NAIC Statutory Accounting Principles Working Group
The NAIC’s Statutory Accounting Principles Working Group held a national meeting on March 24, 2025. The following updates pertain to investment accounting.
Adopted Items with an effective date of January 1, 2025
Ref #2023-28: Collateral Loan Reporting
It was re-exposed in November 2024 for proposed sub-categories for collateral loans depending on the underlying collateral for both Schedule BA and AVR. The re-exposure of this item allows for concurrent exposure with Blanks proposal 2024-19BWG, and NAIC staff reviewed comments for both blanks and SAPWG proposal collectively. Other than the new sub-categories for collateral loans, it recommends adding two electronic columns for Schedule BA Part 1, for the fair value of collateral backing the loan and the percentage of collateral to the loan. NAIC staff had asked two questions regarding the AVR reporting for collateral loans backed by mortgage loans and if additional sub-categories are needed for RBC assessment purposes.
NAIC staff said they disagreed with interested parties’ request to remove the note disclosure 5S that details collateral loans by the distinct type of qualifying collateral category that is more granular than Schedule BA. Removing the note disclosure 5S, which is required by SSAP No. 21, would need to be considered by a new agenda item as a revision to that SSAP. It incorporates interested parties’ comments to expand the description for collateral loans backed by mortgage loans to include loans that would be in the scope of both SSAP No. 37 – Mortgage Loans and SSAP No. 83 – Mezzanine Real Estate Loans. It also splits non-collateral affiliated and related party loans into two separate categories, as SSAP No. 25 provides specific guidance for assessing and admitting loans made to parents and other related parties.
NAIC staff reminded insurers that they shall no longer follow the June 2024 interim provision that allows collateral loans backed by mortgage loans to flow through AVR Equity Component in lines 38-64 after the new categories of collateral loans are adopted in 2026.
Ref #2024-20: Restricted Asset Clarification
It adopted revisions to SSAP No. 1 – Accounting Policies, Risk & Uncertainties, and Other Disclosures, with minor modifications to replace “amount” with “book/adjusted carrying value (BACV)” in paragraphs 23b and 23c. It sponsored revisions to the annual statement instructions and template for the restricted asset disclosure in the notes to financial statements Note 5L to specify how Modco and FWH assets should be reported within a ceding company’s financial statements. It also includes a new disclosure to identify whether Modco/FWH assets are pledged by the ceding company and expands disclosure requirements to detail the differences between what is reported in the note and what is reported in the general interrogatories. It is expected that the BWG will adopt the changes on May 29 to allow for 2025 annual reporting.
It will also send a referral to the Life RBC working group to clarify the guidance for when an RBC reduction can occur for modco and funds withheld reinsurance agreements. The referral will include recommended clarifying language to Life RBC reports LR045 through LR048 to explain that the RBC reduction is not permissible if any portion of the modco/FWH asset has been pledged at any time during the year to prevent interpretations that pro-rata reductions are permitted.
It is adopted with an effective date of December 31, 2025.
Ref #2024-04: Conforming Repurchase Agreement Assets
It was exposed in August 2024 with a comment deadline of September 27, 2024, which was later extended to December 16, 2024. This item originates from the industry requesting Life RBC working group to lower the RBC factor for conforming repurchase transactions, as currently conforming securities lending transactions receive a lower RBC factor than conforming repurchase transactions.
NAIC staff was directed to develop clarifying language for SSAP No. 103 and may move securities lending and repurchase agreement guidance from SSAP No. 103 to a new SSAP. After reviewing the comments from the interested parties, NAIC staff don’t believe it needs any changes other than clarifying language to the existing guidance, but they may add additional disclosure requirements to enhance the reporting that will allow the regulators to review and confirm if the repo transactions are conforming.
