 assumptions against 2015 assumptions.

The American Council of Life Insurers’ (ACLI) questions on the assumptions were addressed during an October 8 conference call.

BlackRock provided a status report at the Fall National Meeting. Modeling is progressing as expected and BlackRock has not experienced any significant issues with the new RMBS modeling.


When a non-recourse loan was accidentally entered into the VOS database at year-end 2014, it caused questions regarding the structure and characteristics of these loans. Some argued that because these are non-recourse loans, there is no contractual amount of principal and interest. As a result, the general admissibility of non-recourse loans was questioned.

The VOSTF referred this issue to the Statutory Accounting Principle Working Group (SAPWG). The SAPWG reviewed which SSAP regulates non-recourse loans, and if there should be a new SSAP developed. The SAPWG determined that non-recourse loans are accounted for under SSAP 26 or SSAP 43R. This determination resolved the question of admissibility, and the matter was referred back to the VOSTF.

The VOSTF received this update at the Fall National Meeting, and confirmed that since the non-recourse loans are admissible under SSAP 26 or 43R, the loans would continue to be handled under the 5*/6* process.

The Securities Valuation Office (SVO) was instructed to post the SAPWG response on the VOSTF webpage. The SVO confirmed that it will apply the guidance as insurers file 5* Principal and Interest Certification forms.


Due to a recent corporate merger and reorganization, Walgreens Co. is now a wholly owned subsidiary of Walgreens Boots Alliance, Inc. (WBA). Since Walgreens Co. is no longer a publicly traded company, it no longer issues annual audited financial statements; however, under SVO procedures, it needs audited financial statements in order to make a direct financial assessment.

In an October 25 memo, the SVO recommended that the VOSTF determine the designation for the affected credit tenant loans (CTLs), which comprise approximately 381 CTLs in the VOS database, by using the publically available information about WBA. The proposed approach reflects that Walgreen Co.’s legacy business represents a large portion of WBA’s consolidated sales, operating income, and total assets.

The proposal was highly supported by Industry and capital market participants, and after a 10-day comment period, the recommendation was adopted at the Fall National Meeting.


Part Two, Section 4 (d) (i) (C) of the Purposes and Procedures Manual (P&P Manual) exempts public common stock from filing with the SVO. In a September 14 memo, a proposal was added to clarify that the section does specifically exclude private common stock. Additionally, the proposed clarification will explain that insurers will only use the valuation reporting code “e” for any type of common stock, “if the insurer wants to obtain a value for the security that the SVO has not previously valued for another insurer or if the insurance department has directed the insurer to file the security with the SVO for valuation” (Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office to Clarify When Insurers are Required to File Unaffiliated, Private Common Stock with the SVO).

This amendment was proposed in response to Industry confusion about when to file private common stock with the SVO, and was adopted at the Fall National Meeting.


Previously, insurers were required to report mandatorily convertible securities as bonds and manually insert the RBC charge for common stock.

A proposed amendment seeks to clarify that there are preferred stocks that meet the definition of mandatorily convertible securities, and that those should be filed in accordance with SSAP 32.

In addition to that clarification, the proposal will:

  • Refer the issue to the SAPWG to inform them of the change and have them consider the need to create guidance in SSAP 32 specific to mandatorily convertible preferred stock.
  • Refer the issue to the Casualty Actuarial Task Force (CATF) so they can consider developing an RBC charge for mandatorily convertible preferred stock. This proposal was discussed during the October 8 conference call and was released for a 30-day comment period. No comments were received and the proposal was adopted at the Fall National Meeting.


At the NAIC Fall National meeting, SVO Director Charles Therriault provided a status report on the project to modernize filing rules and SVO systems to align more closely with the newer electronic filing processes and minimize cyclical pressures on the SVO staff.

Therriault discussed the 5*/6* process and how recent developments and changes in this procedure will impact the filing process. Suggestions were made to decrease the number of days required prior to filing for a designation; The North American Securities Valuation Association (NASVA) responded that they would like to keep the 120-day filing rule. Additionally, the ACLI recommended that instead of billing insurers per security (which encourages insurers to wait for other insurers to file), they should have all insurers pay for the entire universe of securities.

While this was just a status report, the SVO is hoping to create a proposal next year that would create additional clarity around any recommended changes.


