NAIC Investment Updates Summer 2016 National Meeting Overview September 13, 2016
Diana Gallinger, CPA Product Owner, NAIC Clearwater Analytics Robert Lindsay, CPA Insurance Reporting Manager Clearwater Analytics
Agenda 1 2 3 4 Valuation of Securities Task Force Special Session Statutory Accounting Principles Working Group Blanks Working Group and Investment Reporting Subgroup Valuation of Securities Task Force
Valuation of Securities Task Force Special Session
VOSTF Special Session Summer National Meeting Updates VOSTF met in a special session to discuss infrastructure investments Presentations by ACLI, Moody s, S&P Ratings, consulting firms, and five of the largest insurers in the US Infrastructure broadly defined Includes power and water delivery, power generation, communications infrastructure, and social infrastructure NAIC recognizes infrastructure investment affects the US economy as a whole Other projects may be delayed in the interest of moving forward
VOSTF Special Session Summer National Meeting Updates (cont.) NAIC is still in a discovery phase Changes may arrive in the coming years Changes likely targeted toward life insurers first Reasons: Life insurers portfolios have larger durations Life insurers do not have the same tax benefits when investing in municipal bonds as P&C insurers
VOSTF Special Session Suggested Changes Revision of the Securities Valuation Offices (SVO) analysis process to acknowledge different risk factors for infrastructure investments Adjustments of RBC factors for investments in infrastructure Primarily on Schedule D 1 assets but could also include: Federal Home Loan Bank collateral Collateral loans Investments structured as partnerships Would be referred to Capital Adequacy Task Force and IRBCWG
VOSTF Special Session Recap Life insurers especially should monitor closely Could impact SVO rating process/filing requirements Will likely impact RBC calculation
Statutory Accounting Principles Working Group
Changes to Quarterly Reporting Background NAIC and state regulators struggle to compile and analyze mid-year holdings data due to the amount of work required to roll-forward prior-year activity to current year Three solutions suggested: 1. NAIC could hire a consultant to develop new systems 2. New holdings schedule could be created for CUSIP, par value, BACV, and fair value fields with the quarterly acquisition and disposal schedules 3. Could replace Schedule D Parts 3 and 4 with a Schedule of Owned Holdings to streamline quarterly filings
Changes to Quarterly Reporting Proposal SAPWG compromised with Industry and requested second option only at mid-year Insurance companies will be required to file Schedule of Owned Holdings with CUSIP, par value, book/adjusted carrying value, and fair value at mid-year Proposal exposed for 45-day comment period
Polling Question 1
Money Market Funds as Cash Equivalents Changes to Stable NAV MMFs will no longer maintain stable net value Will be implemented October, 2016 VOSTF and SAPWG reviewed how new treatment would impact statutory accounting Determined Class One Mutual Funds are required to maintain stable net asset value Class One Money Market Mutual Funds will be eliminated New category, Other Money Market Mutual Funds, to be added to Schedule DA
Money Market Funds as Cash Equivalents (cont.) Summer National Meeting Updates MMFs function more like cash equivalents than bonds and treated like so for GAAP reporting Suggested they be re-classified to Schedule E Part 2, Cash Equivalents Change would eliminate a GAAP/STAT reporting difference for many insurance companies reporting on a GAAP basis Effective date of proposal is January 1, 2018
Polling Question 2
Reviewed Items and Updates to GAAP Rejected: ASU 2016-01 Measurement of Financial Instruments Proposal requires equity securities with readily determinable fair value take changes in fair value through net income Smaller provisions suggested for incorporation into SSAP No. 30 and SSAP. No. 100 Guidance on securities without readily determinable fair value Changes to fair value disclosures SAPWG determined no changes to existing fair value disclosures were necessary Not applicable to statutory accounting
Reviewed Items and Updates to GAAP Rejected: ASU 2016-06 Separation of Embedded Derivatives from Host Contracts SAPWG reviewed ASU 2016-06 Primarily refers to convertible bonds Statutory accounting does not allow separating these instruments Exposed revision to SSAP No. 86 to reject the standard as not applicable to statutory accounting
