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  • March 31, 2015

NAIC Spring 2015 National Meeting Updates

The NAIC Spring 2015 National Meeting took place on March 28 – 31, in Phoenix, Arizona.

Relevant investment accounting items are examined below, including updates on RBC Asset Charges, proposed corporate bond factors, the Investment Classification Project, and more. Read this entire post for a full recap, or click below to jump to the section that most interests you.

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

The Investment Risk-Based Capital Working Group (IRBCWG) Update


The IRBCWG referred an item seeking to review the RBC asset charges for derivatives to the Capital Adequacy Task Force for Life Insurance Companies. The current recommendation is to change the exposure formula for written credit default swaps to a formula consistent with the RBC formula for bonds.


At the 2014 Summer National Meeting, the American Academy of Actuaries (AAA) proposed new corporate bond factors for life insurance companies’ RBC assets. The ACLI and interested parties posed numerous questions and concerns about the updated factors. In response to these questions, the AAA is completing documentation of the modeling process for the C1 factors that were recommended. This modeling process will include a reconciliation back to the current factors and additional support for the recommendation.

Nancy Bennett of the AAA gave an update on the proposed bond factors for life insurance companies. She said that while there are currently no new numbers to report, the AAA is still working on reconciling the recommended bond factors to the current bond factors, which would validate any recommended changes. Ms. Bennett added that the AAA is exploring adjustments to the currently developed factors. These adjustments would result in both smoother and more reasonable factors.

The AAA expects to complete their documentation for the reconciliation and validation of the factors by August 15, which corresponds with the NAIC Summer National Meeting. At that point, the AAA will provide their base recommended factors, not considering any adjustments based on security type, concentration, or other relevant variables.

Ed Toy, Director of the NAIC Capital Markets Bureau, reiterated that the proposed RBC factor changes are only applicable to life insurance companies, and discussed the inherent risk differences between life and P&C companies. The current life factors may or may not correspond with any future related P&C RBC factor changes.


In addition to reviewing Corporate Bond Factors, the IRBCWG is determining if it’s necessary to produce different sets of factors for other non-modeled fixed income, such as municipals, sovereign debt, and hybrids. Currently, factors only change based upon the credit rating, without additional consideration to security type. Historically, this type of additional granularity has been considered unnecessary because the Moody’s and S&P global rating scale is calibrated such that, at least for public, sovereign, and municipal debt, the expected loss in a default event is the same.

Given the information from rating organizations, the IRBCWG stated it would probably not be beneficial to produce new factors for municipals and sovereign debt. However, they will still have to look at other asset types, provided the asset class is large enough to produce a material difference in RBC. The IRBCWG reiterated that any interested parties planning to suggest additional granularity based on asset class must have a robust argument prepared for the NAIC Summer National Meeting in August.

The AAA supported the recommendation that a single factor for bonds be applied. They noted that they have to be able to use a process to derive a rating based on published data, such as an NRSRO, because it is public auditable data. The AAA further indicated that they do not feel it is appropriate to override the ratings process. Even so, the IRBCWG argued that if there is good reason to reflect increased risk, they should consider the proposal of additional granularity.


Discussion continues regarding how many designation classes there will be after the factors are determined. Northwestern Mutual Insurance advised the IRBCWG that the greater the number of designations, the longer the time-frame that insurance companies will need to accommodate the changes. Although third-party vendors should be able to accommodate the changes quickly, there may be issues with “homegrown” systems, and company processes will need to change based on the number of designations.

Undeniably, increasing the number of designations will have remarkable trickle-down effects on all insurance companies’ processes. Not only does the designation determine the accounting value of any one security based on the book or market value calculation, whichever is lower, but any changes will result in broad edits to the SVO credit analysis. It will also require numerous revisions to SSAPs, Blanks, and any regulations that refer to the designation process. For this reason, Clearwater expects that the NAIC will allow ample transition time. Even considering the work necessary to implement a new framework, the AAA indicates that it makes tremendous sense to expand the number of designations.

