NAIC Fall 2017 National Meeting Update – Valuation of Securities Task Force

The Valuation of Securities Task Force (VOSTF) held a conference call on November 13 in lieu of meeting at the NAIC Fall 2017 National Meeting. During the call updates on the Z designation rule, FE enhancements, full faith credit lists, and more were discussed.

Update on Proposal to Modernize the Z Designation Rule

The NAIC presented a proposal to refine the Z designation process. The proposal retains the use of the Z designation for new purchases, but introduces new processes for securities that are transitioning filing statuses or are still under review by the Securities and Valuations Office (SVO).

The SVO is in the process of compiling a list of all properly filed securities it will not be able to rate before year-end. According to their proposal, a “YE” symbol would be assigned to these securities and the previous designation in the Automated Valuation Service+ (AVS+) system could be used for year-end reporting. For all properly filed initial filings that the SVO cannot rate before year-end, insurers would self-designate the security for year-end and append an “IF” suffix. Both suffixes would be removed when the SVO assigns the designation and publishes in the AVS+ product.

A referral was sent regarding this proposal to the Blanks Working Group (BWG), and the proposal was released for a 30-day comment period. The VOSTF would like this change in place for 2018 reporting.

Update on FE Enhancements Project

The VOSTF continues to develop a process for times when an insurer disagrees with the AVS+ designation for privately-rated securities.

The current proposal for privately-rated securities is as follows:

  1. Private letter (PL) ratings are now specifically included in the filing exempt rule, and the process for PL securities is included with the filing exempt (FE) instructions
  2. The proposal transfers responsibility for assignment of FE designations to the SVO through the AVS+ product
  3. The proposal creates a new 5* interrogatory for PL securities issued on or after January 1, 2018; a proposal will be brought forth for securities issued prior to that date where an insurer cannot disclose the rating to the NAIC

A few clarifications were added regarding the scope of the PL process:

43R securities will be excluded from the scope of the PL process, and the VOSTF doesn’t anticipate PL securities to go through the “YE”/”IF” process since they are rated by a nationally recognized statistical rating organization (NRSRO) and not required to be filed with the SVO. A flowchart is available on the VOSTF’s website to help insurers visualize and understand this process.

Other adopted changes that relate to the PL process include the removal of the IAO’s authority to ignore a credit rating of a Credit Rating Provider (CRP), and the authority of the SVO to require an insurer to file a security rated by a CRP.

Regarding discrepancies between what is in the AVS+ product and what insurers believe is the correct designation for a security, Industry and the VOSTF believe an informal process is best, and the SVO is currently working on an informal process for discussion. Insurers have been opposed to the idea of an “RE” designation suffix, as they are worried it would carry a negative connotation with their regulators and auditors. Industry worries that they will be required to spend extra time verifying that what they filed is correct.

Full Faith and Credit List

Earlier this year, the SVO added approximately 40 funds to the U.S. Direct Obligations/Full Faith and Credit Exempt list that do not qualify for the list. After reviewing these funds, the SVO is recommending a change in guidance that would allow these funds to be added to the list, and change the name of the list to the “U.S. Obligations Exempt List.” This would allow funds that invest in government-sponsored enterprises to be added to the list. The revisions were exposed for a 30-day comment period.

Schedule BA Private Funds

This agenda item clarifies that fund investments may have the underlying characteristics of fixed income investments if they meet the following criteria:

  1. Predominantly holds debt
  2. Either receives a public rating from a CRP or is given a designation by the NAIC

Under this new clarification, companies can receive designations on Schedule BA investments that function like fixed income and receive a more favorable RBC charge and AVR treatment. Several members of Industry would like the allowed treatment for Life companies to be extended to P&C and Health companies so that they too may benefit from an RBC charge that accurately reflects the risk of the investment; however, this will require input from other working groups

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Robert has deep domain knowledge of insurers' accounting and reporting issues. He attends NAIC meetings and helps ensure the Clearwater solution proactively addresses regulatory changes. Robert has a master's degree in accountancy, and bachelor's degree in accounting from the University of Idaho.