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  • 8 Min Read
  • August 10, 2017

NAIC Summer 2017 National Meeting Update – Valuation of Securities Task Force

The Valuation of Securities Task Force (VOSTF) met Monday, August 7 during the NAIC 2017 Summer National Meeting in Philadelphia. The VOSTF also held several interim conference calls May 18, June 15, June 22, July 14, and August 1. The VOSTF’s primary goal for these calls has been to discuss potential updates to the Investment Analysis Office’s (IAO) role and responsibility in the designation process. These updates were proposed to reduce the number of reporting exceptions present in the filing process that occur when the NAIC determines a designation different from the insurance entity.

Referral on Bank Loans Sent to the SAPWG

The Statutory Accounting Principles Working Group (SAPWG) recently updated language in SSAP No. 26(R), which identifies that bank loan syndications, participations, and assignments are covered under SSAP No. 26(R). Industry provided feedback on this change, stating the language proposed does not cover direct originations, and they should be included with the other types of acquisition transactions. Industry also commented the language specifying that bank loans must be issued by a financial institution is not appropriate because bank loans issued by insurance companies are, in substance, the same type of asset.

The SAPWG sent a referral to the VOSTF to provide more information on bank loans and whether the types of transactions referenced pose different risks than those previously mentioned. The VOSTF adopted a motion to send a referral back to the SAPWG, which confirms that bank loans issued by an insurer or in a direct origination do not pose significantly different risks to insurers. This referral will allow the SAPWG to move forward with additional proposed changes on future conference calls.

Disposed Referral Related to Loan-Backed and Structured Securities

The VOSTF previously recommended revisions to SSAP No. 43(R) which would change the definition of loan-backed and structured securities (LBSS). This item was referred to the SAPWG. In response, Industry voiced significant concerns, saying the recommended change would enable some assets to become non-admitted. The SAPWG noted the concerns and disposed of the item without recommending changes. The VOSTF does not plan on pursuing this agenda item further at this time.

Enhancements to the Administration of the Designation Process

Three proposals regarding enhancements to the administrative process for the SVO are currently in consideration. While these proposals were not discussed at the NAIC 2017 Summer National Meeting, they are notable and will be discussed in future meetings.

1. Producing Designations for Private Letter Ratings

Insurers anticipate that effective January 1, 2018, all privately held securities will either be received from rating agencies through feeds or filed directly with the IAO and manually added to the FE database. NAIC staff discussed several amendments, but there is confusion regarding the process flow, the meaning of the word “private,” the situations in which the “PL” suffix should be appended to a designation, grandfathering previous private placements, and the overall timing for the change.


In the event that the designation the IAO produces conflicts with a designation reported by an insurer, it has been recommended that the “RE” suffix be appended to a security for further investigation. Industry and the VOSTF continue to discuss the merits of this proposal, potential processes for resolving reporting exceptions, and the timing of the change.


The VOSTF is discussing a proposal that would allow the IAO to require an insurer to file a security that has already been rated so the IAO could identify new types of risks pertaining to the security.

During an interim conference call August 1, some members of the VOSTF indicated they developed a proposed flowchart that outlines the process for these securities and indicates when either the “PL” or the “RE” suffix would be reported. Many Interested Parties agreed the flowchart would be helpful for understanding the impacts of these changes. The VOSTF agreed to make the flowchart available on the NAIC’s website and discuss it once Industry has a chance to review it.

Each of the above amendments has been discussed in great detail on the interim conference calls, but Industry and the VOSTF have yet to agree on how each of these securities’ subsets would be reported and communicated to the IAO.

Amendment to the 5*/6* Designation Process

The VOSTF received a cumulative staff report on an adopted change that removes the 5*/6* process from the guidance of the SVO and moves it to an interrogatory. The VOSTF did not need to take any action at this time.

Policy Statement on NAIC Staff Interactions

The VOSTF reviewed another referral from the SAPWG that recommended language in a policy statement transferring the administrative function on Filing Exempt (FE) and Private Letter (PL) ratings to the IAO, and require that the IAO study the result of the exceptions and recommend improvements.

The VOSTF members reviewed the referral and agreed with the intent of the statement, but they were concerned the SAPWG’s proposed text did not identify the areas of staff interactions. The VOSTF revised language to address these concerns and re-exposed the language.

There has been concern expressed that this language conflicts with language in the Purposes & Procedures (P&P) Manual in many different parts. The VOSTF will discuss how to revise this language on future calls.

SVO Methodology for Power Generation

NAIC designations have been assigned by the SVO for many decades. However, it was recently noted in a joint IAO/American Council of Life Insurers (ACLI) proposal that the methods for assigning a designation to these securities is not transparent and possibly not appropriate. The regulatory treatment for these types of securities is unclear and should be addressed.

During a June 15 conference call, the VOSTF passed a motion to expose amendments to the P&P Manual, which provided a methodology and instructions for assigning a designation to renewable energy and power generation securities. NAIC staff heard a report on the benefits and rationales for insurers investing in renewable energy and power generation and adopted the proposed amendments to the P&P Manual.

Errors in the US Government List and Proposal to Expand

During the June 22 conference call, NAIC staff heard a report regarding administrative errors found on the US government list. Ineligible money market funds were inappropriately added despite their investment in agencies of government-sponsored enterprises and other ineligible organizations.

The staff made a recommendation to expose the report for a 45-day comment period, which ended August 7. Industry comments will be discussed on a future conference call.

SVO Report on Fund Investments

There were two separate proposals related to fund investments that were addressed by the VOSTF:


The VOSTF proposed to add language to the P&P Manual clarifying that the SVO does not have procedures to add designations to funds, stating the SVO only applies designations to funds in specific and limited circumstances, which are clearly outlined in the P&P Manual. This includes applying a designation to bond mutual and exchange traded funds after it is identified that those funds are invested in certain types of investments. The VOSTF commented that Industry has been confused by the instructions related to the Schedule BA. This is because they indicate that if the security has fixed-income characteristics, it is eligible to be filed with the SVO for a designation. The VOSTF clarifies in the proposal that this instruction does not apply to fund investments.


The VOSTF recommended the SAPWG review SSAP No. 30 for the purposes of differentiating between funds that predominantly hold bonds and those that do not.

Both memorandums were exposed for a 45-day comment period.

IAO Report on the IRBCWG Proposal

As part of the Investment Risk-Based Capital Working Group’s (IRBCWG) pending proposal to add further granularity in Risk-Based Capital (RBC), a referral was sent to the IAO requesting information on the impact of the change in the P&P Manual and IAO processes. The IAO adopted a response to the IRBCWG which outlined that the IAO would provide a mapping from the 20 designations that are intended to be captured for RBC purposes to the six designations that will remain as part of the reporting schedules.

SVO-Affiliated Transactions Memorandum

The SVO heard a report from the SAPWG that requested the SAPWG assist in developing the regulatory criteria for assigning a designation to a Subsidiary, Controlled and Affiliated (SCA) entity. The SAPWG responded outlining the following key points:

  1. An inter-affiliated transaction is outside the scope of an NAIC designation
  2. The SVO should only assign a designation in the circumstance that the affiliated transaction is identical to an unaffiliated transaction
  3. The P&P Manual should be clear that only credit risk is communicated, not statutory accounting guidance
  4. The SVO should contact the state insurance regulator prior to undertaking an assignment to ensure the asset can be admitted under SSAP No. 25

A motion passed to expose the memorandum for a 45-day comment period.

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