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  • June 10, 2021

NAIC May Meetings Update

The Valuation of Securities Task Force, Blanks Working Group, Life Risk-Based Capital Working Group, and Health Risk-Based Capital Working Group of the NAIC all held meetings in May. The following items pertain to investment accounting.

Valuation of Securities Task Force

The Valuation of Securities Task Force held a meeting on May 24, 2021.


Discuss Comments Received and Consider for Adoption an Updated Proposed Amendment to the P&P Manual to Require the Filing of Private Rating Letter Rationale Report

The Financial Condition Committee directed the Task Force to implement policies to oversee the administration of rating agency ratings used for statutory purposes, including staff’s discretion over the applicability of their use in its administration of Filing Exemption. The Task Force directed the SVO to amend the P&P Manual to require the private rating letter rationale filed with the SVO but without the SVO’s discretion over evaluating the appropriateness of the rating or methodology utilized. It also directed the SVO to include transition guidance in case the insurers cannot provide the ratings rationale report due to confidentiality or contractual reasons and provide filers with a brief explanation in VISION systems as to why securities will not be provided an NAIC Designation. The expected content of the private rating letter rationale report would be what the rating agencies typically publish in their public reports for a specific asset type.

To allow the SVO to be able to determine an NAIC Designation Category for a private letter rating security, insurers are required to provide a private rating letter with a related private rating letter rationale report outlining more in-depth analysis of the transaction and the methodology utilized to arrive at the private rating and other documents (e.g., discussion of the transaction’s credit, legal, and operational risks and mitigants). They will allow the SVO to determine if the security type is eligible to be reported on the Schedule D as filing exempt and if the SVO agrees with the private letter rating.

The proposed change to the SVO’s P&P Manual is that insurers shall be responsible for providing the SVO a copy of the related private letter rating rationale report effective January 1, 2022, until industry representatives and the SVO have established reliable procedures for the SVO to obtain the rationale report directly from the NAIC CRPs.

  • For private letter ratings issued between January 1, 2018, and December 31, 2021, insurers may report such securities on the General Interrogatory (i.e., a PLGI security) if they cannot provide a copy of a private letter rating rationale report to the SVO due to confidentiality or other contractual reasons. If there are no such limitations, the private letter rating securities will be reported with a self-designated NAIC Designation Category of NAIC 5.B GI.
  • For private letter ratings issued after January 1, 2022, insurers may report those private letter rating securities on General Interrogatory until December 31, 2023, if they cannot provide the SVO with a copy of a private letter rating rationale report due to confidentiality or other contractual reasons. Those securities will be reported with an NAIC 5.B GI Designation if the insurer still cannot provide the relevant rationale report for any reasons after December 31, 2023.

The interested parties (American Council of Life Insurers, North American Securities Valuation Association, and Private Placement Investors Association) said their initial concern is two-fold: they want to provide transparency to the regulators, but also minimize the disruption caused by this new guidance to the private placement market. They will have several follow up meetings with the credit rating agencies and the SVO to figure out the rationale report delivery mechanism.


Filing Exemption for Real Estate Lease-Backed Securities

This item clarifies the difference between credit tenant loans and real estate lease-backed securities for filing exemption eligibility. Initially, the SVO proposed to update the residual asset exposure from the current 5% limitation to 50%. Those securities would be ineligible for filing exemption if they have more than 50% residual asset exposure.

The Statutory Accounting Principles Working Group (SAPWG) proposed an alternate amendment which won’t require the VOSTF to opine on acceptable residual risk thresholds. The SAPWG said the original intent of the credit tenant loan provisions, which was adopted in the 1990s, was to allow certain mortgage loans in the scope of SSAP No. 37 to be reported on Schedule D-1 instead of Schedule B due to the reliance on the creditworthiness of a credit tenant. Credit tenant loans have evolved from direct “mortgage loan” structures to “securities” which are not in the scope of SSAP No. 37. The SAPWG proposed modifying the SVO P&P Manual definition of credit tenant loans by clarifying that they only refer to “mortgage loans in scope of SSAP No. 37” and not “securities,” which would be in scope of SSAP No. 26R or 43R.

The item proposes requiring credit tenant loans that are mortgage loans in the scope of SSAP No. 37 to be filed with the SVO for review and potential assignment of an NAIC Designation Category. All other real estate lease-based transactions which meet the definition of a security would be eligible for filing exemption and have the option to file with the SVO for NAIC Designation Category.



Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to Add Additional Instructions to the Review of Funds

This item incorporates comments from interested parties on the new proposal that would adhere much more closely to Rule 18f-4 under the Investment Company Act of 1940. One difference between the new proposal and the SEC rule is that the new proposal would require a look-through assessment of all funds.