NAIC staff said they disagreed with the industry that conforming collateral provisions are only required at the beginning of the program and conforming program classification should not be impacted if the insurers reinvest the received collateral into non-eligible assets, as the reduced RBC factor is contingent on the collateral being in specific categories or with an NAIC 1 Designation. NAIC staff said the insurers should monitor and compare the market value of collateral with the market value of the securities lent; any shortfall of collateral fair value compared with the book-adjusted carrying value of the loaned security is non-admitted. NAIC staff also notes that the current short-term admittance guidance for cash takers or cash providers is not clear and likely inconsistently applied. They are going to review the reporting for those transactions to ensure a full understanding of the impact of non-admittance for consistency purposes across the industry. As insurers are allowed to use the collateral received in a repo transaction for other business needs, such as paying claims or for other obligations, NAIC staff recommends enhancing disclosure requirements that would allow the regulators to identify the extent to which collateral received in repo transactions is no longer retained by the insurers and insurers will be required to use other assets when they need to return the collateral to the counterparty. NAIC staff proposes expanding the use of Schedule DL to detail all held collateral for both securities lending and repurchase transactions, even though the collateral received from repurchase transactions may not be retained or reinvested internally.
Ref #2024-15: ALM Derivatives
The SAPWG directed staff to develop new guidance for the deferral of realized gains/losses generated from non-accounting effective hedges in December 2024.
NAIC staff presented IMR derivatives which were data-captured for the year-end 2024 financial statements. Twenty-six insurance companies had IMR derivatives gains of $10 billion and IMR derivatives losses of $15 billion as of year-end 2024. Net derivative losses of $5 billion were non-accounting effective derivative losses in the IMR reserve which made up 35% of the entire net negative IMR balance of $14 billion across all reporting entities. Out of 26 companies, one had IMR gains only, five had IMR losses only, and the rest had both IMR losses and gains.
NAIC staff asked the working group members if they support establishing new statutory accounting guidance with the members and ACLI representatives, that allows the deferral of derivatives gains/losses for transactions that do not qualify as accounting-effective hedges under SSAP No. 86 – Derivatives. NAIC staff suggested leveraging guidance and approach in SSAP No. 108 – Derivatives Hedging Variable Annuity Guarantees, requiring sufficient guardrails on the types of hedging strategies, proving effectiveness and mechanisms for the regulators.
Exposed Item with Comment Deadline of May 2, 2025
Ref #2024-07: Reporting of Funds Withheld and Modco Assets
It updates the draft of Schedule S Part 8 for only the Life/Fraternal blank, and won’t include it on the Health blank. The updated exposure also removed Schedule F Part 7 from the original proposal for the P&C blank after the NAIC staff read the comments and met with the interested parties. The updated draft is closely in line with the recommendations from interested parties and more closely aligns with AVR reporting. It sponsored the blanks proposal (2025-06BWG) which was exposed by the BWG on March 6, 2025.
Ref #2025-04: Capital Structure Code (2025-11BWG)
It proposes deleting the capital structure code column on Schedule D-1.1 and D-1.2. NAIC staff asked the SAPWG members if they wanted to retain this column or expand, clarify, and/or limit application to improve consistency and usefulness. NAIC staff has been receiving questions on how to allocate investments to those closed options and whether the codes are still applicable to all reporting categories when there are more granular categories on the reports due to the Principles–Based Bond Project. This proposal to remove unnecessary or unused data elements is consistent with the intent of the BWG charge. Insurers can focus on other elements that are more beneficial to the needs of regulators by removing unnecessary data.
Ref #2025-05: Reinsurer Affiliated Assets (2025-10BWG)
In response to the referral from the Financial Analysis Working Group, it proposes enhancing reporting or disclosures to identify whether investments held under modified coinsurance (modco) or funds withheld (FWH) arrangements are related or affiliated with the reinsurer.
Current reporting captures aggregate detail that corresponds to the AVR reporting. The report frequency is proposed to change from annually, and significant changes be reported quarterly to annually and quarterly.
Ref #2025-06: AVR Line: Unrated Multi-Class Securities (2025-12BWG)
It originates from insurers’ questions about what should be captured in the AVR Default Component line 8 – unrated multi-class securities acquired by conversion. NAIC staff believes there should be no securities reported within this line under current statutory accounting concepts. Any securities on Schedule D-1 must be reported with NAIC Designation.