The IRBCWG and the AAA agree that the AVR factors should correspond directly with the newly developed RBC life insurance factors. The AAA and the NAIC have noted that both the AVR and RBC factors deal with the impact of credit risk on default, so it would make sense that these factors be consistent. Therefore, any changes to RBC will likely bring about identical changes to the AVR. The AAA also noted that they will reach out to those responsible for developing the previous AVR factors to further validate that the RBC and AVR factors should be identical.


In addition to the review of RBC factors for corporate bonds, the IRBCWG is undertaking a related review project for BA assets’ RBC factors.

There is still a question of whether or not these assets warrant a factor change. Complicating the matter, the BA categories are being merged, which would affect any proposed changes to the RBC factors. For this reason, the IRBCWG discussed the importance of coordination with other NAIC committees in the implementation of new risk factors.

The Valuation of Securities Task Force (VOSTF) Update


As part of the Investment Classification Project, the Statutory Accounting Principles Working Group (SAPWG) is working in close conjunction with the VOSTF to review and propose changes to all investment SSAPs. During the VOSTF meeting, Julie Gann, Senior Manager of Accounting and Reporting at the NAIC, gave an update on the Investment Classification Project, which included the exposure of four memorandums for comment:

  • Inclusion of the security definition in SSAP 26
  • A discussion around the requirement of a “contractual amount of principal due” to be included in SSAP 26
  • Accounting for ETFs currently within the scope of SSAP 26
  • A discussion of non-bond (yet bond-like) instruments

The VOSTF clarified that the Investment Classification Project originated from a need for the SAPWG and VOSTF to align their professional orientation when analyzing securities amongst the specific schedules. For example, the VOSTF reported that in order for the Securities Valuation Office (SVO) to perform appropriate analysis, they need to know if there is a “contractual amount of principal due,” while the SAPWG is determining whether the asset is “bond-like.” The VOSTF and SAPWG will continue to work closely during the length of the Investment Classification Project to ensure aligned and complete securities’ analysis.


Nationwide Insurance requested a referral to the SAPWG to reconsider the RBC treatment of both rated and unrated catastrophe-linked bonds.

Nationwide asserted that because these bonds are largely uncorrelated with macroeconomic factors, they provide important untapped diversification benefits for insurance companies. Currently, rated catastrophe (CAT) bonds are treated like corporate bonds for RBC purposes, while unrated CAT bonds (approximately 1/3 of total outstanding) are treated as Class 6 bonds.

The SVO noted that they will make an effort to quantify the demand of these bonds, and determine whether that demand justifies committing significant resources for a detailed investigation. Additionally, it was agreed that a referral to the SAPWG will need to be made in order to develop accounting treatment for these bonds.


The VOSTF received a referral requesting a clarification of “structured securities” definition in the 5*/6* special reporting instructions. The 5* designation is used in the event that the insurer can certify that documentation for filing a security does not exist, while 6* can be used in lieu of the aforementioned certification.

The SVO has determined that the phrase “structured securities” refers to a group of complex corporate securities specified in Part 3, Section 3 (a) and (b) of the Purposes and Procedures Manual (P&P). The referral request recommends that the special reporting process instructions reference that portion of the manual. The suggested amendment was released for a 45-day comment period.


The SVO received a proposal recommending the development of a new securities’ filing framework.

The VOSTF mentioned that filings increase significantly at year end, with limited filings at the beginning of the year. This filing pattern forces SVO staff to work quickly at year end, and results in a strain on SVO staff resources and an increased possibility of inaccuracy.

In order to decrease the number of unassessed securities at year end and increase overall accuracy, the SVO proposed a change to the filing deadlines. The VOSTF directed the SVO and industry to work on developing a proposal.


Non-recourse loans are mortgage or business loans made to individuals meeting certain charitable criteria. The investors in these loans are repaid through the borrowers’ cash flows. With this structure, non-recourse are considered pass through loans, but SVO management asserts that there is no legal responsibility for repayment, and therefore these loans cannot be assessed for credit quality.

In the most recent annual filing period, non-recourse loans were entered into the VOS database based on an analysis that did not comply with filing standards. More specifically, assigning a designation requires an analysis of repayment, which the VOS said was inapplicable for these securities. When this was discovered, VOS management instructed that these securities be deleted from the database.

