Ref #2013-16
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Quarterly Reporting of RMBS and CMBS Purchased Subsequent to Year-End
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue: During the 2013 Spring National Meeting, the Valuation of Securities (E) Task Force
reviewed a proposed amendment to the NAIC Purposes and Procedures Manual of the NAIC Securities
Valuation Office regarding interim reporting allowances (election of modeling or non-modeled approaches)
for Residential Mortgage Backed Securities (RMBS) and Commercial Mortgage Backed Securities (CMBS)
purchased subsequent to year-end and agreed that it should be adopted. However, it was identified that the
statutory accounting guidance does not differentiate between annual and interim reporting periods in the
reporting of CMBS and RMBS in SSAP No. 43R—Loan-backed and Structured Securities (SSAP No. 43R).
As such, the Task Force delayed adoption and referred a recommendation to the Statutory Accounting
Principles (E) Working Group to consider incorporating revisions to SSAP No. 43R. After consideration of
the referral recommendation by the Working Group, the Task Force will reconsider adoption of the proposed
amendment to the NAIC Purposes and Procedures Manual of the NAIC Securities Valuation Office. (The
VOSTF referral is included as Appendix A.) This agenda item addresses the process to value securities
acquired after year-end as noted in the VOSTF referral.
Existing Authoritative Literature:
SSAP No. 43R—Loan-backed and Structured Securities
Reporting Guidance for All Loan-Backed and Structured Securities
24.
Loan-backed and structured securities shall be valued and reported in accordance with this
statement, the Purposes and Procedures Manual of the NAIC Securities Valuation Office,
and the designation assigned in the NAIC Valuations of Securities product prepared by the
NAIC Securities Valuation Office or equivalent specified procedure. The carrying value
method shall be determined as follows:
a.
For reporting entities that maintain an Asset Valuation Reserve (AVR), loan-backed
and structured securities shall be reported at amortized cost, except for those with an
NAIC designation of 6, which shall be reported at the lower of amortized cost or fair
value.
b.
For reporting entities that do not maintain an AVR, loan-backed and structured
securities designated highest-quality and high-quality (NAIC designations 1 and 2,
respectively) shall be reported at amortized cost; loan-backed and structured
securities that are designated medium quality, low quality, lowest quality and in or
near default (NAIC designations 3 to 6, respectively) shall be reported at the lower of
amortized cost or fair value.
Designation Guidance
25.
For securities within the scope of this statement, the initial NAIC designation used to
determine the carrying value method and the final NAIC designation for reporting purposes is
determined using a multi-step process. The Purposes and Procedures Manual of the NAIC
Securities Valuation Office provides detailed guidance. A general description of the
processes is as follows:
© 2013 National Association of Insurance Commissioners 1
Ref #2013-16
a.
b.
Financial Modeling: The NAIC identifies securities where financial modeling must be
used to determine the NAIC designation. NAIC designation based on financial
modeling incorporates the insurers’ carrying value for the security. For those
securities that are financially modeled, the insurer must use NAIC CUSIP specific
modeled breakpoints provided by the modelers in determining initial and final
designation for these identified securities. Securities where modeling results in zero
expected loss in all scenarios are automatically considered to have a final NAIC
designation of NAIC 1, regardless of the carrying value. The three-step process for
modeled securities is as follows:
i.
Step 1: Determine Initial Designation – The current amortized cost (divided
by remaining par amount) of a loan-backed or structured security is
compared to the modeled breakpoint values assigned to the six (6) NAIC
designations for each CUSIP to establish the initial NAIC designation.
ii.
Step 2: Determine Carrying Value Method – The carrying value method,
either the amortized cost method or the lower of amortized cost or fair value
method, is then determined as described in paragraph 24 based upon the
initial NAIC designation from Step 1.
iii.