It proposes sponsoring the BWG to relabel this line with “intentionally left blank” to prevent renumbering all lines in the AVR Default Component schedule.
Exposed Item with Comment Deadline of June 6, 2025
Ref #2025-03: SSAP No. 7 IMR Definition
IMR is a valuation adjustment to maintain consistency between insurance liabilities (the assumptions for which are often unchanged from origin) and the assets needed to support them (where the assumptions can essentially be revisited any time there are fixed income realizations).
IMR defers and amortizes the recognition of non-economic gains or losses where investment activity, whether through fixed-income investment sales or fixed-income derivative hedging transactions, essentially unlocks unrealized gains/losses for either assets or liabilities. IMR is not intended to defer economic gains and losses related to asset sales compelled by liquidity pressures that fund significant cash outflows (e.g., such as excess withdrawals and collateral calls.)
Specifically, the IMR valuation adjustment more appropriately reflects the impact on statutory surplus from fluctuations in interest rates and, therefore provides a more accurate representation of solvency under the NAIC’s statutory framework, which often includes amortized cost valuation of fixed income investments and liability valuations with fixed assumptions in accordance with the Accounting Practices and Procedures and Valuation Manual.
Ref #2023-14: Hypothetical IMR Memo
It proposes removing hypothetical IMR as the practical limitations outweigh any potential benefits that retaining the concept would provide. Currently, the IMR Ad Hoc Group meets every other week. The group acknowledges that the hypothetical IMR may have a valid theoretical purpose, but the concept is counterintuitive and difficult to understand and implement. It can result in the hypothetical IMR balance continuing to exist and be amortized when all liabilities it relates to have been transferred to a reinsurer.
Deferred Item
Ref #2024-21: Investment Subsidiaries
It proposes adding the prescribed measurement method and potential non-admittance thresholds if the assets held within the investment subsidiary would be non-admitted if held directly or sponsoring a blanks proposal to clarify the instructions in Schedule D Part 6 Section 1 to prescribe allocation of the underlying investments in a manner that coincides with the SCA measurement and admittance under SSAP No. 97. It considers sponsoring the blanks proposal to detail the underlying assets held within an investment subsidiary for transparency purpose as the RBC and AVR calculations require insurers to calculate RBC and AVR based on the underlying assets. It sends referrals to the Capital Adequacy Task Force and related RBC working groups to consider incorporating the new details into the RBC formula.
NAIC staff recommends deferring this item to allow for further consideration of Delaware Statutory Trusts (DSTs) holding residential mortgage loans and if specific statutory accounting parameters and guidance should be established. DST allows insurance companies to bypass the requirement of obtaining individual state lending licenses for each state where they hold residential mortgage investments. NAIC staff are concerned with the lack of transparency on the assets within an investment subsidiary and how the RBC is being reported when there is no need to provide the details of underlying assets. NAIC staff asks the industry if there are other specific structures captured as investment subsidiaries other than DST on Schedule D Part 6 Section 1 that warrant separate review; otherwise, they will sponsor a blanks proposal to remove the concept of a generic investment subsidiary from D-6-1, and referrals will be sent to Capital Adequacy Task Force to remove the investment subsidiary concept from related RBC formula to prevent future use of investment subsidiary reporting and RBC look-through.
Other Item
Received Referral from Capital Adequacy Task Force regarding the asset concentration for non-bond debt securities on Schedule BA (2025-05-L)
As non-bond debt securities are moved from Schedule D Part 1 to Schedule BA due to the NAIC’s Principles-Based Bond Project in 2025, the ACLI identified no asset concentration factors (LR010) for those newly created categories. This proposal from the ACLI specifies that those securities without SVO-assigned NAIC Designation are out of the scope and suggests two options for asset concentration factors – either follow the same asset concentration factors of D-1 bond debt securities or flat charge of 15%.
NAIC Blanks Working Group
The Blanks Working Group of the NAIC held a virtual meeting on March 6, 2025. The following updates pertain to investment accounting.
Adopted Items with an effective date of December 31, 2025, unless stated otherwise.
