Market Insight Paper

NAIC Summer 2019 National Meeting Update

August 3-6 in New York City

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Clearwater® is dedicated to keeping insurers updated on the latest regulatory guidance changes as they pertain to investment accounting and reporting. Our insurance experts attend NAIC national meetings and pertinent calls to monitor regulatory updates and provide proactive education on adopted and proposed items.

Statutory Accounting Principles Working Group


The following items had nonsubstantive changes and are effective immediately.
Ref #2018-03: SSAP No. 43R – Reporting NAIC Designations as Weighted Averages

At the NAIC Spring 2019 National Meeting, revisions were exposed to SSAP No. 43R – Loan-backed and Structured Securities that clarify accounting and reporting guidance for securities acquired in lots. It specifically addresses whether securities acquired at different purchase prices can report NAIC designations under a weighted average method under the financial modeling or modified filing exempt (MFE) process.

Action was taken during the NAIC 2018 Fall National Meeting to remove the MFE approach from SSAP No. 43R (Ref #2018-19). With that, only securities captured in the financial modeling process may be subject to differing NAIC designations by lot. It is expected that with the removal of the MFE process, there will be fewer of these instances.

This proposal revises SSAP No. 43R to require securities with differing NAIC designations by lot to be reported in overall aggregate at the lowest NAIC designations, or with separate aggregations by NAIC designation. Interested parties had no comment on this item.

Ref #2018-04: VOSTF Bank Loan Referral

A review of guidance in the P&P Manual determined that the referenced bank loan structures may go beyond the scope of bank loans permitted within SSAP No. 26R, and some structures may be more appropriately classified as collateral loans within the scope of SSAP No. 21 – Other Admitted Assets. That includes revolving lines of credit, debtor-in-possession financing, and borrowing base loans.

Revisions exposed in the spring meeting were intended to clarify that a security should not be classified as a “collateral loan” because it has additional protection in the form of collateral (e.g., a bank loan is backed by operations of the entity or has a first lien against inventory of the issuer). This included a new footnote.

Interested parties expressed general support for the clarifications to SSAP No. 21, but also proposed changes to the new footnote. The new footnote states a collateral loan does not include investments captured in scope of other statements. For example, the investments captured in SSAP No. 26R that are also secured with collateral should continue to be captured within scope of SSAP No. 26R.

Interested parties stated that some instruments captured within the scope of other statements may not technically be a security. They requested replacing mentions of “security” with “investment” in the footnote to meet this broader scope. NAIC staff agreed with this change and added that the new footnote is intended to apply to all investments captured in an investment SSAP, not just SSAP No. 26R.

The revision and new footnote are just one part of the VOSTF referral being considered. NAIC staff have received comments from interested parties regarding the types of instruments they believe should be captured in the bank loan definition. After consideration of the new footnote and further assessment on the investments that may be considered bank loans, a referral response to the VOSTF will be considered. Staff added that additional discussion is needed before moving forward with a recommendation due to concerns over adding investments to the bank loan definition that should be characterized as collateral loans. Because of this, bank loans will be discussed again at a future meeting.

Ref #2018-22: Participation Agreement in a Mortgage Loan

Proposed revisions to SSAP No. 37 – Mortgage Loans, were first exposed on August 4, 2018, to clarify that a mortgage loan acquired through a mortgage loan participation agreement is limited to a single mortgage loan agreement with a sole borrower, and again on November 15, 2018, to exclude “bundled” mortgage loans. Bundled mortgage loans are interest in mortgage loans with various unrelated borrowers and collateral. However, a bundle of mortgage loans does not include a “bulk purchase” where the reporting entity’s interest in each mortgage loan is legally separate and divisible and the purchase simply facilitates the acquisition of multiple single mortgage loan agreements.

Staff received informal regulator comments requesting additional clarity to ensure structures captured in SSAP No. 37 are compliant with the intent that acquisition through a participation agreement results in the same ownership and protections that a reporting entity would have if they had directly acquired a mortgage loan. SSAP No. 37 is limited to single mortgage loan agreements which can have more than one lender (e.g., co-lenders/participations) and more than one borrower (a tenancy-in-common arrangement).

At the meeting, interested parties commented about changing the reference from “original lender” to “lender of record” and how the participation agreements are recorded. NAIC staff agreed with both proposed changes and added the participation agreements are generally not publicly recorded.

This item was adopted with minor modifications.

Ref #2019-03: Affiliated Transactions

At the spring meeting, the working group exposed revisions to statutory accounting principles that clarify affiliate reporting when underlying investments continue to reflect affiliate transactions. Principal concepts were proposed for SSAP No. 25 – Affiliates and Other Related Parties intending to highlight that although they include an unrelated intermediary, transactions that involve affiliates, or risks of an affiliate, they should be reported as a related party transaction or an investment in an affiliate for statutory accounting principles.

