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Clearwater Analytics is dedicated to keeping insurers updated on the latest regulatory guidance changes regarding investment accounting and reporting. In order to provide readers with a comprehensive view of these changes, our insurance experts attended conference calls and tracked guidance as it was adopted and discussed. The following market insight paper is a summary of the NAIC’s updates pertinent to investment accounting and reporting.

Statutory Accounting Principles Working Group

The Statutory Accounting Principles Working Group met November 12, 2020, to discuss items pertinent to statutory accounting. The following items are updates specifically for investment accounting and reporting.

COVID-19 Updates

Response to COVID-19 Expiring Third Quarter 2020: INT 20-02: Extension of the Ninety-Day Rule for the Impact of COVID-19; INT 20-04: Mortgage Loan Impairment Assessment Due to COVID-19; INT 20-05: Investment Income Due and Accrued

During the summer 2020 meeting, the SAPWG extended three interpretations in response to COVID-19 to the third quarter. These include INT 20-02: Extension of the Ninety-Day Rule for the Impact of COVID-19, INT 20-04: Mortgage Loan Impairment Assessment Due to COVID-19, and INT 20-05: Investment Income Due and Accrued. 

NAIC staff asked the SAPWG to provide comments on whether they should consider a further extension of these interpretations into the fourth quarter of 2020.  NAIC staff said they had not heard any comments supporting extension from the working group and thus recommended not to extend these interpretations. It was decided not to extend or seek public comment regarding the extension. All three of these interpretations were not extended beyond third quarter reporting. NAIC staff will update these three interpretations to state that no further action is anticipated.

Interpretations in response to COVID-19 expiring 60 days after the end of the national emergency or December 31, 2020: INT 20-03: Troubled Debt Restructuring Due to COVID-19 and INT 20-07: Troubled Debt Restructuring of Certain Investments Due to COVID-19

Two interpretations in response to COVID-19, INT 20-03: Troubled Debt Restructuring Due to COVID-19 and INT 20-07: Troubled Debt Restructuring of Certain Investments Due to COVID-19, are due to expire 60 days after the end of the COVID-19 national emergency or December 31, 2020, whichever comes first.

Since the national emergency has not ended and these INTs will be effective through 2020 year end, NAIC staff said an extension is not needed at this time. 

Adopted Items

All adopted items are non-substantive and effective immediately.

Ref #2020-21: SSAP No. 43R – Designation Categories for RMBS/CMBS Investments

During a spring conference call, the VOSTF adopted an amendment to the P&P Manual to map financial modeled residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). This affects the NAIC designations produced by the financial model and will now be mapped to a final NAIC designation category, which will be used for accounting and reporting purposes by reporting entities. The edits proposed by this item would update the final NAIC designation category mapping instructions in SSAP No. 43R—Loan-Backed and Structured Securities for RMBS/CMBS investments.

Interested parties expressed support and suggested editorial changes to remove redundant language from SSAP No. 43R Para 27 a(iii) Step 3. NAIC staff recommended the working group support the changes along with interested parties’ edits. 

Ref #2020-20: Cash Equivalent Disclosures

This item would make edits to SSAP No. 2R—Cash, Cash Equivalents, Drafts and Short-Term Investments as a follow-up to changes adopted in May on Ref #2019-20: Rolling Short-Term Investments. The item referenced cash equivalent investments but did not include them in the final disclosure. To remedy that, this item makes two revisions:

  1. Cash equivalents and short-term investments (or those that are substantially similar) which remain on the same reporting schedule for more than one consecutive reporting period shall be disclosed.
  2. Clarification that using the code on the investment schedules satisfies the disclosure.

Interested parties supported the measure and suggested adding a qualifier to avoid irrelevant data being captured: “Identification of cash equivalents (excluding money market mutual funds as detailed in paragraph 7) and short-term investments, (or substantially similar investments), which remain on the same reporting schedule for more than one consecutive reporting period.” 

NAIC staff recommended the working group support the changes with interested parties’ edits. 

Ref #2020-19: Clarifying Edits – Participating in Mortgages

This item affects participation in loan agreements in scope of SSAP No. 37— Mortgage Loans. NAIC staff noted questions regarding the scope of “financial rights and obligations” in a participation agreement for a reporting entity lender, and if these extend beyond the right to receive contractual cash flows.

