Working groups held a series of conference calls in lieu of an in-person NAIC Fall 2020 National Meeting. Clearwater experts attended these calls to keep insurers updated on the latest regulatory guidance changes pertinent to investment accounting and reporting.
The following are five key updates from the NAIC Statutory Accounting Principles Working Group (SAPWG) and Valuation of Securities Task Force (VOSTF). For a more in-depth look at these and other items specific to investment accounting and reporting, watch the Clearwater Fall 2020 NAIC Webinar and download the NAIC Fall 20520 National Meeting Update market insight paper.
Adopted: Ref #2020-24 Accounting and Reporting of Credit Tenant Loans (INT 20-10T)
This item intends to clarify the reporting of CTLs outside of the SSAP No. 43R project, which may extend past when CTL clarity is needed. NAIC recently identified that some insurers include CTLs that did not qualify under the SVO’s structural and legal analysis, or were not filed with the SVO, in Schedule D with filing exempt designations under SSAP No. 43R. These are other lease-backed transactions, or “non-conforming CTLs.”
During the November 12 call, the working group directed 2020 year-end reporting guidance as a limited-time provision that non-conforming CTLs stay on D-1 but the insurers will need to submit them to SVO for a NAIC Designation Category by March 1, 2021. They will be reported on Schedule BA if they don’t get SVO assigned a NAIC Designation Category for 2020 Year End.
Due to subsequent questions after the call, INT 20-10T was exposed through evote, with a comment deadline of December 4, to detail the provisions provided and clarify the reporting of CTLs in the year-end 2020 statutory financial statements. The direction given by the working group is not intended to require or permit non-conforming CTLs that have been previously reported as mortgage loans on Schedule B or as other invested assets on Schedule BA to be moved to Schedule D Part 1. Non-conforming CTLs that have been reported on Schedule B or BA shall remain on that reporting schedule for the duration of this interpretation.
Exposed: Ref #2020-22 Accounting for Perpetual Bonds
This item proposes similar accounting and reporting treatment for perpetual bonds as perpetual preferred stock. As such, the guidance proposed by this agenda item is similar to Ref #2019-04: SSAP No. 32 – Investment Classification Project. This item would affect SSAP No. 26R—Bonds. NAIC staff clarified that “perpetual bonds shall be reported at fair value, not to exceed any current effective call price.”
Staff recommended the item be exposed again with revisions clarifying that “perpetual bonds are within scope as a ‘bond’, therefore shall apply the yield-to-worst concept (i.e. applicable premium or discount shall be amortized or accreted for perpetual bonds with an effective call option). Additionally, for perpetual bonds that do not possess or no longer possess a call feature, fair value reporting is required.”
Exposed: Ref #2019-21 Iowa Insurance Division proposal to establish principles on what is intended to be captured on Schedule D-1 - Long-term Bonds regardless if the investment is in scope of SSAP No. 26R or 43R
The working group exposed the Iowa Insurance Proposal to define which securities should be captured in scope of Schedule D – Part 1 – Long-term Bonds for a comment deadline ending December 4. It is expected to have several focused calls beginning in 2021.
Exposed: Assign NAIC Designation Category to issues of non-guaranteed, unrated subsidiaries of NAIC Credit Rating Provider (CRP) rated parent entities for Working Capital Finance Investments only
The Securities Valuation Office (SVO) proposes certain amendments (see below) to Part One and Part Three of the P&P Manual.
- SVO may rely upon the credit quality of the obligor’s parent entity if the obligor isn’t rated and its operations are at least 25% of the parent entity’s assets, revenue, and net income.
- SVO may notch the NAIC Designation of a subsidiary based on its analytical judgement and in its sole discretion
- SVO may choose not to assign any NAIC Designation to the WCFI program based on other attributes of the WCFI program which are unrelated to the obligor or its parent entity
Exposed: Require Private Letter Rating Rationale Report from the Credit Rating Provider for Private Letter Rating Filing effective January 1, 2022
The SVO proposed the first incremental change to increase its scrutiny of PL securities, which are commonly bespoke. The SVO included its specific amendments to Parts One and Three to the P&P Manual.
It proposes to require the insurers to provide a copy of the Private Letter Rating with a copy of the related private rating letter rationale report from the Credit Rating Provider for each security, effective January 1, 2022. The rationale report should include an analytical review of the privately rated security, e.g. transaction structure, methodology relied upon, analysis of the credit, legal and operational risks and mitigants supporting the assigned NAIC CRP rating, in a report issued by an NAIC CRP on its letterhead or its controlled website to an issuer or investor. SVO may not assign the equivalent NAIC Designation Category if it deems the privately rated security ineligible to receive an NAIC Designation with a NAIC CRP Credit Rating.