Step 3: Determine Final Designation – The final NAIC designation that shall
be used for investment schedule reporting is determined by comparing the
carrying value (divided by remaining par amount) of a security (based on
paragraph 25a.ii.) to the NAIC CUSIP specific modeled breakpoint values
assigned to the six (6) NAIC designations for each CUSIP. This final NAIC
designation shall be applicable for statutory accounting and reporting
purposes (including establishing the AVR charges). The final designation is
not used for establishing the appropriate carrying value method in Step 2
(paragraph 25.a.ii.).
Modified Filing Exempt Securities: The modified filing exempt method is for securities
that are not subject to modeling under paragraph 25.a., and is further defined in the
Purposes and Procedures Manual of the NAIC Securities Valuation Office and have a
NAIC Acceptable Rating Organization (ARO) rating. The four-step process for these
securities is similar to the three-step process described in paragraph 25.a.i. through
25.a.iii.
i.
Step 1: Translate ARO Rating – Translate ARO Rating to the NAIC
Designation Equivalent in accordance with the Purposes and Procedures
Manual of the NAIC Securities Valuation Office. If the result is NAIC 1 or
NAIC 6, the remaining steps do not need to be performed; use the NAIC 1 or
NAIC 6 to establish the appropriate carrying value methodology per
paragraph 24 and report the NAIC 1 or NAIC 6 as the Final Designation. For
NAIC 2 through NAIC 5, proceed to Step 2.
ii.
Step 2: Determine Initial Designation – Use the NAIC 2 through NAIC 5 from
Step 1 to identify the appropriate breakpoints from the pricing matrix (see
table, “NAIC Designations Breakpoints for Loan-Backed and Structured
Securities” provided in Part Three Section 3 (c) (iv) (A) of the Purposes and
Procedures Manual of the NAIC Securities Valuation Office) and compare to
the amortized cost (divided by outstanding par) to determine the initial NAIC
designation.
iii.
Step 3: Determine Carrying Value Method – The carrying value method,
either the amortized cost method or the lower of amortized cost or fair value
method, is then determined as described in paragraph 24 based upon the
initial NAIC designation determined in Step 2.
© 2013 National Association of Insurance Commissioners 2
Ref #2013-16
iv.
c.
Step 4: Determine Final Designation – If the appropriate carrying value
methodology established in Step 3 results in the security being carried at
amortized cost (including securities where the carrying value method is lower
of amortized cost or fair value where the amortized cost is the lower value),
then the final NAIC designation is the same as the initial NAIC designation.
If the appropriate carrying value methodology established in Step 3 results in
the security being carried at fair value (thus the carrying value method is
lower of amortized cost and fair value, and the fair value is the lower value),
use the converted ARO rating NAIC designation from Step 2 to identify the
appropriate breakpoints from the pricing matrix and compare to the fair value
(divided by outstanding par) to determine the final NAIC designation. This
final NAIC designation shall be applicable for statutory accounting and
reporting purposes (including establishing the AVR charges). The final NAIC
designation is not used for establishing the appropriate carrying value
method in Step 3 (paragraph 25.b.ii.).
All Other Loan-Backed and Structured Securities: For loan-backed and structured
securities not subject to paragraphs 25.a. (financial modeling) or 25.b. (modified filing
exempt), follow the established designation procedures according to the appropriate
section of the Purposes and Procedures Manual of the NAIC Securities Valuation
Office. The NAIC designation shall be applicable for statutory accounting and
reporting purposes (including determining the carrying value method and establishing
the AVR charges). The carrying value method is established as described in
paragraph 24. Examples of these securities include, but are not limited to, equipment
trust certificates, credit tenant loans (CTL), 5*/6* securities, interest only (IO)
securities, and loan-backed and structured securities with SVO assigned NAIC
designations.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups):
These items pertain to SSAP No. 43R, but are not related to the VOSTF designation guidance:

Agenda Item 2011-10: Schedule for SSAP No. 43R Disclosures - This agenda item proposed
revisions to move the individual security disclosures reflected in paragraph 48g of SSAP No. 43R
from the financial statement notes and include them within an annual and quarterly schedule. During
the 2011 Summer National Meeting, the Working Group formed a subgroup to develop and
recommend a disclosure schedule. Consideration of this item has been postponed due to more
pressing projects. Additionally, interested parties have requested a review of securities within scope
of SSAP No. 43R – particularly for securities with single-payers (e.g., credit tenant loans).