Interested parties reviewed the exposed revisions and noted that the terms “affiliated” and “related party” were used interchangeably. For example, “a related party/affiliated.” They recommended the wording be revised to ensure the terms are used properly. NAIC staff recommended the SAPWG approve the revisions with changes that satisfied the concerns expressed by interested parties. The item was adopted with minor modifications.

This revision will apply to SSAP No. 25, SSAP No. 26R – Bonds, SSAP No. 32 – Preferred Stock, SSAP No. 43R – Loan-backed and Structured Securities, and SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies.


Comment deadline is October 11, 2019
Ref #2019-22: Wash Sale Disclosure
This proposed change eliminates the need to report transactions that meet the wash sale criteria in SSAP No. 103R that are sold and repurchased within the same reporting period.

This proposal clarifies what would be subject to the wash sale disclosure: only investments that meet the definition of a wash sale in accordance with SSAP No. 103R, which are purchased or sold prior to a reporting period-end and sold or repurchased after that reporting date.

This item stems from revisions to the wash sale disclosure captured in 2017 in SSAP No. 103R – Transfers and Servicing  of Financial Assets and Extinguishments of Liabilities. At the time, the guidance was revised to: 1) clarify what types of investments are subject to the wash sale disclosure, 2) respond to several comments from interested parties, and 3) clarify what investments are subject to and what investments were exempt from this disclosure.

This proposed change eliminates the need to report transactions that meet the wash sale criteria in SSAP No. 103R that are sold and repurchased within the same reporting period.

Since the 2017 revisions, industry has told NAIC staff that the tracking of wash sales can be very time-consuming and uses a large amount of resources while not necessarily responding to the main risks associated with these transactions. The investments sold and repurchased within the same reporting period do not pose any greater risk than if the investments had been held throughout the reporting period and at the period-end date. The real risk is investments that are sold prior to the period-end date and repurchased shortly after that date.

Ref #2018-26: SCA Loss-Tracking Accounting Guidance

At the spring meeting, SAPWG exposed updated proposed revisions to SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities to update existing reporting requirements when a reporting entity has a negative equity value in a SCA investment and there is a guarantee or commitment to provide financial support.

This would remove stipulations that result in double-counting the impact of the parent insurer’s guarantee or commitment of SCA’s obligations on the parent insurer’s surplus, and incorporates existing language from the INT 00-24 into SSAP No. 97 to provide examples of how losses in a SCA shall be applied to other investments once the SCA equity investment has been halted at zero.

Interested parties expressed concern that the term “entire loss” in SSAP No. 97 Paragraph 13e is inconsistent with how SSAP No. 5R recognizes guarantees. They recommended text changes to align it more closely with SSAP No. 5R.

NAIC staff countered that the interested parties’ proposed changes focus on SSAP No. 5R’s initial and subsequent recognition of a guarantee, when SSAP No. 97 addresses scenarios in which the SCA has incurred losses that resulted in a negative equity value of the SCA. Staff recommended that, “when there is a guarantee/financial commitment and the SCA has incurred losses resulting in a negative equity value, the noncontingent liability should be adjusted so, at a minimum, it reflects the reporting entity’s negative equity value (this would be consistent with historical guidance in SSAP No. 97).”

Staff suggested that, in order to prevent confusion with having guidance in both SSAP No. 5R and SSAP No. 97, clarifying language be added to SSAP No. 5R “that the noncontingent liability of a guarantee in these situations shall be the greater of the premium that would be expected to cover the guarantee in a stand-alone transaction (e.g., fair value of the guarantee), or losses that exceed an insurance reporting entity’s initial investment in an SCA (negative equity position).”

Additionally, staff recommended removing the guidance regarding financial guarantee/commitment from SSAP No. 97 and instead referring people to SSAP No. 5R, as well as a slight disclosure change to the SCA loss-tracking disclosure capturing the guarantee and not the reporting value of the SCA. This proposed edit ensures the SCA will be reported at zero.

Ref #2019-04: SSAP No. 32 – Investment Classification Project

At the spring meeting, as part of the Investment Classification Project, the SAPWG directed NAIC staff to prepare proposed revisions to SSAP No. 32 – Preferred Stock for subsequent exposure.

In response, NAIC staff drafted an issue paper documenting the rationale and illustrating proposed revisions to SSAP No. 32 to reflect the following key elements:

  • Improve preferred stock definitions, with inclusion of information from US GAAP for classifying preferred stock as redeemable or perpetual. The revisions also incorporate a new exhibit to capture various terms prevalent in preferred stock.
  • Revise the measurement guidance to ensure appropriate, consistent measurement based on the type of preferred stock held and the terms of the preferred stock. The revisions also incorporate guidance for mandatory convertible preferred stock.
  • Clarify impairment guidance as well as guidance for dividend recognition and redemption of preferred stock with the issuer.

Ref. #2019-12: Pushdown Accounting

This proposal would reject ASU 2014-17 Pushdown Accounting and explicitly prohibit pushdown accounting in SSAP No. 97. 