Ref #2024-13BWG MOD – Editorial items for annual investment schedules (SAPWG 2019-21)
It intends to show all annual editorials for the PBBD project in one proposal instead of the editorial lists over multiple Blanks proposals.
It incorporates INT 24-01 PBBD Implementation Q&A and some instructions clean-up into the changes, e.g. add clarifying instructions for securities issued by small business administration loans (SBA) and small business investment company (SBIC) to be reported as agency commercial mortgage-backed securities, update CUSIP reference, split the call date field into two columns – one for “make whole call” and another one for the rest of bonds, expected payoff date at acquisition date instead of at origination date, etc.
Ref #2024-14BWG MOD – Update Issuer Credit Obligation line category for Bonds Issued by Funds Representing Operating Entities (SAPWG 2024-01)
SAPWG adopted 2024-01 on September 12, 2024, which expands the bonds issued by any funds that represent operating entities in the scope of Issuer Credit Obligation instead of bonds that are issued by SEC-registered business development corps, closed-end funds, and REITs. This proposal updates the ICO line category in the annual and quarterly blanks instruction for Investment Schedule General Instructions, Summary Investment Schedule, Summary by Country, Schedule D Part 1A, Schedule D Part 1 Section 1, Schedule D Parts 3, 4 & 5, Schedule DA Part 1, Schedule DL Parts 1 & 2, Schedule E Part 2.
It incorporates the interested parties’ comment, adding “bonds issued by real estate investment trusts (REITs) or similar property trusts” to the definition.
Ref #2024-16BWG – Remove Quarterly Investment Interrogatory Line 13 – Mortgages and Real Estate from the Quarterly Investment
It removes the quarterly investment interrogatory line 13 as mortgages and real estate are no longer allowed to be reported as short-term investments and renumbers the subsequent lines.
It is adopted effective January 1, 2026.
Ref #2024-21BWG – Update Schedule D Parts 4 and 5, add clarifying instructions on what should be included in the investment schedule (SAPWG 2024-16)
It originates from SAPWG agenda item 2024-16, where it was noted that some insurers sold their D-1 securities to the special purpose vehicle and then acquired them back from the SPV after substantially changing the structure of the investment. Dale Bruggman, the Chair of the SAPWG, reminded the industry that the transformed investments are not substantially the same as the original D-1 securities, and the sold and reacquired securities should be reported on Schedule D Parts 3 and 4.
Ref #2024-22BWG – Update Schedule BA definitions for surplus debentures and capital notes to add clarification on what should be included in these categories (SAPWG 2024-28)
It originates from SAPWG agenda item 2024-28, which adds clarifying language to SSAP No. 41 – Surplus Notes to clarify capital notes’ references and guidance. It reflects the clarifying language to the annual and quarterly statement instructions.
Other Editorial Changes
One of the editorial changes is changing investment income to interest income for Notes to Financial Statement Note 7C. It mainly clarifies which parts of the Note 7 should be reported for investment income due and accrued or interest income due and accrued.
The interested party believes it should not be changed to interest income as the intent for Note 7C was for all investments and not limited to debts or mortgage loans. NAIC staff confirmed with the SAPWG staff on what the different parts of the note should read and the proposed changes for Note 7C is accurate, which should report interest income only.
Exposed Items with an effective date of April 29, 2025, unless stated otherwise.
Ref #2024-19BWG MOD – Update Schedule BA line categories and instructions for the expansion of collateral loans and add columns for fair value of collateral backing and the percentage of the collateral. Updates the Asset Valuation Reserve “AVR” instructions and blank for the added collateral loan line categories. (SAPWG 2023-28)
It aims to expand the reporting for collateral loans to enable regulators to quickly identify the type of collateral backing the loans. It proposes adding six sub-categories for collateral loans and three sub-categories for non-collateral loans and adding two new columns for fair value of collateral backing the collateral loan and current over-collateralization percentage to the collateral loan. It proposes adding new lines 100 through 112 for collateral loans before the “All Other Investments” section on the AVR Equity Component.
