Key Updates from the 2024 NAIC Spring National Meeting

The 2024 National Association of Insurance Commissioners (NAIC) Spring National Meeting recently took place in Phoenix, Arizona from March 15^th to 18^th. Investments continue to play a central role in regulatory discussions and there are several notable proposals that will take shape later this year. Below we provide updates on the following topics:

• SVO discretion over NAIC designations in filing exempt process
• Collateralized Loan Obligations (CLO) risk-based capital analysis
• Residual tranche capital charges
• Framework for Regulation of Insurer Investments
• Life Actuarial Task Force initiatives impacting investments
• Debt issued by non-SEC-registered funds
• Residual tranche measurement method adopted
• Perpetual preferred stock through Asset Valuation Reserve (AVR)
• Conforming repo program Risk Based Capital (RBC) and accounting alignment

SVO discretion over NAIC designations in filing exempt process¹

In 2023, the Valuation of Securities Task Force (VOSTF) presented two proposals for the Securities Valuation Office (SVO) to remove filing exempt eligibility for securities where they estimate a 3+ notch difference in rating. At the 2024 Spring National Meeting, regulators addressed the key themes from interested party comments received earlier in the year, and mentioned that they would incorporate the feedback into a third proposal to be presented later in 2024. Given remaining process to adopt, as well as the technical build-out requirements at the SVO, this proposal most likely will not take effect until January 1, 2025. We expect the third proposal to maintain the fundamental discretion the SVO is looking for, but possibly refine certain aspects of the process and improve industry transparency.

VOSTF has stated that they are not targeting specific asset classes, rating agencies, or private assets specifically – actions are taken on individual securities, and any recurring patterns would be discussed among regulators for further action (such as an issue paper). We continue to believe the SVO will focus its attention primarily on privately-rated securities with weak rationale reports given broader regulatory concern around private assets as well as limited SVO resources.

CLO Risk-Based Capital Analysis²

The Risk-Based Capital Investment Risk and Evaluation (RBCIRE) Working Group is progressing on establishing an RBC framework for CLOs through its engagement with the American Academy of Actuaries (the “Academy”). The Academy plans on conducting a quantitative analysis to identify how key deal attributes explain risk, along with qualitative review of historical experience and Credit Rating Providers (CRP) rating methodologies. They intend to share interim findings at the upcoming Summer National Meeting and final analysis at the Fall National Meeting. As a result, a framework for updated CLO charges most likely won’t take effect until 2025 or later.

Additionally, the SVO has effectively stopped its parallel work to model CLOs in order to align with NAIC/Academy work. This prevents the potential situation that CLOs would receive NAIC designations based on SVO modeling before the RBCIRE and Academy completed their capital charge work.

Residual Tranche Capital Charges³

Oliver Wyman Study – Oliver Wyman performed an independent analysis of residual tranche risk for broadly syndicated loan CLOs, middle market CLOs, private student loan Asset Backed Securities (ABS), prime auto ABS, and subprime auto ABS, and shared their key takeaways with the RBCIRE. While there was some debate, regulators expressed the view that the report justified the current 45% charge but are willing to continue discussions on the analysis with interested parties. The report is open for comment, and the Academy group working on structured asset RBC will also provide its thoughts on how the report aligns with their principles for structured security RBC. We believe the bar would be high to justify a lower charge, given the substantial debate it required to agree on the current 45% charge.

Property & Casualty (P&C) / Health Residual RBC – During the Capital Adequacy Task Force meeting, regulators noted that the residual capital charge had not changed in the P&C and Health RBC formulas, despite the interim charge for Life. After some discussion, regulators proposed the 45% charge also apply to P&C and Health insurers, and the proposal is currently open for comment.

Framework for Regulation of Insurer Investments⁴

The Financial Condition (E) Committee provided an update to the Framework for Regulation of Insurer Investments, after providing an updated proposal in February and a work plan. The Framework proposal is still open for comment, but one key component of the work plan was a Request for Proposal (RFP) for a consultant to advise on a due diligence program for the NAIC’s reliance on credit rating providers. This request has been approved, so regulators will move forward with the RFP process.

While the NAIC contemplates a broader enhancement of its investment regulation framework, it has noted several times that it does not plan to pause or redirect other initiatives currently in flight, as they believe these initiatives will fit in the new framework.

Life Actuarial Task Force Initiatives Impacting Investments⁵

Asset Adequacy Analysis for Reinsured Business – In 2024, some regulators have expressed a desire for insurers to perform cash flow testing on ceded business and establish reserves if assets held by the reinsurer are not sufficient. This received pushback from both regulators and interested parties from a few dimensions relating to materiality, operational challenges, data challenges, and the principles of covered agreements/reciprocal jurisdictions. At the Spring National Meeting, regulators proposed for comment a set of elements relating to asset adequacy testing of reinsured business, indicating a more cautious and measured approach to this proposal but still a desire to move forward in some form.

Actuarial Guideline 53 – LATF provided a summary of key data identified from the initial implementation of Actuarial Guideline 53, focused on the guideline excess spread assumptions and attributions of that excess spread to different risks. While the results are high level, they note that insurers mostly attributed excess spreads to just one risk, and quite often to the “Other Risk” bucket. Insurers are asked to perform this on a best-efforts basis, and we believe it can be challenging without industry standard approaches, but regulators will be working with insurers on improving their approaches moving forward.

Debt Issued by Non-SEC Registered Funds⁶

The principles-based definition of Schedule D-eligible bonds (adopted last year and effective January 1, 2025) allows for debt issued by SEC-registered funds to qualify as issuer credit obligations. Both industry and regulators agreed in principle that non-SEC-registered funds could also issue debt that should qualify, and the SEC-registration requirement is not aligned with a principles-based approach. The Statutory Accounting Principles Working Group (SAPWG) had proposed updated language to reflect this, but at the Spring National Meeting they expressed concerns that some were viewing the new language as allowing controversial structures such as feeder funds to qualify. As a result, SAPWG withdrew the proposal and stated they would work with the industry on more appropriate language.

Residual Tranche Measurement Method Adopted⁷

SAPWG adopted a proposal for residual tranches to be reported using either “effective yield method with cap” or “cost recovery” methods, after an initial proposal and comments from interested parties. Effective yield with a cap allows for realization of income at the same time as cash income is received, capped by an effective yield estimated each reporting period, with any excess income beyond the effective yield writing down the book value of the asset. Cost recovery uses all income to first write down the book value of the residual until it hits zero, after which any further income is reported as interest income. This delays income realization and is more conservative but is operationally simpler, so it is included as a practical expedient.

Perpetual Preferred Stock through AVR⁸

SAPWG adopted revisions to statutory accounting guidance that clarifies that realized gains and losses on perpetual preferred stock and mandatory convertible preferred stock, including those accessed via Exchange Traded Funds (ETFs), will not flow into the interest maintenance reserve regardless of NAIC designation, and instead should follow similar procedures as common stock and flow through the asset valuation reserve (AVR).

Conforming Repo Program RBC and Accounting Alignment⁹

In recent months, it has been discussed among various NAIC committees that “conforming” securities lending programs receive favorable RBC treatment relative to similar repurchase agreement programs, despite both being similar in nature and primarily only differing in the counterparty. While regulators and industry agree on revising the treatment, it will require coordination across multiple committees to implement.

For more information on the 2024 NAIC Spring National Meeting or other regulatory updates, please reach out to your BlackRock Relationship Manager and schedule a discussion with our Insurance Solutions team.