Insurers that are SEC filers have historically used pushdown accounting when acquiring a subsidiary. Thus, US GAAP allowed pushdown to prevent differences between the SEC and US GAAP. With ASU 2014-17, more insurers may have elected to use pushdown, but it is unknown how extensive pushdown accounting has been applied. The NAIC asked the working group for direction on whether pushdown should continue to be permitted.

Interested parties expressed concerns that the proposed changes are difficult to implement and maintain. They stated that they believe there are other direct approaches to addressing the goodwill issue that would be less confusing to the industry. They suggested applying the new guidance prospectively so that the companies won’t have to restate previous years’ valuations. They would like to work with the NAIC staff on different approaches.

NAIC staff recommended three options:

1. Complete rejection of pushdown accounting with a prospective effective date in order to avoid restatement of those entities that elected pushdown previously
2. Permission to use pushdown for all non-insurance subsidiaries at the original acquisition date
3. Permit pushdown for SEC registrants at the original acquisition date

The proposal also clarifies that goodwill resulting from an insurer’s acquisition of a subsidiary when pushdown is applied shall be captured in the goodwill admittance limitation (i.e., 10%).

Ref #2019-14: Attribution of Goodwill

At the spring meeting, the working group exposed revisions to SSAP No. 68 – Business Combinations and SSAP 97 – Investments in Subsidiary, Controlled and Affiliated Entities. These revisions clarify that when a holdings company is acquired, the purchase price and goodwill should be attributed to the downstream entities directly owned by the holding company. Such an exercise is not intended to be pushdown accounting, but rather for purposes of documentation.

Interested parties did not specifically comment on this agenda item, but referred to comments on Ref #2019-12.

The NAIC American Institute of Certified Public Accountants (AICPA) Task Force requested clarification of the methods that would be used to attribute goodwill to acquired downstream entities. It suggested different methods could include attribution based on the relative percentage of net book value, fair value, or another amount applicable to the individual entities at the acquisition date. Additionally, as in its comments on Ref #2019-13, the AICPA Task Force (a non-NAIC entity) stated that Form A is also classified as nonsubstantive and suggested specific transition guidance be included in the proposal.

NAIC staff stated this particular agenda item is to ensure goodwill is properly nonadmitted or eliminated when the look-through entities under downstream holding companies are nonadmitted, sold, or need to be assessed for impairment. Staff referenced US GAAP and FASB guidance regarding the assignment of goodwill. Staff added that for statutory accounting purposes, the assignment of goodwill is needed to ensure proper reporting for that type of situation.

A calculation method was intentionally not included because staff was under the impression that the reporting entity should choose the method in which they believe the goodwill is supported. NAIC staff agreed that the AICPA Task Force’s suggested options for calculation methods are viable; for example, attribution based on the relative percentage of net book value, fair value, or another amount applicable to the individual entities at the acquisition date.

NAIC staff recommended the working group expose revisions to SSAP No. 97 clarifying the assignment of goodwill is a disclosure element, with revisions to the disclosure requirements for downstream holding companies. Revisions also included:

  • A change in terminology from “allocation” to “assignment”
  • Language indicating the SSAP does not specify a particular method for the assignment of goodwill, and that goodwill should be assigned in accordance with the assessment of the reporting entity at acquisition; the method or approach used must be disclosed

Ref #2019-18: “Other” Derivatives

This proposal considers revisions incorporating guidance for “other” derivatives to SSAP No. 86 – Derivatives. Current guidance only addresses derivatives involved in hedging, income generation, or replication transactions. This item was exposed at the spring meeting, when changes were adopted regarding 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 other derivatives under SSAP No. 86 (Ref #2018-18).

This proposal recognizes “other” derivatives at fair value but specifies they are nonadmitted under SSAP No. 4 – Assets and Nonadmitted Assets and would be subject to state investment law. If permitted under state laws, they would be admitted under a prescribed practice.

Interested parties commented on the treatment of structured notes in the proposal and proposed aligning the definition for structured notes in SSAP No. 86 with the definition in SSAP No. 26R, addressing structured notes separately from “other” derivatives, and incorporating structured notes in the guidance as admitted assets.

Interested parties commented on the treatment of structured notes in the proposal and proposed aligning the definition for structured notes in SSAP No. 86 with the definition in SSAP No. 26R, addressing structured notes separately from “other” derivatives, and incorporating structured notes in the guidance as admitted assets. 

NAIC staff do not think the structured notes are prevalent and recommended the working group adopt the exposed revisions to SSAP No. 86, and not reflect the interested parties’ comments, instead recommending they be considered in a separate agenda item to capture information on structured notes reported as “other” derivatives. However, the interested parties asked for extra time and will come back with more concerns. The working group decided to expose the proposal again.