Reviewed Items and Updates to GAAP Exposed: ASU 2016-13 Changes to Impairment Guidance for Fixed- Income Securities Current GAAP and STAT guidance has impairment taken when loss occurred is probable Concern that expected but not yet probable losses are not reflected on financial statements Different guidance for securities held at amortized cost (held-to-maturity assets) offered and classified as available-for-sale Requirement to implement revisions begins January 2020 Early adoption permitted starting January 1, 2019
Reviewed Items and Updates to GAAP Exposed: ASU 2016-13 Changes to Impairment Guidance for Fixed- Income Securities (cont.) SAPWG requested feedback on Difference between HTM and ASF assets How to apply the new guidance for AVR filers To what extent GAAP and STAT inconsistencies will occur Staff expects new credit loss SSAP will be created and INT 06-07 other-than-temporary impairment will be nullified
Polling Question 3
Bond ETFs Exposed: SSAP No. 26 Background SAPWG continues to discuss the bond ETF project Industry disagrees on how to properly classify bond ETFs SAPWG asked for comments on what calculations for book/adjusted carrying value should be Also suggested that companies would be free to choose how to calculate the systemic value if they had a documented approach ETF providers remain strong in their opinion that bondapproved ETFs should be reported using systematic value However, they were not opposed to an option for fair value
Bond ETFs (cont.) Summer National Meeting Updates ETF providers co-presented Agreed with software vendor comments expressing concern with the concept of multiple systemic value calculations Asserted that the calculations should be unified and vetted by NAIC and Industry Gave responses to implementation questions posted by software vendors last November Reponses available on SAPWG s website Exposed: SSAP No. 26
Bond ETFs (cont.) Exposed: SSAP No. 26 Summer National Meeting Updates (cont.) NAIC feels there are too many unknown variables to move forward NAIC staff to prepare an issue paper requiring measurement at fair value for bond-approved ETFs and bond mutual funds This is unless they chose to use a domiciliary state-approved document systematic value SAPWG sent referrals to Capital Market Bureau and VOSTF to review and comment
Revisions to Disclosures Required by SSAP No. 26 Exposed: SSAP No. 26 Clarification Requested on Disclosures Concern over language Confusion over whether disclosures were meant to include only securities applicable to SSAP No. 26 or all securities applicable to Schedule D, including SSAP No. 43 R Loan-Backed Structured Securities Questions on disclosures Groups securities by maturity distributions Intended to be a high-level snapshot of the Annual Statement Schedule D Part 1, Section A Captures granular maturity buckets and should include all applicable bond categories
Revisions to Disclosures Required by SSAP No. 26 Clarification Requested on Disclosures (cont.) NAIC staff exposed a revision to make SSAP No. 26 clear regarding which securities would be included Staff recommended that maturities, paydowns, and other redemptions should be reflected as part of the proceeds on securities Recommendations and revisions were exposed Exposed: SSAP No. 26
Exposed Items SSAP No. 86: Accounting for Derivative Instruments Concerns the definition of notional amount within SSAP No. 86, as insurers are reporting amount inconsistently SAPWG exposed two potential definitions: 1. Based on type of contract (futures vs. non-futures contract) 2. Based on type of underlying item (par value of underlying fixed-income and the fair value of underlying equity) Exposed for 45-day comment period Item 2016-14 also adopted Exposed: Ref #2015-51 Includes swaptions as a type of derivative instrument
Blanks Working Group and Investment Reporting Subgroup
Collateral Type Revisions Background Investment Reporting Subgroup discussed reducing the number of collateral type options available on Schedule D Part 1 Suggested reducing from 21 to 8-10 21 distinct categories are not consistently reported by Industry Not heavily utilized by regulators
Collateral Type Revisions Proposed Revisions Revisions would condense collateral types into individual or commercial types Eliminates need for specific asset type reporting Industry commented that RMBS and CMBS are reported as a NAIC-specific category Collateral type designation for these is redundant NAIC prefers 10 to eliminate possible confusion
Collateral Type Revisions Proposed Revisions (cont.) Investment Reporting Subgroup referred item to VOSTF VOSTF had no concerns with proposed revisions Further work from Investment Reporting Subgroup to continue
