a. SAP Working Group Outlines Revisions to Principles-Based Obligations Definition and Related Discussion Paper
The SAP Working Group has set out for comment revisions to the draft principles-based definition of obligations, which will be used for all securities to determine if they are eligible for reporting on Schedule D-1: term (Annex D-1), as well as as a first draft of the Issue Paper which details past discussions in drafting the definition of exposed obligations. The comment period for the revisions to the definition of obligations and the discussion document ends on May 6, 2022.
The SAP Working Group’s review of the proposed definition of bonds is part of its ongoing work on the “Investment Classification Project”, which aims to resolve a variety of issues relating to definitions, measurement and overall scope of investment SSAPs. The principles-based definition of obligations was originally outlined in May 2021 and was the product of multiple meetings between Iowa Division of Insurance regulators, NAIC staff, and a small subset of interested parties in response to a concern about the expansion of investment structures that has been reported. in Appendix D-1. Going forward, investments eligible for Schedule D-1 reporting must either conform to the principles-based definition of an obligation (and be classified as an “issuer credit obligation” or an “asset-backed security”) or be specifically listed as in the scope of SSAP 26R or SSAP 43R.
Since its first exposure, NAIC staff have continued to work on the proposed definition of bonds with a small group of regulators and industry participants to discuss concepts, review proposed wording, and consider various design designs. ‘investment. As a result of these discussions, the SAP working group outlined revisions to the draft definition of obligations that
clarify that for the purposes of determining whether there is sufficient repayment support for an instrument to be considered a “credit obligation of the issuer”, with respect to investments which are in the form of securities backed by an underlying contractual obligation of a single operating entity (such as tenant loans, equipment trust certificates or notes backed by a financing agreement), the repayment of this instrument is deemed to be “fully assumed”. charge” by the underlying obligation of the operating entity if the instrument provides cash flows for the repayment of all interest and at least 95% of the principal
- remove hybrid securities from the list of instruments automatically assimilated to “issuer credit obligations”; instead, hybrid securities may be reported as bonds only if they are assessed and determined to qualify under the requirements of the proposed definition
- specify that investments with “declared” interest and “additional returns” to which the holder of the debt instrument is entitled (such as principal protected notes, principal protected securities and structured notes), the interest “declared” and “additional returns” shall be collectively considered as interest and should be assessed together to determine whether the investment has variable principal or interest due to underlying interests; the bond definition will require a structural assessment including all investment components and will not allow segregation of components within a structure, such as bond collateral supporting principal and interest payments to determine reporting of Schedule D-1 when the structure also includes other collateral with the potential to generate additional interest or returns
- include additional factors to consider in determining whether a debt instrument reflects a creditor relationship with respect to instruments issued by a securitization vehicle that holds underlying interests; such an instrument qualifies as a bond if the characteristics of the underlying equity securities lend themselves to producing predictable cash flows and if the underlying equity risks have been sufficiently redistributed through the capital structure of the transmitter
- remove a previously included example with respect to the treatment of “associated” investments, as it was recognized that where bond and equity investments are “associated” and held by the same reporting entity, the bond instrument may still meet the requirements for being reported as a Schedule D-1 Obligation even if the equity tranche cannot (and would instead be reported as a Schedule BA asset).
Details of these proposed changes, as well as the background to previous discussions regarding the proposed definition of obligations, are set out in the draft discussion paper. The draft discussion paper does not cover proposed revisions to the SSAPs at this time, as these revisions will be considered once the definition of obligations and the discussion paper are finalized. As a first step toward these changes to SSAPs, at the spring meeting, the SAP Working Group directed NAIC staff to proceed with the development of a more robust illustration of the proposed reporting options for revising Schedule D-1 to include more granular reporting lines to capture investments within the scope of SSAP 26R and SSAP 43R as well as a new sub-schedule that will detail bond investments with certain characteristics. The goal is to outline reporting options during the May 2022 SAP Working Group conference call.
b. SAP working group outlines revisions to clarify requirements for identifying and reporting affiliated transactions
In response to recent discussions on reporting and disclosure requirements for investments with related parties, the SAP Working Group outlined revisions to SSAP No. 25 that (i) would clarify the reporting of affiliated transactions in reporting lines existing statement in investment schedules to be in accordance with the definition of an “affiliated entity” under the Insurance Holding Company System Regulatory Act (#440) (Holding Company Model Act) and (ii) incorporate new requirements for reporting for investment transactions with related parties. The proposed revisions have been exposed for a shortened comment period until May 6, 2022, to allow for a year-end 2022 effective date.
The proposed amendments to SSAP No. 25 would add a new paragraph specifying that if there is direct or indirect control, whether through voting securities, contracts, joint management or otherwise, the arrangement will be considered an “affiliate” under SSAP No. 25. For example, pursuant to the definition of “affiliate” in the Holding Company Model Act, if a limited partnership were to be controlled by an affiliated general partner, and such limited partnership held more than 10% of the voting shares of another partnership, indirect control by the affiliated general partner must be presumed to exist unless the presumption of control can be rebutted.
The proposal also includes revisions to SSAP No. 43R to note the requirement to identify related party investments in investment schedules. As a result of recent discussions, regulators have requested additional information about investment transactions involving related parties, whether or not the related party is “affiliated” under the Holding Company Model Act. In order to preserve the affiliate definition and reporting categories, these proposed additional reporting items will be captured outside of the current affiliate reporting requirements. The related changes to the reporting requirements for annual returns are set out in a Blanks Proposal, which has been exposed by the Blanks (E) Working Group for comment until April 25, 2022.
vs. SAP Working Group Adopts Agenda Item to Add New General Cryptocurrency Inquiry
The SAP WG also adopted an agenda item proposing to add a new general inquiry to require disclosure relating to cryptocurrencies held directly by insurers or authorized for payment of premiums to insurers. This agenda item did not give rise to statutory revisions; however, the adoption reflects support for the proposal sponsored by the white (E) working group.
The proposal would add new questions to Part 1 of the general questions about whether the reporting entity accepts cryptocurrency for premium payment, what cryptocurrencies are accepted, and whether they are held for investment purposes or immediately converted into US dollars. Comments on exposure from the White Working Group (E) are expected by April 25, 2022.