SVO / VOSTF Updates

Exposed for comment

Private ratings – The SVO¹ highlights growth in private ratings submissions, looks for rating agencies to provide reports with more analytical substance

The SVO recently released a report detailing security filings in their system, which showed a 112% increase in private rating submissions. The bulk of the increase can be traced to rationale reports on private letter ratings, with 2024 being the deadline for rationale reports to submitted to the SVO for securities that previously experienced confidentiality issues in prior years. Going forward, any private letter rating security without a rationale report (which isn’t filed with the SVO) will be subject to an NAIC 5.B rating, a punitive result for RBC purposes.

To provide better support for rationale report submissions moving forward and to prevent securities with no rationale reports from being de-activated and ineligible for the filing exemption (FE), the SVO is proposing to allow a grace period of 90 days from the date of any annual or mid-year, rating affirmation, confirmation or change, for a new or updated rationale report to be provided to the SVO. Also, any de-activated securities could subsequently become FE eligible again once the SVO receives the new or updated rationale report.

Additionally, regulators are also looking to clarify what is expected from a private rating rationale report when provided to the SVO. Regulators have expressed concerns that some rationale reports did not possess sufficient analytical substance where an independent party could form their own opinion of the security’s investment risk. Therefore, a guidance amendment is being proposed that all rationale reports shall be, at a minimum, as comprehensive in its analysis as a similarly rated public security.

Comments on these proposals are due until April 25^th.

Investment RBC Updates

New NAIC task force created to oversee the modernization of the RBC framework

The NAIC announced the creation of a new RBC-related task force (The Risk-Based Capital Model Governance Task Force) tasked with “developing guiding principles for updating the RBC formulas to address current investment trends , focusing on more RBC precision in the area of asset risk, and ensuring that insurance capital requirements maintain their current strength while continuing to appropriately balance solvency with the availability of products to meet consumer needs”. For 2025, the task force will look to accomplish the following:

1. Develop guiding principles for future RBC adjustments.
2. Perform a comprehensive gap analysis to identify inconsistencies and prioritize solutions where appropriate.
3. Design an education and messaging campaign to highlight the RBC framework's strengths

In developing new principles, work related to RBC will look to answer the following questions:

• When should a particular risk be addressed in the RBC model?
• What level and type of data and analysis are needed to support the setting of capital factors?
• How should new and emerging risks and asset types be treated if a capital framework has not yet been developed for them?
• What level of statistical safety is to be targeted by the model or, if not, a single target, and how should such tailored safety targets be determined?
• When should the calibration of risks to capital factors be re-evaluated?

The task force will also work to help regulators globally understand the regulatory differences across jurisdictions in an effort to better supervise large, global insurance groups.

RBC for Bond Funds – NAIC staff to work on proposal addressing various fund types

Back in February, the American Council of Life Insurers (ACLI) released a report highlighting the history of RBC treatment for fund holdings. The report detailed the inconsistencies in treatment for various fund vehicles, even though the underlying holdings and risks could be identical. This issue has been raised in prior years, but recently the ACLI has agreed, under the direction of the Risk-Based Capital Investment Risk and Evaluation Working Group, to begin looking at three types of funds (ETFs, mutual funds and private bond funds) to determine if their characteristics and risk profiles warrant similar or different regulatory treatment.

NAIC staff will work on a proposal that defines the next steps. The focus will first be centered on the treatment for life insurers, but no changes in RBC treatment are expected for 2025.

Exposed for comment

Asset concentration (Life) – Clarification needed for non-bond debt securities that will move from Schedule D to BA

The asset concentration charge for fixed income assets will be analyzed for appropriateness, an issue that can be traced to the Principles-Based Bond Definition (PBBD), the new accounting rules that governs bonds on the Schedule D.

Asset concentration will generally double the RBC pre-tax factor of the ten largest asset exposures, excluding lower risk categories, not to exceed a maximum overall capital factor of 45%. This maximum 45% capital charge for Schedule BA assets essentially limits the asset concentration-related increase to 15%. And because there’s no specific RBC guidance for non-Schedule D bonds moving to Schedule BA, it leaves the treatment for asset concentration open to varying approaches.

