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NAIC Spring 2018 National Meeting Update – Valuation of Securities Task Force

NAIC Spring 2018 National Meeting Update – Valuation of Securities Task Force


The Valuation of Securities Task Force (VOSTF) met March 24 at the NAIC Spring 2018 National Meeting in Milwaukee, Wisconsin, to discuss numerous items that were reviewed and exposed.

Adopted Items

Accommodate NAIC Designation Category for Risk-Based Capital

The VOSTF proposed amendments to the Purposes and Procedures (P&P) Manual to provide Credit Rating Providers (CRP) mapping to factors. Adopting this proposal in early 2018 would allow staff to prepare for these changes. VOSTF decided to use 20 designations instead of six, and also removed short-term ratings translation. The proposal creates an extra column to feed into risk-based capital (RBC) calculation. The goal is to complete the project by year-end 2019.

The motion on this proposal was carried.

Add Adopted Policies Related to SVO Administration of the FE Process

This proposal allows the Securities Valuation Office (SVO) to go into its system and override certain ratings if an error is found and discussed. This allows staff to make changes to inaccurate data, as long as they perform due diligence.

Exposed Items

SVO Report and Comprehensive Proposal on Fund Investments

In correspondence with the SAPWG's ongoing Investment Classification Project, the VOSTF received a report on a proposed comprehensive framework for funds eligible for fixed-income treatment from the SVO. The intent of the proposal is to ensure consistent treatment for funds comprised of underlying bonds.

This item was exposed for a 60-day comment period.

During the spring meeting, the SAPWG reviewed a proposal that would grant all bond mutual funds bond-like treatment under SSAP No. 26R – Bonds. The SAPWG declined the proposed changes, which would have required re-opening SSAP No. 26R. By re-opening SSAP No. 26R, all mutual funds other than SVO-identified funds would have continued to be accounted for under SSAP No. 30 – Unaffiliated Common Stock.

Currently, the SVO allows for bond-like treatment to bond ETFs and private funds that are guaranteed by agencies and indicated in the P&P Manual. The SVO proposal would extend the existing framework to include any investment company registered with the exchange list. NAIC staff advised the proposal is an attempt to create a consistent framework for bonds with a similar underlying structure.

Policy & Procedures Manual

A proposal was made to amend the P&P Manual to simplify and consolidate text in part two, which contains filing instructions and documentation requirements. New text describing procedure and methodology would also be added in part three. Industry reviewed the logic behind these changes and agreed it is a step in the right direction.

The item was exposed for a 30-day comment period.

NAIC Designations on the Schedule BA for Other Long-Term Invested Assets

The VOSTF discussed a referral from the SAPWG for guidance on whether all entities should report NAIC designations on the Schedule BA for other long-term invested assets. Currently, life insurers can submit and report NAIC designations for private funds, which are then reported on the Schedule BA and receive bond-like treatment. Staff agreed this process allowed for greater insight and review of the securities, as well as allowing for the potential of better RBC treatment for insurers. During the meeting, staff questioned if it was worth reviewing whether all insurance companies, including health and property/casualty insurers, should be able to submit and report designations for Schedule BA assets. Staff noted that if the current approach was adequate for life insurers, it may also be adequate for all other insurers.

This item was exposed for a 30-day comment period.

Include Affiliates of NRSROs in the definition of NAIC Credit Rating Providers

The VOSTF heard a proposal to include affiliates of Nationally Recognized Statistical Rating Organizations (NRSRO) in the current definition of CRP, as outlined in the P&P Manual. During the meeting, NAIC staff heard the SVO has been receiving credit ratings from affiliates of NRSROs; however, those affiliates are not technically covered by current guidance in the P&P Manual. There is concern that these affiliates or subsidiaries of CRPs would not be allowed under the FE process due to this technicality. Staff noted the subsidiary of a CRP could be considered and assigned an equal status to that of an acceptable CRP. The proposal would allow credit ratings received from affiliates of CRPs to be accepted and considered equal to that of a CRP.

This item was exposed for a 60-day comment period.

Additional Item

Joint Staff and Industry Report on Private Letter-Related Issues

The VOSTF reviewed a report on an ongoing project to streamline the process of receiving credit ratings for private letter securities. Staff have received assistance from seven out of the nine required credit ratings agencies to receive private letter ratings and are continuing to work with the remaining two agencies. Staff also heard an update from the SVO, which is currently receiving test files for five of the rating agencies.

Staff expects the new functionality to be activated and available as of July 1, 2018.