US Insurance Regulatory News - Volume 3, No. 1

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1 US Insurance Regulatory News - Volume 3, No. 1 This edition of the PFS US Insurance Regulatory newsletter provides a summary of the National Association of Insurance Commissioners (NAIC) Spring Meeting held in Orlando, Florida March 29-30th, Please note that the items included in this newsletter are intended as a summary and not a full report of regulatory changes. Blanks Working Group (BWG) Items Received for Comment BWG Move Disclosure for Offsetting and Netting of Assets and Liabilities from Note 21 to Note 5 - Adopted This proposal moves the disclosure for offsetting and netting of assets and liabilities from Note 21, Other Items to Note 5, Investments, with an illustration that will be data captured BWG Add Lines and Instructions to AVR for Mortgage Loans - Deferred This proposal includes additional lines for the AVR Default Component and Equity and Other Invested Assets Component blank pages for mortgage loans. The instructions have been updated to include updated line and page number references. This intent of the proposal is to implement an AVR treatment for commercial mortgages that is the same as the methodology used for Life Risk Based Capital. This item was deferred by the working group as there were many lines that were not numbered correctly, and they did not wish to make modifications to the proposal during the meeting. Staff will review and correct the proposal so that it may be considered for adoption during the June conference call. New Items BWG New Disclosure Added to Note 5 for Structured Notes Exposed for Comment The proposal would add a new disclosure to Note 5 for Structured Notes. The proposal originates from the Invested Asset Working Group (IAWG) of the Valuation of Securities Task Force. The IAWG had been charged with review of the structured notes and was unable to reliably identify the population with standard data sources. This disclosure allows the NAIC to data capture the population of structured notes, and those notes that are considered mortgage referenced securities. The CUSIP Identification, Actual Cost, Fair Value, and Book/Adjusted Carrying Value are included in the disclosure BWG Schedules A, B, and BA New Electronic Only Columns Exposed for Comment The proposal suggests adding new electronic only columns to Schedules A, B, and BA for postal code and property type. Additional electronic columns would also be added to Schedules B and BA to capture maturity date. The existing State column would also be updated on these schedules to accept the three character country code if a country is reported. 1

2 The comment deadline for all exposed items is May 8, Additional information on all adopted and exposed items may be found on the NAIC website. Statutory Accounting Principles Working Group (SAPWG) Hearing Agenda The SAPWG took action on the following items from the Hearing Agenda Clarification of Appendix B Included in SSAP No Adopted The working group has adopted updates to clarify that for downstream holding companies, the sum of all investments in the SCAs within are calculated as the investment in the downstream holding company ASU Inclusion of the Fed Funds Swap Rate as a Benchmark Interest Rate - Adopted Guidance issued in July 2013 in ASU allows the use of the Fed Funds Swap Rate as a benchmark interest rate for hedge accounting, along with the US Government (UST) and the LIBOR. The guidance also removes the restriction on using difference benchmark interest rates for similar hedges. The working group has adopted non-substantive revisions to SSAP No. 86 to include a definition for benchmark interest rate and which rates are permissible in the US Investment Classification Review Work in Progress The NAIC staff has received comments and questions regarding the definition and scope of the bond and equity SSAPs. This agenda item tracks a comprehensive project to review the investment SSAPs. As a first step, NAIC staff will begin developing an Issue Paper to serve as a source document for reference materials and discussion. The Task Force will also send formal referral to other working groups/task forces to inform them of the project and to request participation as part of a collaborative process. New Items- All Items Exposed for Comment Disclosure for Structured Notes The working group has proposed updates to SSAP No. 26 for a new disclosure for structured notes. They have also submitted a proposal to the Blanks Working Group ( BWG) to include the disclosure in Note 5 for yearend Updates to SSAP 43R are also included in the proposal. These updates clarify that the guidance contained in SSAP 43R is for structured securities and not structured notes Reference SSAPs on Issue Papers Issue Papers are not considered to be authoritative guidance however they currently do not contain any reference to the applicable authoritative guidance. This proposal looks to add references to the SSAP that corresponds with the issue paper (both the original SSAP and the current authoritative SSAP guidance for the issue) ASU , Derivatives and Hedging Accounting for Certain Receive- Variable, Pay- 2