SAPWG agenda item 2023-28 was adopted at the 2025 Spring National Meeting. The proposed effective date has been changed from 2025 Annual to 2026 Quarterly to be consistent across quarterly and annual reports.
Ref #2025-01BWG – Update the Note to Financial Statements Note 8 – Derivatives to include adopted revisions to SSAP No. 86 – Derivatives and Note 11 – Debt for the adopted revisions to SSAP No. 15 – Debt and Holding Company Obligations (SAPWG 2023-26)
The SAPWG adopted agenda item 2023-26 (ASU 2023-06) on August 13, 2024. This Blank proposal recommends adding Note 8A(7) to disclose the insurer’s accounting policy for where cash flows associated with derivative instruments and their related gains and losses are presented in the cash flow statement and renumber the subsequent numbers. It also proposes adding Note 11C and its illustration for unused commitments and lines of credit for financing arrangements disaggregated by short-term (maturing in 12 months or less) and long-term (maturing in more than 12 months).
Ref #2025-06BWG – Update the Note to Financial Statements Note 5L – Restricted Assets Instructions and Illustrations to make the changes for clarification on what should be reflected within the restricted asset note (SAPWG 2024-20)
It proposes adding three types of assets (e.g., collateral assets received and on balance sheet, assets held under modco reinsurance agreements, and funds withheld reinsurance agreement) to the restricted assets list in Notes to Financial Statements Note 5L – Restricted Assets to clarify how assets held under modified coinsurance (Modco) or funds withheld (FWH) agreements shall be reflected within the restricted asset disclosure pursuant to paragraph 23c of SSAP No. 1 – Accounting Policies, Risks and Uncertainties, and Other Disclosures.
Ref #2025-09BWG – Update Life/Fraternal Note to Financial #35 for separate account transfers. Also add general interrogatories to Separate Account Blank for transfers and repurchase agreements and reverse repurchase transactions. (SAPWG Ref #2024-10)
It proposes adding clarifying language to the Notes to Financial Statements Note No. 35(3) to include pension risk transfer (PRT) and registered index-linked annuity (RILA) as the examples of separate account products that often do not have stated yield or death benefit guarantees but have the general account serves as a final backstop when the separate account assets are insufficient to support the product obligations, including repo and reverse repo agreements in the Note No. 35(4) and adding new Note No. 35(5) for asset transfers between the general and separate accounts without cash involved, e.g., asset-for-asset swaps, contributions of general account assets to support separate account deficiencies, and dividends of assets from the separate account to the general account.
It also proposes adding new General Interrogatories Line 2.7 for separate account products where the general account provides an inherent or ultimate guarantee, including repo and reverse repo transactions in General Interrogatories Line 6.5 and adding a new line 6.8 for details on the current status of repo and reverse repo transactions.
Ref #2025-10BWG – Update Note 5L to identify assets held under funds withholding agreements (including modco) affiliated with the reinsurer. Also update the list of required quarterly disclosures to include Note 5L – Restricted Assets. With this change, this disclosure will be required in all interim and annual financial statements. (SAPWG Ref # 2025-25)
It proposes updating Notes to Financial Statements Note No. 5L(4) to identify modco and funds withheld assets aggregated by asset class with an investment involving related party codes one through six. The reporting frequency is proposed to change from quarterly when there are substantial changes and annually to quarterly and annually.
Ref #2025-11BWG – Remove the capital structure code reporting column on Schedule D, Part 1, Sections 1 and 2. (SAPWG Ref #2025-04)
It proposes removing the capital structure code column from Schedule D Part 1 Sections 1 and 2 because NAIC staff have been receiving questions on how to assign those codes to the bonds, and the reporting was inconsistent across insurance companies. This code was created for SVO use, but the SVO has been using other data sources instead of Schedule D reporting. NAIC staff recommended removing this column as it is believed no regulators utilize this data.