Agenda Item 2013-15: Consolidate SSAP No. 43R Footnote Disclosures – This agenda item was
referred by David Chellgren from Conning Inc. and recommends revisions to SSAP No. 43R to only
require impairment disclosures for securities with an OTTI recognized in the current year. This item
is scheduled for original discussion during the 2013 Summer National Meeting.
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
A previous agenda item 2012-12 addressed changing Acceptable Rating Organizations (ARO) to Credit
Rating provider (CRP), but it seems to have overlooked updating SSAP No. 43R, paragraph 25.
Staff Recommendation: Summary Recommendation - It is recommended that the Working Group move
this item to the nonsubstantive active listing and expose nonsubstantive revisions to SSAP No. 43R to
incorporate accounting and reporting guidance for interim financial statements. The VOSTF proposed
language incorporates an interim reporting option for RMBS and CMBS securities acquired subsequent to
year-end. Under the proposed Task Force language, for quarterly financial statement reporting, the insurer
© 2013 National Association of Insurance Commissioners 3
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could elect to either 1) use the prior year-end modeling data for the particular RMBS/ CMBS CUSIP and
apply the financial modeling methodology, or 2) follow the analytical procedures applicable to RMBS/
CMBS securities that are not subject to the financial modeling methodology.
This optionality has been proposed as:
1) Not all reporting entities acquire the financial modeling data for all RMBS/ CMBS securities, and
such entities only purchase the financial modeling data for the specific securities owned as of
year-end. For acquisitions in the subsequent year, without the ability to follow the analytical
procedures specified in the Practices and Procedures Manual of the NAIC Securities Valuation
Office, these entities would be required to purchase the prior year-end modeling data, which
would not be updated until current year-end.
2) Not all RMBS and CMBS securities acquired in the subsequent year may have been included in
the financial modeling data for the prior year. For these securities to be modeled, they would need
to be reported through the NAIC RMBS/ CMBS process. As the financial modeling process
currently only occurs at year-end, these securities would not be financially modeled for interim
reporting.
3) For those entities that acquire the financial modeling data for all securities, there is the desire to
maintain a consistent valuation approach from the year-end reporting. As such, these entities want
to continue using the prior-year end modeling data for their quarterly reporting.
In reviewing the proposal from the Task Force, it is first noted that statutory accounting principles generally
attempt to avoid optionality within the financial statements. By avoiding optionality, the financial statements
can be consistently evaluated and compared to other reporting entities. However, there are limited instances
within the statutory financial statements that do allow optionality between different accounting methods.
In considering this specific proposal for statutory accounting, the following key items are noted:
1. Proposal is only for interim financial reporting periods: Regardless of the valuation process used for
the interim financial reporting securities, RMBS/CMBS securities would be valued in accordance
with the designation guidance in SSAP No. 43R for year-end reporting.
2. The quarterly filings only detail disposals and acquisitions within the quarter: Although the aggregate
value of all securities is reflected within the interim balance sheet security level detail is not provided.
3. Accounting for variations between interim and year-end methodologies: If the optionality is
supported for interim reporting on acquisitions subsequent to year-end, any changes from amortized
cost to fair value would follow existing guidance (unrealized gain or loss recognition).
4. Limitations to optionality: If the different reporting methods are supported for interim reporting,
consideration should occur regarding whether to prescribe the specific method each entity needs to
follow in reporting the securities. This approach would still result with some inconsistency between
entities in interim reporting, but it would eliminate the entity’s elections on which valuation
methodology to apply. For example:
a. Entities that acquired the entire financial modeling database for the prior-year end could be
required to follow the financial modeling methodology for all securities acquired in
subsequent year acquisitions that were included in the financial modeling data previously
acquired.
