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MARKET INSIGHTS

NAIC Update: VOSTF September Meeting

NAIC Update: VOSTF September Meeting

MARKET INSIGHTS

The Valuation of Securities Task Force of the NAIC held a meeting on September 30, 2021. The following updates pertain to investment accounting.

Adopted Items Effective Immediately

Adds Spanish GAAP to the List of Countries and Associated National Financial Presentation Standards

In March 2021, the SVO received a letter from the American Council of Life Insurers (ACLI) to consider adding Spanish GAAP to the list of Countries and Associated National Financial Presentation Standards. 
As there are several significant differences between Spanish GAAP and IFRS, the SVO proposes to add the following information requirements to the Purposes and Procedures (P&P) Manual Part Two Paragraph 182, when insurers file securities whose issuers use Spanish GAAP:

• Complete set of audited financial statements (i.e., balance sheet, income statement and consolidated statement of cash flows) for at least three years, if available
• Disclosure of operating lease commitments in a manner similar to that required by IFRS or US GAAP
• Disclosure of Government Grants, initial amount and year-to-date and cumulative amortization
• Disclosure of gross capitalized research costs and cumulative amortization
• Disclosure of gross goodwill and cumulative amortization, including goodwill created by fresh-start accounting
• Disclosure in the change in fair value for financial assets and liabilities
• Disclosure of joint ventures recorded not using the equity method, including full financial results

The SVO Director said the presentation of the Spanish GAAP review including the comparison between Spanish GAAP and IFRS by Deloitte in June was sufficient for the SVO to analyze credits presented under Spanish GAAP. As there are some major differences between Spanish GAAP and IFRS, the filers will have to provide additional footnote disclosures that allow an analyst to make any necessary adjustments to an analysis. 

The ACLI reviewed the list of required documents and agrees they are adequate and are supportive of this adoption.

Items Exposed with Comment Deadline October 30, 2021, Unless Specified Otherwise

Adds the United States International Development Finance Corporation (DFC) to the US Government Full Faith and Credit – Filing Exempt List

The SVO recommends adding 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 DFC is authorized to borrow from the U.S. Treasury to fulfill obligations of the U.S. 

This new agency is from the merger of the U.S. Overseas Private Investment Corporation (OPIC) and the Development Credit Authority of the U.S. Agency for International Development (USAID) after the Better Utilization of Investments Leading to Development (BUILD) Act was signed in October 2018. 

The SVO director emphasized that insurers shall file those securities issued by entity on that list if the security is not fully guaranteed by the U.S. Government full faith and credit guarantor. He 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 insurer, as investor, is the party bearing that risk of loss, meaning the securities it purchased are not fully guaranteed by the entities on that list, it would need to file those securities with the SVO for NAIC Designation Category. The insurers should file the security with the SVO or use the Regulatory Treatment Analysis Service (RTAS) – Emerging Investment Vehicle process if they are not sure about the Filing Exempt status of a security pursuant to the P&P Manual Part One Paragraphs 75-76.  

This item was exposed for 30 days.

Bank Loans

This exposed item proposes to add 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

This item was exposed for 30 days.

Zero Loss Criteria for Legacy Modeled RMBS and CMBS

This item proposes to revise the P&P Manual Part Four Paragraph 27 - change the mapping to NAIC 1.A Designation Category regardless of the insurers book/adjusted carrying value for the modeled legacy RMBS or CMBS tranche that has no expected loss under any of the selected modeling scenarios. 

NAIC staff responded to a letter from the American Council of Life Insurers (ACLI) and North American Securities Valuation Association (NASVA) in July 2021. NAIC staff said non-modeled RMBS and CMBS securities are allowed to go through the filing exempt process for NAIC Designation Category pursuant to the P&P Manual Part Four Paragraph 5 and no change to the P&P Manual is needed. For non-legacy modeled securities, SSG will produce NAIC Designation Categories based on the methodology already published for mortgage reference securities. For legacy modeled securities, Structured Securities Group (SSG) will continue to provide five price breakpoints to determine an NAIC Designation with the result mapped to the middle NAIC Designation Category as that was done for year-end 2020. SSG plans to provide 19 price breakpoints and remove the mapping instructions to an NAIC Designation Category from the P&P Manual for year-end 2022. SSG plans to use “through the cycle” for modeling RMBS in 2021 and CMBS in 2022. 

One interested party said the guidance for legacy securities is clear but for non-legacy modeled securities, they should get the 1.A designation if they meet the threshold and don’t have any expected loss. 

This item was exposed for 15 days with a comment deadline of October 15, 2021 and will be adopted via e-vote.

Post meeting note: It was adopted on October 19, 2021 via evote.

Discussion Items

Private Letter Rating Rationale Report

The Chair of the North American Securities Valuation Association (NASVA) said the industry has been working with the credit rating providers to ensure they are able to provide this information for private letter rating rationale and are also looking at the current private rating letter to see if it includes rationale. The industry met with the SVO and some IT folks at Kansas City. The NAIC expects it will take some time to get VISION and AVS+ updated to accommodate this change and filing. 

SVO Director Charles Therriault said his team has been building the capability to receive the rationale reports and it is expected to be done in mid-2022. The insurers can email the analysts the rationale reports in the meantime. Regarding an indicator that represents if the SVO received the rationale report, it will take time for the SVO team to build this feature. The director plans to continually provide updates to the Task Force. 

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