NAIC Spring 2016 National Meeting Update

Transcription

1 NAIC Spring 2016 National Meeting Update By: Richard Pullara Insurance Market Specialist, Clearwater Analytics Robert Lindsay, CPA Insurance Reporting Manager, Clearwater Analytics Investment Risk-Based Capital Working Group (IRBCWG) pg. 2 Primarily dedicated to the development of new corporate bond factors for life insurance companies. Statutory Accounting Principles Working Group (SAPWG) pg. 3 Dedicated to maintaining accounting principles and providing periodic updates to guidance as it develops. Their work is specifically related to discussions that result in changes to the Accounting Practices and Procedures Manual (AP&P Manual) and related SSAPs. NAIC SPRING 2016 Blanks Working Group (BWG) pg. 6 Addresses changes made to the annual statement blanks and instructions, including technical changes and clarifications. Valuation of Securities Task Force (VOSTF) pg. 8 Dedicated to designations, valuations, and the Securities Valuations Office (SVO) filing process as outlined in The Purposes and Procedures Manual (P&P Manual) of the NAIC Investment Analysis Office.

2 The NAIC held their Spring 2016 National Meeting on April 3-6, in New Orleans, Louisiana. Clearwater Analytics is dedicated to keeping insurers up-to-date on the latest regulatory guidance changes as they pertain to investment accounting and reporting. Our insurance experts attend each NAIC national meeting to monitor regulatory updates and provide proactive education on adopted and proposed items. Investment Risk-Based Capital Working Group The Investment Risked-Based Capital Working Group s (IRBCWG) discussions centered around the proposed A Way Forward document. The A Way Forward Document The IRBCWG has been updating the outdated RBC asset factors for years, with no clear end-point in sight. They decided that in order to move forward, they had to agree on some guiding principles and address specific Industry concerns. The A Way Forward document is a roadmap for addressing those concerns and providing clear next steps. The document was exposed for a 45-day comment period ending May 19. The major principles of the document are outlined below. Fixed-Income Factors A new framework that does not affect statutory accounting or the book/adjusted carrying value would be created for RBC designations. NAIC designations for RBC (and perhaps AVR) purposes would expand from six NAIC designation classes to 20 NAIC designation classes. These designations would be on a new mandatory electronic-only column on the Annual Statement and would continue to be based on credit ratings or on the SVO s assigned designation. There are two major changes since these designations were last discussed: 1. The increased granularity no longer affects statutory accounting rules for whether a security is held at amortized cost or fair market value, so updating state laws and the IMR to reflect this change is not a concern. 2. The proposed NAIC designation has typically been 14, based on the recommendation of the American Academy of Actuaries (AAA). Most likely because of the reduced scope of the change, and to make future recalibrations easier, the IRBCWG is now proposing expansion to a 20 NAIC designation. The factors will primarily be based off the analysis done on corporate bonds by the AAA over the past two years. Depending on discussions with Industry and the AAA, there could be adjustments to these base factors. These new factors would not affect the RBC method for residential mortgage-backed securities (RMBS) or commercial mortgage-backed securities (CMBS) that are modeled by the NAIC. The IRBCWG does intend to revise their guidance for how non-modeled 43R securities (asset-backed securities) are charged; the A Way Forward document suggests they no longer be subject to Modified FE, but whether asset-backed securities will be subject to the same factors as other fixed-income securities was not specified. The IRBCWG will consider keeping the six NAIC designation system in place for P&C and Health insurers. Given the smaller effect of asset risk on non-avr 2

