Regulatory Roundup: Catching Up With the NAIC

Three NAIC working groups met recently to adopt updated regulatory guidance and discuss proposed changes. Clearwater attended these meetings to track updates pertaining to investment accounting.

Here’s what you need to know from the Statutory Accounting Principles Working Group, the Blanks Working Group, and the Life-Risk Based Capital Working Group.

Statutory Accounting Principles Working Group

The Statutory Accounting Principles Working Group met on May 24, 2022.

Adopted Items Effective December 31, 2022 

Ref #2022-08: INT 22-01T Freddie Mac When-Issued K-Deal (WI Trust) Certificates

This item addresses new investments issued by Freddie Mac. This investment type is backed by cash held in trust on Day 1, and cash will be exchanged for one or more structured pass-through certificates (SPCs) within 90 days. The WI trusts pay fixed coupons to the investors as if K-Deal certificates had been acquired prior to the asset transfer date.

This item clarifies this investment type is in scope of SSAP No. 43R from initial acquisition because the WI program is fully guaranteed by Freddie Mac at original acquisition that the investor will receive K-Deal certificates.

The draft was adopted as final.

Ref #2021-21: Related Party Reporting

This item was exposed on December 11, 2021, and re-exposed on April 4, 2022. It is not a statutory accounting revision on the definition of an affiliate, but it adds clarification guidance to SSAP No. 25 and 43R that clarifies the investments should be identified as related party investments on the investment schedules if they are originated, managed, sponsored, serviced, or acquired from a related party, regardless of whether the investments are currently reported in affiliated reporting lines on the investment schedules.

The working group sponsored a blanks proposal (2021-22BWG) that identifies investments involving related parties on Schedule B (Mortgage Loans), BA (Other Invested Assets), D Part 1 (Bonds), D Part 2 Section 1 (Preferred Stocks), D Part 2 Section 2 (Common Stocks), DA (Short Term Investments), DB (Derivatives), DL (Securities Lending) and E Part 2 (Cash Equivalents) by adding a new electronic column, “Investments involving related parties.”

The working group is supportive of the inclusion of Code 6 – Investment doesn’t involve related party, to eliminate potential confusion on whether a blank represents incomplete reporting or a non-related party relationship.

Interested parties said the investments that are managed by the affiliate and have no underlying credit exposure to the affiliate of the insurer should not be considered as affiliated. For example, the CLOs are managed by the affiliate and have no direct credit exposure to an affiliate. If those investments are considered as affiliated, they would no longer be eligible for filing exemption, and the insurers would have to file them with the SVO for an NAIC Designation Category, pursuant to SVO P&P Manual Part 3 Paragraph 4.

Interested parties also asked for more time to implement the look-through of affiliated investment structures. They said foreign registered funds should also be exempt from the look-through requirement, other than exchange traded funds (ETF) or SEC-registered mutual funds.

Both Chairman Dale Bruggeman, and Co-Vice Chair Kevin Clark, emphasized this agenda item does not intend to make any changes to what should be reported as affiliated or unaffiliated investments. The definition of an affiliate is captured in the Model Act#440, SSAP No. 25 and SSAP No. 97. However, it came to their attention that there are inconsistencies on the reporting of investments as affiliates or unaffiliates. Regarding the concerns from the interested parties, the working group:

1. Will send a referral to the Valuation of Securities Task Force for reviewing the filing exempt status of the investments (e.g., CLOs) that are managed by the affiliate
2. Direct NAIC staff to work with the interested parties on developing the examples of related party relationships for the structured securities
3. Suggest the interested parties’ proposed amendments be included in a separate agenda item

It was adopted with minor edits to SSAP No. 43R Paragraph 6b, effective December 31, 2022.

Other Items

The next SAPWG meeting will be held on July 18, 2022. The group is scheduled to discuss the proposed bond definition.

Blanks Working Group

The Blanks Working Group held a meeting on May 25, 2022.

Adopted Items with Effective Date of 2022 Annual

Ref #2021-22BWG Modified: Add a new reporting requirement in the investment schedules for investment transactions with related parties (2021-21 SAPWG)

This item corresponds to agenda item 2021-21, adopted by the SAPWG on May 24, 2022. It adds an electronic column on Schedule B, BA, D, DA, DL, DB, and E Part 2 that captures investments issued by a related party or acquired through a related party transaction or arrangement. Dale Bruggeman, the Chairman of SAPWG, said the interested parties suggested limiting the new electronic column to Schedule BA and D only, but the intent is to allow the regulators to be able to find all investment transactions that involved related parties. He emphasized this new electronic column is applicable to mortgage loans (Schedule B), other invested assets (Schedule BA), long-term bonds (Schedule D Part 1), preferred stocks (Schedule D Part 2 Section 1), common stocks (Schedule D Part 2 Section 2), short-term investments (Schedule DA), securities lending (Schedule DL), derivatives (Schedule DB), and cash equivalents (Schedule E Part 2).