Ref #2019-19: SIRI – Equity Interests

This proposal is not related to any SSAP changes, but is a carryover from a prior agenda item related to SSAP No. 30R wherein SEC-registered and non-SEC-registered foreign mutual funds were added to the scope.

It clarifies what is captured in Line 13: 10 Largest Equity Interests of the Supplemental Investment Risk Interrogatories (SIRI). The intent is to clarify what is needed to ensure consistent reporting and that the desired aggregation of risks is reported. This item is being considered subsequent to changes made recently by the BWG. At a June 24 conference call for the BWG (2019-13BWG), revisions were incorporated to SIRI Line 2: 10 Largest Exposures to a Single Issuer/Borrower/Investment, and a new reporting category for fund managers was added for SIRI Line 14.

Proposed revisions include:

  • Clarification that a look-through should only occur for nondiversified funds, and that investments within a diversified fund investment shall be excluded from an aggregation
    requirement to other equity investments
  • Clarification that any equity interest excluding diversified funds that individually qualifies as one of the largest equity interests shall be captured in SIRI Line 13. This is consistent with the Option 2 approach presented at the spring meeting.
  • Expand the guidance to exclude SVO-identified bond exchange-traded funds, and SVO-Identified fund investments with underlying characteristics of fixed-income instruments, which do not contain underlying equities from this equity listing

NAIC staff recommended the SAPWG expose the proposed changes with the intent to sponsor a BWG proposal to clarify what should be captured in SIRI Line 13: 10 Largest Equity Interests. Staff also recommended the SAPWG send a referral to the Capital Adequacy Task Force with a request for clarification on the impact (if any) to risk-based capital.

Ref #2019-20: Rolling Short-Term Investments

This proposal would affect SSAP No. 2R – Cash, Cash Equivalents, Drafts and Short-Term Investments and SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It considers statutory accounting guidance for short-term investment structures that are being purposely designed to mature at or around 364 days (often with affiliates), with the full expectation that the investment structure would be renewed (rolled) continuously for subsequent years. It also addresses investments reported as cash equivalents, with the same dynamic, but structured to comply with the cash equivalent timeframes.

NAIC staff said it is only allowed to show those investments as short-term (Schedule DA) or cash equivalent (Schedule E) once in the schedules. Those investments should not be reported on Schedule DA or E continuously. The proposed revisions permit the insurers to report the security as a long-term investment at acquisition regardless of the maturity date.

NAIC staff noted the proposal was structured specifically to apply to affiliated bond investments (SSAP No. 26R), all loan-backed and structured security investments (SSAP No. 43R), and all investments that would be captured on Schedule BA. In doing this, it excludes a variety of cash equivalent/short-term investments that are often purposely rolled/reacquired to ensure a continuous balance of available short-term liquidity (e.g., treasury-bills, commercial paper, certificates of deposit, etc.) from being classified as long-term investments. Non-affiliated SSAP No. 26R investments would be exempt from the proposed change.

NAIC staff noted the proposal was structured specifically to apply to affiliated bond investments (SSAP No. 26R), all loan-backed and structured security investments (SSAP No. 43R), and all investments that would be captured on Schedule BA.
Ref #2019-21: SSAP No. 43R – Equity Instruments

This proposal would clarify the scope of SSAP No. 43R – Loan-backed and Structured Securities, specifically regarding collateralized fund obligations (CFOs) and similar structures that reflect underlying equity interests but are issued in the form of bonds/debt instruments. It states that CFOs (or similarly structured instruments), and other structures with underlying equity exposure, are excluded from the scope of SSAP No. 43R. Additionally, the revisions prevent existing assets from being repackaged as “securitizations” for reporting in scope of SSAP No. 43R.

NAIC staff explained they were contacted by a ratings provider requesting information on how CFOs are considered for statutory accounting. The ratings provider stated that this information would assist them in determining methodology for reviewing CFOs under their credit policy and provide credit ratings. While CFOs did not perform well in the financial crisis and the development/issuance was halted, they have returned to the market and the majority of holders are insurance companies. It was noted that if an insurer held private equity on Schedule BA, it can package these assets in a CFO and report it on Schedule D under SSAP No. 43R. CFOs can include both debt and equity components. The insurer either keeps both debt and equity pieces, or they sell the debt component and retain the equity component. The latter is the insurers’ preference.

Staff recommended the working group move the item to the active listing, categorized as nonsubstantive, and expose the revisions.

Ref #2019-23: Going Concern

The going concern is the assumption that a company will continue into the foreseeable future. Under current statutory guidance, the investment in a subsidiary with a going concern audit opinion must be nonadmitted in the reporting entity’s financial statements. It doesn’t specify any action to be taken if going concern is noted in any other part of the audit report other than the audit opinions.

NAIC staff noticed there have been few instances in which the audit opinions did not explicitly mention going concern, but the notes in the audited financial statements identified that
there was a going concern.

This proposed change to SSAP No. 97 is to make SCA value nonadmitted if an unalleviated going concern is mentioned in any part of the audit report, accompanying financial statements, or notes.