© 2013 National Association of Insurance Commissioners 4
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b. Entities that acquire identical securities (identical CUSIP) to those held (and financially
modeled) at the prior year-end could be required to follow the prior-year financial modeling
methodology for subsequent year acquisitions.
c. Entities that did not acquire the entire prior-year financial modeling database, and acquired a
security that was not identical to a security already owned at the prior year-end would be
required to follow the analytical procedures for non-financially modeled securities. (Although
the security may have been modeled at the prior-year end and included in the financial model
database, this approach would not require the entity to purchase the prior-year end modeling
data for subsequent year interim financial statements)
d. Entities that acquire securities not previously modeled at year-end would be required to
follow the analytical procedures for non-financially modeled securities.
5. A previous agenda item (ref #2012-12) addressed replacing “Acceptable Rating Organizations”
(ARO) to “Credit Rating provider” (CRP), but it seems to have overlooked updating SSAP No. 43R,
paragraph 25. As such, these reference revisions are recommended.
Proposed Recommendations to SSAP No. 43R:
Designation Guidance
25.
For securities within the scope of this statement, the initial NAIC designation used to
determine the carrying value method and the final NAIC designation for reporting purposes is
determined using a multi-step process. The Purposes and Procedures Manual of the NAIC
Securities Valuation Office provides detailed guidance. A general description of the
processes is as follows:
a. Financial Modeling: The NAIC identifies securities where financial modeling must be used
to determine the NAIC designation. NAIC designation based on financial modeling
incorporates the insurers’ carrying value for the security. For those securities that are
financially modeled, the insurer must use NAIC CUSIP specific modeled breakpoints
provided by the modelers in determining initial and final designation for these identified
securities. Securities where modeling results in zero expected loss in all scenarios are
automatically considered to have a final NAIC designation of NAIC 1, regardless of the
carrying value. The three-step process for modeled securities is as follows:
i.
Step 1: Determine Initial Designation – The current amortized cost (divided by
remaining par amount) of a loan-backed or structured security is compared to the
modeled breakpoint values assigned to the six (6) NAIC designations for each
CUSIP to establish the initial NAIC designation.
ii.
Step 2: Determine Carrying Value Method – The carrying value method, either
the amortized cost method or the lower of amortized cost or fair value method, is
then determined as described in paragraph 24 based upon the initial NAIC
designation from Step 1.
iii.
Step 3: Determine Final Designation – The final NAIC designation that shall be
used for investment schedule reporting is determined by comparing the carrying
value (divided by remaining par amount) of a security (based on paragraph
25a.ii.) to the NAIC CUSIP specific modeled breakpoint values assigned to the
six (6) NAIC designations for each CUSIP. This final NAIC designation shall be
applicable for statutory accounting and reporting purposes (including establishing
the AVR charges). The final designation is not used for establishing the
appropriate carrying value method in Step 2 (paragraph 25.a.ii.).
© 2013 National Association of Insurance Commissioners 5
Ref #2013-16
b.
c.
Modified Filing Exempt Securities: The modified filing exempt method is for securities
that are not subject to modeling under paragraph 25.a., and is further defined in the
Purposes and Procedures Manual of the NAIC Securities Valuation Office and have a
NAIC Credit Rating Provider (CRP) rating. The four-step process for these securities
is similar to the three-step process described in paragraph 25.a.i. through 25.a.iii.
i.
Step 1: Translate ARO Rating – Translate CRP Rating to the NAIC
Designation Equivalent in accordance with the Purposes and Procedures
Manual of the NAIC Securities Valuation Office. If the result is NAIC 1 or
NAIC 6, the remaining steps do not need to be performed; use the NAIC 1 or
NAIC 6 to establish the appropriate carrying value methodology per
paragraph 24 and report the NAIC 1 or NAIC 6 as the Final Designation. For
NAIC 2 through NAIC 5, proceed to Step 2.
ii.