Reporting inconsistencies for subsidiary, controlled, and affiliated (SCA) entities—an issue that was brought to the attention of the NAIC through a confidential survey sent to state regulators on August 15—led the SAPWG to expose revisions to SSAP 97 (Investments in Subsidiary, Controlled, and Affiliated Entities). The revisions to the P&P Manual include adding a new disclosure and incorporating guidance on these investments’ filing processes.

The proposal to add that disclosure was adopted for year-end 2015, and VOSTF staff was instructed to submit a referral to the Blanks Working Group (BWG) to add the change to the annual statement blanks. The disclosure details the reported value for the SCA and filing information.

Industry has concerns with the second recommendation to move the P&P Manual filing instructions to SSAP 97, noting that it might blur the purpose for both the P&P Manual and the Accounting Practices and Procedures Manual (AP&P). As such, the item was deferred by the SAPWG and referred to the VOSTF for evaluation.

At the Fall National Meeting, the SAPWG presented the potential changes for the SVO to consider, and the VOSTF released the referral for a 30-day comment period.


The SVO has an ongoing project to determine why insurers are identifying securities not on the CRP feeds as “filing exempt.” As part of that process, the SVO identified some of the 2014 securities that were not on the CRP feeds but were reported as filing exempt:

  • Private placements
  • Government securities
  • Corporate bonds
  • Syndicated loans
  • Lottery securities
  • Municipalities (including pre-refunded)

The BWG recently began requiring ISIN codes as part of the Schedule D Part 1, which should resolve some of the inconsistencies related to unidentified securities that actually are rated.

The SVO staff were instructed to continue working with Industry to resolve the exceptions.


Recent SEC money market fund reforms will likely have broad effects on the Class One Mutual Fund List and the P&P Manual instructions for which securities qualify for class one treatment. The NAIC is evaluating whether the Class One Mutual Fund List should be reviewed for changes in order to provide sufficient time for any needed edits.

The SVO staff was directed to renew the Class One Mutual Fund List for 2016 and to advise that the list would be expiring on September 30, 2016. Additionally, the VOSTF will prepare a P&P Manual amendment to be presented for adoption no later than the NAIC Summer 2016 National Meeting.


  • The SAPWG updated some SSAP titles and the VOSTF was asked to review the title revisions to make corresponding updates to the P&P Manual.
  • The VOSTF received a referral from SAPWG to consider statutory guidance for catastrophe-linked bonds.
  • The VOSTF adopted proposed amendments to add UK FRS as a National Financial Presentation Standard (NFPS).
  • The VOSTF heard a status report on a project to consider Italian GAAP as a NFPS.
  • The VOSTF heard a final report on whether an evaluation was needed to modify the Derivatives Instrument Model Law. The recommendation is that the framework should remain unmodified and was released for a 60-day comment period.
  • The SAPWG gave a status report on the Investment Classification Project.
  • The Investment Risk-Based Capital Working Group (IRBCWG) gave a status report on the Life RBC Factors.
  • The SVO released a recommendation that the NAIC only use credit ratings produced under a specified methodology for inclusion on the Bank List, and that the SVO monitor the institutions on the list. This recommendation is open for a 30-day comment period.

The Investment Risk-Based Capital Working Group (IRBCWG)


In August 2014, the IRBCWG released a new set of corporate bond factors (also known as C-1 Base Risk Factors) specific to life insurers. The factors were recommended by the American Academy of Actuaries (AAA).

The new Life factors were met with strong Industry opposition. There were two major reasons why Industry opposed the change:

  1. The AAA proposed changing from six designation classes to 14, using a system of 1+,1,1-, etc. This change would take years, as most insurers would need to significantly update their systems.
  2. The new factors, on average, would produce a 33% increase in the C-1 factor for an average life insurer.

Shortly before the NAIC Summer 2015 National Meeting, the AAA released extensive documentation in response to this Industry opposition. The documentation detailed how the AAA arrived at their proposed factors and the reasons for the proposed changes. Industry replied with several new concerns about the project, as well as comments on the assumptions used in the AAA’s model to determine the new proposed factors.

During the Fall National Meeting, Industry and state regulators again expressed concerns. Regulators expressed concerns mainly around the impact of the change from six to 14 designation classes.