The chair questioned if that is even possible or allowed to not be mentioned in the audit opinion while it is mentioned in other parts of the audited financial statements.

Ref #2019-28: ASU 2019-05, Targeted Transition Relief

The Federal Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in June 2016 to introduce the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis to replace incurred loss methodology. ASU 2016-13 also modified the accounting for available-for-sale debt securities.

The FASB noted that the companies have begun to elect the fair value options on newly purchased investments when the existing investments are still reported at amortized cost.This has made comparison impossible between instruments measured at fair value and other identical investments measured at amortized costs. In order to get rid of the dual measurement methodologies, this update proposes an alternative accounting treatment to elect the fair value option for certain financial assets previously measured at an amortized cost basis.

The SAPWG exposed revisions to SSAP No. 100R to reject ASU 2019-05 because an election to utilize fair value in lieu of the stipulated measurement method (e.g., amortized cost) is not
allowed under statutory accounting.


Ref. #2019-13: Clarification of a Look-Through Approach

Due to an inconsistency in the understanding and application of the look-through approach for valuation of subsidiary, controlled, and affiliated entities, the SAPWG proposed revisions to SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities that would clarify the guidance.

These revisions were exposed at the spring meeting, with comments requested specifically on multiple-level shell-holding companies. Interested parties commented that the “double look-through” approach, when applied to immaterial downstream non-insurance companies, is an appropriate way to interpret SSAP No. 97. The guidance is intended to prevent unnecessary costly audits and would not yield additional assurance on investment valuation.

The NAIC AICPA Task Force recommended the proposal include specific transition guidance and stated the Form A is classified as “non-substantive, which would result in adopted revisions being effective upon adoption unless otherwise noted.”

NAIC staff recommended the agenda item be disposed and added that more than one look-through is not concerning when the look-through entities comply with the existing provisions of SSAP No. 97. Although it doesn’t spell out multiple levels of look-through, it doesn’t restrict that in SSAP No. 97. Staff pointed to Ref. #2019-14: Attribution of Goodwill, as an instance where information might be captured for a more-than-once look-through.


Ref #2016-20: Credit Losses

ASU 2016-13 was adopted by the FASB in 2016 and resulted in substantial changes to previous US GAAP. Further discussion on the item has been deferred as of the spring meeting, and no significant work has been done on the item since that time. NAIC staff said there will be a new exposure in mid-August from the AICPA that will extend the effective date for certain size and types of companies. The effective date will still be January 1, 2020, for SEC filers.

While the item is deferred, NAIC will monitor discussions on this topic by the FASB. NAIC staff also asked if any regulators or interested parties would like them to pick that up. ACLI representatives said they received a deferral for 11 insurers after discussions with the FASB because the insurers need extra time to implement.

Ref #2018-07 SSAP No. 41R: Surplus Note Accounting – Referral from the Reinsurance (E) Task Force

This item is a continued discussion of a referral from the Reinsurance Task Force, which requested revisions to surplus note determination for “linked” transactions. Revisions to SSAP No. 41R have already been exposed twice, during the 2018 Spring and Summer National Meetings.

After the exposure period set during the 2018 summer meeting, it was determined that more company-specific details were needed on “surplus linked notes” and “requested that regulators and interested parties provide information on transactions for Working Group assessment.” That information was gathered by NAIC staff, discussed with regulators, and further disclosures were identified to be drafted. These include:

  • Disclosure for insurance reporting entities that file statutory financial statements with the NAIC
  • Disclosure for captives that do not file statutory financial statements with the NAIC, but that issue surplus notes under the provisions of SSAP No. 41R

As the cut-off date for blank changes has passed, there were two options that would enable the information to be collected for 2019 annual reporting: Permitted/Prescribed Practice or Data Call. The data call option was chosen because prescribed practice is generally negative to the industry. NAIC staff said they will work with industry and regulators to finalize the components for the data call.

As the NAIC doesn’t have the authority to force the insurers to provide data, the NAIC will rely on each state to compel the insurers to do so. NAIC staff emphasized the insurers will have to provide data only if they have linked surplus notes.

Proposed guidance for determining linked surplus notes:

A linked surplus note is any situation in which a reporting entity has “linked” the cash flows payable from an issued surplus note with cash flows receivable under any other agreement or held asset. Such dynamics include, but are not limited to, situations in which terms negate or reduce cash flow exchanges, and/or when amounts payable under surplus notes and amounts receivable under other agreements or assets can be netted or offset (partially or in full) eliminating or reducing the exchange of cash or assets that would normally occur throughout the duration, or at maturity, of the agreement, asset or surplus note. A linked surplus note also exists when the reporting entity uses the proceeds from the surplus note to purchase a financial instrument directly/indirectly from the holder of the surplus note.

NAIC staff was directed to prepare proposed disclosures for data capture in 2020 and sponsor a blanks proposal.

