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At its 2023 Summer and Fall National Meetings, the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group (SAP WG) adopted major investment-related initiatives that will impact U.S. insurers. Below, we outline what we believe to be the most relevant to insurance company investment portfolios, including major reporting changes for structured debt securities. With these changes taking effect between 2024 and 2025, insurers should review all current holdings to ensure proper reporting standards are followed and assess what, if any, impact these changes will have on their risk-based capital (RBC) requirement.
Principles-Based Bond Definitions
Effective Date: January 1, 2025
After more than three years, the principles-based bond definition project was adopted, redefining what investments are entitled to be treated as bonds for statutory accounting purposes. The adoption includes major revisions to SSAP No. 26R – Bonds and SSAP No. 43R – Loan-Backed and Structured Securities, as well as corresponding changes to several other statutory accounting principles (SSAPs), most notably SSAP No. 21R – Other Admitted Assets. The effective date of the new definition will be January 1, 2025, including updating the title of SSAP No. 43R to SSAP No. 43R – Asset-Backed Securities.
Under SSAP No. 26R, a bond is characterized, in spirit, as any security representing a creditor relationship, whereby there is a fixed schedule for one or more future payments, and which qualifies as either an issuer credit obligation or an asset-backed security. A security that possesses equity-like characteristics or represents an ownership interest in the issuer in substance does not represent a creditor relationship and is inconsistent with what is expected of bonds reported on Schedule D-1. This includes:
- Ownership or membership interest (LLC, joint venture, partnerships).
- Reflects performance of entity or principal and/or more than a nominal amount of interest varies based on underlying non-debt variable.
- Any debt instrument whose risk/reward profile is substantially similar to equity.
The principles-based approach avoids references to legal structure in the classification process and distinguishes between two types of bonds:
- Issuer Credit Obligations (ICO) – a bond for which the general creditworthiness of an operating entity or entities through direct or indirect recourse is the primary source of repayment.
- Asset-backed securities (ABS) – a bond issued by an entity (an “ABS issue”) created for the primary purpose of raising debt capital backed by financial assets or cash-generating non-financial assets owned by the ABS issuer, for which the primary source of repayment is derived from the cash flows associated with the underlying defined collateral rather than the cash flows of an operating entity.
Bonds with secondary collateral are:
- ICO if the obligation is expected to be satisfied without reliance on the collateral.
- ABS if the obligation is expected to rely on the collateral to meet the criteria.
Collateralized Loan Obligation (CLO) Modeling
Effective date: December 31, 2023
Changes were incorporated to SSAP No. 43R – Loan-Backed and Structured Securities definition to add Collateralized Loan Obligations (CLOs) to the financial modeling guidance (i.e., SSAP No. 43R paragraphs 27 & 28) and clarify that CLOs are not captured as legacy securities and insurers will receive single NAIC Designation instead of 19 price points from the SSG.
- A CLO is a type of structured security backed by a pool of debt, typically corporate loans with low credit ratings. An insurer that purchases every tranche of a CLO holds the same investment risk as if it had directly purchased the entire pool of loans backing the CLO. The aggregate risk-based capital (RBC) factor for owning all the CLO tranches should be the same as that required for owning all the underlying loan collateral. If it is less, it means there is risk-based capital (RBC) arbitrage.
The Structured Securities Group (SSG) will model CLO investments and evaluate all tranche-level losses across all debt and equity tranches to assign NAIC designation categories for each CLO tranche effective January 1, 2024. Filing Exempt (FE) designations will continue to be used until the modeling results are published. Insurers shall begin receiving the NAIC designation categories in mid-December 2024, but an extension into 2025 may occur if modeling takes longer than expected.
- CLOs added to the list of securities that are subject to financial modeling, other than residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), to the Securities Valuation Office (SVO) Purposes and Procedures (P&P) Manual Part One through Four.