The American Council of Life Insurers (ACLI) released a comment letter on September 29, listing the most extensive concerns about the modeling process used by the AAA. Concerns include:

Lack of Asset Class Analysis

Public corporate bonds only account for about 50% of assets that C-1 factors cover; Industry was concerned that analysis should be done on other asset classes, especially municipal bonds. Related to this, the National Association of Mutual Insurance Companies (NAMIC) provided data detailing default rates for municipal bonds that shows significant differences from corporate bond factors, and asked for more analysis on municipal bonds. The lack of analysis for asset classes was the most prevalent concern from Interested Parties. During the Fall National Meeting, both the ACLI and AFLAC agreed to share data they were collecting about other asset classes with the AAA, including municipal bonds and sovereign debt. Moody’s Investors Service also clarified why historical experience for municipals has been different than public corporate bonds: Prior to April 2010, municipals were calibrated in a way that emphasized ordinal ranking only within the municipal sector. This was changed in April 2010; Moody’s now asserts that a municipal bond with any given rating should have the same default risk as corporate debt with that rating. Default experience since 2010 backs up this claim, but Moody’s admitted that drawing long-term conclusions from the short time period of four years is not ideal.

Discount Rate Questions

The ACLI had issues with the discount rate using an after-tax rate, as well as using a risk-free rate. They believe an appropriate rate would be “significantly higher” than the proposed rate of 3.25%. Principal Financial expressed this concern in their comment letter as well.

Risk Premium Offset

The model currently uses the mean expected rates. The ACLI believes it should use a more conservative provision. Principal Financial expressed this concern in their formal letter, as well as concern about the discount rate used.

Use of a Greatest Loss Construct

This construct is not conducive to the purpose of the C-1 factors (which is to measure long-term performance of a single asset class, not to measure the survival of the firm as a whole). At the Fall National Meeting, the AAA defended their logic behind their discount rate, Risk Premium Offset, and the Greatest Loss Construct.


The ACLI requested more information about certain topics, including a sensitivity analysis, more information about the recovery and default rates used, and why the proposed factors were significantly different than those used by S&P to rate insurance companies.

The ACLI, as well as state regulators, have questioned the necessity for a change in the number of rating classes. Other parties, such as Principal, have expressed support for the change to 14 classes in the long-term, and multiple parties expressed that an implementation period of several years would be necessary. Several members of the IRBCWG asked for more information concerning the estimated impact to insurers before deciding whether the shift from six to 14 classes is necessary.

While no set of C-1 factors has been released yet, the AAA is also considering how to best update C-1 factors for P&C companies. There are currently two options on the table for P&C companies: Leave the P&C factors the same as they currently are; or leverage the modeling work done for Life, and adjust the modeling for known differences between P&C and Life RBC formulas. P&C companies have shorter investments, lack statutory reserves for expected credit loss, and use factors that are calibrated on a pre-tax basis as opposed to post-tax; these differences might affect the RBC calculation. However, the asset risk is a much smaller part of the P&C RBC formula compared to Life; which is the justification behind keeping the current formula for P&C companies. Regardless of which option is chosen, the impact on P&C insurers should be very small.


The IRBCWG believes more information is needed on several fronts before they proceed. They primarily want to investigate the impact of changing from six to 14 designation classes, and details on other asset classes. This will continue to be a topic to watch as Industry, the AAA, and the IRBCWG try to come to a solution that works for all parties.

Blanks Working Group (BWG)


Insurers must be prepared to populate four new electronic-only columns for year-end 2015. The four new columns will provide regulators with additional details on certain assets. The columns are:

  • ISIN
  • Issuer
  • Issue
  • Capital Structure

Though the column changes are effective year-end 2015, there is a planned change in 2016 to eliminate the Junior Subordinated option of the new Capital Structure Code, leaving only four applicable options.

As a reminder, the current options are:

  1. Senior Secured
  2. Senior Unsecured
  3. Senior Subordinated
  4. Junior Subordinated, will be eliminated in 2016
  5. Other

During the October 8 conference call, Ed Toy, NAIC Director, explained the rationale for eliminating the Junior Subordinated option. He stated that both junior and senior subordinated options are subordinated debt, so there should just be one subordinated debt category.


During an Investment Reporting Subgroup conference call on October 8, the BWG decided to send out a survey to state regulators. The survey will help BWG determine:

  • What information is beneficial to regulators for use in the description column
  • How state regulators use the 12 foreign codes

This information will help the NAIC determine if the description column and foreign codes require any simplification or changes.


