Key Updates from the 2023 NAIC Summer National Meeting

The 2023 National Association of Insurance Commissioners (NAIC) Summer National Meeting took place on August 12-16^th in Seattle, Washington. Several key updates to existing proposals were provided which could have implications for insurers’ investment portfolios. Highlighted below are updates related to several projects including the Principles-Based Bond Definition, the Securities Valuation Office’s (SVO) proposal to override Credit Rating Providers’ (CRP) ratings, updated NAIC Designation Categories for Collateralized Loan Obligations (CLOs) and capital charges for residual tranches, and allowance for a negative Interest Maintenance Reserve (IMR).

Statutory Accounting Principles (E) Working Group Adopts the Principles-Based Bond Definition with an Effective Date of January 1, 2025

During its National Meeting session on August 13^th, the Statutory Accounting Principles (E) Working Group (SAPWG) voted to adopt its Principles-Based Bond Definition, bringing a conclusion to this multi-year project. In accordance with this adoption, official updates were made to SSAP No. 26 – Bonds¹ and SSAP No. 43 – Asset-Backed Securities².  The finalized version defines a bond 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 as described further in the statements. The decision carries weight as it will determine the types of assets which can be classified as bonds on Schedule D-1, and thus a lower capital charge.

The SAPWG session also included discussion on another topic, residual tranches – specifically, which investments would qualify as a residual tranche. This is of particular importance given the Risk-Based Investment Risk and Evaluation Working Group’s (RBCIRE WG) recent adoption of a new 45% residual tranche charge for Life insurance companies, to take effect at year-end 2024. This debate is of particular interest for rated note investors, where there is ambiguity as to whether the equity tranche of these structures will qualify as Limited Partnership (LP) interests (and garner a 30% charge) or as residual tranches (and garner the eventual 45% charge). We expect the dialogue on this topic to continue in the months ahead.

Valuation of Securities Task Force (VOSTF) Asks the Securities Valuation Office (SVO) to Take into Consideration Interested Party Comments Regarding its Proposal to Override NRSRO Ratings

Over time, the SVO’s proposal has morphed from its original focus on the Filing Exemption eligibility of Rated Note feeder funds to a broader proposal to grant the SVO the authority to override Nationally Recognized Statistical Rating Organizations’ (NRSRO) credit ratings (both public and private). Numerous comment letters were presented during the VOSTF session on August 14^th, all of which argued against granting the SVO this unilateral authority. The commenters’ arguments claimed there was  lack of transparency in the proposal, a weak processes and standards employed in terms of checks and balances, a short notice period to insurers, the appeal process for insurers, and  a lack of resources at the SVO to successfully execute on such a vast undertaking. In our view, the general sense coming out of the VOSTF session is that there is a lot of wood left to chop on the proposal and it will certainly face additional headwinds before being officially adopted, if at all, in its current form. The discussion concluded with VOSTF Chair Carrie Mears’ mandate to the SVO to take away and address many of the concerns offered in the comment letters received on the proposal.

Structured Securities Group (SSG) Details Next Steps for CLO RBC Project

Also during the VOSTF session, Eric Kolchinsky, director of the NAIC’s SSG provided an update on the latest work being done on the project related to new NAIC Designation Categories for CLO risk based capital (RBC). Mr. Kolchinsky noted that the ad hoc group has resolved and clarified many of the technical and modeling issues pertaining to the initial CLO modeling. He indicated the working group will now shift attention to the development of the new macroeconomics scenarios. 

SSG’s tentative timeline for the final methodology and scenarios to take effect on January 1, 2024 remains in place.

Statutory Accounting Principles Working Group (SAPWG) Adopts Allowance of Negative Interest Maintenance Reserve (IMR)

IMR is a concept which was established for life insurers’ statutory accounting in 1992 to amortize realized, interest-related capital gains and losses on fixed income assets into statutory earnings over the remaining life of the asset. It serves to stabilize statutory surplus and earnings against interest-related realized gains/losses. Interest-related realized gains result in an offsetting IMR increase, and vice versa for losses. However, aggregate IMR cannot go below zero – at which point realized losses would be reflected immediately.

During periods of falling interest rates, IMR has been used to smooth interest-related realized gains into earnings and surplus. However, given 2022’s rapid and significant rise in interest rates, insurers are starting to realize losses, potentially depleting their IMR. Since IMR cannot become negative, insurers may have to realize losses immediately, which in turn reduces statutory earnings and total statutory surplus.

During the SAPWG session on August 13th, SAPWG adopted an interim solution allowing net negative (disallowed) IMR of up to 10% of adjusted capital and surplus with the requirement that reporting entities applying this interpretation need to have a risk-based capital greater than 300% of the authorized control level (ACL).³ The update is effective immediately and lasts through December 31, 2025.  An ad-hoc subgroup has been formed to work on the development of a long-term solution in the meantime.

For more information on the 2023 NAIC Summer National Meeting or other regulatory updates, please reach out to your BlackRock Relationship Manager and schedule a discussion with our Insurance Solutions team.