- CLOs would be assigned an NAIC designation and designation category by the Structured Securities Group (SSG) without an administrative symbol pursuant to SVO P&P Manual Part Four Paragraph 2.
- CLOs can be financially modeled and are exempt from filing with the SVO. The SSG will produce probability weighted net present values using its financial model with defined analytical inputs selected by the SSG.
- For CLOs that cannot be financially modeled but are rated by a credit rating provider (CRP), the NAIC designations are determined by application of the filing exemption procedures, i.e., using the second-lowest rating methodology. For those that cannot be financially modeled but are not rated by a CRP, the insurers are required to file them with the SSG. For initial sufficiency information filing, the insurers shall provide the SSG with indenture, prospectus, offering memorandum, accountant’s comfort letter if obtained in connection with the transaction, International Swaps and Derivatives Association (ISDA) schedules and confirmation, legal opinions given in connection with the transaction, all available eligible CRP ratings for the underlying loan portfolio. The insurers shall provide the prospectus, offering memorandum, and three years of the issuer’s audited financial statements for each unrated underlying loan.
At this stage, the NAIC is excluding the following from financial modeling:
- Commercial Real Estate (CRE) CLOs.
- Re-securitizations, ABS, collateralized debt obligations (CDOs), and trust preferred securities (TruPS) CDOs are out of scope.
- Middle market CLOs due to specialized assumptions, but the NAIC hopes to return to these.
Statutory Reporting Schedule for Bonds (Schedule D Part 1)
Effective date: 1st Quarter 2025
Schedule D Part 1 will be split into two sections: Issuer Credit Obligations (ICOs) and Asset-Backed Securities (ABS).
- Schedule D-1-1: ICOs (corporate bonds, treasuries, municipals, agencies, to name a few)
- Schedule D-1-2: ABS (securities that are not reported in RMBS/CMBS/CLOs/CBOs/Equity-backed ABS reporting lines)
- Non-Standard Home Loan Equity
- Individual Obligations – Credit Card, Auto, Personal Loans, Student Loans, Recreational Vehicles, etc.
- Corporate/Industrial Obligations – Tax Receivables, Utility Receivables, Trade Receivables, Small Business Loans, Commercial Paper, etc.
- Real Estate Leases
- Other Leases
- Cash Flow Rights
- Other
Cash Equivalent and Short-Term Investment Reporting
Effective 1st Quarter, 2025
Revisions were made to SSAP No. 2R – Cash, Cash Equivalents, Drafts, and Short-Term Investments to further restrict investments permitted for cash equivalent (E2) and short-term (DA) investment reporting. Investments shall be reported on the long-term dedicated schedule and follow all guidance regardless of maturity date. Investments Excluded – those in italics are new restrictions:
- Asset-Backed Securities
- All Investments on Schedule BA, which includes:
- Non-Bond Debt Securities
- Collateral / Non-Collateral Loans
- Working Capital Finance Investments
- Surplus Notes
- Mortgage Loans
- Derivatives
Stay tuned as additional significant revisions are expected to be adopted in 2024 relating to SSAP No. 21R – Other Admitted Assets and new reporting lines on Schedule BA intended to separate debt securities that do not qualify as bonds based on whether they have NAIC designations.
Madison Investments Insurance Solutions Team and our investment accounting and reporting partner, Clearwater Analytics, are dedicated to keeping insurers updated on the latest regulatory guidance changes. We touched on a few items we felt were most relevant to insurance company investments above. View the NAIC staff’s summary of the Summer and Fall Meetings:
To learn how these proposed changes may impact your organization’s investment portfolio, please contact us.
About Madison Investments Insurance Solutions
For more than 30 years, Madison’s Insurance Solutions Team has been dedicated to serving the investment management needs of insurance entities. Leveraging their expertise in insurance portfolio management, the team adopts a holistic approach to develop tailored investment strategies that balance risk and return, aiming to maximize income generation and surplus growth opportunities for their clients.