Clarifications include that a member of a participation agreement’s financial rights may include “the right to take legal action against the borrower or participate in the determination of legal action, but do not require that the participant have the right to solely initiate legal action, foreclosure, or under normal circumstances, require the ability to communicate directly with the borrower.”

This item was exposed for comment July 30, and interested parties supported it. NAIC staff recommended the working group adopt the revisions.

Ref #2020-17: Updating the SCA Review Process

This item would update the current SCA filing review process as is required by SSAP No. 97— Investments in Subsidiary, Controlled and Affiliated Entities, thereby removing manual steps. 

NAIC staff stated adoption of this item would generate significant savings for the NAIC on the administrative side. For example, NAIC staff reviewed more than 825 filings during the calendar year 2019.

Moving forward, financial statement filers for Sub 1 & 2 filings would be responsible for retrieving their finalized SCA review information from VISION. As a benefit, this would result in fewer emails for regulators. They would still receive the review information from the NAIC staff in a monthly email. Regulator access to VISION would be unaffected. 

In July, this item was exposed  for regulator feedback on whether this new process would adversely impact operations. Interested parties recommended two changes to the proposal:

  1. Extend the filing deadlines. For Sub-1 form extend to 90 days from the acquisition or formation of an investment, and for Sub-2 form extend to August 31 of the next year or one month after the audit report date.
  2. Correct a spelling error on page 8 of the Sub-2 document.

NAIC staff recommended the working group accept the changes with the interested parties’ edits.

Ref #2020-18: SSAP No. 97 Update

This item follows up on changes made by adopted agenda item 2018-26: SCA Loss Tracking – Accounting Guidance, for SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities. A minor revision would be made to paragraph 9 to corroborate the revisions made in that agenda item and remove a lingering reference to negative equity value that can result for a subsidiary controlled or affiliated entity (SCA). Specifically, the statement that “guarantees or commitments from the insurance reporting entity to the SCA can result in a negative equity valuation of the SCA” would be removed.

Interested parties submitted extensive comments and suggested edits to this item. They argued that the proposed change to paragraph 9 suggests a negative equity valuation of foreign insurance subsidiaries would be required. They requested the working group clarify whether the proposed modifications “intended to cause an insurer’s equity investment in a foreign insurance subsidiary to fall below zero," and contended that it should not.

One interested party suggested wording changes to remedy the issue pointed out by the previous comments. They also discussed the potential negative valuation of 8.b.iv entities, e.g. when the parent insurer has committed to fund losses of the foreign insurance subsidiaries or the subsidiaries provide services to or hold assets on behalf of the parent insurer or affiliate.

NAIC staff recommended the working group adopt the proposed changes to SSAP No. 97 without the interested parties’ suggested edits. The proposed item removes “a superseded statement that guarantees or commitments from the insurance reporting entity to the SCA could result in a negative equity valuation of the SCA.” This item does not make modifications applicable to limited statutory basis adjustments for 8.b.ii and 8.b.iv entities. 

Staff asked the working group to provide direction on whether to create a separate agenda item about making some of the provisions of paragraph 9 non-applicable to 8.b.iv.

The working group adopted this non-substantive item and agreed to have NAIC staff create a separate agenda item.

Exposed items with comment deadline January 11, 2021

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.”  

During the July 30 working group phone call, NAIC staff suggested an effective date of January 1, 2021, with early application permitted; this would correlate with the expected updates to SSAP No. 32.

Interested parties stated that perpetual bonds “should continue to be accounted for as bonds under SSAP No. 26R (as currently written) and reported on Schedule D as hybrids.” They agreed that it is justifiable to report perpetual bonds as hybrids on Schedule D. However, the characteristics of the investments in question are similar to bonds substantially in how insurers invest and by the capital markets.

NAIC staff agreed that perpetual bonds have similarities to “traditional” bonds but stated that “reporting a perpetual bond indefinitely at historical cost in instances where the bond does not have a remaining call feature, is not an appropriate measurement method.” Other-than-temporary-impairment assessment may not be required despite a decrease in market value because there is no contractual timing for repayment.

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.” 