Chris Anderson of the consulting group Anderson Insights, LLC, spoke on non-recourse loans. He pointed out that non-recourse loans are socially conscious loans, and requested bond treatment—even if it results in the worst bond treatment (5*/6* process). He pointed out that payment is due from homeowners and questioned why the SVO was doubting the responsibility of repayment.

A report was released for a 45-day comment period ending May 14. The VOSTF anticipates referring the report to the SAPWG to consider the development of accounting treatment.


Currently, reconciliation from UK GAAP to either US GAAP or IFRS is not necessary for UK GAAP insurers. Due to some recent changes in UK GAAP, VOS staff was asked to consider whether or not reconciliation is now needed.

The VOSTF reported that the majority of the UK GAAP changes were made to eliminate redundant disclosures or to converge more with IFRS. The American Council of Life Insurers (ACLI) and SVO expect to proceed with an analysis of the modifications and report back to the VOSTF during the NAIC Summer National Meeting.


The SVO received a report on the Private Letter Rating Project. This project was started because the SVO received filing exemptions that were not reported on the SVO’s eight credit rating provider feeds.

The VOSTF discussed ways to potentially reduce the number of filing exemption false positives, such as encouraging the credit rating agencies to put the private placement ratings in their feeds.

The NAIC staff has grouped these exceptions into eight categories, with one of those being private placement securities, and will work with industry and the ACLI towards reducing the number of exceptions in the jump-start report.


As part of the Model Law Review Initiative, the Financial Condition Committee has requested that the VOSTF review the Derivatives Instruments Model Regulation and decide whether it should be retained, amended, converted to a guideline, or archived. The SVO requested that individuals with expertise in this area be identified so they can make comments on any applicable changes to the Model Law.


  • The Life Risk Based Capital Working Group is considering a proposal to identify standards that would apply to reinsurance transactions backed by letter of credit or guarantees if these were included in the definition of “Other Security”
  • The SVO received a referral released for a 45-day comment period to amend Part Seven to substitute references to the SVO with references to the Structured Securities Group.
  • An RFP is being developed for the SSG’s financial modeling vendors in order to comply with NAIC governance practices.
  • The P&P Manual will now be released once a year (it was previously released twice a year) and interim changes will be communicated to industry through the SVO web page. The P&P Manual is now available for free on the NAIC website.

Blanks Working Group (BWG) Update


The BWG adopted item 2014-20, which modifies the instructions and illustrations for Note 32 and 34 to correct inconsistent use of “market value and fair value” within the instructions.

In both of these notes, the instructions and illustrations changed the words “fair value” to “market value” in certain areas.


2015-07: Modify Instructions on Part A to Reflect the Reporting of Real Estate owned by a LLC on Schedule A, if it Meets the Requirements Set Forth in SSAP 40R, Real Estate Investments

This was an item (REF #2013-17) that was passed by the Statutory Accounting Principles Working Group (SAPWG) in 2014. It allows 100% wholly owned real estate LLCs to be reported on Schedule A instead of Schedule B. This exposed proposal is to update the BWG with the same change.

2015-08: Modify the Instructions to Reflect the Inclusion of Only Cash Transactions on the Cash Flow Page

This is another item exposed as a result of a previously discussed SAPWG issue. During the December 11 conference call, the SAPWG exposed non-substantive revisions to SSAP No. 69, clarifying that the cash flow statement should be limited to transactions involving “cash.”

This item was adopted by the SAPWG during this meeting, and the instructions were modified to reflect the change. The item was then exposed for similar consideration by the BWG.

2015-09: Add Instructions and Illustration for New Disclosure Note 5A

This proposal is to add the additional disclosures required by the adoption of changes to SSAP 37 (2014-30) in the Purpose and Procedures Manual (P&P Manual). This is a new disclosure with an anticipated effective date of year-end 2015.

Key data points in this disclosure include: the mortgage loans derecognized as a result of disclosure aggregates in amount; the collateral (real estate and other) recognized; and the receivables recognized from a government guarantee of the foreclosed mortgage loan.

