Investment-Related Initiatives
The US National Association of Insurance Commissioners (NAIC) held its Fall National Meeting in Denver, Colorado on November 16-19, 2024. This Legal Update reports some highlights of the meetings of the Valuation of Securities (E) Task Force (VOSTF), held on November 17, and the Accounting Practices and Procedures (E) Task Force (AP&P TF) on November 18. Actions taken at the meetings of the Financial Analysis Solvency Tools (E) Working Group and the Statutory Accounting Principles (E) Working Group (SAPWG) will be reported separately.
VOSTF adopted proposed Amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office regarding the use of CRPs and references to investment risk.
The VOSTF adopted a revised version of a previously exposed amendment to the section of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) that relates to the NAIC’s use of ratings from NAIC-approved credit rating providers (CRPs). When determining whether a CRP rating is eligible to be used to determine the NAIC designation of a filing exempt security, the P&P Manual requires the rating to be produced by a rating agency that is registered with the US Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NSRO) for the rating class of the type of security. The amendment was designed to resolve confusion caused by differences between the definition of asset-backed securities (ABS) used in the principles-based bond definition (PPBD) that is used for statutory accounting purposes—which will become effective January 1, 2025—and the SEC definition of ABS that is used for securities regulation purposes. The amendment added the following sentences to the P&P Manual:
The NAIC only recognizes NAIC Credit Rating Provider ratings for those classes of credit ratings (each as defined by the SEC) for which an NAIC Credit Rating Provider is registered with the SEC as an NRSRO. For the avoidance of doubt, SEC definitions are distinct from those used for statutory accounting asset classification purposes in the Statements of Statutory Accounting Principles.
The added text clarifies that a CRP that is not registered with the SEC to provide credit ratings for issuers of ABS is not precluded from rating securities that fall within the PPBD’s definition of ABS unless those securities also fall within the SEC’s definition of ABS.
The VOSTF also adopted revisions to the P&P Manual to replace references to “Other Non-Payment Risk,” “subscript S,” with “credit risk” with “investment risk” or a corresponding meaning, where appropriate. At the NAIC 2024 Summer National Meeting, VOSTF adopted an updated definition of an “NAIC Designation,” which removed the “Other Non-Payment Risk” concept in addition to the corresponding SVO administrative symbol “Subscript S,” and replaced “credit risk” with the newly defined term “investment risk.” “Investment risk” is defined as “the likelihood that an insurer will receive full and timely principal and expected interest.” “Credit risk,” by contrast, “traditionally focuses on the ability of an issuer to make payments in accordance with contractual terms.” The November 17 revisions adopted by VOSTF are technical in nature and align with the updated definition of an “NAIC Designation.”
VOSTF heard a report regarding the modeling of collateralized loan obligations.
On November 17, VOSTF heard a report from Eric Kolchinsky, Director of the NAIC’s Structured Securities Group (SSG), on the SSG ad hoc group’s efforts to develop a modeling methodology for assigning NAIC designations to collateralized loan obligations (CLOs).
At the NAIC 2024 Summer National Meeting, the VOSTF also received a report from Kolchinsky on the progress of the CLO modeling methodology project. At that time, Kolchinsky reported that the SSG had finished certain scenario testing and would make its results available to the American Academy of Actuaries for further analysis. On November 17, Kolchinsky reported to VOSTF that the SSG had analyzed the scenario data and selected a preliminary probability distribution. He also reported that the C1 Subcommittee of the American Academy of Actuaries (which is working on a parallel project for the NAIC Risk-Based Capital Investment Risk and Evaluation (E) Working Group) is currently processing data received from Moody’s, and that the Academy’s results will be compared with the model the SSG is developing.
The AP&P TF directed NAIC staff to remove a proposal to amend SSAP No. 86 – Derivatives to require bifurcated statutory reporting for debt securities with derivative wrappers/components.
At an August 13 meeting, the SAPWG exposed proposed revisions to SSAP No. 86 – Derivatives to address all debt security investments with derivative wrappers/components. The proposal would have required bifurcation—i.e., separate accounting for the derivative and the underlying debt security—in contrast to current statutory accounting guidance, which explicitly precludes the separation of embedded derivatives. In light of comments received during the comment period, the SAPWG voted at its November 17 meeting to withdraw that proposal. On November 18, the AP&P TF (the parent task force of the SAPWG) exposed more limited revisions to SSAP No. 86, omitting the prior proposal to bifurcate the reporting of debt securities and embedded derivatives, and instead proposing limited revisions to clarify the reporting obligations relating to the acquisition of a debt security with a derivative wrapper/component and the corresponding disposal of the underlying debt security.
AP&P TF exposed revisions to SSAP No. 1 – Accounting Policies, Risk & Uncertainties, and Other Disclosures which specify how modified coinsurance and funds withheld assets are reported in a reporting entity’s financial statements.
AP&P TF exposed revisions to paragraph 23 of SSAP No. 1—Accounting Policies, Risks & Uncertainties, and Other Disclosures that would expand the existing restricted asset disclosure in insurers’ financial statements to require disclosure of the amount and nature of any assets received as collateral or assets that are held under modified coinsurance (modco) or funds withheld (FWH) reinsurance agreements (Reference #2024-20). The purpose of the expanded restricted asset disclosure is to give regulators “a better picture of the assets that are restricted as pledged, not under the exclusive control of the reporting entity, or that are earmarked (such as modco/FWH) for a specific purpose.” NAIC staff explained that the rationale for including modco and FWH assets in the restricted asset disclosure section, even if an offsetting liability is reported, is that this will allow for a full comparison of such assets to total assets, and thus provide a more accurate representation of an insurer’s available assets. The revisions are subject to a public comment period ending on January 1, 2025.
To view additional updates from the US NAIC Fall 2024 National Meeting, visit our meeting highlights page.