Ref #2020-32: SSAP No. 26R - Disclosure Update

This item expands an existing disclosure regarding called bonds to include bonds terminated early through a tender offer. The SAPWG previously clarified that the accounting and reporting of bond investment income and capital gains/losses due to early liquidation either through a call or a tender offer shall be similarly applied. 

Staff recommended exposing nonsubstantive revisions to the disclosures in SSAP No. 26R—Bonds

Ref #2019-34: SSAP No. 25 - Related Parties, Disclaimer of Affiliation and Variable Interest Entities

This item clarifies any related party identified under US GAAP or SEC reporting requirements would also be considered a related party under statutory accounting principles. Non-controlling ownership over 10% results in a related party classification despite disclaimer of control or affiliation. It emphasizes disclaimer of control or affiliation impact holding company group allocation and reporting as an SCA under SSAP No. 97, but it doesn’t eliminate the related party classification and the required disclosure of material transactions. Also, it proposes to reject seven GASB Accounting Standards Updates as not applicable for SSAP No. 25.

Interested parties recommended new Schedule Y Part 3 to be added for disclosure.

NAIC staff recommended this item be re-exposed for comments. 

Ref #2020-33: SSAP No. 32R – Publicly Traded Preferred Stock Warrants

This item proposes expanding the scope of SSAP No. 32R—Preferred Stock to include publicly traded preferred stock warrants, require publicly traded preferred stock warrants to be reported at fair value, and revise SSAP No. 86—Derivatives to identify this treatment.

Staff recommended exposing nonsubstantive revisions to SSAP No. 32R—Preferred Stock and SSAP No. 86—Derivatives with these updates.

Ref #2020-36: Derivatives for Hedging Fixed Indexed Products

This item proposes two concepts to address reporting mismatch for derivatives that are used for hedging Fixed Indexed Products:

  1. Establish guidance that permits effective hedge treatment that is in line with SSAP No. 86. The derivative would be reported at amortized cost. The fair value changes would be recognized at settlement to offset the change in FIA/IUL reserve.  
  2. Establish guidance that permits effective hedge treatment that is in line with SSAP No. 108. The derivative would be reported at fair value. The change in fair value is bifurcated for reporting based on whether the change is an effective hedge to the interest crediting rate change in the hedged FIA/IUL reserve.

NAIC staff recommends notifying the Life Actuarial (E) Task Force of this proposal and plans to work on an issue paper as this is a substantive guidance change and a potential new SSAP. 

Ref #2020-34: SSAP No. 43R – Government-Sponsored Enterprise (GSE) Credit Risk Transfer (CRT) Program

Following recent changes to the Freddie Mac Structured Agency Credit Risk (STACR) and Fannie Mae Connecticut Avenue Securities (CAS) programs, a proposal was made to include STACR and CAS Real Estate Mortgage Investment Conduits (REMIC) into the scope of SSAP No. 43R – Loan-Backed and Structures Securities and align SSAP No. 43R guidance regarding the financial modeling of mortgage referenced securities to the requirements as directed in the P&P Manual. It is anticipated that future Freddie Mac STACR and Fannie Mae CAS issuances will be solely conducted through a REMIC trust.

Staff recommended exposing nonsubstantive revisions to SSAP No. 43R – Loan-Backed and Structures Securities to allow credit risk transfer securities from Freddie Mac and Fannie Mae to remain in scope when a REMIC structure is used in the STACR program or CAS program.

Ref #2020-35: SSAP No. 97 – Qualified/Adverse Audit Opinions

This item proposes to expand the quantification exception guidance to 8.b.iii entities in limited situations.  

Under the existing guidance, this exception is only permitted for US insurance subsidiaries (aka 8.b.i entity). US subsidiary received qualified or adverse audit opinion due to departure from US GAAP. If the departure is consistent with SAP accounting that resulted in a more conservative financial statement representation, the investment in this subsidiary is admitted.

Other Updates

Ref #2020-24: Accounting and Reporting of Credit Tenant Loans

This item considers a referral from VOSTF to permit non-conforming CTLs that receive an NAIC designation from the SVO to be considered in scope of SSAP No. 43R Loan-Backed and Structured Securities. 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.”

Two options include:

  1. Continue the historical practice of allowing conforming CTLs to be reported on Schedule D Part 1, and direct non-conforming CTLs to be reported on Schedule B as mortgages or on schedule BA under SSAP 21—Other Admitted Assets
  2. Remove CTLs from the scope of SSAP No. 43R, allowing all CTLs to be reported and the regulators be able to see all CTLs in the same schedule (i.e., Schedule BA).

