NAIC 2020 Summer National Meeting – Statutory Accounting and SVO Updates
- COVID-19 relief measures extended into the 3rd quarter
- Continuing SVO discussions on bespoke securities
- Principal protected securities (a.k.a. combo notes) no longer filing exempt under new guidance
- Substantial changes proposed for credit tenant loans
As the national emergency related to COVID-19 still remains in place, these temporary adoptions remain in effect throughout 3rd quarter 2020:
- Troubled Debt Restructuring Due to COVID-19 (INT 20-03)
- Troubled Debt Restructuring of Certain Investments Due to COVID-19 (INT 20-07)
Additionally, the temporary adoptions below have been exposed for a short two-week comment period, with the expectation that they will be extended into 3rd quarter 2020 as well:
- Mortgage Loan Impairment Assessment Due to COVID-19 (INT 20-04)
- Investment Income Due and Accrued (INT 20-05)
Continuing discussions on bespoke securities, and the reliance on credit rating provider (CRP) ratings
At an interim conference call, the Valuation of Securities Task Force (VOSTF) reviewed an issue paper prepared by NAIC staff, which made several recommendations they believe will remediate many of the concerns surrounding bespoke securities. The paper highlights two previously mentioned concerns:
- Bespoke securities are not broadly syndicated, are created for one or a few investors and are assigned a rating – often private – by only one ratings provider. The participants also often deliberately keep the terms of structure private.
- Reliance on CRP ratings – Credit ratings are used to determine NAIC designations under the filing exempt policy1, which includes recognizing private ratings, but there is no explicit oversight to monitor CRP rating use or their analytical basis despite the extensive reliance on them.
The paper also highlighted areas of potential improvement, which include:
- Exploring how to reduce reliance on ratings
- Considering alternatives to assessing insurers’ investment risk, including expanding the role of the SVO (e.g., increasing state insurance regulator reliance on the SVO in evaluating credit risk)
- Taking into account steps taken to correct the prior ratings shortfalls, when considering continuing to use ratings in insurance regulation
- Establishing a process to monitor and evaluate rating agency activities, including permitting timely intervention to set regulatory treatment of risk securities
- Modifying the filing exempt rule, including developing alternative methodologies for assessing structured security risks
The VOSTF acknowledged that they’re not looking to make changes in the middle of this current financial environment, but did expose the paper for comment from the broader industry, as regulators continue to work toward developing better oversight of these securities.
Principal protected securities (PPS, a.k.a. combo notes) no longer filing exempt under new guidance
The VOSTF adopted an amendment that updates the definition for PPS. The amendment also updates the instructions for PPS, which details that they must be filed with the SVO for review, per updated filing instructions, and are no longer eligible to be filing exempt. The effective date for the change is January 1, 2021. Any securities acquired prior to January 1, 2021 must be filed by July 1, 2021 to be eligible for an NAIC designation. All others will follow existing filing deadline instructions.
Filing deadline temporarily extended for newly acquired or in-transition securities
The filing deadline for the 2020 initial filing of newly acquired or in-transition securities will be 165 days instead of the usual 120 days.
Financial modeling for RMBS/CMBS NAIC designations
An amendment was adopted to retain the financial modeling and book-adjusted carrying value price ranges for modeled RMBS/CMBS securities. The adoption also adds instructions to map financially modeled RMBS/CMBS securities to NAIC Designation Categories. The existing NAIC designations 1–6 will still apply for RBC, but the NAIC Designation Categories will be captured to study the output data. This is a temporary measure until new RBC factors are adopted for each NAIC Designation Category and new price ranges can be developed.
Renaming of the SVO’s Money Market Fund List/the Bond Fund List is discontinued
The SVO has renamed the “U.S. Direct Obligations/Full Faith and Credit Exempt List” as the “NAIC U.S. Government Money Market Fund List.” Also, given the limited number of insurers investing in funds on the “NAIC Bond Fund List,” this list is being discontinued.
Short-term CRP ratings to be mapped to NAIC Designation Categories
In light of the impending expansion to 20 bond NAIC designations, and because there isn’t a direct one-for-one set of CRP rating symbols for short-term investments, short-term CRP rating symbols will be mapped to the NAIC Designation Category that is equivalent to the mid-point of the range of long-term ratings.