Ref #2019-25: Working Capital Finance Investments

The VOSTF referred industry-prepared, tracked revisions to SSAP No. 105 – Working Capital Finance Investments to the SAPWG, along with materials produced by SVO staff on the issues raised. The VOSTF recommended the SAPWG consider the amendments, which the VOSTF has previously exposed.

This agenda item addresses that referral.

Industry proposed 10 revisions to SSAP No. 105. According to the NAIC, the industry-proposed revisions can be grouped into these categories:

  1. Changes to program and/or obligor credit quality requirements
  2. Changes to program administration and/or documentation 
  3. Changes to regulatory compliance requirements
  4. Changes to statutory reporting requirements

NAIC staff recommended six out of the 10 proposed changes. The following are those changes it does not recommend:

  1. Lowering the credit quality of the obligors from NAIC 1 and 2 to NAIC 3 and 4
  2. The proposed credit substitution methodology for unrated subsidiaries, as it is very hard for SVO staff to apply the proposed methodology
  3. Removing the need to seek approval from the domicile
  4. Moving WFCI investments from Schedule BA to DA

NAIC staff recommended the SAPWG direct NAIC staff proceed with drafting revisions to SSAP No. 105 and have an interim conference call to discuss the third item in the above list (removing the need to seek approval from the domicile).

AP&P Manual Update – Printed and Electronic Versions

Those interested in receiving a printed copy of the “As of 2020” edition of the AP&P Manual (regulators and nonregulators) should place their order via the working group’s reserve process (product code APP-CB-2020). The deadline to reserve a copy is December 13, 2019. Those who miss the deadline will only have access to the digital version.

Those who plan to only use the electronic version can receive the 2019 updates by contacting the Service Desk and referencing product code APP-2020-UPD-K.

Valuation of Securities Task Force


Amendment to the P&P Manual to Update the Definition and Instructions for Structured Notes

At the spring meeting, the SAPWG adopted new guidance that defines structured notes as “an investment that is structured to resemble a debt instrument, where 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,” (Ref #2018-18).

The new definition puts structured notes in the scope of the SSAP No. 86 – Derivatives, and removes them from the scope of SSAP No. 26R – Bonds and SSAP No. 43R – Loan-Backed Structured Securities, with the exception of mortgage-referenced securities.

SAPWG sent a request to VOSTF to revise the structured notes definition in the P&P Manual. The current definition in the manual will be deleted. A reference to structured notes and SSAP No. 86 – Derivatives will be added to the guidance on mortgage-referenced securities, and two new sections including structured notes and mortgage-referenced securities will be added to the disclosure on securities not eligible for filing an exemption.

Amendment to Add Text to the P&P Manual Referencing Administrative Codes Used to Report Regulatory Transactions

At the spring meeting, the SAPWG sent a request to the VOSTF to incorporate new reporting codes into the P&P Manual for the investment component of regulatory transactions (Ref #2018-06). They apply specifically to Schedule D, Part 1 reporting.

Under the adopted changes:

  • The code “RTS” is reported for a regulatory transaction if the insurance department of the entity’s state of domicile has obtained assistance assessing regulatory transactions. It would be reported with the “analytical value,” which is assigned by the SVO and given to the state. “Analytical value” is a new term defined as “an expression of the credit quality of the security component of a Regulatory Transaction expressed with the numerical symbols 1 through 6 in the case of a Regulatory Transaction within the reporting paradigm associated with the RTS code.”
  • The code “RT” is reported for all other regulatory transactions where the insurance department of the entity’s state of domicile did not request assistance from the SVO. It would also be used if the SVO was unable to determine an analytical value for the transaction. The “RT” code would be reported with a NAIC designation 6 for measurement and risk-based capital assessments.

Amendment to the P&P Manual to Delete Stray Reference to the Modified Filing Exemption

Following a vote at the NAIC 2018 Fall National Meeting, the VOSTF deleted MFE provisions from SSAP No. 43R – Loan- Backed and Structured Securities in the P&P Manual

Representatives from the American Council of Life Insurers (ACLI), the North American Securities Valuation Association (NASVA), and the Private Placement Investors Association (PPIA) identified a reference to Modified FE in Part Three, Section 1 (b) of the 2018 P&P Manual. They requested the reference be removed from the draft 2019 edition of the P&P Manual.


Amendment to the P&P Manual to Update the Definition and Instructions for Principal Protected Notes

The SVO became aware of Principal Protected Notes, a class of structured securities that mixes a traditional bond or bonds with additional assets that may possess any characteristic. The additional assets, known as “performance assets,” are intended to generate an excess return. After reviewing about a dozen of these securities, the SVO found a consistency in that “the credit rating provider rating is based solely on the component dedicated to the repayment of principal and ignores the risks and statutory prohibitions of reporting the performance asset on Schedule D, Part 1.” In this case, the SVO concluded that by focusing only on the repayment of principal, significant risks may be overlooked.

