Rich PullaraInsurance Solutions Specialist
Clearwater Analytics
Molly Petrowiak Insurance Team LeadClearwater Analytics
Agenda– Guiding SSAPs– GAAP and STAT Differences– Regulatory Reporting– It’s in the Details– Supplemental Investment Risk Interrogatories– Risk Based Capital– Other Schedules– SVO Designation Process
Terminology
GAAP Generallyy Accepted Accounting Principles
STAT Statutory Accounting Treatment
SSAP Statement of Statutory Accounting Principles
VOS Valuation of Securities Task Force
IFRS International Financial Regulation Standards
ORSA Own Risk Solvency Assessment
ACLI American Council of Life Insurers
IASA Insurance Accounting System Association
NASVA North American Securities Valuation Association
IP Interested Parties
LEI Legal Entity Identifier
BACV Book Adjusted Carrying Value
Guiding SSAPs
SSAP No. 26
Bonds excluding loan back and structured securities
SSAP No. 30
Investments in common stock (excluding investments in common stock of subsidiary, controlled, or affiliated entities)
SSAP No. 32
Investments in preferred stock
SSAP No. 43R
Loan backed and structured securities
SSAP 100
Fair value measurements
SSAP No. 26 – Bonds
Broad definition of bonds, excluding loan back and structured securities
– Any securities representing a creditor relationship, whereby this is a fixed schedule for one or more future payments
– U.S. treasury securities, U.S. government agency securities, municipal securities, corporate bonds, bank participations, convertible debt, CD with fixed schedule of payment, commercial paper, ETFs (that qualify for bond treatment), Class 1 bond mutual funds
SSAP No. 30 – Investments in Common Stock
Broad definition of common stocks
– Securities that represent a residual ownership in a corporation
– Publically traded common stocks, master limited partnerships trading as common stock and American deposit receipts only if the security is traded on the New York, American, or NASDAQ exchanges
– Publically traded common stock warrants shares of mutual funds except for certain money market funds, Class 1 bond funds, and exchange traded funds
Mutual Funds
Mutual funds are typically common stock unless:
It’s a money market fund with U.S. direct obligations/full faith and credit exempt list on the Class 1 list
Bond mutual fund
U.S. Direct Obligations/Full Faith and Credit Exempt List
– Must maintain a MMK rating of AAA-m (S&P) or AAA-mf (Moody’s)
– Stable NAV of $1 per share
– Maximum of 7 day redemption
– 100% of assets in direct obligations of U.S. government or securities backed by U.S. government
– Class 1 list: same, except for 97% requirement
Bond Fund List
Highest credit ratings by NAIC CRPs
Must declare a dividend of investment income
No derivatives, leveraged notes, foreign currencies
SSAP No. 32 – Investments in Preferred Stock
Broad definition of preferred stocks
Any class or series of shares for which the holders have any preference, either as to payment of dividends or distribution of assets on liquidation over the holder of common stock
Redeemable preferred stock includes mandatory sinking fund preferred stock and payment-in-kin (PIK)
Perpetual preferred stock-nonredeemable and redeemable at the option of the issuer
SSAP No. 43R – Loan-Backed and Structured Securities
Loan-backed securities are securitized assets for which the payment of interest and principal is directly proportional to the payments received by the issuer from the underlying assets.
Structured securities are loan-backed securities that have been divided into two or more classes, for which the payment of interest and/or principal of any class of securities has been allocated disproportionately to payments received from the underlying assets.