An ACLI-supported proposal seeks to clarify whether “SVO-designated non-bond debt securities” can obtain an asset concentration factor treatment akin to Schedule D-1 bonds, which would simply double the C-1 bond factor and not subject those securities to a flat asset concentration “Schedule BA” factor increase of 15%.

A referral has also been sent to SAPWG for additional comments and review on the matter.

Suggested guidance edits proposed for life RBC due to the PBBD and other overdue updates.

Regulators look to clean up the RBC instructions for life companies, primarily due to the PBBD, which became effective January 1^st. Clarifying edits have been proposed for the following:

• Line 53.1 for Schedule BA assets within C-1o, will now include surplus notes and capital notes.
• Schedule BA Unaffiliated Residential Mortgages in Good Standing – there is a dedicated line item for affiliated residential mortgages (0.68% charge), but not one for unaffiliated residential mortgages, leading to them being reported as Unaffiliated Mortgages - Primarily Senior (1.75% charge) or Unaffiliated Mortgages – All Other (3% charge). No edit has been proposed for this, as the LRBCWG² plans to dedicate a separate proposal to this in the future.
• Schedule BA farm mortgages 90 Days Overdue, Not in Process of Foreclosure (11% charge) and In Process of Foreclosure (13% charge) – edits proposed to ensure these mortgage loans flow into life formula correctly.
• Asset Concentration Factor – guidance edit proposed that would exclude cash equivalents from the top 10 exposures.

All changes are proposed to be effective for 2025 year-end RBC filings.

Capital notes and other non-Schedule D debt securities – P&C and health insurers seeks review of RBC following recent bond accounting changes.

The PCRBCWG³ and HRBCWG⁴ received a referral from SAPWG⁵ that focuses on the inequities in RBC treatment between the Life and P&C / health formulas, as it pertains to capital notes⁶, and more generally, non-Schedule D debt securities. P&C and health insurers do not have the ability to receive Schedule D-like RBC on debt securities that move to the Schedule BA due to the PBBD, which recently became effective January 1^st. Therefore, securities with high credit quality will be subject to onerous capital charges reaching 20% unless changes are made.

Many in the industry have expressed a desire for a resolution and regulators will continue to discuss the issue and begin to map out potential solutions.

Statutory Accounting Updates

Adopted Items

Capital notes – Guidance revisions adopted to clean up accounting treatment (Ref #2024-28)

SAPWG has adopted guidance edits to SSAP No. 41—Surplus Notes to clarify the statutory accounting treatment of capital notes. The revisions include:

• Paragraph 9a – This has been deleted and removed, as the inclusion of guidance referring to equity limits for admitted assets is not present anywhere else within the statutory accounting principles.
• Paragraph 18c and Paragraph 21 – Paragraph 18c will be deleted and removed. It required the disclosure of the holder of the note or, if public, the names of the underwriter and trustee. There was also a requirement to disclose whether the holder of the surplus note is a related party. Regulators deemed this requirement to be unnecessary and not beneficial to their regulatory efforts. The requirement in Paragraph 21 to identify all affiliates that hold any portion of a surplus note or capital note will be revised to also include related party holders.
• Paragraph 9b – A minor revision was made to Paragraph 9b to explicitly include capital notes in the guidance. This paragraph requires that surplus notes be nonadmitted if a regulator halts principal or interest payments. Re-admittance can be allowed in the future if principal or interest payment resumes.

Derivative premium costs and IMR (Ref #2024-23)

To lessen the confusion on the accounting treatment of derivative premium costs, SAPWG had previously exposed revisions to SSAP No. 86—Derivatives and the annual statement instructions that clarifies the terminology for derivative financing premium and further clarifies that derivative premium costs were not to be included in realized losses capitalized to IMR (they are amortized into net investment income over the life of the derivative contract).

After receiving feedback from the industry, regulators have adopted guidance to update the definition for derivative financing premium but will move the issue regarding derivative premium costs and the inclusion of those costs as realized losses in IMR to a separate agenda. This will allow the accounting for derivatives to be further analyzed, which will include discussions on the appropriate treatment for IMR.

