The NAIC’s Statutory Accounting Principles Working Group, Valuation of Securities Task Force, and Blanks Working Group all held meetings in November. The following is a recap of investment accounting updates from each of the meetings.
Statutory Accounting Principles Working Group
The Statutory Accounting Principles Working Group of the NAIC held a meeting on November 10, 2021.
Adopted Non-Substantive Effective December 31, 2022
Ref #2021-15: SSAP No. 43R
This agenda item was exposed via e-vote on September 9, 2021. It clarifies that non-rated residual tranches should be reported as Other Long-term Invested Assets at the lower of cost or fair value on Schedule BA. NAIC staff identified that there is inconsistency in reporting for non-rated residual tranches that are structured securities in scope of SSAP No. 43R during the bond proposal project. Some insurers already report them on Schedule BA but some report them on Schedule D Part 1 with a self-assigned NAIC Designation 5GI or 6. NAIC staff said assigning 5GI to those residual tranches is an incorrect application of the guidance because there are no contractual principal and interest payments and it is not reasonably expected all contractual principal and interest of the underlying collateral will be received when these tranches absorb the losses before the senior tranches within the securitization structure.
Interested parties are supportive of the proposal in general. Due to the proximity to year-end 2021, they believe it would be feasible to implement this update for year-end 2022, and those residual tranches should be reported on Schedule BA with the correct category based on underlying collateral, e.g., equities, fixed income, real estate, etc.
NAIC staff recommended that this agenda item be adopted with both interested parties’ edits and slight changes on the reference to AVR, effective December 31, 2022, with early application allowed. For year-end 2021, the reporting entities can continue reporting residual tranches on D-1 with NAIC Designation 6 or report them as Any Other Class of Assets on Schedule BA. For year-end 2022, these securities will be reported as Residual Tranches on Schedule BA. Staff also suggests a joint memo from the SAPWG and Valuation of Securities Task Force (VOSTF) be sent to the Blanks Working Group to clarify that a self-assigned NAIC 5GI is not permitted for residual tranches, and they are required to be reported with an NAIC 6 designation if they are retained on Schedule D-1. Another referral will be sent to the VOSTF to modify the SVO P&P Manual to mitigate future misapplication of the NAIC 5GI process.
This item was adopted.
Adopted Effective Immediately
Ref #2021-12EP: SSAP No. 21R
This editorial change improves the readability of paragraph 9 regarding Receivables for Securities.
It was adopted.
Valuation of Securities Task Force
The Valuation of Securities Task Force of the NAIC held a meeting on November 17, 2021.
Adopted Items Effective Immediately
Add the United States International Development Finance Corporation (DFC) to the U.S. Government Full Faith and Credit – Filing Exempt List
This item adds a new agency called the U.S. International Development Finance Corporation (DFC) to the “U.S. Government Full Faith and Credit – Filing Exempt” list in the P&P Manual Part One Paragraph 78 based on the express full faith and credit.
The SVO staff emphasized that insurers shall file those securities issued by an entity on that list if the security is not fully guaranteed by the U.S. Government full faith and credit guarantor. Staff pointed out statute may require parties other than the U.S. Government full faith and credit guarantor to bear a risk of loss equal to a specified percentage of the guaranteed support. If the securities it purchased are not fully guaranteed by the entities on that list, they won’t automatically get NAIC 1.A Designation.
This item adds clarification that bank loans should follow the filing instructions and methodology of other corporate obligations to the footnote of the P&P Manual Part Three Paragraph 27.
As the Accounting Practices and Procedures Manual has included bank loans issued directly by a reporting entity or acquired through a participation, syndication, or assignment in the scope of SSAP No. 26R since 2018, this clarification will be consistent with this bond definition in SSAP No. 26R – Bonds.
Items Exposed with Comment Deadline December 2, 2021
Remove Residual Tranches from Receiving an NAIC Designation
The Task Force received a referral from the SAPWG on November 15, 2021. The working group requested the VOSTF to review the NAIC 5GI guidance in the SVO P&P Manual and see if it needs to clarify the intent of the guidance and mitigate misapplications.
Pursuant to SSAP No. 43R, residual tranches reflect loss layers without any contractual interest or principal payments. The holders of these investments will receive interest or/and principal payments only after the other tranches received contractual interest and principal payments.
The SAPWG recommended an amendment to the SVO P&P Manual to clarify the 5GI process is not intended to be used for securities that would not qualify for a designation even if a full credit analysis could be performed. NAIC 6* self-assigned designation is allowed when the securities could not be reviewed for a full credit analysis and the requirements for an NAIC 5GI are not met.
To qualify for a 5.B GI self-assigned NAIC Designation, the securities must meet all three criteria pursuant to the SVO P&P Manual Part One Paragraph 91:
• Documentation necessary to permit a full credit analysis of a security by the SVO does not exist or an NAIC CRP rating for an FE or PL security is not available
• The issuer or obligor is current on all contracted interest and principal payments
• The insurer has an actual expectation of ultimate payment of all contracted interest and principal
The SVO said the residual tranches holders do not have the actual expectation that they will receive all interest and principal payment.
It was exposed for 15 days.
Technical Correction Amendment Clarifying 5GI Mapping to NAIC Designation Category
The task force adopted an amendment to the SVO P&P Manual on May 24, 2021. That new guidance requires the submission of private rating letter rationale reports with certain private rating letters that are filed with the SVO. However, it omitted the mapping of NAIC 5GI Designation to NAIC 5.B GI Designation Category.
The SVO said it is a non-substantive language change and recommended a 15-day exposure period.
Report from the Structured Securities Group on the Year-End Process
The Structured Securities Group Director reported to the task force that two files – price points for legacy securities and single designation for non-legacy securities are now available on the website. His team will introduce “through the cycle” for both RMBS and CMBS and develop 19 price points based on new RBC factors for 2022 Annual.
Blanks Working Group
The Blanks Working Group of the NAIC held a meeting on November 16, 2021.
Exposed Item with Comment Deadline March 4, 2022
Ref #2021-21BWG: Add instruction to the Investment Schedules General Instructions to exclude non-rated residual tranches or interests from being reported as bonds on Schedule D Part 1 and add lines to Schedule BA for the reporting of those investments.
This agenda item reflects changes being adopted by the SAPWG (Agenda Item#2021-15) on November 10, 2021. It proposes to exclude non-rated residual tranches or interests from being reported as bonds on Schedule D Part 1 and require them to be reported on Schedule BA effective for 2022 Annual.
It proposes to add a new category “Non-rated Residual Tranches or Interests” with five different underlying assets (e.g., fixed income instruments, common stock, real estate, mortgage loans, and other) that are affiliated or unaffiliated for Schedule BA.