Step 2: Determine Initial Designation – Use the NAIC 2 through NAIC 5 from
Step 1 to identify the appropriate breakpoints from the pricing matrix (see
table, “NAIC Designations Breakpoints for Loan-Backed and Structured
Securities” provided in Part Three Section 3 (c) (iv) (A) of the Purposes and
Procedures Manual of the NAIC Securities Valuation Office) and compare to
the amortized cost (divided by outstanding par) to determine the initial NAIC
designation.
iii.
Step 3: Determine Carrying Value Method – The carrying value method,
either the amortized cost method or the lower of amortized cost or fair value
method, is then determined as described in paragraph 24 based upon the
initial NAIC designation determined in Step 2.
iv.
Step 4: Determine Final Designation – If the appropriate carrying value
methodology established in Step 3 results in the security being carried at
amortized cost (including securities where the carrying value method is lower
of amortized cost or fair value where the amortized cost is the lower value),
then the final NAIC designation is the same as the initial NAIC designation.
If the appropriate carrying value methodology established in Step 3 results in
the security being carried at fair value (thus the carrying value method is
lower of amortized cost and fair value, and the fair value is the lower value),
use the converted ARO rating NAIC designation from Step 2 to identify the
appropriate breakpoints from the pricing matrix and compare to the fair value
(divided by outstanding par) to determine the final NAIC designation. This
final NAIC designation shall be applicable for statutory accounting and
reporting purposes (including establishing the AVR charges). The final NAIC
designation is not used for establishing the appropriate carrying value
method in Step 3 (paragraph 25.b.ii.).
All Other Loan-Backed and Structured Securities: For loan-backed and structured
securities not subject to paragraphs 25.a. (financial modeling) or 25.b. (modified filing
exempt), follow the established designation procedures according to the appropriate
section of the Purposes and Procedures Manual of the NAIC Securities Valuation
Office. The NAIC designation shall be applicable for statutory accounting and
reporting purposes (including determining the carrying value method and establishing
the AVR charges). The carrying value method is established as described in
paragraph 24. Examples of these securities include, but are not limited to, equipment
trust certificates, credit tenant loans (CTL), 5*/6* securities, interest only (IO)
securities, and loan-backed and structured securities with SVO assigned NAIC
designations.
© 2013 National Association of Insurance Commissioners 6
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Specific Interim Reporting Guidance for RMBS/CMBS Securities
26.
The guidance in this paragraph shall be applied in determining the reporting method for RMBS/
CMBS securities acquired in the current year for quarterly financial statements. Securities
reported as of the prior-year end shall continue to be reported under the prior-year end
methodology for the current-year quarterly financial statements. For year-end reporting, securities
shall be reported in accordance with paragraph 25, regardless of the quarterly methodology used.
a. Reporting entities that acquired the entire financial modeling database for the prior-year end
are required to follow the financial modeling methodology (paragraph 25.a.) for all securities
acquired in the subsequent year that were included in the financial modeling data acquired
for the prior year-end.
b. Reporting entities that acquired identical securities (identical CUSIP) to those held and
financially modeled for the prior year-end are required to follow the prior year-end financial
modeling methodology (paragraph 25a) for these securities acquired subsequent to year-end.
c.
Reporting entities that do not acquire the prior-year financial modeling information for currentyear acquired individual CUSIPS, and are not captured within paragraphs 26a or 26b, are
required to follow the analytical procedures for non-financially modeled securities (paragraph
25.b. or paragraph 25.c. as appropriate). Reporting entities that do acquire the individual
CUSIP information from the prior-year financial modeling database shall use that information
for interim reporting.
d. Reporting entities that acquire securities not previously modeled at the prior year-end are
required to follow the analytical procedures for non-financially modeled securities (paragraph
25.b. or paragraph 25.c. as appropriate).
(Remaining paragraphs to be renumbered accordingly.)
Staff Review Completed by:
Julie Gann – June 2013
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© 2013 National Association of Insurance Commissioners 7