Collateral Loans – New reporting for Schedule BA and AVR (Ref #2023-28, 2024-19BWG)

SAPWG has adopted guidance to expand the reporting of collateral loans on Schedule BA that helps regulators identify the types of collateral that supports the admittance of collateral loans in scope of SSAP No. 21—Other Admitted Assets. New reporting lines are also being added to the AVR schedule to capture collateral loans in a separate section.

The new reporting lines will be broken out by asset type backing the loan, while also noting if the collateral loan should be admitted or non-admitted based on the collateral used. For the collateral loan to be admitted, the collateral securing the loan must be an asset that would be allowable for admittance if it was held directly.

There will also be new electronic-only columns for (1) the fair value of collateral backing the collateral loan and (2) the percentage of collateral to the collateral loan, along with footnote disclosures that provide more granular detail of the collateral types.

Additionally, there is a current Blanks proposal that SAPWG supports, which includes several schedule / instruction changes:

• The June 2024 interim provision that permitted collateral loans backed by mortgage loans to flow through AVR in lines 38-64 as an “Equity and other Invested Asset Component” is no longer applicable. All collateral loans backed by mortgage loans shall be captured on their dedicated Schedule BA and AVR reporting lines.
• Collateral loans backed by mortgage loans shall include loans that would be in scope of both SSAP No. 37—Mortgage Loans and SSAP No. 83—Mezzanine Real Estate Loans.
• Expansion of the reporting lines for “non-collateral loans” to separate affiliated and related party loans. This will result in reporting lines for affiliated loans, related party loans and other unaffiliated loans.
• The category for “Collateral Loans – All Other” will be renamed to “Collateral Loans – Backed by Other Collateral Types”. This will help to differentiate between admitted and non-admitted collateral loans.

The effective date of the new guidance is January 1^st, 2026.

Reinsurance reporting – Restricted asset disclosures and RBC reporting (Ref #2024-20, 2025‐06BWG)

Due to a lack of consistency in how insurers have reported restricted assets, SAPWG has made further edits to its proposal, detailing guidance revisions clarifying how assets held under modified coinsurance (Modco) or funds withheld (FWH) agreements shall be reported within the restricted asset disclosure (SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures), in the Note 5L disclosure, and in the general interrogatories.

For SSAP No. 1, SAPWG has adopted minor edits to ensure that book adjusted carrying value is the amount being reported as the statutory value (effective December 31, 2025). For Note 5L, a corresponding Blanks proposal has been exposed for potential adoption in May, which details the clarifying edits to the restricted asset disclosure in the Notes to Financial Statements.

SAPWG is also sending a new referral to LRBCWG to clarify the guidance for when an RBC reduction can occur for Modco and FWH reinsurance agreements. The guidance will clarify that RBC shall not be reduced for the ceding insurer when a pledged asset is concurrently used in a modco/funds withheld reinsurance agreement.

Repacks and Derivative Instruments (Ref #2024-16, 2024-21BWG)

SAPWG adopted revised annual statement instructions, which clarifies that held debt securities that are sold to an SPV and then reacquired, reflecting the addition of derivative or other components, shall be reported as a disposal and reacquisition in the investment schedules. A corresponding Blanks proposal has also been adopted that updates the reporting of sales for Schedule D, parts 4 and 5.

Tax Credits Project (Ref #2022-14)

SAPWG adopted Issue Paper No. 170 – Tax Credits Project, which details the revisions and discussion for the adopted revisions to SSAP No. 93—Investments in Tax Credit Structures and SSAP No. 94—State and Federal Tax Credits. The conceptual changes to statutory accounting were the result of the passage of the Inflation Reduction Act and the Financial Accounting Standards Board adopting ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (ASU 2023-02), which amends ASC Topic 323 to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits.

Deferred Items

Investment subsidiary proposal deferred to address trusts holding mortgage loans (Ref #2024-21)

Regulators are looking to revamp the accounting rules around investment subsidiaries, as they’ve identified situations where insurers are using subsidiaries to circumvent statutory guidance and improve their capital position.

