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  • December 28, 2020

SAPWG and VOSTF Year-End 2020 Updates

The Valuation of Securities Task Force (VOSTF) and Statutory Accounting Principles Working Group (SAPWG) of the NAIC each held conference calls December 18, 2020. The following updates are from those meetings.

Valuation of Securities Task Force


Consider Editorial Edits Updates to the Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to Include Instructions for Financial Modeled RMBS/CMBS Securities to Map NAIC Designations to NAIC Designations Categories:

The task force adopted the amendment to the P&P Manual Part Four, Paragraph 27 in May 2020 to reflect that RMBS or CMBS which have no expected loss under any of the selected modeling scenarios and that would be equivalent to an NAIC 1 and NAIC 1.A designation category if the filing exempt process were used, would be mapped to an NAIC 1.A designation category.

The industry thought all zero-loss bonds would be mapped to NAIC 1.A. However, in November the industry became widely aware of the new two-step process that zero-loss securities with CRP rating lower than AAA will now be mapped to NAIC 2-4 designations based on breakpoints in the same way that non-zero-loss bonds are mapped. This substantially increases the risk-based capital requirement for insurers who hold those zero-loss securities with CRP ratings of AA+ to A-. Interested parties said that in many cases, non-AAA rated zero-loss securities will receive a worse RBC treatment than lower quality BBB and even BB-rated bonds.

Financially modeled RMBS and CMBS previously received NAIC 1 designations if the securities had both zero-loss and NAIC 1 equivalent rating regardless of the insurer’s book/adjusted carrying value. The Chair said it was not the VOSTF’s intent to move the zero-loss securities with CRP rating of AA+ to A- out of the highest NAIC designation.

Charles Therriault said NAIC designation category 1.D is more appropriate for those zero-loss securities. The task force members understand it may be too late for insurers and software companies to change their programs. For year-end 2020, zero-loss securities can be mapped to either 1.A or 1.D.

This item proposes all financially modeled RMBS or CMBS with zero-loss will be mapped to NAIC 1.D designation category regardless of the insurer’s book/adjusted carrying value, effective December 31, 2020.


Discuss Financially Modeled RMBS/CMBS Price Break-Points and Other Issues Surrounding Securities That Have Zero-loss in 2020

Eric Kolchinsky (Director, Structured Securities Group) proposes to get rid of the break-point price methodology because it penalizes fixed rate securities where prices move in response to interest rate movement. Due to the pandemic, the number of zero-loss securities has dropped by 566 from 3923 in 2019 to 3357 in the interim. Eric proposes lowering the zero-loss threshold price by 50 basis points to $99.50 for CMBS only for this year end. The interested party asked why it only applies to CMBS but not RMBS. Eric Kolchinsky said they ran the analysis on CMBS only, due to time constraint. The Task Force agrees with staff’s proposal on the new threshold price.

Mr. Kolchinsky recommends that the VOSTF direct the staff to develop a designation mapping framework for post-crisis RMBS/CMBS securities for 2021 Year-End.

Post-meeting updates:

The Structured Securities Group (SSG) discovered an omission in the analysis of the impact of the threshold price proposal. The 99.5 threshold price did not increase the number of zero-loss bonds as expected. The SSG decided to further lower the zero-loss threshold price to 99.15, which is the same cut-off for credit risk transfer bonds. As a result, the number of zero-loss bonds increases to 79% of the total as compared with 86% in last year.

Statutory Accounting Principle Working Group


Consider Editorial Edits Updates to the Temporary Interpretation INT 20-10 for Non-conforming Credit Tenant Loans (CTLs):

Julie Gann said this tentative temporary interpretation is related to agenda item 2020-24 Accounting and Reporting of Credit Tenant Loans. The issue originated as non-conforming CTLs had been incorrectly reported on Schedule D-1 Long Term Bonds when they should be reported on Schedule B or BA. Comment letters were discussed during the call on November 12, which stated that it may be premature to conclude the reporting requirement before the Schedule D-1/SSAP No. 43R project (Ref #2019-21) is finalized. The SAPWG agreed to issue an interpretation to provide a limited exception that nonconforming CTLs can remain on Schedule D-1 if they obtain an SVO-assigned NAIC designation and those non-conforming CTLs that were previously reported on Schedule B or BA shall remain on the prior schedule. If the non-conforming CTLs are not filed or do not receive an NAIC SVO designation prior to the Annual Statement filing date (i.e., March 1, 2021) for any reason, they shall be reported on Schedule BA.

Interested parties said it would be very challenging to collect all the required documents for filing with the SVO because those documents may be stored off-site and are not available in electronic form. However, the biggest concern is that non-conforming CTLs that are reported on Schedule BA will receive a 30% RBC charge that is equivalent to defaulted debt. This type of investment is not as volatile as common stock or Limited Partnerships. Sasha Kamper of PPIA said most of the US domicile insurers hold this type of investment. The genuine concern is if the SVO will be able to assign an NAIC designation category by March 1, 2021, when there is no pre-existing methodology or criteria set up. Most of the non-conforming CTLs have been held for many years and it is a challenge to provide the SVO the securities agreement, lease agreement, and so on.

The item proposes to extend the filing deadline from December 31, 2020, to February 15, 2021. The reporting entities are not required to receive the SVO-assigned designation prior to submitting their 2020 annual statutory financial statements. However, they are required to disclose the total amount of non-conforming CTLs that were reported on Schedule D-1 and were not reported on Schedule BA on Note 1 as if it were a permitted practice pursuant to SSAP No. 1 – Accounting Policies, Risks & Uncertainties, and Other Disclosures. The Note 1 disclosure is not needed once an SVO-assigned designation is received. It allows the reporting entities that have previously reported non-conforming CTLs on Schedule D-1 to report them on Schedule B or BA without NAIC designations if they do not file with the SVO or do not disclose in Note 1. The proposed expiry date of this interpretation is October 1, 2021.