3 companies, this increased granularity might not be worth the implementation costs. The goal for having these updated bond factors in place is year-end 2017, with all IRBCWG work completed by April This is an aggressive goal, considering how many details have yet to be specified. Due to the technical nature of RBC, Industry will likely request longer comment periods to review details. There could be additional adjustments for other nonmodeled fixed-incomes, such as sovereign debt and municipals. However, those adjustments will not be decided on until after the base factors have been finalized and are in effect. With these changes to the bond model, the IRBCWG also wants to update the Common Stock Factor by year-end Equity Factors The Life Factor was reviewed several years ago and found to be appropriate at 30%. After the Tax adjustment, the corresponding P&C Factor would be 19.5% higher than the current 15%. Industry wants more information before the P&C Factor is raised. They noted exposure to Common Stock is generally higher for P&C companies (usually comprising 10-15% of invested assets, which is seven to ten times as much as the average life insurer) and want more investigation into the proper factor from P&C Common Stock, rather than just assuming the adjustments made for Life translates with only an additional tax adjustment to P&C companies. A beta adjustment may be considered for P&C companies, or it could be eliminated for the Life formula. Given discussion from the NAIC s Property and Casualty Risk-Based Capital Working Group, it seems unlikely that a beta factor will be added on the P&C side. Their reasoning was that the impact of any adjustment was not material to the overall factor, as well as their concern that it may dissuade companies from Common Stock investments. Other Asset Classes Real Estate may be updated in the next year, but only if it doesn t slow down the progress of the Bond and Stock updates. Other asset classes will not be considered until after Bond and Stock updates are complete. This includes referrals from other RBC working groups on commercial mortgages and affiliated investments. Statutory Accounting Principles Working Group The Statutory Accounting Principles Working Group (SAPWG) discussed guidance on how to report for short sales, updates to the Investment Classification Project, prepayment penalties on callable bonds, and more. Ref# Holders of Surplus Notes The SAPWG adopted substantive changes to SSAP No. 41R Surplus Notes. The revisions require insurance companies that hold surplus or capital notes to be reported as follows: If rated by an NAIC credit rating provider (CRP) and has an equivalent of a one or two NAIC designation class, then report the note at amortized cost; If the surplus note is not rated by a CRP or has an NAIC designation class rating equivalent to three through six, report the note at the lower of amortized cost or fair value. The adoption date of January 2017 allows the Valuation of Securities Task Force (VOSTF) to update the P&P Manual to be consistent with the SSAP guidance. In addition to the revised SSAP, a new paragraph reflecting the changes has been added to Issue Paper No

4 Ref# Short Sales In November 2015, the SAPWG re-exposed Issue Paper No. 152, which gave Industry some guidance on how to report for short sales and secured borrowing transactions. Interested Parties did not see the need to make any changes to SSAP 103, but commented that if the NAIC was going to pursue this path, they would like to make some modifications to the issue paper and SAP. The NAIC has incorporated most of the comments and have re-exposed the item for comment. The proposed changes to SSAP 103 are as follows: Paragraph 82: Clarifies that short sales are generally not considered a derivative transaction. Paragraph 87: Adds a sentence about identification of the other side of a securities borrowing transaction. Paragraph 89: The NAIC wanted to originally eliminate the contra asset from the Balance Sheet (and Schedule D). This would cause an out-ofbalance on the roll-forward report. Interested Parties have requested to keep this item on Schedule D. Ref# Investment Classification Project The NAIC has directed the SAPWG to work towards exposing a proposed change to SSAP No. 26. The proposed change will provide insurers an option on the measurement method for approved bond ETFs and bond mutual funds. In short, insurers would have the option to report approved ETFs at either fair value or amortized cost, as proposed by BlackRock during the NAIC Fall 2015 National Meeting. With this change, insurers will be required to determine each specific bond s treatment at purchase, which will then be used for as long as the insurance company holds the asset on their balance sheet. From a vendor standpoint, there are still several concerns with this proposal. While we do not question the calculations that BlackRock has proposed, several practical implementation issues still have not been addressed since the vendors jointly submitted a comment letter prior to the NAIC Fall 2015 National Meeting. The addition of an option for Amortized Cost or Fair Value is also concerning, as one of the original intents of the investment classification project was to ensure consistency across the industry for how insurance companies report their assets. The option would effectively eliminate this goal, which is one of the primary reasons why vendors question this change. Based on the pending exposure proposal, two insurance companies will hold the same ETF but measure it completely differently, and get a different RBC charge for it. Furthermore, Interested Parties have commented that the SAPWG should closely consider the benefits of this proposal, given the large amount of uncertainty that exists. NAIC staff have also noted that they are open to a third option, which is to require a fair value treatment and propose a RBC framework that is consistent with other investments within the scope of SSAP No. 26. Clearwater would welcome this proposal, since it would be more consistent with the goals of the Investment Classification Project a consistent reporting approach by all insurance companies throughout the industry. The NAIC will expose this document for comment by mid-april. Ref# Quarterly Reporting of Restricted Assets The SAPWG adopted non-substantive revisions to SSAP No. 1 and the annual statement instructions to clarify that the disclosure of restricted assets (note 5H) shall be included in the annual statements, as well as quarterly if significant changes have occurred. 4