A substantive amendment was proposed to update guidance in Part Three of the P&P Manual under the Procedure Applicable to Filing Exempt Securities and Private Letter Rating Securities, Specific Populations of Securities Not Eligible for Filing Exemption, to remove Principal Protected Notes from eligibility for a filing exemption. This is now exposed for 45 days for comments, with the comment period ending September 20.

A referral was also sent to SAPWG.

Amendment to the P&P Manual to Update the Interim Instructions for Mortgage-Referenced Securities

A nonsubstantive amendment was made to the P&P Manual to include interim instructions for quarterly reporting of mortgage-referenced securities. The Structured Securities Group (SSG), which is responsible for financially modeling this group of securities, only reviews them during SSG’s annual surveillance process.

If a mortgage-referenced security is purchased after the annual surveillance data process, the insurer should use the prior year-end modeling data for the CUSIP to determine an NAIC designation until the annual surveillance data is published for the current year. If the mortgage-referenced security is not in the prior year-end modeling data for that CUSIP, the insurer may follow the instructions for the assignment of the SVO administrative symbol “Z,” if the insurer-owned security meets the criteria for a security that is in transition in reporting or filing status.

The deadline for comments on this amendment is September 5.


Report on the Project to Review Existing Credit Tenant Loan Guidance and Possible New Guidance on Other Lease-Based Transactions
VOSTF agrees that insurers can report the other lease-based transactions as-is. Insurers do not have to file these securities with the SVO and can continue converting CRP ratings into NAIC designations for those securities until SVO establishes a better approach.

NAIC staff noted they held a meeting June 23, 2019, to discuss this guidance, and have hired a new general counsel who will review associated legal documents. They also stated that there may be new guidance for other lease-based transactions — that is, other types of high-quality, well-structured, credit-supported, project loan, infrastructure, and lease-backed securities that are not expressly contemplated by the P&P Manual but have been rated by credit rating providers (CRPs) and purchased as Schedule D investments. These other assets, which have evolved out of assets contemplated by the NAIC, have undergone considerable scrutiny by investors and rating agencies. Staff will continue working with the interested parties.

The VOSTF agreed insurers can report the other lease-based transactions as-is. Insurers do not have to file these securities with the SVO and can continue converting CRP ratings into NAIC designations for those securities until the SVO establishes a better approach.

Interested parties responded that they look forward to working further on this issue with the SVO.

Report on the Impact of RMBS/CMBS Price Breakpoints with Upcoming Changes to NAIC Designation Categories

NAIC staff said the consensus is to provide a single NAIC designation instead of 19 breakpoint prices after the granularity of the NAIC designation category and removal of modified FE process. Eric Kolchinsky, Director of the NAIC Structured Securities Group, said the SSG could provide breakpoint prices, but there is concern it would be costly for the insurers to change their investment platform. In addition, they may change the financial model later. Providing a single designation for financially-modeled RMBS/CMBS and mortgage referenced securities is more efficient for both the vendors and insurers.

Interested parties said they look forward to seeing the memo of proposed changes.

Staff Report on the “Bespoke” Securities

NAIC staff have discovered certain bespoke securities which are held by “trouble” insurers. These are securities which have been tailored specifically for a single client or a group of affiliated companies and not for clients generally. These types of securities were created with the intention that they will stay with the same investors. NAIC staff illustrated two examples:

  1. Phantom Principal Bond (also known as Principal Protected Note)
  2. Underlying of bespoke securities – inadmissible (e.g., aircraft) or affiliated assets

The challenge to NAIC staff is that the issues would not be visible on the face of the security; to get the required information, they need to research underlying documents of those securities. Because these bespoke securities are one-off private securities, it is hard to tell if the security is problematic from a single entry on the blank. NAIC staff said these securities change form quite often and described the characteristics of a bespoke security as private, not broadly syndicated, created by or for one or a few related insurance companies, and rated by only one NAIC CRP (often via a private rating). In addition, the assets backing the security were primarily owned by an insurer or affiliates and do not generate bond cash flows. Typically, the affiliate is the underwriter or sponsor of the security.

Currently, the NAIC is unable to resolve issues with poorly rated bespoke securities. NAIC staff recommends that VOSTF direct them to draft an issue paper because they believe that these types of securities are a critical developing issue.

Investment Risk-Based Capital (E) Working Group


Adopted 2019 Life and Fraternal Combination

The Fraternal Statement and the Fraternal Risk-Based Capital blanks are now obsolete. The blank and instructions changes were exposed for comment during the spring meeting and unanimously approved during a May 13 conference call. Discussion at the summer meeting posed whether the statistics for life and fraternal companies should be combined or remain separate. Further discussion of this topic was suggested for a future conference call.

