Key updates from the 2024 NAIC Fall National Meeting

The NAIC Fall National Meeting recently took place in Denver, CO, and investments remain a central focus of regulator and industry discussions. Key updates from the meeting include:

• Comprehensive funds RBC review
• CLO Risk-Based Capital (RBC)
• Deactivation of private securities without rationale reports from filing exempt (FE) process
• Accounting and RBC for investment subsidiaries
• Credit repacks
• CRP eligibility clarification in the filing exempt process
• 2023 liquidity stress testing results

Comprehensive funds RBC review

In August, the Risk-Based Capital Investment Risk and Evaluation (RBCIRE) working group opened a workstream to review the treatment of funds in the RBC framework. The RBCIRE did not meet at the Fall National Meeting, and therefore, it was not discussed. However, an interim meeting in October was held to scope this workstream. Based on these early discussions, the RBCIRE will initially focus on bond mutual funds, bond ETFs, and private bond funds. Before any analysis begins, the ACLI will lead the identification of “principles” that will guide the development of RBC treatment for these different types of funds.

For bond ETFs, this workstream is not expected to reverse any of the recent progress to align bond ETF RBC treatment with that of the underlying bonds. Instead, it may help tie out various loose ends that are outstanding and may overall increase alignment between ETFs and mutual funds. This could be more impactful for private bond funds, which are generally not distinguished from private equity funds for RBC purposes.

CLO Risk-Based Capital

The Valuation of Securities Task Force (VOSTF) heard an update from Eric Kolchinsky of the Structured Securities Group (SSG) on progress towards direct modeling of broadly-syndicated loan CLOs for assignment of an NAIC Designation. As a reminder, CLOs have been added to the Securities Valuation Office’s (SVO) list of modeled securities (similar to RMBS and CMBS) effective for year-end 2025, and the SSG has been publicly developing the modeling framework. Initial model results across various scenarios have been published, and the next key step is to determine probability weights for the scenarios. The SSG’s website with results and documentation can be found here: SSG CLO Analysis Website.

There was no material update on the RBCIRE’s partnership with the American Academy of Actuaries (“Academy”) on developing a new RBC framework for CLOs, given that the RBCIRE did not meet. This workstream is separate from the SVO’s short-term initiative to directly model CLOs by 2025, but key stakeholders are engaged across both workstreams, and the Academy/RBCIRE framework would be expected to replace SVO modeling once it is adopted. The Academy is looking to share initial modeling results in early 2025, though there will likely be several rounds of feedback and iteration before a final framework is adopted.

Deactivation of PLRs without rationale reports

The VOSTF has recommended deactivating securities from the filing exempt process that have private letter ratings (PLRs) but do not have rationale reports filed with the SVO for year-end 2024 reporting, as described in paragraphs 9-12 of Part Three of the Purposes and Procedures Manual for the NAIC Investment Analysis Office (IAO P&P). Filing rationale reports for PLRs has been required for over two years, but they have delayed deactivation until now due to technological issues. The NAIC shared that right now there are an estimated 1,700+ securities that would be deactivated due to not receiving rationale reports. There is a 30-day grace period for securities whose rationale reports would renew in December.

If a PLR security is deactivated from filing exempt, an insurer would need to either file the security with the SVO to get a designation assigned or self-assign a 5.B designation.

Accounting and RBC for investment subsidiaries

The SAPWG opened an agenda item focused on clarifying and enhancing the reporting for investment subsidiaries. Regulators have become aware of several inconsistencies across the annual statement, asset valuation reserve (AVR), and RBC guidance which has resulted in diverse approaches taken by insurers due to varying interpretations. The agenda item suggests three potential actions: 1) revising SSAP No. 97 to directly address investment subsidiaries; 2) adding new reporting schedules to detail the underlying assets held within an investment subsidiary; and 3) making referrals to RBC-focused working groups to address any additional information required for regulators to verify the RBC calculations for investment subsidiaries.

A summary of this topic can be found here (Ref # 2024-21): SAPWG Meeting Materials.

Credit repacks

The Statutory Accounting Practices Working Group (SAPWG) has rescinded its proposal to bifurcate reporting of “credit repack” investments, which combine debt and derivatives in a special purpose vehicle (SPV) which then issues a debt security held by the insurer with altered characteristics compared to the underlying debt (such as floating to fixed). At the Summer National Meeting, the NAIC proposed bifurcating the debt and derivative for statutory purposes in order to provide regulators with better insight into the individual exposures. However, interested parties uniformly pushed back on this approach, noting several inconsistencies and complications that this bifurcation would create. The revised proposal no longer recommends bifurcating the debt and derivative, and instead, focuses on proper disposal and acquisition reporting of a security that is sold into a credit repack structure and then rebought.

SAPWG discussion of this proposal can be found in the hearing materials here (Ref # 2024-16): SAPWG Hearing Materials.

CRP eligibility clarification in FE process

The VOSTF adopted clarifying language within the IAO P&P that the NAIC will recognize a rating in the filing exempt process from a credit rating provider (CRP) if the CRP is registered with the SEC as a Nationally Recognized Statistical Rating Organization (NRSRO) for that asset. They specifically noted that SEC definitions may be different than statutory definitions. This clarification eliminates some industry concern that an NRSRO’s eligibility in the filing exempt process could change for an asset based on that asset’s statutory classification (such as an asset-backed security vs. and issuer credit obligation under the new bond definition).

The updated language can be found here (Attachment Four-C): VOSTF Materials.

2023 liquidity stress testing results

The Macroprudential Working Group shared results from the 2023 Liquidity Stress Test analysis, which is a requirement for life insurers that exceed minimum balances in specific activities or product types (such as FA/FIAs, sec lending, funding agreements, etc.). The analysis requires an analysis of liquidity needs, sources and uses of liquidity, and any asset sales over 1-month, 3-month, and 1-year horizons in various scenarios. Overall, they found that industry-wide asset sales in the stress test were generally minimal and would not impact broader financial markets even in adverse scenarios.

The report can be found here (Attachment Three): Financial Stability Materials.

For more information on the outcomes from the meeting, contact your Relationship Manager for a follow-up discussion with our Insurance Solutions team.