5 Ref# Prepayment Penalties on Callable Bonds This item has been open since early It deals with the inconsistent reporting on bonds with make whole provisions. Based on Industry comment, the SAPWG has re-exposed the changes, which now include the following: 1. A new paragraph to SSAP No. 26 and 43R, clarifying the breakout of investment income and realized gain loss. This would also include changes to annual instructions. 2. The addition of a new disclosure (effective date January 1, 2017) that includes the number of CUSIPs sold and the aggregate amount of investment income generated as a result of a prepayment penalty/acceleration fee including traditional call features and make whole call provisions (see fig. 1). 3. The effective date for this disclosure and changes to the SSAPs would be January Ref# Quarterly Reporting of Investment Schedules During the NAIC Fall 2015 National Meeting, the SAPWG exposed a proposal that would add a number of new electronic-only columns to the quarterly investment schedule. Industry continues to be against providing any additional information to NAIC staff on a quarterly basis. However, if regulators are going to continue down this path, they have proposed a few alternatives, one of which the NAIC is considering. The proposed alternative would eliminate the quarterly acquisition and disposition schedules and instead require a full quarterly Schedule D holdings (Part 1, Part 2-1, Part 2-2, DA). This proposal is only for Schedule D holdings, and does not include Schedules BA or DB. Furthermore, the Schedule D verification and Schedule DB Part 1B would still be required on a quarterly basis. The NAIC is exposing this revised proposal for Industry and regulator feedback. Ref# */6* Securities This item discusses if changes to statutory accounting are needed if the SVO no longer provides a 5* NAIC designation rated investments after reviewing the insurer self-certifications. Industry has responded that the need and use of 5* ratings are both relevant and important because 5* securities are current on payment obligations, but are unable to produce relevant information to the SVO in order to get a full NAIC designation. The NAIC has proposed a new disclosure to capture the number of 5* NAIC-rated securities and the book- Fig. 1 SAPWG New Disclosure (Note 5H) 5

6 adjusted carrying value and fair value for those securities (see fig. 2). Ref# ETF reporting in Investment Schedules The NAIC has exposed a change to Schedule D Part 1 for reporting of ETFs. The proposal change adds a new category (line number) to identify all SVO designated ETFs and bond mutual funds. This proposal is expected to be passed and applicable for 2016 year-end reporting. The SAPWG also exposed item , which includes revisions to SSAP 26, 30, and 32 to remove references to the Class 1 Money Fund list. This item is discussed in detail in the VOSTF meeting update on page 8. Ref# Financial Instruments Measurement The SAPWG discussed ASU , which was issued in January The major change in GAAP was the requirement for equity securities to be measured at fair value, with changes recognized in net income. NAIC staff is reviewing the standard for other changes that should be considered in statutory accounting, but currently recommends that the SAPWG reject ASU for statutory accounting. Blanks Working Group The Blanks Working Group (BWG) focused on electroniconly columns guidance, foreign codes, and more. Removal of Non-Rated from Footnote: Adopted Item BWG This item removes the reference to non-rated from the instructions for footnote D on Schedule D Part 1A, Section 1 and Schedule D Part 1B footnote A. This item includes a new cross-check that ties the footnote in total to Schedule DA and Schedule E Part 2. For Schedule D Part 1A, Section 1, the footnote will now read, Includes the following amount of short-term Non-AVR Filers AVR Filers Fig. 2 SAPWG New Disclosure 6

