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  • September 15, 2021

NAIC Summer 2021 National Meeting: Statutory Accounting Principles Updates

The Statutory Accounting Principles Working Group of the NAIC held a meeting on August 26, 2021. The following updates pertain to investment accounting.


Adopted Nonsubstantive Items Effective Immediately


This agenda item originated when agenda item 2018-26 was adopted. In November 2020, the SAPWG adopted item 2020-18 – SSAP No. 97 which removed a lingering, superseded reference regarding negative equity method loss valuations.

It adds clarification to SSAP No. 97 Para 9 that the limited statutory adjustments will stop at zero and will not result in a negative equity valuation for 8.b.iv entity (foreign insurance SCA) unless that entity provides services including reinsurance transactions, to the reporting entity or its affiliates or holds assets on behalf of the reporting entity. It adds additional language to SSAP No. 48 Para 6 that the equity method calculation may result with a negative valuation and thus, the SSAP No. 97 equity method calculation shall occur regardless of whether the investment is supported by an audit and the insurer will not admit the investment.

The interested parties were supportive of this agenda item. They said the foreign insurance SCAs are subject to foreign jurisdiction and should stand independent of a domestic insurer. There are significant differences between 8.b.ii (US and foreign noninsurance SCAs that meet revenue and activity test) and 8.b.iv entities that warrant different accounting treatment. The proposed changes provide the appropriate accounting treatment for 8.b.iv subsidiaries and effective guardrails to prevent any potential abuses of the rules.

NAIC staff said the intent of the Para 9 adjustments are to prevent assets held by an SCA from receiving better accounting treatment than had the assets held by the insurer. It is important to separate SSAP No. 97 Para 13 equity method adjustments which stop at zero from the para 9 adjustments, which intentionally do not stop at zero. For the investments that are in scope of SSAP No. 48, they may not apply US GAAP and it requires an audit for admittance. It may be hard to calculate the required para 9 adjustments when they are not audited.

Staff recommended the item be adopted.


This item was exposed through an e-vote on July 20.

It adds a new footnote to SSAP No. 32R Para 11 to clarify that the effective call price shall only apply if the call is currently exercisable by the issuer or if the issuer has announced that the instrument will be redeemed or called.

NAIC staff said they received implementation questions regarding the application of a valuation ceiling for perpetual preferred stocks. The valuation ceiling requires perpetual preferred, mandatory convertible preferred stock, and publicly traded preferred stock warrants be reported at fair value, with a valuation ceiling that is not to exceed any currently effective call price. There are currently two interpretations on the “effective call price” – one is any future call price and the other is currently exercisable by the issuer. The former is more conservative, but the latter better reflects the economics of the equity investment.

No comment letter was received but informal comments indicate that the interested parties are supportive of this proposal. Staff recommended the working group adopt this item.

Items Exposed with Comment Deadline October 1, 2021


On July 15, 2021, the Valuation of Securities Task Force (VOSTF) adopted revisions to the SVO P&P Manual to clarify that credit tenant loans (CTL) are defined as mortgage loans in scope of SSAP No. 37. The CTL-like securities are not subject to the SVO P&P Manual CTL structural assessments and should be captured in either SSAP No. 26R or 43R. Mortgage loans in scope of SSAP No. 37 that qualify under a SVO structural assessment are in scope of SSAP No. 43R as CTLs. With the adoption of the SVO P&P Manual change, NAIC staff believes there is no need to retain INT 20-10 as the reporting exception.

This item proposes to:

1. Nullify INT 20-10: Reporting Nonconforming CTLs

2. Dispose of agenda item 2020-24: Accounting and Reporting of Credit Tenant Loans without statutory revisions

3. Revise SSAP No. 43R to explicitly identify the SVO-identified CTLs in scope of SSAP No. 43R and remove the examples of “other Loan-Backed Structured Securities” from paragraph 27b

As the expiry date of the INT 20-10 is the same as the comment deadline date of this exposed item, October 1, 2021, NAIC staff asked if the working group members would prefer letting INT 20-10 expire instead.

The interested parties are supportive of the staff’s action to expose this item.

Other Items


The VOSTF adopted changes to the SVO P&P Manual to remove any inconsistencies with the revisions to SSAP No. 105R adopted in May 2020 (2019-25). It also exposed and sent a referral to the working group on proposed edits regarding the SVO’s direction to designate an unrated and nonguaranteed subsidiary obligor for the Working Capital Finance Investments (WCFI) program only by relying upon the parent’s ratings.

The working group has considered this exposure and acknowledges that establishment of NAIC designations is within the purview of the task force. As SSAP No. 105R was established in accordance with the historical approaches (i.e. credit substitution methodology in the SVO P&P Manual Part One) utilized in determining NAIC designations, the proposed policy change would require the SVO to designate an unrated and unguaranteed subsidiary in WCFI programs based on the parent entity’s credit quality without legally binding guarantees that provide assurance that the parent entity will be legally or contractually obligated to financially cover the obligations of the unrated entity. If the task force adopts this exposed item, the working group may incorporate additional guardrail provisions to SSAP No. 105R, as the NAIC designation of the obligor may no longer provide the intended safeguard for WCFI programs. The working group recommends the task force remove any inconsistencies in the SVO P&P Manual with SSAP No. 105R Para 7 that require an NAIC designation and create a specific identifier so that WCFI programs with rated obligors and unrated obligors can be easily identifiable by the regulators.

The working group approved sending the response drafted by the NAIC staff to the task force.

