• Progress updates provided for the SVO’s FE proposal and the Academy’s ABS RBC project
  • Residual tranches – regulators finalize accounting treatment and propose new capital charges
  • RBC review planned for life covariance, asset concentration and bond mutual funds
  • Regulators look to clarify guidance for debt issued by funds
  • Reduced capital charges proposed for repurchase agreements


Exposed Items, to be considered further

The SVO continues to address industry concerns over proposal to increase its authority over filing exempt (FE) securities

The SVO’s proposal addressing its authority over FE securities and its ability to disallow NRSRO3 ratings remains a work in progress. In addition to previously discussed matters, the NAIC staff has put together responses to additional issues raised by the industry, including:

  • Securities with more than one NRSRO rating / three-notch challenge rule – There could be situations where the SVO feels that more than one of the available NRSRO ratings on a security may not reflect its true risk. Nevertheless, to ensure efficient use of NAIC resources, the SVO intends to have only one review of a security.
  • NRSRO rating removal near year-end – The expectation is that the security would have gone through a full review by the SVO and the VOSTF sub-group by the time removal occurs. Therefore, the removal of a NRSRO rating by the SVO and any future action will come at the conclusion of the appeal process, whenever that occurs.
  • Insurers presenting their case to the SVO – The expectation is that insurers will be able to present their position along with supporting information to the SVO senior credit committee and VOSTF sub-group, and the impacted insurers would be as involved throughout this process as they would like to be. Additionally, the impacted insurers are permitted to include any other parties during their presentation that are allowed access to the material being presented.
  • Transparency / public notification of decision – The SVO intends to publicly post an anonymized summary of the analytical issue or concern only after a final decision has been made. The summary would provide insurers with sufficient information to understand the core issues of the rating challenge.
  • Requiring more than one NRSRO rating – The SVO would welcome more ratings in the FE process and believes that there should probably be a minimum number of ratings required to be eligible for FE to ensure there is a broad assessment of risk. However, requiring multiple ratings is beyond the scope of this proposal and would have to be addressed separately. Also, for securities with only one rating and a three-notch rating difference (as determined by a SVO risk assessment), if the security in question is subsequently rated by a second NRSRO and the second rating has a less than three-notch difference, the SVO would permit FE to proceed as normal with the alternate rating.

Regulators will continue to work on the production of a final draft of the proposal, with a revised version scheduled to be released in time for the NAIC’s summer national meeting in August.

Investment RBC Updates

Exposed Items, to be considered further

The American Academy of Actuaries project to address RBC on asset-backed securities (ABS) makes further progress

The American Academy of Actuaries (Academy) currently has three workstreams moving in parallel, as it attempts to institute a principles-based approach to RBC for ABS held by life insurers:

Analyzing comparable attributes for collateralized loan obligation (CLO) tail risk – The current plan entails 1) identifying comparable-attribute candidates, 2) running CLOs through a range of scenarios and multiple available models and 3) narrowing comparable attributes to the most informative. Depending on how the attributes explain the inherent tail risk will determine the best path forward (e.g., if new C-1 factors are needed or if modeling is more appropriate).

Review of NRSRO rating methodologies – The review will focus on Moody’s, S&P, Fitch, KBRA4, Morningstar DBRS (as raters of ABS) and study their methodologies, focusing on tail risk. The review will also analyze historical data on default and loss experiences by rating and integrate the results with the comparable-attributes workstream detailed above.

Residual tranche risk analysis report – Oliver Wyman has performed a quantitative analysis of the relative risk of ABS residuals, which was done to help regulators with their goal of determining the appropriate C-1 RBC factors for this class of securities (the life charge for residuals is 45% pre-tax but is considered interim by regulators). The Oliver Wyman report found that ABS residual tranches realize lower losses on a portfolio level than common equity under corresponding levels of macroeconomic stress, while ABS residual tranches realize greater losses than commercial real estate and low-rated corporate bonds. The Academy will review the report to see where the analysis could be helpful within its broader project.

All three workstreams will provide updates for the industry by the next NAIC National Meeting.