Proposal 2015-25BWG suggests removing the reference to non-rated bonds from the Schedule D, Part 1A and Schedule D, Part 1B footnote. The proposal addresses Industry confusion on what should be included in that footnote.

Insurers have been misinterpreting the reference to non-rated bonds to mean that they should only include the non-rated portions of cash equivalents and short-term bonds in the footnote. The footnote actually intends to capture the total book/adjusted carrying value (BACV) of Schedule DA and Schedule E-2 in the filing, including the potentially rated portion of DA bonds.

The motion to expose proposal 2015-25BWG, which would remove the reference to non-rated bonds and add the clarifying instructions to Schedule D Part 1A Section 1 and Schedule D Part 1B, was passed with a public comment period ending February 29, 2016. This proposal will not have much impact on insurers, but is simply a clarification to an existing disclosure.


The BWG is reviewing both the collateral type and bond characteristics’ columns for possible simplification. Both columns have a number of options where the regulatory benefit is unknown and industry use is rare. The BWG is evaluating whether the columns should be simplified to provide additional clarity for regulators and Industry alike.

During an October 8 Investment Reporting Subgroup conference call, the items were both exposed for a 45-day comment period, ending November 22. As the comment period was still open as of the date of the BWG meeting, there was no discussion at the Fall National Meeting.

Statutory Accounting Principles Working Group (SAPWG)


As part of the Investment Classification Project, SAPWG met on September 24 to discuss the accounting and reporting of bond ETFs, specifically in regards to BlackRock’s proposal that suggests an amortized cost methodology for all bond ETFs. Historically, ETFs have been reported at cost or fair value, depending on the designation.

Regulators and analysts have expressed the need to separately identify and analyze bond ETFs on the Schedule D Part 1. During the September conference call, NAIC staff was directed to proceed with drafting reporting changes for the Securities Valuation Office (SVO) designated bond ETFs. Two separate methods were considered:

  1. Report the bond ETFs on the Schedule D Part 1 as part of a different line or category; or
  2. Report the bond ETFs on a separate schedule, which would be referred to as the Schedule D Part 1, Section 1, and which would omit any columns not applicable to bond ETFs, such as par value or interest rate.

This proposed change is intended to help resolve bond ETF identification and reporting issues. The two options were adopted as exposed at the Fall National Meeting, with changes expected by January 2017. At the Fall National Meeting, the SAPWG directed NAIC staff to continue work with the vendors and issuers of bond ETFs.


On June 17, the SAPWG was directed to draft an exposure that would expand amortized cost treatment on surplus notes to include NAIC Designation 2 securities.

This was exposed in August, and was supported by Interested Parties. Interested Parties and the SAPWG agree that expanding amortized cost treatment to apply to “NAIC designation 2” surplus notes creates consistency across an otherwise unwarranted distinction between NAIC 1 and 2 bonds, since both are investment grade when appropriately mapped to the rating agencies.

Interested Parties also noted that the designation guidance for surplus notes is included in both SSAP 41R and the Purposes and Procedures Manual (P&P Manual), and that the SSAP 41R reference should be removed. The SAPWG pointed out that 41R creates more clarity around determining a designation than the P&P Manual, and recommended that the P&P Manual be clarified and revised prior to removing the guidance from 41R. A motion was adopted to re-expose changes to the P&P Manual.


The SVO referred non-recourse loans to the SAPWG in order to determine if the SAPWG should develop guidance. This action was prompted by the SVO’s accidental assigned designation on a non-recourse note. The SVO questioned whether these investments met the definition of a bond and whether they should be considered admitted assets.

Interested Parties concluded a thorough review of the CUSIPs on non-recourse loans, which were taken from the 2014 Annual Statement Filings. They concluded that non-recourse loans were bonds (either under SSAP 26 or SSAP 43R) and that they comprised a very small volume of total insurers assets (approximately $50M).

Since the SAPWG considers the amount immaterial to total insurer assets, the SAPWG recommended disposing and referring this exposure back to the Valuation of Securities Task Force (VOSTF). The SAPWG chair indicated that they did not think the assets warranted an additional SSAP, and noted that they didn’t want to make decisions that would discourage insurers’ investments in these types of loans. The motion carried and the exposure was disposed.

This disposal does not affect the SVO’s ability to determine a designation for non-recourse loans. The SVO has indicated that they will not be providing a designation for these assets and that the investments should be reported under the 5*/6* process.