Ref #2025-12BWG – “Remove” Line 8 – Unrated Multi-Class Securities Acquired by Conversion from AVR: Default Component – Basic Contribution. Relabel the line with “intentionally left blank” to prevent renumbering all lines in the AVR schedule and to be used in the future if there are other AVR updates. (SAPWG Ref # 2025-06)
It proposes relabeling AVR Default Component line 8 – unrated multi-class securities acquired by conversion with “intentionally left blank” as there should be no securities reported within this line under current statutory accounting concepts, and the insurers are not fond of renumbering 100+ lines. NAIC staff said this line could be used in the future if there are other AVR changes.
Ref #2025-13BWG – Update Notes to Financial Statements Note 13K with disclosure updates to SSAP No. 41—Surplus Notes (SAPWG Ref # 2024-28)
It proposes updating the Notes to Financial Statements Note No. 13K to reflect the changes to SSAP No. 41 adopted by the SAPWG, e.g., it is no longer needed to disclose any holder of 10% or more of the outstanding amount of any surplus notes registered under the 1933 Act or distributed pursuant to Rule 144A under the 1933 Act.
Ref #2025-15BWG – Update Note 8 – Derivatives in the Notes to Financial Statements and Schedule DB to clarify the terminology used for derivative financing premium. (SAPWG Ref # 2024-23)
It proposes updating the Notes to Financial Statements Note No. 8A(8) and Schedule DB Part A and B Sections 1 and2 for the derivative financing premium being stated consistently.
NAIC Valuation of Securities Task Force
The Valuation of Securities Task Force of the National Association of Investment Commissioners (NAIC) held a national meeting on March 25, 2025. The following updates pertain to investment accounting.
Exposed Items with Comment Deadline of April 25, 2025
Proposed Amendment to the SVO P&P Manual to Require the Filing of Private Rating Letter Rationale Reports Within 90 days of an Affirmation, Update, or Change
It proposes adding a grace period of 90 days from the date of any annual, mid-year, rating affirmation, confirmation, or change for a new or updated private rating letter rationale report to be filed with the SVO to make sure the privately rated securities remain eligible for filing exemption and the FE-derived NAIC Designation remains activated. Charles Therriault, the SVO Director, said this proposed amendment would help operationally.
Proposed Amendment to the SVO P&P Manual to Require that Private Rating Letter Rationale Reports Possess Analytical Substance
It proposes adding clarifying language to SVO P&P Manual Part Three Paragraph 13 to require insurers to file a full private rating letter rationale report that contains sufficient analytical substance to enable an independent party, including the SVO, to form an opinion as to the investment risk for the privately rated securities even if the CRP’s policies do not require a full analysis. Charles Therriault, the SVO Director, said this proposed amendment would help clarify what is needed for the rationale report.
Other Items
Status of Private Rating Letter Rationale Report Filings for 2024
Private letter rating (PLR) securities issued on or after January 1, 2024, are required to have a corresponding private rating letter rationale report filed through NAIC’s VISION application to be eligible for the filing exemption process. 2024 was the first year that NAIC systems were able to accurately identify which PLR securities did not comply with the rationale report filing requirement and would be removed from filing exemption. The SVO deferred the implementation of the VOSTF’s policy to remove those PLRs that lack rationale report as it took NAIC systems two years to have needed enhancement for the implementation.
1,636 PLR securities did not have a required rationale report as of November 11, 2024, but the number dropped to 853 and 494 by December 31, 2024, and February 27, 2025, respectively. The SVO and the VOSTF met with the American Council of Life Insurers (ACLI), Private Placement Investors Association (PPiA), and North American Securities Valuation Association (NASVA) to discuss and review the PLR securities missing rationale report and issues reported by these trade associations. The SVO said there are no longer any systemic issues in NAIC systems after resolving all issues identified by the trade association. The SVO sent the list of PLR missing rationale reports to each state with an insurer that held any identified securities during 2024. This action further reduces the number of PLR securities missing rationale reports. The SVO removed 346 PLR securities from the FE process on March 3, 2025. The list of removed securities has been published in the NAIC’s AVS+ system, and they can be reinstated once insurers submit the missing rationale report.