Residual tranches – P&C and health capital charge increase proposed for residuals

Regulators exposed a proposal to update the RBC instructions to include specific references to residual tranches in the P&C and Health formula. This is in the direct response to recent changes that expanded the statutory reporting requirements for residuals. The exposure will also include a capital charge increase from 20%, up to 45%, which will create consistency in the capital requirement for residuals across the industry. A 30-day comment period is currently in effect, after which regulators will discuss its next steps. 

Covariance to be reviewed within the life RBC formula

The Life RBC formula has been reviewed and updated several times in recent years (bond factor expansion, size factor changes, etc.), but one area that hasn’t been reviewed in quite some time is the correlation of risks. Therefore, as part of a maintenance review, the Academy will analyze covariance within the RBC formula. The initial scope will be focused on the correlation between C-risks, but could also include a review within the individual C-1 risks (such as within C-1o). The plan calls for further discussion at future LRBCWG5 meetings.

Regulators to review the RBC treatment for SEC-registered bond funds

Under statutory rules, there are some fixed income funds that can receive bond RBC treatment (bond ETFs, private Schedule BA funds), provided they are SVO-reviewed and receive an NAIC Designation. But there are other bond funds, notably SEC-registered funds (mutual funds, listed closed-end funds) that aren’t currently eligible to receive bond RBC treatment. The RBCIREWG6 will review the guidance to determine if a change is warranted for SEC-registered funds to be treated similarly to SVO-reviewed ETFs and Schedule BA funds.

RBC changes to be considered for asset concentration regarding diversified versus non-diversified funds

Insurers are required to review asset concentration for the purposes of RBC and the Supplemental Investment Risks Interrogatories. Currently, there are inconsistencies between the two, specifically as it pertains to whether a fund is considered diversified in accordance with the ’40 Act, which determines whether a fund should be subject to look-through when analyzing for concentration. Regulators are recognizing the need for clearer instructions and will review the guidance for potential changes to ensure accurate reporting and capital calculations.

The ACLI proposes reduction to repo capital charge to align with securities lending programs

The ACLI7 is proposing a reduction of the capital charge for repurchase agreements (repos) that meet the conforming program criteria. Repos currently have a C-0 charge of 1.26%, the proposal seeks to lower this charge to 0.2%, which would align with the capital charges for conforming securities lending programs, as they represent similar forms of short-term funding.

This reduced charge will apply to the ending balance for collateral received under secured borrowing (or the conforming amount as determined by the RBC instructions). The overcollateralized amount (the difference between the collateral sold and collateral received) will receive the C-1 BBB+ bond charge (i.e., 1.26%), which would only apply to counterparties rated BBB or higher. All other repo programs that do not meet the conforming programing criteria or where the counterparty is rated BB or lower would continue to receive the current 1.26% charge.

P&C and health regulators have a parallel proposal to also reduce their repo capital charge from 1% to 0.2%

Per LRBCWG’s request, SAPWG8 and the Blanks Working Group will begin analyzing the accounting and reporting revisions needed to adequately define conforming repos and incorporate the appropriate guidance into the annual statement instructions.

Statutory Accounting Updates

Adopted Items

Residual tranches – Guidance amendments adopted to support new accounting treatment (Ref #2019-21)

To support the changes in accounting treatment for bond holdings, regulators have adopted several guidance amendments to SSAP 21R related to residual tranches, including:

  • Book adjusted carrying value (BACV): Residuals will be accounted for at either 1) the lower amortized cost or fair value, with amortized cost calculated under the allowable earned yield (AEY) method, or 2) using the practical expedient method, which reflects a return of principal concept.
  • Income recognition: Under the AEY method, the BACV will be limited to initial cost, and the recognition of interest income/reduction of the cost basis will depend on the cash flows received. Cash flows received that are within the AEY will be reported as interest income, and cash flows received in excess of the AEY will reduce the BACV. The AEY is established at acquisition as the discount rate that equates the best initial estimate of the residual’s cash flows to its acquisition cost and is not to be updated after acquisition. For companies using the practical expedient, all distributions received are treated as a reduction in BACV. Therefore, no interest income will be recognized until the residual tranche has a BACV of zero. Once the residual has a zero BACV, distributions received shall be recognized as interest income.
  • OTTI: For residuals measured using the AEY method, an OTTI exists if the present value of expected cash flows discounted by the AEY, is less than amortized cost. If an OTTI has occurred, the insurer shall recognize a realized loss equal to the difference between the amortized cost and the present value of expected cash flows. For residuals measured using the practical expedient, anytime the residual has a fair value less than the reported BACV, an OTTI shall be considered to have occurred, and a realized loss equal to the difference between the fair value and the BACV shall be recognized.
  • Transition: Transition guidance has been added to specify how residuals that were previously accounted for under different SSAPs will move to the new measurement guidance in SSAP 21R. The guidance reflects a prospective measurement approach, with the reporting value as of December 31, 2024, being used as the initial value. Residuals with unrealized gains and losses as of December 31, 2024 would realize those gains/losses at the effective date of transition (which is December 31, 2024, or earlier for those that choose to early adopt).
  • Admittance (Audits): Going forward, residuals will follow the accounting and admittance guidance within SSAP 21R. As such, residuals that were in the form of a SSAP 48—Joint Ventures, Partnerships and Limited Liability Companies investment would not be required to obtain an audit to be an admitted asset.
  • Reclassification: To reduce complexity, reclassifications of residuals will not be allowed. Once classified as a residual, the investment will be reported as such until it is disposed of by the insurer.

The effective date of this new guidance is January 1, 2025, with early adoption allowed.

IMR – New quarterly and annual statement disclosures adopted for negative IMR (2023‐13BWG)

A new reporting requirement has been adopted for life insurers to disclose negative IMR in the Notes to Financial Statements and General Interrogatories. The update will allow regulators to easily verify the overall impact of negative IMR on surplus and the split of any negative IMR between general accounts and separate accounts. The change is effective for year-end 2024.

IMR/AVR – Preferred stock (Ref #2023-29)

A guidance revision has been adopted to clarify that realized gains and losses on perpetual preferred stock shall not be added to the IMR, regardless of NAIC Designation, and will follow the same concepts that exist for common stock in reporting realized gains/losses to AVR. The current guidance for redeemable preferred stock will remain as is for now (which is the same as bond investments), since redeemable preferreds are more akin to debt instruments.

Additionally, mandatory convertible preferred stock (redeemable or perpetual) is captured as perpetual preferred stock and treated as equity investments, with gains and losses excluded from IMR.

Collateral loans – Reporting change seeks to improve collateral transparency (Ref #2023-28)

Regulators have adopted guidance to expand the reporting requirements for collateral loans, which would help regulators more easily identify the types of collateral backing each collateral loan. New accounting rules were previously adopted that requires the collateral supporting the loan to be a qualifying investment (meaning that it would qualify for admittance if held directly by the insurer). The additional disclosure requirements will help regulators ensure compliance and identify admitted and non-admitted collateral loans.

Because of increased allocations, regulators will revisit the overall regulatory treatment of collateral loans. Several insurers have been inaccurately using the “non-registered private fund” category for certain loans, because doing so allows the loans to run through AVR for RBC purposes (collateral loans are the only Schedule BA asset that does not run through AVR). Therefore, regulators will analyze whether collateral loans backed by certain types of collateral should flow differently through AVR for RBC impact.

Exposed Items, to be considered further

Debt securities issued by funds (Ref #2024-01)

Regulators are proposing a guidance amendment to clarify the treatment of bonds issued by funds. Under the recently adopted bond definition, bonds issued by business development corporations, closed-end funds, or similar operating entities are considered issuer credit obligations, provided they were registered under the ’40 Act. This gave preferential treatment to registered funds, even if an unregistered fund was structured in a similar manner. This revision removes the emphasis on registration status and will instead focus on how the fund functions as an operating entity, and whether the fund’s primary purpose is to raise equity capital (as an operating entity) or debt capital (as an ABS issuer).

The distinction regarding a fund’s primary purpose is an important one, as it will determine whether a debt security should be classified as an ABS issuer or securitization vehicle, which will subject the security to the analysis contained in the new bond definition (which determines whether a security meets the qualifications for Schedule D inclusion).