It proposes a single test to determine whether a fund’s use of derivatives will be deemed fixed income-like or not. ETFs with certain derivative structures can qualify as SVO-identified ETF bonds or SVO-identified ETF preferred stocks. Interest rate and currency derivatives that hedge assets held in the portfolio will be exempt from the exposure calculation.

The gross notional amount of derivatives with risk of future payment obligations, short sale borrowing, and reverse repurchase agreement exposure would be capped at 10% of the fund, which is more conservative.

All other derivatives, short sale borrowing, and reverse repurchase agreement exposure would be capped at 20% of the fund. The exposure will be calculated based on their market value for derivatives with only potential gain (less conservative).

To expedite review of funds with derivatives, it proposes a new filing requirement to provide the SVO with additional information for review, e.g., derivative type, any risk of future payment obligations, excluded derivative transactions (i.e., interest rate and currency derivatives that hedge assets held in the fund), the counterparty credit rating, and calculation of the derivative exposure. However, the SVO would reserve the right to request derivative legal documents if they deem it necessary.

Funds on the NAIC US Government Money Market Fund List are not permitted to use any derivatives transaction or other derivatives instrument.

Blanks Working Group

The Blanks Working Group held a meeting on May 26, 2021.


Ref #2021-05BWG-Modified: Modify the instructions for Note 17B(4)b1(a)

This item proposes additional disclosures and to data-capture certain elements of SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities in response to the Statutory Accounting Principles Working Group’s deliberation of item 2019-21: Review of the investments eligible for reporting on Schedule D-1: Long Term Bonds. During that project, regulators expressed a desire to identify when a reporting entity has entered a securitization, asset-backed financing or similar transfer transaction where a significant economic interest in the transferred assets is retained by the reporting entity, its related parties, or another member within the holding company group (SAPWG Agenda Item 2021-03 – SSAP No. 103R Disclosure).

Ref #2021-07BWG: Add additional line categories to the instruction for Column 26 – Collateral Type on Schedule D Part 1, to capture collateral type data for all RMBS, CMBS and LBSS regardless of reporting category

This item expands the requirement to indicate collateral type from the category “Industrial and Miscellaneous (Unaffiliated)” to all categories for residential mortgage-backed securities, commercial mortgage-backed securities, and other loan-backed and structured securities.


The next BWG meeting will be held July 22, 2021.

LRBCWG Meeting

The Life Risk-Based Capital Working Group held a meeting on May 27, 2021.


Update the RBC calculation and factors for Real Estate 2021-06-L

The working group initially proposed both a real estate reporting structural change (2021-01-L) and RBC factors update and adjustment factor (2021-06-L). The former was adopted by the Capital Adequacy Task Force on April 29, 2021.

This agenda item proposes:

1. Reducing base RBC factors for LR007 – Real Estate:

  • From 15% or 23% to 11% for Schedule A real estate including investment, foreclosed, and held for sale real estate
  • From 23% to 13% for Schedule BA real estate
  • From 12% or 20% to 1.75% for encumbrances credit factor

2. Reducing factors for lines 18, 20, and 22 on LR010 – Asset Concentration Factor

The recommended base factor would cover cumulative losses during a two-year period at a 96.8 confidence level.

It also proposes creating an adjustment factor (Base RBC Factor x {1 – ½ x [(Fair Value – Book Value) / Book Value]}) that will be based on the difference between fair value and statutory carrying value, to determine the RBC requirement.

A few members of the working group said it was not the right time to change the real estate RBC factors during a pandemic, and they were not sure what the impact of COVID-19 will have on the performance of commercial real estate. Since more companies are allowing their employees to work from home, the demand for commercial real estate may be negatively impacted. They suggested deferring this agenda item and will revisit it in several months or even a year after the end of the pandemic. However, most of the working group members, including the Chair, disagreed and thought the factor changes were long overdue and the update on real estate RBC factors would be in line with the upcoming bond factor updates.

For adjustment factor, the initial plan was to use the fair value from Schedules A and BA. The working group sent a referral to the SAPWG asking if that approach is appropriate. The SAPWG sent their response to the LRBCWG on May 20, 2021, and expressed their concerns on the reliability and consistency of fair value data with the adjustment factor that allows the reporting entities to reduce RBC through their reported fair value of real estate.

The item was adopted with edits to set the adjustment factor to zero.

HRBCWG Meeting

The Health Risk-Based Capital Working Group held a meeting on May 25, 2021.


Update Bond Factors 2021-09-H

This item incorporates the bond factors for the 20 NAIC Designation Categories based on a five-year time horizon (duration of assets held for health insurers) for XR006 – Off-Balance Sheet Security Lending Collateral, XR007 – Bonds, and XR012 – Asset Concentration. The factor includes the bond portfolio adjustment.