7 and cash equivalent bonds by NAIC designation. This change is in effect for 2015 annual reporting. Electronic-Only Columns Guidance: Exposed Item BWG This item incorporates the 2015 application guidance and combines the Senior Subordinated Debt and Junior Subordinated Debt codes in the electronic Capital Structure Column (34). The options for Column 34 Capital Structure Code now read: 1. Senior Secured Debt 2. Senior Unsecured Debt 3. Subordinated Debt 4. Other This also modifies the instructions for Schedule D Parts 2 through 6 to reflect changes made on Schedule D Part 1 for both CUSIP and Description columns. For purposes of consistency, this item also adds electronic-only columns for Issuer, Issue, and ISIN to those schedules. Foreign Codes: Exposed Item BWG This item reduces the current foreign codes from 12 to four for Schedule D. This item has long been desired by Industry, as the previous foreign matrix table was confusing and cumbersome. Reducing the number of foreign codes significantly simplifies the process. The new options are as follows: A For Canadian securities issued in Canada and denominated in U.S. dollars. B For those securities that meet the definition of foreign provided in the Supplemental Investment Risk Interrogatories and pay in a currency OTHER THAN U.S. dollars. C For foreign securities issued in the U.S. and denominated in U.S. dollars. D For those securities that meet the definition of foreign as provided in the Supplemental Investment Risk Interrogatories and denominated in U.S. dollars (e.g. Yankee Bonds or Eurodollar bonds). All other types of securities should be left blank. Bond Characteristics: Exposed Item BWG This is another item aimed at providing Industry with clarification on what should be provided in the Bond Characteristic column (column 5). This proposal completely eliminates the eight previous codes and replaces them with ten new codes. The purpose of these changes is to more accurately reflect a more detailed explanation of the types of information regulators are examining. Restricted Assets Disclosure: Exposed Items and BWG This item is the result of the adoption of SAPWG Ref# Quarterly Reporting of Restricted Assets. It further clarified that Note 5H shall be included in the annual statement, as well as quarterly if significant changes have occurred. Further changes to note 5H concerning collateral received were exposed under item BWG. For more details on the SAPWG adoption of Ref# , read the SAPWG meeting update on page 3. 5*/6* Disclosure: Exposed Item BWG This is another item that is the result of the SAPWG exposing Ref# on the use of 5*/6* securities. While the SAPWG has not passed the changes yet, they have moved forward with exposing the corresponding blanks change to ensure it will be complete in time for 2016 annual reporting deadlines. This item adds a new disclosure to Note 5 (investments) for 5* securities for data capture purposes (see fig 2). Short Sales: Exposed Item BWG This item is a pending disclosure required as a result of SAPWG Ref# It adds a new disclosure to Note 5 for short sales for data capture reasons. It also adds a new code (SS) to the investment general instructions for 7