The Securities Valuation Office (SVO) Annual Report on Carry-Over Filings for 2024
The SVO reviewed 19,443 (15,549) filings comprised of 4,480 (3,893) initial filings and 14,685 (11,257) annual updates during 2024 (2023). This was a 25% overall increase, primarily due to PLR filings increasing by 112%. 8,229 (3,879) out of the filings belong to PLR filings. 3,083 (2,407) related to PLR filings and 4,812 (1,305) related to rationale report filings. The most common reasons for PLR rejections in 2024 are the ratings are preliminary or provisional but not final, security is not identified in the document, rationale report filings without PLR, etc.
Due to the high volume of PLR filings, the carry-over filings (i.e., NAIC Designation with administrative symbols of IF or YE) for 2024 (13.3%) and 2023 (10.8%) exceeds 10%, which indicates there is an analytical resource constraint issue for the SVO that requires additional staff to handle this increase in filing volume.
Several new technology resources were approved in the 2024 budget, and it helped the implementation of multi-factor authentication for the SVO’s VISION and AVS+ applications and PLR process that allows implementation of removing PLR that lacks rationale report per the SVO policy that was adopted a few years ago. The SVO said they need additional resources and specialties to permit multiple security identifiers, e.g., ISIN, to utilize S&P’s business entity cross reference service (BECRS) and global identifier cross reference service (GICRS).
Proposed Collateralized Loan Obligation (CLO) Modeling Methodology
Eric Kolchinsky, the SSG director, said the next ad hoc group meeting will be April 2, 2025, and they published the new CLO results on the website. They continue collaborating with the Academy on CLO refactor.
NAIC Capital Adequacy Task Force
The Capital Adequacy Task Force of the NAIC held a national meeting on March 25, 2025. The following updates pertain to investment accounting.
Exposed Items with Comment Deadline of April 24, 2025
Proposal 2024-25-CA (Principle-Based Bond Project for P/C and Health)
It proposes incorporating reporting changes adopted by the BWG (2023-06BWG MOD, 2023-07BWG MOD, 2023-12BWG MOD) and accounting changes adopted by the SAPWG to both P&C and Health RBC reports.
It also proposes updating PR009 – Miscellaneous Assets to pull non-admitted collateral loans from the Notes to the Financial Statements Note 5S (2024-09BWG MOD).
Proposal 2024-26-CA (Tax Credit Investments for P/C and Health)
It proposes updating the RBC instructions and blanks for the adopted statutory accounting conceptual changes to SSAP No. 93 – Investments in Tax Credit Structures and SSAP No. 94 – State and Federal Tax Credits resulting from the Tax Credits Project (SAPWG 2022-14) and adopted blanks and instruction changes by the BWG (2024-11BWG MOD). The reason for removing the federal guaranteed reporting line was those types of tax credit investment structures were substantially eliminated by the Historic Boardwalk Hall, LLC v. Commissioner of Internal Revenue court decision in 2012.
It also proposes updating XR008 – Miscellaneous Fixed Income Assets to pull non-admitted collateral loans from the Notes to the Financial Statements Note 5S (2024-09BWG MOD) to be aligned with P&C RBC report PR009 – Miscellaneous Assets.
NAIC Risk-Based Capital Investment Risk and Evaluation Working Group
The Risk-Based Capital Investment Risk and Evaluation Working Group of the National Association of Investment Commissioners (NAIC) held a national meeting on March 25, 2024. The following update pertains to investment accounting.
Other Items
Updates from the American Academy of Actuaries (Academy) on Structured Securities RBC Project
Steve Smith, the Chair of the Academy C-1 Working Group (C1WG), presented the current progress for each of the in-flight projects:
- Collateral Model: NAIC’s Structured Securities Group “SSG” team currently models the credit risk of loans inside the CLOs. The objective was to prioritize C1 factors and create consistency within the framework. They have been using the same model of bond C-1 factor, which was produced by Moody’s and owned by ACLI. ACLI has been supportive in providing the NAIC and C1WG with the model data. This task is expected to be completed soon.
- C-1 Dynamics: The objective was to assess the underlying loans of the CLOs and see how the risk flows through the waterfall structure. SSG has been very supportive of running the model.