Multiple interested parties submitted comments with reasoning as to why CTLs should continue to be reported on Schedule D Part 1. Interested parties also felt that the exposure’s suggestion to report all CTLs in Schedule BA was random and could potentially cause companies to run afoul of state investment limits. Interested parties said 5% residual risk for CTLs to be classified as conforming is not appropriate while asset backed securities can have up to 65% residual risk. They felt it was in the best interest of insurance companies, and ultimately policyholders, to continue reporting conforming CTLs on Schedule D Part 1 and raise the residual risk threshold for non-conforming CTLs. Others commented on the fact that many investors have strict policies prohibiting investments in Schedule BA assets and that putting them under that schedule would disfavor an investment with excellent credit performance.

In light of these comments, NAIC staff provided two recommendations to the SAPWG:

  1. Direct NAIC staff to prepare guidance that specifies the reporting of non-conforming CTLs on Schedule BA, unless the working group directs for mortgage loans. Staff provided example language, which, when chosen, could be exposed for comment. The Schedule BA proposal allowed for those CTLs that do not meet the structural analysis for bond reporting to be submitted to the SVO for a credit assessment, thus permitting non-conforming CTLs to obtain improved RBC. If the BA version is chosen, a referral would be sent to VOSTF clarifying that non-conforming CTLs previously reported on Schedule D-1 are not grandfathered.
  2. Send a referral to the SVO and Capital Markets Group “requesting comments on an appropriate residual risk percentage to assess whether it is appropriate to increase the 5% residual risk threshold as a restriction in determining whether a CTL is conforming. Furthermore, inquire whether other mechanisms, beyond a residual insurance policy, could be incorporated as a mitigating factor for CTLs that exceed the residual risk threshold.” 

NAIC staff said the residual risk for those non-conforming CTLs is significantly higher than 5% threshold. However, the number of non-conforming CTLs have been dropping because some were adjusted to become conforming by including the mitigation plan in the CTLs. They don’t think this type of investment is prevalent now and also pointed out non-conforming CTLs should be reported in line 22-28 on Asset Valuation Reserve Equity Component.  

The VOSTF chair said if there is a potential opportunity for non-conforming CTLs to go back to Schedule D Part 1, they should be able to be reported on Schedule D until the 43R Investment Classification Project is finalized. Blanks will need to be modified so non-conforming CTLs will be easily identified on Schedule D Part 1.

The working group chair asked the SVO director if it is feasible to assign a NAIC Designation to non-conforming CTLs. The SVO director said they will need CRP ratings and to develop a methodology on NAIC Designation Category for this asset type. The latter is more challenging because it is in the middle of November and 2020 year-end is approaching, but he will try.  

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 a SVO assigned NAIC Designation Category for 2020 year-end. 

Post-meeting news: Due to subsequent questions after the meeting, INT 20-10T was exposed through e-vote with comment deadline 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.

Ref #2019-21: SSAP No. 43R - Update

The Working Group previously 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 and is expected to have several focused calls beginning in 2021.

Valuation of Securities Task Force

The Valuation of Securities Task Force of the NAIC held a conference call November 18. The following are updates from that meeting.

Adopted Effective Immediately

Consider Adoption of a Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to Update Guidance on Initial and Subsequent Annual Filings, and Methodologies and Documentation

This item addresses a recent common scenario where the SVO did not receive proper documentation from insurance companies to support a request for clarification or overall analysis. The proposed amendment updates guidance in the P&P Manual “for initial and subsequent annual filings and assessment methodologies to reinforce documentation and information requirements.”  

Interested parties were supportive of the amendments but they would like to have a list of required documents from the SVO. For guidance on documentation requirements, see here.