The SVO’s inability to assign a designation does not determine admissibility. As mentioned above, these investments are admissible under SSAP 26 or SSAP 43R, depending on the structure.


In August, the SAPWG exposed revisions to SSAP 26 and 43R. These revisions require any investments with an “NAIC designation of 5” to be valued at the lower-of-amortized cost or fair value. This discussion was caused by redeemable preferred stocks’ “NAIC designation of 5” for AVR filers being valued at amortized cost instead of the lower of the two values.

Interested Parties strongly opposed this change, noting that this exposure makes fundamental changes to the accounting framework simply because they consider the current measurement to be “inconsistent.” Interested Parties also noted that there is significant background and reasoning that went into determining these assets’ reporting requirements, which should not be ignored for this change. Interested Parties pointed to several reasons why the change was not justified, including the numerous ways that NAIC 5 securities are accounted for that currently provide sufficient capital levels, given their risk.

During the Fall National Meeting, the SAPWG motioned to defer this exposed item until consideration of the related 5*/6* motion from the VOSTF (that motion is discussed in-depth below).


In June, the SAPWG asked to move this item to the substantive active listing, which requests that insurers provide either the full investment schedule information, or potentially a select portion of it, to be included in the quarterlies as they do in the annuals. This project would ultimately be handled by the Blanks Working Group (BWG), but the SAPWG was asked to comment, as they provide the guidance related to those schedules. NAIC staff have noted that this information would be helpful to aid them in identifying industry trends, changes, and “macro-level” issues.

At the Fall National Meeting, the SAPWG acknowledged the significant time and resource pressure this change would put on insurers of all types and sizes. Additionally, the SAPWG noted that NAIC staff do currently have the information that they are requesting in the quarterlies, although it does take some time to prepare. Therefore, this change would shift the burden of piecing together the information from NAIC staff to insurance company staff.

Interested Parties argued that NAIC staff has not justified the cost to insurers by providing specifics regarding the regulatory benefit that this additional information would provide. Interested Parties suggested “Data Calls” as an alternative in which the NAIC staff could request details from insurers without consistently putting the strain on insurance company staff to provide all information quarterly.

The NAIC staff indicated that from historical experience, the Data Calls have not been timely enough to complete assessment, are generally incomplete, and not always responded to.

The SAPWG suggested that they consider a proposal for quarterly reporting of electronic-only information, including CUSIP, Par Value, BACV, and Fair Value for Schedule D Investments. The motion to expose was adopted.


On October 19, the SAPWG exposed proposed revisions to SSAP No 1 to collect limited information regarding insurance-linked securities. These disclosures are proposed for December 31, 2015. The SAPWG will subsequently consider inclusion of these disclosures in the General Interrogatories with other disclosures at a later date. A motion to adopt as modified was passed, and the NAIC will consider additional Interested Parties’ comments in 2016.


This agenda item was referred to the SAPWG from the VOSTF. The VOSTF has asked that the SAPWG consider their proposed change to the 5*/6* process to ensure that the change is consistent with reporting requirements in the P&P Manual.

The 5* process allows insurers to avoid filing without a designation when they file a form certifying that the documentation necessary to do a full credit analysis does not exist. Currently, insurers are required to remit principal and interest certification forms to the SVO in order to designate the security as 5*. Since the certification forms are filed directly with the SVO, the designation is considered to be an NAIC-determined designation, even though the NAIC is not performing a credit analysis on these assets.

For this reason, the VOSTF accepted a recommendation by Interested Parties to remove the SVO from the 5* process, and instead require insurers to file the certification form as part of a General Interrogatory.

At the Fall National Meeting, the SAPWG exposed an item that will address how this change will interact with the requirements in the P&P Manual.


On October 19, the SAPWG directed staff to draft proposed revisions to the Schedule D and Annual Statement Blanks and Instructions based on the SAPWG’s preferred accounting treatment of investment income for prepayment penalties. Among these revisions is the suggestion to create an electronic-only column on the Schedule D Part 4 and 5, which would capture the prepayment penalty separate from the coupon or regular investment income on the asset.

There was some discussion at the Fall National Meeting of an “effective date” of the change. The SAPWG clarified that this is a change in interpretation for an insurance company, not a change in accounting guidance. It is SAPWG’s position that the prepayment penalty should have always been accounted for as Investment Income, even though there were some inconsistencies between the P&P Manual and the statement instructions. As such, an “effective date” would be inappropriate.

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