Valuation of Securities Task Force
Reporting Exceptions Subgroup Background Created to investigate large number of securities not included in credit rating provider feeds sent to NAIC Still reported as filing exempt FE securities have been rated by one or more credit rating providers
Reporting Exceptions Subgroup Summer National Meeting Updates Exceptions fell into six main categories Private letter ratings Securities dropped from or never included in CRP data feeds International securities using ISINs Use of Bloomberg Pre-refunded securities Government guarantees
Reporting Exceptions Subgroup Private Letter Ratings Contentious issue between Industry and Subgroup Privately placed securities comprise large portion of Jumpstart exceptions NAIC does not have a method to verify the NRSRO rating Recommended VOSTF require insurers to file private letter ratings with the SVO or file documentation with NAIC to obtain designation Insurers currently provide rating letters to regulators upon request Industry questions necessity of filing rating letters directly with the NAIC
Reporting Exceptions Subgroup Securities Dropped from or Never Included in CRP Data Feeds SVO proposed enhancement to VISION (AVS+) application Would map identifier on NRSRO s website to the SVO s identifier and resolve exception International Securities Using ISINs SVO will add ISIN to the VISION (AVS+) application Will address the majority of these exceptions
Reporting Exceptions Subgroup Use of Bloomberg NAIC asserted Bloomberg is not an acceptable source to obtain CRP ratings and calculate NAIC FE designations Two reasons: 1. Bloomberg does not capture ratings from all NAIC approved NRSROs 2. Industry may use issuer ratings from Bloomberg, but NAIC designations are based on issue-level ratings. Unclear whether this exception will cause changes to the P&P Manual
Reporting Exceptions Subgroup Pre-Refunded Securities Must be filed once and not annually renewed SVO needs to verify pre-refunding agreement Industry has not been following this practice and has raised concern about cost of the filing Industry asserts cost outweighs the work necessary by SVO to verify the agreement
Reporting Exceptions Subgroup Government Guarantees Not a high priority Three ideas to reduce exceptions: 1. Separate designation (1US) 2. New subcategory for GSEs 3. More explicit guidance in instructions stating these securities should have One rating, not 1FE
Polling Question 4
Clarifying Treatment of DIPs Background Loans granted to a debtor to finance an organization under bankruptcy code DIPs are a type of bank loan Can be assessed for quality and assigned an NAIC designation under scope of SSAP No. 26
Clarifying Treatment of DIPs Next Steps Financial Regulatory Services staff noted DIPs are not specified in the AP&P Manual Characteristics are more similar to collateral loans Collateral loans are accounted for under SSAP No. 21 Other Admitted Assets Also filed under Schedule BA (Other Long Term Assets) Issue referred to SAPWG to clarify treatment of DIPs
Surplus Notes Adopted Revisions to SSAP No. 41 Surplus Notes Expand amortized cost treatment from one NAIC designation class security to both one and two NAIC designation class securities Eliminate the need for financial assessment of surplus notes rated 2-6 SAPWG referred this issue to VOSTF to consider related adjustments to P&P Manual
Surplus Notes Adopted Revisions to SSAP No. 41 Surplus Notes P&P Manual contains a list of surplus notes rated One Also contains instructions relating to financial assessment of surplus notes VOSTF adopted a proposal that would delete this information from the P&P Manual
Proposed Changes to RMBS and CMBS Summer National Meeting Updates Since adoption of SSAP 43R, ACLI has criticized methodology of financial modeling process SSG proposed a through-the-cycle modeling approach Would result in less fluctuation in modeling RMBS/CMBS and increase transparency More conservative during economic booms Less conservative during economic downturn Exposed for comment BlackRock also updating its model for CMBS, effective 2017 Net effect will be a more conservative model
Additions to Reference Lists Summer National Meeting Updates HR Ratings de Mexico, S.A. de C.V. officially adopted as a Credit Rating Provider Added to the P&P Manual Belgian GAAP was added to P&P Manual s list of National Financial Presentation Standards Financial statements can be presented to the SVO following Belgian GAAP reconciling to the US GAAP or IFRS
Polling Question 5
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