While gathering info on the topic, regulators have observed that most of the current focus from the industry is on Delaware statutory trust (DST) structures that many use to hold residential mortgage loans due to their operational efficiency. While the mortgage loans are technically held by a wholly owned subsidiary trust, the reporting is done on a look-through basis via the Schedule B.

Instead of continuing with a broad review on investment subs, NAIC will narrow its work to focus specifically on DSTs and assess the need for specific accounting and reporting guidance.

Exposed for comment

Reinsurance – Reporting of Funds Withheld and Modco Assets (Ref #2024-07, 2025‐05BWG)

Last year, regulators released a proposal to add parts to Schedule S (Life/Fraternal/Health) and Schedule F (P&C) to determine whether it was feasible to identify assets that are subject to FWH or Modco arrangements. After discussions with the industry, regulators have decided to not move forward with any new / additional disclosures for P&C and health insurers due to a lack of relevance, but will re-expose a new Schedule S, Part 8 for life and fraternal insurers.

For P&C insurers, there isn’t a pressing need for additional FWH or Modco disclosures, as Modco transactions are rarely executed and FWH transactions have become rare due to the recognition of certified reinsurers and reciprocal jurisdictions (which has reduced collateral requirements). And for health insurers, the original purpose of the proposal was to better identify the reduction in RBC charges for ceded FWH and Modco assets, but this isn’t applicable for health insurers’ reporting requirements.

Life insurers expressed concerns that CUSIP-level detail of investment strategies are, in effect, proprietary and play a significant role in reinsurance pricing. Any disclosure changes may result in adverse effects to FWH deals. Therefore, the updated proposal includes a new Schedule S, Part 8, with a corresponding Blanks proposal that only includes aggregated data, which mirrors AVR reporting. The proposal has been re-exposed for comment until May 2^nd.

Reinsurance relationships and affiliated / related party assets (Ref #2025-05)

Regulators are proposing guidance changes to expand the restricted asset disclosure to identify Modco/FWH assets where the asset is a related party or affiliated investment to the reinsurer. This is in response to increases in offshore reinsurance relationships involving life and annuity liabilities. Regulators highlighted a situation where a reinsurer had investment advisory responsibilities over the assets withheld by the ceding insurer and many of the assets were later identified to be overly complex and affiliated to the reinsurer, which led to valuation issues when the ceding insurer began to have difficulties.

This agenda item also proposes to require the full disclosure in all annual and quarterly financial statements, which is a change from existing guidance where quarterly disclosure is only typically required if there have been significant changes from the annual statement.

Comments can be submitted until May 2^nd, with regulators targeting 2^nd quarter 2025 adoption, which would allow the changes to become effective for year-end 2025.

IMR Definition (Ref #2025-03)

A goal of regulators is to remove any accounting-related guidance from the annual statement instructions and have that guidance be presented within the statutory accounting principles. As part of a long-term project to address IMR-related topics, an expanded definition of IMR is being proposed for entry into SSAP No. 7—Asset Valuation and Interest Maintenance Reserve.

The proposed IMR Definition, per NAIC staff:

Ad-hoc group releases memo on hypothetical IMR (Ref #2023-14)

The IMR Ad-hoc group, which was formed in 2023 to address negative IMR and other IMR-related issues, has released a memo for industry comment on the concept of hypothetical IMR. The concept involves reinsurance transactions where the ceding insurer cedes IMR to a reinsurer for amounts that have not yet been created through actual bond sales. This hypothetical situation, while described in the annual statement instructions, is not widely known, used or understood by most in the industry. And while there is some validity to the concept, the memo recommends that the hypothetical IMR be removed from statutory accounting.

Comments on the memo are due until June 6th.

¹ Securities Valuation Office

² Life Risk-Based Capital Working Group

³ Property and Casualty Risk-Based Capital Working Group

⁴ Health Risk-Based Capital Working Group

⁵ Statutory Accounting Principles Working Group

⁶ Capital notes are securities issued by insurers in an effort to raise capital. Like surplus notes, they are unsecured debt subordinated to all claims by policyholders and creditors. Unlike surplus notes, payment of interest and principal generally do not require regulatory approval, but could be deferred if the issuer becomes undercapitalized.

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