Exposed for a 60-Day Public Comment Period Ending January 18, 2021

Receive an Updated Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) on Guidance for Working Capital Finance Investments Consistent with the Statutory Accounting Principles (E) Working Group Adoption of Changes to SSAP No. 105R – Working Capital Finance Investments

This item proposes to amend the Working Capital Finance Investments (WCFI) section of the P&P Manual to remove inconsistencies with SSAP No. 105R which was updated by SAPWG on May 20, 2020:

  • Removed the requirement that the Securities Valuation Office (SVO) determine if the International Finance Agent is the functional equivalent of the U.S. regulator
  • Removed the finance agent prohibitions on commingling
  • Removed duplicative text regarding exercising of investor rights
  • Removed requirements, with revisions allowing the SVO to determine if a first priority perfected interest has been obtained
  • Broadened the independent review requirements to allow independent review of the finance agent by either audit or through an internal control report
  • Changed the default provisions from 15 to 30 days so the default date and the cure period are consistent
  • Removed the statement that the reporting entity may need to seek approval from the domestic regulator

This proposed amendment was exposed for 45 days, which ended August 17, 2020.

The ACLI submitted proposed detailed changes to the SVO’s amendments. In turn, the SVO has responded to the ACLI’s recommendations with new proposed changes, as well as an explanation for where it does not agree with the ACLI’s direction that would impede the SVO’s ability to assess investment risk in WCFI transactions.  

Receive a Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to Permit the SVO to Rely Upon the Un-Rated Subsidiaries of a CRP Rated Parent Entity for Only Working Capital Finance Investments

The SVO has received feedback from some insurers and others that it should “assign NAIC Designations to issues of non-guaranteed, unrated subsidiaries of NAIC Credit Rating Provider (CRP) rated parent entities, based on implied support from the parent to the subsidiary.”

SVO Director Charles Therriault said Moody’s does not support the process to imply a rated parent’s support for its unrated, non-guaranteed subsidiary because some parent companies decided to cease support of their subsidiaries in the past. Without legally binding support, e.g. guarantee, parental support of a subsidiary is entirely discretionary, ultimately reliant on the best interest of the parent and should not be the basis for a rating on the subsidiary. Reliance on implied support (e.g. comfort letters, keep-well agreements, or other statements of intended support) of a parent for its subsidiary also conflicts with the “Credit Substitution” guidelines in the P&P Manual.   

As the VOSTF considers it essential that the SVO be able to assign designations to WCFI transactions with unrated, non-guaranteed obligors, the 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 for a 60-Day Public Comment Period Ending February 5, 2021

Receive a Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to Require the Filing of Private Rating Analysis 

During a May 14 meeting, IAO staff shared concerns with the VOSTF regarding bespoke securities and the NAIC’s reliance on CRP ratings to assess their associated risk and for regulatory purposes. The VOSTF exposed the IAO’s memorandum, and requested the SVO make incremental recommendations to address the concerns.

The SVO has 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.  

SVO Director Charles Therriault said the rationale report will allow the SVO to be able to determine if the securities are eligible to be filing exempt. He said there are several thousand methodologies from the CRP. It is inefficient if they have to talk to the task force whenever it disagrees with the CRP methodologies. The chair said it will make it a more adoptable form if the “discretionary” is taken out from the proposal. Interested parties said it would cause capital uncertainty for the insurers if the NAIC Designation may be different from the relevant CRP ratings. Due to confidentiality, the SVO will schedule a regulator-only call in 2021 to review with the Task Force PLR transactions if they are either ineligible for filing exemption, Schedule D reporting or there is a material difference in opinion as to the risk.

Post-meeting notes: The amended proposed item (i.e., SVO’s discretion is removed from the proposed changes) was exposed on December 7, 2020, for 60 days ending February 5, 2021.

Other Updates

Discuss IAO Staff Concerns about Bespoke Securities, and NAIC Reliance on CRP Ratings

During an educational session in May 2020, IAO staff shared concerns with the VOSTF regarding bespoke securities. In short, there is concern that typical ratings assigned by CRPs do not effectively capture the risk of bespoke securities, which tend to be private and unconstrained by normal market forces.

This item is to build toward an issue paper outlining the risks associated with bespoke securities, recommendations to mitigate these risks, and other issues related to CRP ratings.

The IAO recommends sharing the resulting issue paper with Financial Conditions (E) Committee and continuing the discussion next year.

The interested parties said they look forward to working with the Task Force and the SVO to develop principles and a framework to address the regulatory issues raised in the issue paper. The interested parties said many of the securities identified by the SVO as “bespoke” are legitimate. Insurance companies working with asset managers to design investment products that meet insurance company asset-liability matching, cash flow matching, and risk appetites is a positive, appropriate, and necessary goal for industry. Those effective asset-liability matching contribute to keeping insurers resilient under market stress. They asked the VOSTF to use the security characteristics as review factors instead of assuming those features are per se problematic.  

