• Blog
  • 4 Min Read
  • November 8, 2023

Q&A: What to Expect from the NAIC’s Principles-Based Bond Updates

Insurers, get ready: The biggest NAIC accounting guidance change in three decades goes into effect in a little over one year.

The NAIC’s Principles-Based Bond Project, a yearslong process to modernize both SSAP No. 26R and SSAP No. 43R guidance, is effective January 1, 2025. That means you have 2024 to prepare and implement the changes, but any entities that file statutory financial statements and schedules will need to take action now to prevent any implementation surprises.

Is your investment accounting software ready? Clearwater has closely followed this guidance change to ensure our clients can answer that question with a yes. That includes working with data vendors for public securities, including private placement 144A securities, and internal teams to develop channels to consume additional data points from the insurance clients.

What Insurers Need to Know About the PrinciplesBased Bond Project

What is the impact of the PrinciplesBased Bond Project on insurers?

The NAIC started the project in 2019 with the intention of modernizing SSAP No. 43R guidance. This project later turned into an unprecedented guidance update that modified multiple SSAPs. The guidance impacts all lines of insurance, including fraternal and life, property and casualty, and health.   

The definition of D-1 bonds, issuer credit obligations and asset-backed securities, and the statutory accounting treatment of issuer credit obligations are in SSAP No. 26R. The statutory accounting treatment of asset-backed securities are in SSAP No. 43R, which changed from Loan-Backed and Structured Securities to Asset-Backed Securities.   

The existing Schedule D Part 1 will be split into two sections – Section 1 issuer Credit Obligations and Section 2 Asset-Backed Securities.  The reporting categories will be replaced with more granular categories that allow regulators to better identify the important characteristics of bonds on Schedule D Part 1.

When were the changes adopted?

The accounting changes were adopted August 13, 2023, and the reporting changes were adopted on November 7, 2023. Both are effective on January 1, 2025.   

What do insurers need to do to prepare for the Principles-Based Bond Project?

  • Review D-1 assets and identify securities that no longer meet the new D-1 bond definition 
  • Determine whether to move these securities to Schedule BA, outside the entity, or outside the insurance group 
  • Bucket the remaining securities into either D-1-1 or D-1-2 categories 
  • Collect documentation to support the eligibility of asset-backed securities for reporting on D-1-2 
  • Plan to transition D-1 assets to the appropriate schedule (D-1-1, D-1-2, or BA) including:
    • Re-evaluate fair value assets at amortized cost to prevent realized gains or losses during the transition  
    • Report asset-backed securities on Schedule D Part 1 Section 2 regardless of maturity date 
    • Book adjusted carrying value for assets on:
      • Schedule D Part 1 will rely on NAIC designation
      • Schedule BA will continue to be the lower of amortized cost and fair value  
  • Identify and collect new data points for categorizing D-1 assets correctly, such as full or partial government guarantees, issuer types, collateral details, waiting periods, covenants, and cashflow sources

What challenges are expected with this project?

The challenges to implementing the Principles-Based Bond Project changes include managing the implementation alongside year-end closing, obtaining necessary data points for public and private securities, providing additional security master file data to investment accounting solution vendors, and ensuring accurate values on Schedule D Part 1 Section 2 with updated cashflow information. 

Clearwater clients can expect to see most of the updates made to the solution in advance of the guidance effective changes. They can also work with their service delivery teams to ensure a smoother implementation along with experts available to help answer questions.

Talk to Our Investment Accounting and NAIC Experts

Is your current technology equipped to handle the demands of the new guidance? Schedule a meeting with one of our experts for a consultation today and learn more about the benefits of having the right technology partner on your side.