Supranational entities allowed to be added to the Sovereign NAIC Designation Equivalent List
Supranational entities filed with the SVO will be permitted to be added to the Sovereign NAIC Designation Equivalent List. This list is used to cap the NAIC designation that can be assigned by the SVO to an investment at the sovereign designation equivalent.
EXPOSED ITEMS, TO BE FURTHER CONSIDERED
Proposal to allow ETFs that hold both bonds and preferred stock for inclusion on the preferred stock ETF list
Current SVO guidance restricts the SVO from reviewing ETFs that hold a portfolio of both bonds and preferred stock. This proposed amendment would allow the SVO to review ETFs that hold both bonds and preferred stock for possible inclusion on the preferred stock ETF list.
Proposal to further clarify documentation and information requirements when filing securities with the SVO
This proposed amendment reinforces the expectation that insurers will provide the necessary documentation in a timely manner to the SVO, and further outlines the types of information the SVO may require when filing securities for an SVO assessment.
Statutory Accounting updates
Credit Tenant Loans (Ref #2020-24)
The Statutory Accounting Principles Working Group (SAPWG) recently exposed an agenda item to address and clarify the accounting and reporting of credit tenant loans2 (CTLs). While being historically captured in SSAP No. 43R—Loan-Backed and Structured Securities, due to recent SVO discussions, this agenda item aims to address whether conforming CTLs3 should be captured in scope of SSAP No. 43R or whether these investments should be captured in SSAP No. 21R—Other Admitted Assets. This agenda item also addresses whether structures that are not conforming CTLs should be reported as mortgage loans or whether these structures should be captured in SSAP No. 21R.
Some of the downstream impacts of any potential guidance changes:
- Would CTLs be included on Schedule D, Schedule B or Schedule BA? Recent guidance shifts have moved more toward not classifying non-bond items as bonds simply for RBC purposes or because it has attained an NAIC designation.
- Could conforming CTLs, if reported on Schedule BA, still be filed to obtain an NAIC designation? This is imperative for life insurers seeking favorable RBC treatment, as they are the primary holders of these investments.
- Would conforming and non-conforming CTLs continue to be split amongst various investment schedules? Having all CTLs on a single investment schedule would allow for the reporting of CTL exposures to be more streamlined.
SAPWG is currently soliciting comments on two potential paths forward for CTLs:
Option #1: SSAP No. 43R for Conforming CTLs (this includes CTLs With SVO-Identified Bond Characteristics Acquired Prior to Jan. 1, 20204)
This option continues with historical application and keeps CTLs that are identified to have bond characteristics, after review by the SVO, in scope of SSAP No. 43R and reported on Schedule D as bonds. If option #1 is chosen, SAPWG would also need to decide if they would prefer for non-conforming CTLs to be in scope of SSAP No. 37—Mortgage Loans and reported on Schedule B, or if they want these investments to be considered an “other admitted asset” under SSAP No. 21 and reported on Schedule BA.
Option #2: SSAP No. 21 for All CTLs
With this option, all CTLs are in scope of SSAP No. 21 and are reported on Schedule BA. Under this approach, all CTLs will be reported on the same schedule, and revisions will be proposed to allow CTLs that are reviewed and approved by the SVO to be reported with an NAIC designation. This process will be similar to the existing approach for other non-bond items reported on Schedule BA that have underlying characteristics of fixed income instruments. CTLs will not qualify as filing exempt, and a CTL would need an SVO-provided NAIC designation if there was a desire to obtain a more favorable RBC treatment (life entities only).
Reference Rate Reform – LIBOR Transition (2020-12, INT 20-01)
Adopts the U.S. GAAP guidance5 transitioning from the London Interbank Offered Rate (LIBOR) with modifications for statutory reporting. The temporary guidance provides waivers from derecognizing hedging transactions and provides some exceptions for assessing hedge effectiveness as a result of transitioning away from LIBOR. These temporary exceptions are effective beginning March 12, 2020 and have a sunset provision that terminates the relief after December 31, 2022.
Basis Swaps as a Result of the LIBOR Transition (INT 20-09T)
This item clarifies that basis swaps shall reflect a “hedging other” transaction and shall be valued as a non-effective hedge (at fair value), unless the basis swap can be deemed to qualify for effective hedge accounting per SSAP No. 86.