2015-12: Modify the Instructions for Note 5G Based on the Modifications Proposed to SSAP No. 93

This item adds additional disclosures on the annual footnotes, as required by the pending adoptions of SSAP 93 – Accounting for Low Income Housing Tax Credits Property Investments.

2015-14: Modify the Instructions for Column 1 CUSIP Identification and Column 2, Description

This item adds new electronic columns for Issuer, Issue, SEDOL code, ISIN Identification, and Capital Structure Code. It was added at the request of the Valuation of Securities Task Force (VOSTF) on behalf of the Securities Valuation Office (SVO).

The proposal noted that these columns will help the SVO find more securities in their data feeds, and will improve the information used for the Filing Exempt process by eliminating the unidentified securities in the Credit Trading Provider Feeds as well as the Jump State Report exceptions.

The proposal changes the language to state in very specific terms what values should be reported in the CUSIP field if none exists, including that it should come from a new electronic-only column. In addition, for the new electronic-only columns titled Issuer (column 31) and Issue (column 32), the proposal states the preferred sources that the reporting entity is encouraged to use are:

  • Bloomberg
  • Interactive Data Corporation (IDC)
  • Thomson Reuters
  • Descriptions used in relevant SEC filing or legal documentation.

The description column is also updated, with encouragement to use the same entry as Issue, column 32.

In total, four new electronic columns were proposed, including Column 35 Capital Structure Code. The Capital Structure Code will be consistent with the SVO Notching Guidelines in the P&P Manual as:

  1. Senior Secured Debt
  2. Senior Unsecured Debt
  3. Senior Subordinated Debt
  4. Junior Subordinated Debt
  5. Other


In addition to the acted-upon items, the BWG received a report from the Investment Reporting Subgroup. Several items are still being worked on at the subgroup level, including the reduction of BA categories, and foreign matrix column and description column standardization.

Statutory Accounting Principles Working Group (SAPWG) Update


The SAPWG adopted item 2014-23, which is a non-substantive revision to SSAP No. 69 – Statement of Cash Flows. As mentioned in the Blanks Working Group Update, there were questions on whether or not the Statement of Cash Flows should contain certain non-cash transactions (i.e., certain types of transfers or corporate actions).

The non-substantive revision clarifies that the Statement of Cash Flows only includes transactions that involve cash. In conjunction with this, the SAPWG referred an item to the Blanks Working Group (BWG) to affirm the change: item 2015-08 – “Modify the instructions to reflect the inclusion of only cash transactions on the Cash Flow Page.” Refer to the BWG Update for more information on this item.


2014-24: Accounting for Low Income Housing Tax Credit Property Investments

The SAPWG exposed item 2014-24, revisions to SSAP No. 93 – Accounting for Low Income Housing Tax Credit Property Investments. This item was exposed in the Fall 2014 National Meeting with a desire to adopt ASU 2014-01, which prohibits the proportional amortization method allowed by GAAP and requires the modified amortized cost methodology.

The exposure also prohibits net reporting as allowed in GAAP, and requires separate reporting of investment amortization and tax benefits. The revisions state that amortization should be reported in investment income, and tax benefits should be reported in income tax expense.

Based on industry comments, the SAPWG has modified the original proposal to “explicitly identify that the proposed revisions continue the previous SSAP 93 balance sheet treatment.”

2015-02: Short Sales

The SAPWG moved item 2015-02: Short Sales to the substantive active listing and exposed the item for industry feedback.

The NAIC has seen an increase in industry questions regarding the proper accounting and use of short sales. Depending on the nature of the short sale, they can be accounted for under either SSAP No. 103 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and/or SSAP No. 86 – Accounting for Derivative Instruments and Hedging, Income Generation, and Replication (Synthetic Asset) Transactions.

The exposed item provides information on what short sales consist of and proper statutory accounting treatment. Key information in this agenda item includes:

  • How a stock short sale is used
  • Concept of unlimited losses for stock short sales
  • Naked short sales
  • GAAP treatment within derivative guidance
  • Statutory guidance
  • How short sales are used by securities borrowing transactions

The item notes that the NAIC traditionally refers questions back to the insurers’ state of domicile when asked if they are permitted investments. It is anticipated that after industry provides feedback on this item, there will be discussion on changes to SSAP guidance, or possibly a new issue paper.