Regulators will also look for industry input to better clarify the scope of guidance and the types of debt securities issued by funds that should be considered as operating entities. This guidance amendment created some confusion regarding feeder fund debt, which wasn’t the purpose of this amendment (regulators continue to see feeder fund debt as an ABS issuer under the guidance of SSAP 43R). Therefore, further edits are likely to be forthcoming to eliminate any ambiguity on the intent of the revised guidance.

Schedule BA categorizations (Ref #2023-16)

Guidance revisions are being proposed to incorporate more detailed definitions for Schedule BA investments that fall under SSAP 48 – Joint Ventures, Partnerships and Limited Liability Companies. Schedule BA investments currently has primary reporting categories and subcategories that denote the underlying characteristics of a particular asset. Regulators will look to refine the instructions and examples for Schedule BA’s categories to better reflect market convention and improve consistency. This is also a desire at the NAIC to prevent the misreporting of investments, particularly where the goal is to improve regulatory treatment or RBC.

Previously exposed edits to improve Schedule BA reporting include:

  • New reporting lines were added for debt securities that do not qualify as bonds.
  • The “Non-Registered Private Funds” category was removed to prevent confusion with the “Joint Venture, Partnership and Limited Liability Company Reporting Category.”
  • Additional language to ensure that all residuals are included in the “Residual Tranches or Interests” category regardless of investment form.

Specific to Ref #2023-16, SAPWG will sponsor a Blanks Working Group proposal to also include the following Schedule BA modifications:

  • General Instructions:
    • A statement clarifying that all investments shall be reported in the dedicated reporting line category. Investments that do not fit within any specific reporting line shall be captured as an “Any Other Class of Asset.”
  • Joint Venture, Partnership and Limited Liability Company Reporting Category:
    • Only investments in scope of SSAP 48 shall be reported in this category.
    • Clarifies that the “underlying characteristics of bonds” subcategory shall include “collateral that has contractual principal and/or interest payments, excluding mortgage loans.”
    • Structured settlements in scope of SSAP 21R that have an SVO-assigned NAIC designation are also included in this category within the “underlying characteristics of bonds.” subcategory. Any structured settlements without an SVO-assigned NAIC designation shall be reported as an “Any Other Class of Asset.”
    • This category should not include directly owned non-bond debt securities, intercompany loans or collateral loans. (See above for separate proposal on collateral loans.)

Crypto assets – Guidance to codify non-admitted status for statutory purposes (Ref #2024-03)

Regulators are proposing to add guidance to SSAP 20—Nonadmitted Assets that will permanently clarify that directly held crypto assets are non-admitted assets for statutory purposes. This is in response to new FASB guidance for crypto assets that establishes the accounting and reporting requirements for GAAP purposes. The statutory guidance edits will formally codify the treatment for statutory accounting.

Reporting of Funds Withheld and Modco Assets (Ref #2024-07)

Regulators are recommending an industry-wide reporting change to make it easier to identify assets that are subject to a funds withheld or modified coinsurance (modco) arrangement. The reporting change would add new parts to Schedule S (life/health) and Schedule F (P&C) to add transparency on the assets held under those arrangements, but this would only be a reporting change and would not change the statutory accounting for these transactions.

Residual tranches – Accounting guidance to be streamlined into SSAP 21R (Ref #2024-08)

To create consistency within the bond accounting guidance, regulators are proposing to remove guidance for residuals out of all other existing SSAPs, and add instructions to direct insurers to the centralized guidance located in SSAP 21R – Other Admitted Assets. Because the treatment for residuals is consistent regardless of its structural form, specific accounting language within the guidance for bonds, equities or limited partnerships is no longer needed.


1 Securities Valuation Office
2 Valuation of Securities Task Force
3 Nationally recognized statistical rating organization
4 Kroll Bond Rating Agency
5 Life Risk-Based Capital Working Group
6 Risk-Based Capital Investment Risk and Evaluation Working Group
7 American Council of Life Insurers
8 Statutory Accounting Principles Working Group