Financial Condition (E) Committee sent a memorandum to the VOSTF in September 2020 and expressed their concerns with the comment letter that states that SVO staff should not have the authority to determine eligibility for Filing Exemption of an individual CRP rating on a deal-by-deal basis. The Committee directed the VOSTF to implement policies in the next year to oversee the NAIC staff’s administration of rating agency ratings used in NAIC processes, including staff’s discretion over the applicability of their use in its administration of Filing Exemption.  

Capital Adequacy Task Force

The Capital Adequacy Task Force of the NAIC held a conference call October 27. The following are updates from that meeting.

Exposed Item with 45-day Comment Period Which Ended December 11, 2020

Agenda Item #2020-10-CA: Structure of the bonds reported in the Health and P&C RBC and Hybrid Securities will be incorporated into the bonds and reported on PR006 and XR007. This proposed change will be effective for 2021 annual reporting.

This item modifies the structure for the bonds to pull directly from Schedule D – Part 1, Schedule DA – Part 1, and Schedule E – Part 2 footnotes for the 20 NAIC designation categories. Hybrid securities will be reported as bonds on the Bonds pages and removed from XR010 Equity Assets, XR012 Asset Concentration, and XR024 Calculation of Total Risk-Based Capital After Covariance for health-type insurers, and PR007 Unaffiliated Preferred and Common Stock, PR011 Asset Concentration, and PR031 Calculation of Total Risk-Based Capital After Covariance for P&C-type insurers.

The item was exposed, prior to the meeting, for 45 days ending December 11, 2020.

Discussed Item

Agenda Item #2020-09-CA: Add SVO-Identified Bond ETFs to RBC Instructions

This item proposes to add “SVO-Identified Bond ETFs” as a secondary example other than mutual funds in Asset Concentration of Health (XR011) and Property (PR011) RBC Instructions and Common Stock Concentration Factor (LR011) of Life and Fraternal RBC Instructions. It clarifies the language of excluded items from asset concentration and common stock concentration factor instructions to include registered ETFs. It will align the recent language updates made to Supplementary Investment Risks Interrogatories “SIRI”. 

Interested party said the same language change should be in Asset Concentration (LR010) of Life and Fraternal RBC Instructions as well.  

The Task Force accepted this proposal and will consider the comments being made by the Interested Party.

Life Risk-Based Capital Working Group

The Life Risk-Based Capital Working Group of the NAIC held a conference call October 9. The following are updates from that meeting.

Adopted Item Effective Immediately

Using the greater of 2020 Net Operating Income “NOI” or 85% of 2019 NOI as an input into the computation of the Rolling Average NOI

The Working Group finally adopted this industry-requested guidance change for NOI after three of the four industry requested RBC Mortgage reporting guidance changes were adopted in June and July. The Working Group intends to make the decision on 2020 NOI when 2020 annual data becomes available. Interested Parties expressed their concern regarding RBC charges for mortgage loans, and specifically that insurers need the guidance clarity this year in order to make investment decisions.  

This guidance, with respect to 2020 NOI, applies to the application of the 2020 NOI in RBC reporting for 2021, 2022, and 2023. Regulators suggest retaining information about actual 2020 NOI in RBC workpapers so that the information can be readily available to regulators.

Health Risk-Based Capital Working Group

The Health Risk-Based Capital Working Group of the NAIC held a conference call October 29. The following are updates from that meeting.

Adopted Item Effective for 2021 Annual Reporting

Agenda Item #2020-07-H: Splitting the bonds and miscellaneous assets onto separate pages XR007 & XR008

This item splits bonds and miscellaneous assets onto separate pages in the health RBC formula for 2021; the bonds will remain on page XR007, and miscellaneous assets will move to page XR008. All subsequent pages will then be renumbered accordingly within the blanks and instructions. 

The reason for this change is due to differences in character limits in the page numbers within the NAIC system, Excel spreadsheets, and vendor software.

