The Valuation of Securities Task Force (VOSTF) discussed proposed amendments to The Purposes and Procedures Manual (P&P Manual) regarding transferring the responsibility of filing exempt and private letter rating processes to the Securities Valuations Office (SVO). The VOSTF also heard an Investment Analysis Office (IAO) report referred by the Investment Risk-Based Capital Working Group (IRBCWG) pertaining to the increased granularity of RBC factors.
Discussed: P&P Manual Updates
Amendment to Filing Exempt and Private Letter Rating Processes
The VOSTF discussed an amendment to the P&P Manual that modifies the current filing exempt process, adds a verification procedure for securities subject to private letter ratings, and transfers the responsibility of filing exempt and private letter rating processes from insurance companies to the SVO. The purpose of the proposal is to make the SVO the final source for filing exempt designations, reduce the amount of Jumpstart exceptions commonly seen with private letter rating securities, and limit insurers to using the AVS system rather than other sources for designations. Industry has objected to these recommendations, explaining that filing all of these securities through the SVO leaves insurers with minimal room to challenge information and would be expensive.
The VOSTF exposed the revised proposal during its Feb 22 conference call for a 45-day comment period, which ended on April 8. The VOSTF received extensive feedback from Industry and interested parties who expressed concern about the amount of administrative changes proposed and expanding the SVO’s authority to reject eligible NAIC CRP ratings under its own discretion.
Comment letters pointed out three main issues with the proposal:
- The current wording narrowly defines the SVO’s ability to exclude eligible NAIC CRP private letter ratings. The proposed amendment provides the SVO with the authority to exclude ratings whenever they deem necessary without having to provide explanation as to why.
- The proposed implementation date of July 1 was concerning, as Industry believes there should be more time for discussion on this issue.
- The 45-day comment period left interested parties little time to react before at the NAIC Spring 2017 Meeting, and they require more time to review a revised proposal.
The VOSTF noted that the high volume of comment letters will require more time for review, and they will work with the SVO to create a list of issues submitted by interested parties before continuing discussion.
Amendment to Delete References to 5* Certification Process
On the Feb 22 conference call, the SVO proposed an amendment to the VOSTF to delete two references to the NAIC 5* certification procedure in the P&P Manual to reflect that the 5*/6* rule instructions will be moved into the general interrogatory. The SVO found additional instances during the certification process where using the 5* designation is permitted and has included these in the amendment. The VOSTF exposed the proposed amendment for a 60-day comment period, and the SVO will continue to review other instances where the 5* designation is used to make modifications as needed.
IAO Report Requested by IRBCWG
The VOSTF also heard an IAO report requested by the IRBCWG to evaluate the proposal expanding RBC factors from six to 20 and identifying impacts on the VOSTF. The IAO is able to produce the required 20 delineations of credit assessment that would maintain consistency between RBC factors and NAIC designations for the IRBCWG. The IAO also recommended renaming “RBC Factor Categories” to “NAIC Designation Category” so the traditional NAIC designations could coincide with the IRBCWG’s proposed granularity. The report by the IAO was exposed for a 30-day comment period.
SSG Reports for RMBS/CMBS Price Point Modeling
The VOSTF also heard two reports on potential changes to the models used to generate RMBS/CMBS price points. After receiving requests from the ACLI and several Industry members, the Structured Securities Group (SSG) released a report for comment with proposed changes to the current model. The VOSTF exposed the SSG report for a 60-day comment period ending June 8. In addition, BlackRock will update their CMBS model to be slightly more conservative than the current model, which will mean lower price points for insurers. This change is expected to take effect this year.
SVO Memorandum: Additional Guidance for Funds
The SVO also exposed a memo for comment that proposes adding more guidance for funds. NAIC staff has noted confusion on which funds are eligible to receive NAIC designations and which can be considered filing exempt. In addition, there are only three classes of funds where guidance exists:
- ETFs qualifying for bond or preferred stock treatment
- Bond mutual funds
- Money market funds on the Full Faith and Credit list
The NAIC believes there would be value in adding additional guidance clarifying the treatment of other fund types. The VOSTF exposed the SVO memo for a 30-day comment period ending May 9.