3 Fixed Interest Rate Swaps Simplified Hedge Accounting Approach The ASU issued by the FASB Private Company Council (PCC) provides a practical expedient to apply cash flow hedge accounting for certain types of swaps that are entered into for the purpose of economically converting variable rate borrowings into fixed rate borrowings. The guidance is intended for private company stakeholders concerned about the cost and complexity of applying US GAAP hedge accounting. The update states that it would not apply to insurance entities, so the working group has proposed rejecting the guidance as not applicable to statutory accounting. The comment deadline for all exposed items is May 8, Restricted Assets Subgroup The Restricted Assets Subgroup is waiting to receive information from first quarterly filings in order to continue discussions on Federal Home Loan Banks (FHLBs). NAIC staff is currently working to gather information for repurchase and reverse repurchase agreements in order for the group to begin discussions. Accounting for Bottom- Tier Residual Interests The Valuation of Securities Task Force has referred an item the SAPWG to review the guidance in SSAP No. 43R and SSAP No In their referral, the task force requested review of the following: 1. Do bottom- tier beneficial interests meet the definition of a loan-backed and structured security found in SSAP 43R? 2. Should the statement value of bottom- tier residuals be limited to fair value? 3. Do bottom- tier residuals meet the definition of an asset? Valuation of Securities Task Force (VOSTF) The task force addressed the following topics during the spring meeting. Invested Asset Working Group- Referral on Structured Notes The working group determined that they could not move forward with their work on structured notes until they had more information about the industry s exposure. As there have been data inconsistencies with the bond characteristics column on Schedule D Part 1 (codes are not reported or are reported incorrectly) the working group decided to recommend a disclosure be added to Note 5. Both the SAPWG and BWG have proposals exposed for comment that would add this disclosure for yearend Securitization Data Quality Working Group The task force voted to create a new working group to address data quality and quantity standards for the purpose of determining if a new issue RMBS or CMBS is eligible for financial modeling. The group would also make recommendations to amend the Purposes and Procedures manual if private label RMBS or 3

4 CMBS are determined to be ineligible for modeling. A final report to the VOSTF is expected by June 15, Bottom-Tier Residual Interests The task force made a referral to the SAPWG to review and provide a definition and guidance for bottomtier residual interests, as noted above in the SAPWG agenda. Financial Presentation Issues Staff presented a suggested amendment to the Purposes and Procedures Manual that the reference to Canadian GAAP be modified to refer to Accounting Standards for Private Enterprises (ASPE). As this is a new standard, the SVO staff will require training prior to recognizing ASPE as an approved national financial presentation standard. The American Council of Life Insurers (ACLI) has also requested that the SVO review National GAAP of both the Netherlands and France so that they may be considered for approval as national financial presentation standards. Short Dated Non-Principal Protected Securities Due to the new reclassification instructions, several occurrences of either conflicting or outdated guidance needed to be updated in the Purposes and Procedures Manual. Text in Part One, Section 2(c)(iii) in reference to short dated non-principal protected securities has been deleted. Additionally two fragments in Part Two, Section 1 (last sentence in Unconfirmed FE definition) and Part Three, Section 1(b) (General Procedure for Credit Assessment and Classification of Preferred Stock) have also been deleted. Principal Protected Notes The staff presented updated text and a new methodology for principal protected notes. Industry submitted comments on the methodology and the proposal was deferred. Staff will work with industry to refine the methodology. Catastrophe Bonds The language in the Purposes and Procedures Manual was updated to indicate that Catastrophe-Linked bonds are eligible for Filing Exemption, provided that they are rated by a NAIC Credit Rating Provider (CRP) and meet the specified criteria, and also that they are not required to be classified as equity. RTAS Instructions The language in the Regulatory Treatment Analysis Service instructions was updated and the paragraph pertaining to expedited review was deleted. Debt-Equity Hybrid Instructions New instructions were added to the Purposes and Procedures Manual clarifying the policy and analytical procedures for hybrid securities. Hybrids may use CRP ratings and qualify for filing exemption. Unrated hybrids should be filed with the SVO for a rating only, the SVO will not classify the security as debt or equity as these investments are to be reported as bonds. NAIC and NAIC Processes Descriptions 4

5 The task force voted to expose for comment a proposal to update the descriptions of NAIC committee processes. NAIC Structured Securities Group Procedures The task force voted to expose for comment a proposed new Section 7 for the Purposes and Procedures Manual. The new section will include policies and procedures for the new Structured Securities Group (SSG). Capital Adequacy Task Force (CATF) Broker Receivables Proposal The task force discussed proposal from the ACLI. The task force instructed the NAIC staff to compile data to create a weighted average factor based on industry spread of invested assets as an alternative approach. Investment Risk Based Capital Working Group The American Academy of Actuaries (AAA) presented a report on the methodology used to calculate the base corporate bond asset risk factors, updates to the modeling assumptions used in the corporate bond model, and the second set of results produced by the model. The AAA is leaning toward using a matrix for the asset risk factors that has NAIC bond classes on one axis and instrument type on the other axis. Summary PFS continues to monitor the actions of the NAIC and to participate in interim conference calls. We are currently working on 2014 annual updates and look forward to sharing more information with you in subsequent newsletters and PAM Local User Group (PLUG) Meetings. If you have any questions about the information provided in this document, please contact your Client Services Team. The information contained in this newsletter is provided for informational purposes only and is not intended to substitute for accounting, tax, or financial advice from a professional advisor. Readers are advised not to act upon this information without seeking the service of a professional advisor. 5