NAIC Summer 2016 National Meeting Update – Valuation of Securities Task Force (Special Session)

At the NAIC Summer 2016 National Meeting, the Valuation of Securities Task Force (VOSTF) met in a special session to discuss infrastructure investments. The meeting consisted of presentations by the ACLI, Moody’s, S&P Global Ratings, several consulting firms, as well as five of the largest insurers in the United States. The NAIC recognizes that infrastructure investment is an issue affecting the US economy as a whole. As such, they have made this project a top priority, and other projects may be delayed in the interest of moving forward.

Note: the term “infrastructure” in this conversation is defined more broadly than the traditional sense of transportation; the VOSTF included the need for investment in utilities such as power and water delivery, power generation, communications infrastructure, as well as social infrastructure (such as health care and education facilities).

Suggested Changes

At this point, the NAIC is still in a discovery phase and no specific changes have been exposed. However, several changes meant to encourage investment in infrastructure may arrive in the coming years.

Changes will likely be targeted towards life insurers first, since life insurers’ portfolios have larger durations, which eases the process of long-term infrastructure investments. In addition, life insurers do not receive the same tax benefits when investing in municipal bonds as P&C insurers.

Even without the tax complication for life insurers, the supply of municipal bonds is sometimes insufficient to provide for an area’s infrastructural needs due to institutional reluctance to taking on more debt, the effects of withdrawing too much funding at once, and revenue restraints on taxation. Build America Bonds, Private Activity Bonds, and other solutions have been implemented in the past to address this problem, but they were smaller in scope and never deployed as a long-term solution.

Two changes were suggested during the meeting:

1. Revision of the Securities Valuations Offices’ (SVO) analysis processes to acknowledge different risk factors for infrastructure investments
2. Adjustments of RBC factors for investments in infrastructure. This is primarily on Schedule D-1 assets but could also include Federal Home Loan Bank collateral, collateral loans, and investments structured as partnerships. These would likely be referred to the Capital Adequacy Task Force and the Investment Risk-Based Capital Working Group (IRBCWG).

This is an item that insurance companies—especially life insurers—should monitor closely. It will likely impact RBC calculation in the coming years and could result in changes to filing requirements with the SVO and/or SVO analysis methodologies.