2015-04: Prepayment Penalties and Amortization on Callable Bonds

The NAIC exposed revisions to SSAP No. 26 – Bonds, Excluding Loan-Backed and Structures Securities, to address questions on the proper amortization of bonds when a bond is continuously callable or contains a “make whole” call provision. In addition, this item addresses the proper accounting treatment for bonds called with a make prepayment penalty (acceleration fee).

In summary, the three targeted changes to the SSAP will instruct companies to:

  1. Report prepayment penalties and acceleration fees as realized gains (difference between consideration and book adjusted carrying value) at time of early liquidation.
  2. Provide illustrations and revisions to the proper accounting treatment of continuously callable bonds utilizing the “Yield to Worst” methodology.
  3. Clarify that bonds with “make whole” provisions follow the yield to worst methodology, without exception.

Additional Items


The SAPWG continues to work on the Investment Classification Project and released four proposals that will serve as documents to facilitate further conversations.

  • Security Definition: This proposal is to incorporate the US GAAP definition of a security, as used in ASC 320 – Investments Debt and Equity Securities and Topic 860: Transfers and Servicing. Specifically, the goal is to incorporate the definition of a security in SSAP No. 26, which will define the requirements to be considered a bond. Currently within the scope of SSAP No. 26, there are several securities that have been erroneously included within SSAP No. 26, despite not having a contractual amount of principal due. NAIC staff has specifically stated that these items will be considered separately within this project.
  • Contractual Amount of Principal Due: This memorandum incorporates the desire to have a “contractual amount of principal due” for all SSAP No. 26 investments, with consideration of guidance for “funds.” By putting this into SSAP No. 26, the NAIC is starting the concept of a new SSAP that will apply to funds. The ultimate goal is to eliminate confusion on where funds should be reported. The new SSAP will discuss the definition and reporting of both mutual funds and exchange-traded funds. This also starts the framework of a new Schedule D Part 7, which is where all funds will be required to be reported.[2]
  • ETF Analysis: This memorandum details the reporting inconsistencies between insurance companies on ETFs approved for “bond” or “preferred stock” reporting by the SVO as of year-end 2013. It makes an argument that requiring all ETFs to be reported at fair value will have minimal impact on the insurance community.
  • Definition of Non-Bond items: This memorandum discusses the definitions of investments outside of the bond definition that are currently proposed in SSAP No. 26. Four types of securities are included in this memorandum:
    • Loan Participations
    • Loan Syndication
    • To Be Announced (TBA) Securities
    • Hybrids
    • Convertible Securities


During the 2014 Fall NAIC National Meeting, the SAPWG moved 2014-25 to the non-substantive active listing and exposed changes to SSAP No. 41 in regards to non-rated surplus notes and surplus notes with a designation below NAIC 1. Based on industry comments, the SAPWG has now moved this item to the substantive active listing and proposed a revision to SSAP 41.

The revision, to be worked on in conjunction with a new issue paper, clarifies the following:

  1. Surplus notes with a 1 rating CRP should be reported at amortized cost.
  2. Surplus notes that are not rated by a CRP, or have a rating other than NAIC 1, shall be reported at the lower of amortized cost or fair value.
  3. Simplify previous valuation change guidance in SSAP No. 41.

Ultimately, the revisions and issue paper will provide clear guidance on the proper accounting and reporting of surplus notes on Schedule BA and eliminate frequent questions received by the NAIC.


The SAPWG received an update on the Restricted Asset Subgroup, which is discussing the existing guidance in SSAP No. 103 for collateral requirements for repurchase agreements.

The subgroup is currently working on three items:

  1. Revise SSAP No. 103 to clarify that collateral must meet requirements to be an admitted asset.
  2. Revise SSAP No. 103 to clarify the short-term restrictions for repurchase agreements
  3. Perform additional research into the use and reporting of repurchase agreements.