Preview: Updates from the NAIC Spring 2019 National Meeting

The NAIC held its Spring 2019 National Meeting on April 6-9 in Orlando, Florida.

The following are selected updates from the meetings. For Clearwater’s comprehensive market insights from the meeting, click the link at the bottom of this article.

STATUTORY ACCOUNTING PRINCIPLES WORKING GROUP (SAPWG)

Adopted: Ref #2019-02: Single Security Initiative

The NAIC was contacted by Freddie Mac regarding the upcoming exchange of certain securities into nearly identical securities with two exceptions: the associated coupon payments will be delayed an additional 10 days, and the securities will be assigned a new CUSIP number.

In response, an agenda item was exposed by the SAPWG on February 6, 2019, with a tentative interpretation to incorporate a limited-scope exception to SSAP No. 26R – Bonds and to prescribe guidance in SSAP No. 43R – Loan‑backed and Structured Securities for securities exchanged as part of the Freddie Mac Single Security Initiative. This requires a continuation of the amortized cost basis of a security surrendered to the new security received in the exchange, and is an exception to guidance that requires gains or losses to be recognized.

The interpretation also allows reporting entities to adjust the security’s basis for the float compensation received.

Interested parties supported the exchange and conversion guidance and the NAIC staff’s proposed changes.

As this type of exchange has no end date, the NAIC will continue monitoring if other changes are needed.

Adopted: Ref #2018-36: ASU 2018-13: Changes to the Disclosure Requirements for Fair Value Measurement

Non-substantive revisions to SSAP No. 100R – Fair Value Measurement were adopted and became effective immediately. As a result, the deleted disclosures will not be required in the 2019 statutory financial statements.

The revisions were exposed during the Fall 2018 National Meeting to adopt with modification the disclosure amendments in ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. The revisions include: describing the disclosure objective, eliminating information on transfers between hierarchy level 1 and level 2 for items measured and reported at fair value, incorporating changes that eliminate the disclosure of the reporting entity’s policy for determining when transfers between the levels have occurred, and revisions to reflect the GAAP disclosure changes related to the calculation of net asset value from ASC 820-10-50-6A.

These revisions also clarify previous actions on related US GAAP pronouncements.

Interested parties supported the revisions in this item.

Adopted: Ref #2018-18: Structured Notes

The SAPWG adopted revisions to require structured notes for which the contractual principal amount to be paid at maturity is at risk for other than failure of the borrower to pay the contractual amount due to be reported as derivatives under SSAP No. 86. This excludes mortgage-referenced securities (i.e., STACR, CAS), which will be included in the scope of SSAP No. 43R.

Revisions with modifications to SSAP No. 26R, paragraph 2c, and SSAP No. 86 paragraph 5g, were adopted as non‑substantive changes with a December 31, 2019, effective date. This resulted in the following changes:

• SSAP No. 2–Cash, Cash Equivalents, Drafts and Short-Term Investments: Clarification that derivative instruments should not be reported as cash equivalents or short-term instruments regardless of their maturity date and should be reported as derivatives regardless of maturity
• SSAP No. 26R–Bonds: Removes securities from the bond definition when the contractual amount of the instrument to be paid at maturity is at risk for other than the failure of the borrower to pay the contractual amount due and deletes the structured note disclosure
• SSAP No. 43R–Loan-backed and Structured Securities: Captures mortgage-referenced securities in scope, which is an explicit exception to the definition of a loan-backed and structured security (LBSS)
• SSAP No. 86–Derivatives: Captures structured notes within scope when there is a risk of principal loss based on the terms of the agreement (in addition to default risk)

The SAPWG also directed a proposal to the BWG and the Capital Adequacy (E) Task Force to consider reporting AVR and RBC revisions for structured notes. A referral was directed to the VOSTF to revise its definition of structured notes to mirror the definition adopted by the SAPWG.

Finally, NAIC staff were directed to prepare a separate agenda item to consider whether additional guidance is needed within SSAP No. 86 for derivatives that are not hedging, income generation, or replications. If there is no explicit reporting guidance for structured notes, these structured notes can be reported as “Other” derivatives on Schedule DB – Part A, Section 1.

Adopted: Ref #2018-17: Structured Settlements

The SAPWG adopted Issue Paper No. 160 – Structured Settlements, which was exposed during the Fall 2018 National Meeting. The paper documents for historical purposes the substantive revisions to SSAP No. 21R – Other Admitted Assets that were adopted during the Fall 2018 National Meeting and were effective for year-end 2018.