Blanks Working Group

Propose for adoption December 18, 2020

2020-29BWG: Remove the line category and reference to the NAIC Bond Fund List (Bond List) from the investment schedule instructions and blank (SAPWG 2020-01)

With the adoption of the Comprehensive Instructions for Fund Investments on April 7, 2019, that provided new instructions for fixed income-like SEC-registered funds and given the limited number of insurers investing in the funds on the NAIC Bond Fund List, the SVO proposed eliminating this list. This proposal was adopted by VOSTF on July 1, 2020.

SAPWG adopted agenda item 2020-01 on July 30, 2020, to eliminate references to the NAIC Bond Fund List in SSAP No. 26R – Bonds.

This item proposes to eliminate references to the NAIC Bond Fund List from investment schedules general instructions, Summary Investment Schedule, Schedule D Summary by Country, Schedule D Part 1A Section 1 & 2, Schedule D Part 1, 3,4, & 5, Schedule DA – Part 1, Schedule DL – Part 1 & 2, Schedule E – Part 2, and Supplemental Investment Risks Interrogatories Line 13.  

It was adopted as effective for 2021 annual reporting.

SAPWG adopted agenda item 2020-01 on July 30, 2020, to eliminate references to the NAIC Bond Fund List in SSAP No. 26R – Bonds.

This item proposes to eliminate references to the NAIC Bond Fund List from investment schedules general instructions, Summary Investment Schedule, Schedule D Summary by Country, Schedule D Part 1A Section 1 & 2, Schedule D Part 1, 3,4, & 5, Schedule DA – Part 1, Schedule DL – Part 1 & 2, Schedule E – Part 2, and Supplemental Investment Risks Interrogatories Line 13.We expect the BWG will adopt this change effective for 2021 Annual as this proposal is to reflect the changes adopted by SAPWG.  

Exposed Items with comment deadline of February 16, 2021

2020-35BWG: Expand the number of characters used from 7 to 10 in the investment line categories for Schedules D, DA, DL & E Part 2 except for Schedule D Part 6 Sections 1 and 2.  Add line categories for Unaffiliated Certificates of Deposit and Exchange Traded Funds.  Split the line categories for Mutual Funds, Unit Investment Trusts and Closed-End Funds into lines indicating if the fund has been assigned a designation by the SVO.  Add line categories to Summary Investment Schedule, Summary by Country, and Schedule D Part 1A Sections 1 & 2.  

Effective March 31, 2022.

Table
2020-36BWG – Modify the General Schedules Investment Instructions and Schedule DB General Instructions to reflect treatment of publicly traded stock warrants as being in the scope of SSAP No. 30R – Unaffiliated Common Stock or SSAP No. 32R – Preferred Stock and reporting as common and preferred stock (SAPWG 2020-33)

This item proposes to include publicly traded stock warrants captured in the scope of SSAP No. 30R & 32R in the Investment Schedules General Instructions and exclude them from warrant on Schedule DB. It clarifies that publicly traded stock warrants captured in the scope of SSAP No. 32R will be reported at fair value on Schedule D – Part 2, Section 1.  

2020-37BWG: Add a new Schedule Y – Part 3 to capture all entities with ownership greater than 10%, the ultimate controlling parties of those owners and other entities that the ultimate controlling party controls (SAPWG 2019-34)

This item proposes that all insurers of the holding company system should prepare a common schedule (i.e., Schedule Y – Part 3) which will be included in each of the insurers’ individual annual statements. It proposes the following information is needed to be disclosed on this new schedule:

  • Insurers in the holding company that file with the NAIC
  • Owners with greater than 10% ownership
  • Ownership percentage
  • Ultimate controlling party
  • All US insurance groups or entities controlled by the ultimate controlling party and the relevant ownership percentage
  • Identify if any of the entities was granted a disclaimer of control or affiliation by the domicile.

Withdrawn Item

2020-02BWG: Modify the instructions and illustration for Note 10L to reflect the disclosure changes for SSAP No. 97—Investments in Subsidiary, Controlled, and Affiliated Entities being adopted by the Statutory Accounting Principles (E) Working Group.

This agenda item was deferred at the last Summer National Meeting because SAPWG was still discussing.  As SAPWG Agenda Item 2019-14 was deferred, the Blanks Working Group decided to withdraw it and NAIC staff will submit a new proposal once SAPWG start their discussions.

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