SAPWG is also supportive of the new reporting Code 6 – Investment doesn’t involve related party. The intent is to avoid ambiguity or confusion in the future, and it clarifies codes 2 through 4 also apply to mutual funds, limited partnerships, and limited liability companies.

Ref #2022-01BWG: Add new questions to General Interrogatories Part 1 (2021-24 SAPWG)

This item corresponds with the temporary interpretation INT 21-01, which was adopted in 2021, and SAPWG agenda item 2021-24, which was adopted at the Spring National Meeting. It adds new general interrogatory questions 38 and 39 to gain a better understanding of if and how directly held cryptocurrencies are being utilized by insurers.

Ref #2022-02BWG: Add four new electronic-only columns to Schedule D, Part 6, Section 1 (2021-22 SAPWG)

This corresponds with SAPWG agenda item 2021-22, which was adopted at the Spring National Meeting. It adds four electronic columns (see below) to Schedule D Part 6 Section 1 to ensure Sub-1 and Sub-2 filings are submitted by the insurers and identify if the reported value on Schedule D Part 6 Section 1 is different from the NAIC approved value.

• Column 16 – Prior Year Book/Adjusted Carrying Value (BACV)
• Column 17 – Prior Year Nonadmitted Amount
• Column 18 – Prior Year Sub-2 Verified Value
• Column 19 – Prior Year VISION Filing Number

It was adopted with minor edits suggested by the interested parties.

Ref #2022-06BWG: Revise the Health Annual Statement Test language in the annual statement instructions

This item revises the Health Annual Statement Test language to require insurers who write predominantly health business and file on the Life or P&C Blanks to now begin filing on the Health Blank.

The Health Test Ad Hoc Group will continually evaluate if additional change is needed.

Ref #2022-11BWG: Update the Life/Fraternal Blank Asset Valuation Reserve (AVR) factors to correspond with the adopted Risk-Based Capital (RBC) factors for the expanded bond designation categories.

This item updates the AVR factors on the AVR Default Component report to correspond with the RBC bond factors adopted last year for the expanded bond NAIC designation categories. There were no comments received during the public comment period but there was one minor correction – checking the separate account box on the cover page.

Editorial Listing

1. Asset Valuation Reserve – Equity and Other Invested Asset Component: Columns 5, 7, and 9 in line 93 are blocked for factors because line 93 is the sum of lines 81 through 92 (Residual Tranches or Interests).
2. Schedule DA Part 1: Unaffiliated Certificates of Deposit are removed because they should not be reported on Schedule DA pursuant to SSAP No. 2R Paragraph 14.

Other Items

The working group confirmed receipt of the memorandum from the P&C RBC Working Group regarding the removal of the embedded 2% operational risk charge from Schedule F Part 3. The removal was approved by the Capital Adequacy Task Force on March 28, 2022.

Life-Risk Based Capital Working Group

The Life-Risk Based Capital Working Group held a meeting on June 3, 2022.

Adopted Item Effective December 31, 2022

Instructional change for residual tranches and interests on LR008 Other Long-term Assets

This item adds the new instruction to clarify residual tranches should be reported in line 49.2 to facilitate the changes being made for this year-end for Schedule BA and the Asset Valuation Reserve (AVR) Equity Component Report.

Exposed Item with Comment Deadline July 20, 2022

Affiliated Investments Instructions and Structures LR030-LR031, LR042-LR044

The goal of this exposed item is to have accurate and consistent categories across all three Risk-Based Capital (RBC) groups. If there is any change needed, it would be made to all three RBC groups when this item is adopted.

The major proposed changes include:

1. Update the categories for affiliated investments on:
   1. LR030 – Calculation of Tax Effect for Life and Fraternal Risk-Based Capital
   2. LR031- Calculation of the Authorized Control Level Risk-Based Capital
   3. LR042 – Summary for Affiliated/Subsidiary Stocks
2. Modify the report name for LR043 – Crosschecking for Affiliated/Subsidiary Stocks
3. Modify the report name and change the code options in Column 2 “Affiliate Code” on LR044 – Summary for Affiliated/Subsidiary Stocks

The working group’s chairman said this item is the result of a lot of work done by the Affiliated Ad Hoc Group, regulators, and the interested parties.

It was exposed for public comment for 45 days.

Other Items

The next LRBCWG meeting will be held on June 17, 2022.