8 short sales, which impacts Schedules D (Part 1, Part 2; Section 1, Part 2; Section 2), DA, and E (see fig. 3). Class 1 Money Fund list: Exposed Item BWG This item contains a number of changes that are the result of the SAPWG exposing Ref# , which removes references to the Class 1 Money Mutual Fund List. Included in this item is the removal of the * and # from the code column on Schedule D Part 1. This proposal changes references from class one bond mutual funds to bond mutual funds and adds a new section called SVO designated securities as well as a new column ( no maturity date ) to Schedule D Part 1A. Furthermore, it makes changes to the Supplemental Investment Interrogatories and AVR schedules. This project is outlined in more detail below. Valuation of Securities Task Force The Valuation of Securities Task Force (VOSTF) focused on upcoming money market fund reforms, loan-backed and structured securities, and Jumpstart exceptions. Before the meeting, the VOSTF held several conference calls. During those calls, they received the American Council of Life Insurers (ACLI) report on changes in the derivative market and recommended to the Financial Condition Committee that the NAIC retain the Derivative Instruments Model Regulation. Money Market Fund Reform Money market fund (MMF) reform is one of the most significant items that the VOSTF is addressing. In response to the SEC s requirement that institutional prime MMFs report a floating Net Asset Value (NAV), the VOSTF adopted an amendment to remove the Class 1 List from the P&P Manual of the NAIC Capital Markets & Investment Analysis Office. This will be effective September 30, There are Industry concerns that if the list is removed, the affected funds will need to be reclassified to Schedule D Part 2, Section 2 (D-2.2). This reclassification would require a much higher RBC charge, even though nothing about the funds have actually changed. These funds are used by insurers for liquidity and to generate a small amount of interest on otherwise uninvested cash, while most D-2.2 assets are used for long-term capital appreciation and to hedge against inflation risk. Unsettled Short Sale Transactions (outstanding as of Reporting Date) Settled Short Sale Transactions Fig. 3 New Disclosure to Note 5 8

9 During the NAIC Spring 2016 National Meeting, the NAIC clarified that MMFs could still qualify for Schedule DA treatment and the corresponding RBC charge because MMFs are listed in SSAP 2 as an example of a short-term asset. NAIC staff suggested that MMFs be placed under the Other Short-Term Assets Category on Schedule DA. After this discussion, Industry was more receptive to the possible deletion of the Class 1 List. There is currently a referral to delete the category from the Annual Statement Blanks and to remove the category from Schedule DA. The Securities Valuation Office The Securities Valuation Office (SVO) has undertaken several efforts to modernize their computer systems and update how securities are filed. These efforts will also help reduce Jumpstart exceptions, which are caused when securities are reported as filing exempt by an insurer but do not appear on the SVO s credit rating provider feeds. As the SVO redesigns their systems to make filing securities easier and more efficient, the SVO staff and Industry representatives have created a statement of guiding principles. The SVO has also been improving functionality in the AVS+ service to provide greater coverage and more information to Industry about securities. The SVO has already added Bank Loan ratings to AVS and their credit rating feeds. Additionally, they will include international securities identified by ISIN, as well as an indicator marking if a security is a structured note. The SVO also detailed several other issues causing Jumpstart exceptions. The largest category of exceptions relates to private letter rating securities; in these cases, the SVO recommends that insurers file evidence of a private rating with the SVO. Other exceptions include: instances when an NRSRO displays a rating on its website but the SVO does not receive one; insurers using ratings not received directly from the NRSRO; pre-refunded securities; and government-guaranteed securities. In most cases, the SVO s recommendation is that insurers should file these securities with the SVO. Jumpstart exceptions are not inherently an issue because in these cases the insurer simply presents their reasoning to the examiner and the issue is resolved. The report is exposed for a 30-day comment period. The VOSTF approved a motion to form a Working Group to address these issues in more detail. The VOSTF also received a proposal from the SVO to amend the definition of Loan-Backed and Structured Securities in SSAP 43R. Industry had expressed concerns that the current definition is too inclusive and should be changed to be more precise, in order to avoid including assets that have fundamentally different economic characteristics than mortgage- and asset-backed securities (such as credit tenant loans). The proposed definition of Loan-Backed and Structured Securities is as follows: 1) The legal isolation and pooling of; 2) a finite number of cash generating assets; 3) each from a different obligor; 4) in a trust; where 5) the cash flow from the collateral assets is used to pay the holders of the securities. The proposal was exposed for a 60-day comment period. National Financial Presentation Standards (NFPS) The VOSTF adopted an amendment to the P&P Manual to include Italian GAAP as a Standard that s allowed to be presented without reconciliation to US GAAP or IFRS. The SVO will also study Belgium GAAP to determine if it can be added to the list of approved NFPS as well. Some in Industry objected to this report. They explained that it is not their responsibility to supply the SVO with ratings that they ve obtained, that filing all of these securities would be cost-prohibitive, and that

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