Update/Remove References to SVO Fund Listings (Ref #2020-01)
(See above: Renaming of the SVO’s Money Market Fund List/the Bond Fund List is discontinued)
This adoption will update statutory accounting guidance to reflect the SVO’s changes, while also adding a reference to the “NAIC Fixed Income-Like SEC Registered Funds List.”
Cash Equivalents – Cash & Liquidity Pools (Ref #2019-42)
Revisions were adopted to allow specific cash pooling structures that strictly hold cash, cash equivalents and short-term investments and meet certain other criteria to be captured under SSAP No. 2R and be reported as cash equivalents.
Rolling Short-Term Investments (Ref #2019-20)
Revisions incorporate principle concepts that will restrict the classification of “rolling” related party or affiliated investments as cash equivalents or short-term investments that would be in scope of SSAP No. 26R or SSAP No. 43R (i.e., Schedule D bonds), or that would be reported on Schedule BA. Additionally, a disclosure will be required to identify short-term investments that remain on the short-term schedule for more than one consecutive year (i.e., a re-underwritten investment that is renewed).
Accounting for Bond Tender Offers (Ref #2020-02)
Clarifies that the accounting and reporting of investment income and capital gain/loss, due to the early liquidation either through a “call” or a “tender offer,” shall be similarly applied. The effective date is January 1, 2021, but early application is also permitted.
Working Capital Finance Investments (Ref #2019-25)
Adopted Issue Paper No. 163—Working Capital Finance Investment Updates and SSAP No. 105—Working Capital Finance Investments; the modifications are designed to make the asset class more attractive to insurers by easing technical requirements.
Surplus Notes – Enhanced Disclosures (Ref #2019-37)
Increases disclosure requirements regarding the issuance of surplus notes and the associated asset in which the terms negate or reduce typical cash flow exchanges.
Financing Derivatives (Ref #2019-38)
Requires gross reporting of derivative activity for financing derivative transactions, clarifying existing guidance. The effective date is January 1, 2021.
Preferred Stock/SSAP No. 32 – Investment Classification Project (Ref #2019-04)
Adopts the exposed issue paper that revises the definitions, measurement and impairment guidance for preferred stock (SSAP No. 32R—Preferred Stock). The adoption also incorporates a minor edit regarding preferred units issued by SSAP No. 48 (i.e., Schedule BA) entities. The effective date of the revised SSAP No. 32R is January 1, 2021.
EXPOSED ITEMS, TO BE FURTHER CONSIDERED
Mortgage Loan Participations – Clarifying Edits (Ref #2020-19)
These proposed revisions clarify that a participant’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.
NAIC Designation Categories for RMBS/CMBS Securities (Ref #2020-21)
This item details revisions to SSAP No. 43R to reflect the SVO’s updated final designation guidance for RMBS and CMBS securities (see above: Financial modeling for RMBS/CMBS NAIC designations).
Accounting for Perpetual Bonds (Ref #2020-22)
This proposal addresses the accounting treatment for perpetual bonds held as investments within the scope of SSAP No. 26R—Bonds, clarifying that perpetual bonds shall be reported at fair value, not to exceed any current effective call price.
Cash Equivalent Disclosures (Ref #2020-20)
This proposal expands current disclosure requirements from adopted guidance on Rolling Short-Term Investments (see above: Ref #2019-20) to also include cash equivalent investments.
Subsidiary, Controlled and Affiliated Entities (SCA) (Ref #2020-18)
Previously adopted guidance clarified that equity method losses of an investment in an SCA would not create a negative value in the SCA investment. This minor revision updates language to remove the statement that commitments or guarantees from the insurance reporting entity to the SCA can result in a negative equity valuation of the SCA.
1 Filing exempt securities are assigned an NAIC designation based on a credit rating equivalent from approved CRP agencies.
2 This item will address CTLs only, and not other variations of similar investments that are addressed within current accounting guidance, such as ground lease financings and other lease-backed/non-ABS securities.
3 Conforming CTLs generally reflect bond-like characteristics, which includes a principal amount that fully amortizes over the term of the loan and lease. This principal amortization component is a key element in determining whether a CTL meets SVO requirements for Schedule D eligibility.
4 The SVO only will review non-conforming CTLs held prior to Jan. 1, 2020 for bond characteristics. As such, all non-conforming CTLs acquired after Jan. 1, 2020 will not be in scope of SSAP No. 43R.
5 FASB ASU 2020-04.