Discussion Items


This item intends to clarify what should be considered a bond and reported on Schedule D-1 regardless of being captured in either SSAP No. 26R – Bonds or 43R Loan-Backed and Structured Securities. The new proposed bond definition is a bond represents a creditor relationship in substance and it is either issuer obligation or asset-backed security (financial asset backed or non-financial asset backed). Investments with equity-like characteristics or represent ownership interests in substance are not bonds. Non-financial asset backed security must produce fixed income-like cash flows (i.e., meaningful cashflow) in order to meet the definition of bond. To be considered an asset-backed security, the investors must be in a different economic position as if they do not hold the underlying collateral directly, e.g., there must be sufficient credit enhancement through overcollateralization, subordination or other form of guarantee or recourse to proof that the underlying collateral risks have been recharacterized to bond risk.

The exposure requested comments on the proposed principles-based bond definition but also future developments, e.g., reporting changes, accounting and reporting guidance for those that do not qualify as bonds and transition guidance.

NAIC staff proposed developing an issue paper, SSAP revisions to incorporate the principles-based bond concepts and address investments that may not be reported as bonds and reporting revisions to incorporate more granularity in Schedule D-1 reporting once the working group determines the principles-based bond proposal is an appropriate approach or if they should consider a different approach. Staff also emphasized:

1. All elements in the bond proposal are subject to continuous discussion and revision throughout the process.

2. The investments are currently in scope of SSAP No. 26R or 43R and can continue to be reported as bonds on Schedule D-1 until revised guidance is adopted and effective.

3. Unrated equity tranches should be reported as an “Any Other Class of Asset” at fair value on Schedule BA and still qualify as admitted assets. The insurers can continue to report them as bonds at lower of cost or fair value with self-designated NAIC designation 6 on Schedule D-1 for now, but they will not be eligible to be reported as bonds on Schedule D-1 under the bond project. They may want to report them on Schedule BA.

4. There is no grandfathering on the existing investment structures because it will defeat the obfuscation, e.g., some investment structures are reported as bonds, but they will be reported as equities once the new guidance is adopted. If the new guidance allows them to be reported as bonds and the same securities are bought after the guidance is adopted, to be reported as equities, it will create reporting inconsistencies.

NAIC staff expects this guidance change will be effective January 1, 2024, as long as the relevant reporting changes can be adopted by the Blanks Working Group in May 2023.

The working group received three comment letters during the comment period. The interested parties are supportive of the proposal and believe it provides flexibility that can accommodate the future evolution of the bond product and prevent potential regulatory abuses, e.g., some legal form bonds with equity-like characteristics in-substance are currently reported as bonds on Schedule D-1. However, they would like the working group to consider:

1. Exempting bonds that were issued years ago, from the analysis and documentation requirement because it is difficult to get that documentation when the bonds were issued many years ago.

2. Applying a bond-like risk-based capital charge to debt investments that are required to be purchased with a pro rata share of an equity interest where there is a restricted sale of the debt investments once such investments are precluded from getting bond accounting treatment under the new bond concept.

3. Providing clarity on if interest only and principal only strips are an Issuer Credit Obligation under SSAP No. 26R or Asset Backed Security under SSAP No. 43R.

4. Providing examples for a more traditional ABS, e.g., collateralized loan obligation (CLO) and some well-structured debt investments, e.g., collateralized fund obligation (CFO) debt instruments. The interested parties are currently working on developing an example for CLO and will share with the working group later. The real-world CFO debt instruments are much more complicated and nuanced than the simplified example, e.g., many CFO debt instruments are self-amortizing in full or in part and it should not make the CFO debt instruments equity-like.

5. Allowing bifurcation approach that permits the insurers to characterize that portion of their investment which represents a credit relationship as a bond and an admitted asset and the equity portion not being characterized as a bond. As many insurers have statutory limits on how much they can invest in BA assets, the new bond concept “all-or-nothing” approach poses harm to the industry who would suffer a reduction in its surplus when the investments comprised of equity components.

One of the working group members said the goal of this project is to prevent some companies from creating vehicles to get better statutory accounting treatment.

NAIC staff recommends the working group explicitly affirm the direction of the exposed principle-based bond concepts, direct NAIC staff to utilize those concepts to develop an issue paper and proposed SSAP revisions and to repurpose the “43R small group” as a “43R study group” that will continue discussions and propose guidance within the issue paper and SSAP for one hour on a weekly basis. Staff also asked for more regulators to participate in this study group.

The working group agreed with the staff’s recommendation.

Additional SAPWG September Update

SAPWG exposed item 2021-15 via e-vote on September 9, 2021.

It proposes to add clarifying languages to SSAP No. 43R Para 26 that non-rated residual tranches shall be reported at the lower of cost or fair value on Schedule BA – Other Long-Term Investments.

During the principles-based bond proposal project, it brought to NAIC staff’s attention that the reporting of non-rated residual tranches for investment structures captured in the scope of SSAP No. 43R, are inconsistent. Some are reported at amortized cost on Schedule D-1 and self-assigned an NAIC 5 designation, and some are reported on Schedule BA.

For the insurers to self-assign an NAIC 5 to the securities, they must certify that no documentation necessary to permit a full credit analysis of the security or no public or private ratings are available, the issuer or obligor is current on all contractual interest and principal payments, and the insurer expects to receive all contractual interest and principal payments. Using the NAIC 5GI process for non-rated residual tranches is inappropriate because there are no contractual interest and principal payments, and the insurer cannot expect to receive all contractual principal and interest of the underlying collateral when these tranches absorb the losses first. For life insurers, bonds with an NAIC 5 receive a lower RBC charge than what BA assets receive.

It also proposes to sponsor a blanks proposal to capture a new reporting line specific for these items on Schedule BA and send a referral to the Valuation of Securities Task Force to clarify that the NAIC 5GI process shall not be applicable to non-rated residual investments.