Discuss Proposed Changes to the RBC Charge for Unaffiliated Common Stock Supporting Long-Horizon Contractual Commitments

On July 22, industry submitted a proposal to reduce RBC factors for unaffiliated common stock supporting long-horizon contractual commitments. This is still in its 60-day exposure period and tentatively scheduled to be discussed during a September conference call when the exposure period is over. As this would be a significant change, there was a call for any interested parties to submit comments. The working group brought up the following concerns if the proposal moves forward:

  • Should we view it through the C-1?
  • Would this create a need to change accounting standards?
  • This proposal assumes a diversified portfolio; what is the effect on other portfolio types?
  • How do we ensure that this is strictly for payout annuities and structured settlements?
  • If we establish the standard, how will states roll it out in a uniform manner?
  • What are the implications for PRBC?
  • The low interest rate environment is what is driving this proposal; is it appropriate in other environments?
  • This proposal is based on historical information that the stock market always goes up; would the change still apply if this changes?
On July 22, industry submitted a proposal to reduce RBC factors for Unaffiliated Common Stock Supporting Long-Horizon Contractual Commitments.


Discuss Proposed Changes of Bond Pages in the P/C RBC Formula

Updates were proposed to the Bond Pages, including the elimination of the separation of Hybrid Securities and RBC factor changes on the PR006.

This item was exposed for 45 days ending on July 1. No comments were received during the exposure period, nor at the meeting, and the NAIC recommended adoption. The proposed changes have been forwarded to the IRBCWG for further discussion.

Discuss Proposed Changes of Percentage Ownership Calculation in the Affiliated Investments

The calculation of ownership proposal to the PCRBC aims to standardize with the life and health RBC calculations. This would alter the formula in PR003, PR004, and PR005.

This proposal recommends the percent ownership of an insurance affiliate would be based on the ownership of common stock and preferred stock combined basis. This would be similar to how life and health RBC is calculated.

The RBC charge for the preferred stock would not apply as the excess basis, and would be the same charge as the common stock.

This item was exposed for 45 days ending on July 1. No comments were received during the exposure period, nor at the meeting, and the NAIC endorsed adoption. The proposed changes have been forwarded to the Informal Affiliated Investment Ad Hoc Group for further discussion.

Blanks Working Group

The following updates are from a BWG conference call held on June 24, 2019.


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

A NAIC designation column was added for mutual funds only on Schedule D – Part 2, Section 2. For all other common stock, the NAIC designation and administrative symbol field should be left blank. It also modifies the instructions for the NAIC designation and administrative symbols column for the quarterly Schedule D Parts 3 and 4. As the SVO is authorized to assign NAIC designation for funds under the SVO P&P Manual, this blank change gives insurers a mechanical process to report funds with SVO-assigned designation. The NAIC designation doesn’t provide any Risk-Based Capital charge benefit at this moment, but a referral was sent to the Capital Adequacy Task Force.

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

This removes the reference to “Life and Fraternal Only” in the general instructions for Schedule BA regarding securities that have the underlying characteristics of bonds or fixed-income instruments. The category “Fixed or Variable Interest Rate Investments that have the Underlying Characteristics of” is changed to “Non-Registered Private Funds with Underlying Assets Having Characteristics of.” It also adds two subcategories under these two investment types to distinguish securities that have been reviewed and assigned NAIC designation by the SVO and those that have not. For non-registered private funds that were acquired prior to January 1, 2019, the filing exempt eligible status will be grandfathered in if the insurers meet six criteria in question 35 of General Interrogatories, and if the ratings are not private.

Item #2019-06BWG: Add Structured Settlements Reference to Schedule BA Instructions

This adds a reference for structured settlements as an investment to Schedule BA in the “Any Other Class of Assets” category. It corresponds to the SAPWG’s adopted changes (Ref #2018-17) for SSAP No. 21R.

Item #2019-07BWG: Modify Instructions to Note 20 (Fair Value) to Reflect Changes to Fair Value Guidance

This modifies the instructions for Note 20 (Fair Value). The footnote was removed from Note 20A (1). It corresponds to the SAPWG’s adopted changes (Ref #2018-36) for SSAP No. 100R and US GAAP modified disclosure (ASU 2018-13).

Item #2019-09BWG: Add Reference to Mortgage- Referenced Securities

This includes mortgage-referenced securities in the “US Special Revenue and Special Assessment Obligations and All Non-Guaranteed Obligations of Agencies and Authorities of Governments and Their Political Subdivisions” category. This also modifies the bond characteristics definition for Schedule D – Part 1 and deletes Note 5O. It corresponds to the SAPWG’s adopted changes (Ref #2018-18) for SSAP No. 26R and SSAP No. 43R.

Item #2019-10BWG: Add Instructions Regarding Called Bonds

This adds instructions for determining the realized gain (loss) and the prepayment penalty and/or acceleration fee income on Schedule D – Parts 4 and 5 for called bonds when the consideration received is less than par or even book/adjusted carrying value. It corresponds to the SAPWG’s proposed changes (Ref #2018-32) for SSAP No. 26R.

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