The National Association of Insurance Commissioners ("NAIC") held its most recent national meeting from August 3-6, 2019 in New York City, At that meeting, the NAIC Valuation of Securities (E) Task Force ("VOS Task Force") and the NAIC Statutory Accounting Principles (E) Working Group ("SAP WG") addressed certain initiatives that could have significant impact on insurance company investments.

I. VOS Task Force


On August 4, 2019, the VOS Task Force adopted amendments to the Purposes and Procedures Manual (the "P&P Manual") of the NAIC Investment Analysis Office with respect to "structured notes," in response to a referral from the SAP WG.

On April 6, 2019, the SAP WG amended Statement of Statutory Accounting Principles ("SSAP") No. 26R – Bonds to define a "structured note" as "an investment that is structured to resemble a debt instrument, where the contractual amount of the instrument to be paid at maturity is at risk for other than the failure of the borrower to pay the contractual amount due." The April 6, 2019 SAP WG amendments provide that, effective on December 31, 2019, "structured notes" will be excluded from the scope of No. 26R – Bonds and (unless they are "mortgage referenced securities") will be excluded from the scope of SSAP No. 43R – Loan-Backed and Structured Securities and captured within the scope of SSAP No. 86 – Derivatives. SSAP No. 43R defines "mortgage referenced securities" as "credit risk transfer" securities issued by a government sponsored enterprise, where payments on the securities are linked to the credit and principal payment risk of a referenced pool of mortgages.

On August 4, 2019, the VOS Task Force amended the P&P Manual to eliminate the separate definition of "structured notes" and "mortgage referenced securities" in favor of simply cross-referencing the definition in SSAP No. 26R quoted above. The VOS Task Force also amended the P& P Manual to provide that "structured notes" are not exempt from filing with the NAIC Securities Valuation Office ("SVO"). That means that "mortgage referenced securities" will no longer automatically receive the SVO designation equivalent to the rating they receive from a credit rating provider, but rather will need to be pre-filed with the SVO so that the NAIC Structured Securities Group ("SSG") can utilize its own methodologies to assess the overall risk presented before an SVO designation is assigned. "Structured notes" that are not "mortgage referenced securities" will be treated as derivatives, as noted above, and will not qualify as admitted assets unless applicable state investment laws provide prescribed practices that permit admittance.

Importantly, principal protected notes ("PPNs") are not included in the definition of "structured notes," because in a PPN the contractual amount of the instrument to be paid at maturity is not at risk for other than the failure of the borrower to pay the contractual amount due. However, the VOS Task Force has also proposed changes to the treatment of PPNs, which we will now discuss.

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