Changes outlined in the issue paper include:

1. Periodic-certain structured settlements acquired in accordance with state and federal laws are admitted assets
2. Life-contingent structured settlements and periodic-certain structured settlements not acquired pursuant to state and federal laws are non-admitted assets (e.g., the insurer did not properly transfer the title from the original beneficiary to its name)

BWG exposed an associated item, #2019-06BWG, which stipulates that these structured settlements would be reported as “any other class of assets” on Schedule BA.

BLANKS WORKING GROUP

Exposed: Item #2019-03BWG: Add Column to the Schedule D – Part 2, Section 2

This proposal was sent to the BWG by Charles Therriault, Director of the SVO, on behalf of VOSTF. This proposal is part of a broader effort to align treatment for funds that only, or predominantly, hold fixed income assets across schedules.

The working group considered changes that help identify fund investments assigned an NAIC designation and give insurers a mechanical process to report such investments and their designations. Changes include:

• Add a designation column for mutual funds to the annual Schedule D – Part 2, Section 2
• Modify Schedule D – Part 2, Section 2 instructions to reflect the added designation column
• Modify instructions for the NAIC Designation and Administrative Symbols column for the quarterly Schedule D – Parts 3 and 4 to reflect capturing designation for mutual funds

Exposed: Item #2019-04BWG: Amend Inconsistencies Between Reporting for Bonds and Fixed Instruments in Schedule BA Instructions

This proposal was sent to the BWG by Charles Therriault on behalf of VOSTF. Currently, there is an inconsistency in reporting investments for Schedule BA across statement types for investments in the categories “Fixed or Variable Interest Rate Investments that Have the Underlying Characteristics of a Bond, Mortgage Loan or Other Fixed Income Instrument” and “Joint Ventures or Partnership Interests for Which the Primary Underlying Investments are Considered to Be Fixed Income Instruments.” This proposal would fix that inconsistency by doing the following:

• Removing the reference to “Life and Fraternal Only” from the Schedule BA instructions regarding investments that have the underlying characteristics of bonds or fixed instruments
• Removing the reference regarding CUSIP and NAIC Designation column from the Schedule BA instructions
• Adding lines to the two previously mentioned categories to distinguish between those that have SVO review and approval and those that do not

VALUATION OF SECURITIES TASK FORCE

Adopted: Amendment to the P&P Manual to Clarify the Stand-Alone Status of an Investment Security Used in a Regulatory Transaction

Amendments were added to the 2019 edition of the P&P Manual to clarify the status of an investment security that is used as a component in a regulatory transaction. The amendments were proposed by the American Council of Life Insurers and the Securities Valuation Office.

The amendments include a broader definition of a regulatory transaction as, “a transaction engineered to address a regulatory concern one or more insurers have or may have that should be submitted to a state insurance department for approval and that has as a component a security or other instrument which on a stand-alone version may be an investment security, as defined in this manual, eligible for assignment of an NAIC designation.”

Adopted: Amendment to the P&P Manual to Improve and Expand Disclosure on Transactions Not Eligible for Filing Exemption

Guidance from Part Three, Section 1 (b) (v) will be deleted and transferred to Part Three, Section 1 (b) (i) of the P&P Manual. This includes a list of eight security types that are not eligible for filing exemption. Those security types include residential mortgage-backed securities/commercial mortgage-backed securities, SCA investments, catastrophe‑linked bonds, shares of funds, regulatory transactions, credit tenant loans, replication (synthetic asset) transactions, and working capital finance investments.

The amendments were added to the P&P Manual to resolve industry concerns with the inclusion of subsidiary controlled and affiliated, regulatory transactions, and credit tenant loans as securities ineligible for filing exemption.

The SVO will work with the interested parties on their concerns over the following items:

• Non-financially modeled securities to be eligible to use PL ratings as MFE process is removed
• CTL-like instruments that are not currently expressly contemplated by the P&P Manual to be Schedule D eligible

Adopted: Amendment to the P&P Manual to Provide Comprehensive Instructions for Fund Investments and to Make Referrals to the Capital Adequacy (E) Task Force, the SAPWG, and the BWG

The VOSTF exposed a report on a proposed comprehensive framework for all fund investments, including the ability to evaluate all fixed-income-like funds for NAIC designation and corresponding risk-based capital treatment. The intent of the proposal was to ensure all funds that hold underlying fixed income assets as portfolio assets are treated consistently.

The SVO proposed a new Part Three, Section 8 to house all guidance for fund investments. This new section would retain existing verification procedures for money market and bond funds and instructions for ETFs and Schedule BA private funds. It would expand fixed-income treatment to qualifying funds issued by any investment company type. The SVO also proposed restricting more favorable regulatory treatment to funds assigned NAIC designations and excluding credit rating provider credit ratings.