NAIC Fall 2019 National Meeting: 7 Key Updates for Investment Accounting

I attended the NAIC Fall 2019 National Meeting held December 7-10 in Austin, Texas, to hear the latest updates in investment accounting and stay informed of new guidance from the NAIC.

I attended meetings for the Statutory Accounting Principles Working Group (SAPWG), the Valuation of Securities Task Force (VOSTF), and the Capital Adequacy Task Force (CADTF). A call was also held for the Blanks Working Group (BWG) on December 17; an upcoming blog post will provide information from that call.

My colleague Kate Stark and I go into detail about updates in our market insight paper.

The following are seven important highlights from the Fall National Meeting.

Exposed for Comment: One Designation for Financially Modeled 43R Securities (VOSTF and SAPWG)

Financially Modeled SSAP 43R securities may get one single NAIC designation instead of 19 breakpoint prices for 2020 annual reporting.

During the NAIC Summer 2019 National Meeting, the Investment Analysis Office (IAO) recommended to the VOSTF that the NAIC should eventually “align the RMBS/ CMBS modeling to provide a single NAIC Designation for modeled RMBS/CMBS.” This would differ from the current method of “providing a series of book adjusted carrying value price breakpoints to companies to determine the NAIC designation.” Another further reason to align to a single designation is that it would be expensive and complex, for both the NAIC and insurers, to incorporate the additional breakpoints with the pending move to 20 designation categories.

For these reasons, the IAO recommended the NAIC move to a single designation category for RMBS/CMBS. Considering the potential impact to SSAP 43R – Loan-Backed and Structured Securities, the VOSTF recommended a concurrent referral to the SAPWG for exposure.

The VOSTF exposed this issue for comment with a deadline of February 7, 2020.

The SAPWG exposed this issue (Ref #2019-41) for comment with a deadline of January 31, 2020.

New Asset Type: Ground Lease Financing Transactions (VOSTF)

As part of its ongoing review of credit tenant loans (CTL), the Securities Valuation Office (SVO) became aware that some insurers have been filing CTL transactions for assets better characterized as ground lease financing (GLF) transactions.

In response, the SVO directed the market that “all CTL structures must be submitted to the SVO for review” against Part One, Paragraph 106 and Part Three, Paragraph 4 of the Purposes & Procedures (P&P) Manual. It also clarified that it considers GLF transactions distinct from CTLs. Because there are substantial differences between how CTLs and GLFs are structured, the SVO proposed that the P&P Manual be amended to include a “multi-pronged approach” for analyzing GLFs. This includes adding GLFs as a new asset class with an accompanying analytics process.

This item was exposed on October 31, 2019, with a comment period ended November 22, 2019. It was adopted with a referral sent to SAPWG to make applicable changes on statutory accounting.

Exposed for Comment: Rolling Short-Term Investments (SAPWG 2019-20)

This proposal would affect SSAP No. 2R – Cash, Cash Equivalents, Drafts and Short-Term Investments and SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Proposed revisions restrict the classification as a cash equivalent or short-term investment for all affiliated SSAP No. 26R – Bond Investments and all affiliated and nonaffiliated investments in scope of SSAP No. 43R – Loan-backed and Structured Securities.

It also applies to all investments that would be captured on Schedule BA in certain circumstances (see our market insight paper for more details).

Regulators and interested parties expressed concerns over some of the wording of the proposal and suggested modifications. NAIC staff recommended the working group expose the agenda item with limited revisions to exclude qualifying cash pools in scope of SSAP No. 2R from the short-term rolling provisions. Staff also referenced agenda item Ref #2019-42, which proposes to capture cash pools in scope of SSAP No. 2R.

Staff requested that since they do not initially support some of the proposed modifications, industry and regulators provide comments on the comments received to permit short-term lending structures, eliminate the “unaffiliated” exclusion from SSAP No. 26R, and permit reacquisition of a similar investment if certain criteria is met.

Exposed for Comment: Fixing the gap between GAAP/SEC and Statutory Accounting on Identification of Related Parties (SAPWG 2019-34)

As currently written, the requirements for SEC filings do not allow for a disclaimer of affiliation as allowed in the Insurance Holding Company System Regulatory Act (#440), the Insurance Holding Company System Model Regulation (#450), and Appendix A-440. Consequently, the statutory financial statements do not provide the full picture of some complicated business structures when those related parties are only identified under US GAAP or SEC.

In order to capture more related parties, NAIC staff will bring in some SEC and US GAAP language regarding related parties. It also proposes changes to have related party identification in SSAP No. 25 – Affiliates and Other Related Parties regardless of any disclaimer of control or affiliation for non-controlling ownership over 10%. It will ensure regulators have the full picture of complicated business structures which can be common for those large insurers. A referral will be sent to the Group Solvency Issues (E) Working Group regarding the definition of affiliated.

This item also proposes to reject the ASU related to Variable Interest Entities (VIE).

Exposed for Comment: Linked Surplus Notes (SAPWG 2019-37)

This exposed item is the result of previous agenda item Ref #2018-07. The SAPWG considered new disclosures involving surplus notes to better identify certain surplus note situations in statutory financial statements.

Exposed revisions to SSAP No. 41R provide enhanced disclosures to identify when a surplus note has been issued in which anticipated or typical cashflows have been partially or fully offset through the terms of the asset provided by the note holder.

Previous SAPWG discussions around surplus notes where an “associated” asset is received by the surplus note issuer have raised questions about whether a surplus note that does not result with an exchange of cashflows should be considered surplus under SSAP No. 41R. There was a separate discussion during the working group meeting about how to treat those surplus notes.

Updated Definition of Principal Protected Securities (VOSTF)

Credit rating provider methodology on some securities classes do not, in NAIC staff’s opinion, meet NAIC needs. For that reason, they are excluded from the filing exempt eligible list. The SVO would like to apply a look-through methodology approach to capture the regulatory risk on these securities because these securities can come in a number of forms.

The task force chairperson said NAIC staff are still carefully looking at this asset type and working on the definition of Principal Protected Securities (PPS). They are open to any comments on the topic and hopefully will be able to expose this item at the Spring 2020 National Meeting. Interested parties asked the SVO for examples where the SVO disagrees with the CRP’s methodology.

The VOSTF said these securities can still be reported on the Schedule D but they are not filing exempt eligible.

Clarify that the Sovereign Rating Limitation applies to Filing Exemption (VOSTF)

This proposal caps the NAIC designations to individual foreign securities at the NAIC Foreign Sovereign Designation. It clarifies this sovereign limitation is required when an NAIC designation is produced through the Filing Exempt instructions.

The task force previously exposed this item for comment from October 31 to December 16 and did not discuss it during the Fall National Meeting.