- C-1 Methodology: It determines how the cash flow reaches each tranche where the loans default in the collateral credit assumptions and then converts the cash flow into capital charges. Steve’s team is currently waiting for the collateral model to come through and then will determine the key issues.
Steve presented six principles last year, and one of the principles is risk-based capital following statutory accounting. CLOs are different from corporate bonds as Other-Than-Temporary-Impairment “OTTI” occurs when default occurs for corporate bonds. However, CLOs are trickier as CLOs haven’t technically defaulted when their underlying loans are deteriorating, and the CLO started Paid-In-Kind “PIK” (i.e., stop paying interest and start rolling the interest into principal). They ran 10,000 economic scenarios with the help of SSG, and it was found that some bank loans performed well, but some did not. They are currently trying to do impairment in each scenario when default occurs. Steve said SSAP No. 43 requires asset-backed securities to be assessed periodically with the projected cash flow. The question that came up was how feasible it is to project cash flow for CLOs.
Fund Review Project
Interested parties are supportive of this project. They think it is excessive for bond mutual funds to get 30% charge for life insurers when they invest in the same types of bonds as ETFs. They support the SVO’s Weighted Average Rating Factor “WARF” methodology applied to bond mutual funds. They said non-life insurers currently hold 96% of SVO-designated mutual funds and 45% of all SVO-designated funds, including ETFs, mutual funds, and private funds.
Philip Barlow, the Chair of the IREWG, asked the NAIC staff to put in a proposal next year as there are many things going on this year.
Other Items
- Update from VOSTF: Carrie Mears said they would continue coordination with the Academy on CLO modeling and they would propose a few minor adjustments to guidance for PLR rationale.
- Update from SAPWG: Dale Bruggman said
- Non-bond debt securities that fall out from Schedule D: They are on Schedule BA, and some hybrid securities are categorized as capital notes. The SAPWG sent referrals to all RBC working groups for consideration.
- Tax Credit investments: RBC charges may need to adjust, as the changes SAPWG and BWG made expand the scope from real estate only (Low-Income Housing Tax Credits) to all tax credit investments.
- Collateral loans: There will be more granular reporting lines on Schedule BA, and changes on RBC factors may be considered based on the underlying risks.
- Modified coinsurance (Modco) and funds withheld (FWH): Credit currently is given to the insurer when there is modco or FWH reporting, and the assets inside modco and fwh that are pledged to reinsurance companies. NAIC staff believes credit shouldn’t be given for RBC purposes.
- Investment in subsidiaries still shows up in D-6.1 when its concept was removed in 2005. Some lingering guidance didn’t get removed back then. It is noted that some insurers have been using that category for reporting mortgage loans, SAPWG proposes removing this category but wants to consult this group for any RBC concerns.
- Philip Barlow said it was the third year NAIC staff pulled data from annual statements for residual tranches. It provides insights into how the residuals are treated and reported across insurer types. They will set up a regulator-only meeting to discuss this as there is some company-specific information involved.
Life-Risk Based Capital Working Group
The Life-Risk Based Capital Working Group of the NAIC held a national meeting on March 25, 2025. The following updates pertain to investment accounting.
Exposed Items with Comment Deadline of April 23, 2025
2025-04-L LR008 – Other Long-Term Assets
This proposal supersedes the deferred proposal 2024-07-L. It proposes removing sublines 12.1 and 12.2 for preferred stocks, reorganizing lines 44 through 51 to ensure BA assets are grouped by the same risk components, i.e., C-1o, C1-cs, and facilitating proper MODCO/Funds Withheld Reinsurance Agreement adjustments within the report. For residual tranches, it proposes updating the line description and source for residual tranches on LR030 Lines 127-128 and LR031 Lines 14-15.
It also includes proposed changes to LR030 (Yield Guaranteed State Tax Credit Investments will be reported in line 59 while Qualifying and Other Tax Credit Investments will be reported in line 60) and LR031 for tax credit investments, but these proposed changes are contingent on the adoption of the other two proposals, e.g., 2024-21-L MOD, 2024-24-L MOD.
It will be considered adoption with other exposed items in the next call meeting on May 1, 2025.