SSAP No. 43R – Loan-Backed and Structured Securities Cont’d
Guidance on recording other-than-temporary-impairments (OTTI) on loan-backed and structured securities
SSAP No. 43R applies to all investments held by the reporting entity subsequent to September 30, 2009
Decision tree for determining OTTI for loan-backed securities
Additional SSAP effective 2010
Must be filed annually
Filed securities are modeled by 3rd parties
Modeling results are used to determine designation and valuation
PIMCO and BlackRock perform the modeling
SSAP No. 43R – Summary
STAT\GAAP Differences
GAAP
Reports on tax lot level
Can choose between constant yield and straight line amortization
Adjustments to amortization target date must be retrospective
Can choose fiscal year
STAT
Reports on position level
Must use constant yield amortization
Can choose retrospective or prospective adjustments to amortization target date
Fiscal period must be calendar year
Original Value
GAAP
Original cost
Not adjusted for write downs
Adjusted for purchase GAAP
STAT
Actual cost
Adjusted for write downs
No adjustment for purchase GAAP
Book Adjusted Carrying Value
Represents either the Book Value or Market Value of Security based on Type of Insurance Company and Credit Quality of Security
Property & Casualty
– P&C holds only investment grade 1 and 2 at amortized cost
– 3 through 4 – lower of book or market value
• Life
– Life holds only investment grade 1 – 5 at amortized cost
– NAIC 6 – lower of book or market value
Carrying Value
GAAP
Fair value
Report FX at converted fair value
Changes in inflation rates flow though income
STAT
Book/adjusted carrying value
Amortized cost or fair value
Currency gain/loss included in BACV
Changes in inflation flow through unrealized/realized gain/loss
General Ledger Accounts
Balance Sheet Method
Due and accrued (BS)
Accrued interest
Interest income
Dividend income
Cash
Income Statement Method
Due and accrued (IS)Interest/dividend receivedPurchase accrued incomeSold accrued incomeChange in accrued income
Transferred in accrued incomeTransferred out accrued incomeChange in dividend income
Type of insurance companies
• Property and Casualty
• Life
• Health
• Title
• Fraternal
• Separate Accounts
• Yellow
• Blue
• Orange
• Pink
• Brown
• Green
How are Insurance Companies Different
• Duration
– P&C companies, average 1-2 years in duration
– Life companies, average 10+ years
• AVR\IMR
– Asset Valuation Reserve – Life Only
– Interest Maintenance Reserve – Life Only
• Separate Accounts
– Schedule D at Market Value or Book Value only
Quarterly vs. Annual
Quarterly
– due 45 days after QE
– activity only
Annual
– due 60 days after QE
– include holdings
– Additional summary schedules
Investment Schedules
Statements are a combination of accounting and risk values
Some statements show CUSIP-level detail, while others show subtotals/totals
Everything is calculated on a lot level, but detailed schedules are always displayed by CUSIP/position level
Summary schedules show totals or grouped subtotals
What is a Schedule D?
Schedule D is a general term used by the insurance industry to describe the quarterly and annual statement investment-related schedules.
Schedule D is one of many types of investment schedules that insurance companies produce.
NAIC Naming Conventions
Schedule Description
Schedule A All Real Estate Owned
Schedule B Commercial Mortgage Loans
Schedule BA Other Long Term Assets
Schedule DPartPart 2 1 Part 2 2
Long Term BondsPreferredEquity
Schedule DA Short Term
Schedule DB Derivatives
Schedule E Cash,
Purpose of Investment Schedules
Holdings
Part 1: Main holdings report as of current period end
Part 2: Secondary holdings report as of current period end
Activity
Part 3: Acquisitions - anything that came in during the given period, such as buys, transfers, etc.
Part 4: Disposals - anything that went out during the given period, such as sells, pay downs, redemptions, etc.
Part 5: Acquired and fully disposed - any lot that came in and went out fully during the year
Purpose of Investment Schedules
Verification
All activity year-to-date
Summary Reports
Can be “as of” reports or spanning a specific period
Secret Schedule Decoder Ring
The vast majority of the time, you can tell what will be included in a report by the assigned letter and number of the report. For example:
What does the DA-1 show?
Short term investment holdings
What does the D-4 show?
Long term investment disposals
Schedule D – Part 1
Reports on all long term bonds owned
General
Used to subtotal and total asset categories
Focused on
If security is backed by some kind of governmental body
Do the assets have underlying collateral
Specific
Sub-categories
All fixed income security’s specific classification/ category per NAIC guidelines
NAIC General Categorization
U.S. government
All other governments
U.S. states, territories, and possessions
U.S. political subdivisions of states, territories and possessions
U.S. special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities of governments and their political subdivision
Industrial and miscellaneous
Hybrid securities
Parent, subsidiaries and affiliates
Schedule D – Part 2, Section 1
Industrial and miscellaneous
Parent, subsidiaries and affiliates
Schedule D – Part 2, Section 2
Industrial and miscellaneous
Mutual funds
Money market mutual funds
Parent, subsidiaries, and affiliates
NAIC Specific Classifications
Issuer obligations
Not backed by other loans and other assets, subject to guidance in SSAP No. 26
Residential mortgage-backed securities
Securities directly or indirectly secured by liens on one-to-four family residential properties and subject to guidance in SSAP No. 43R
NAIC Specific Classifications
Commercial mortgage-backed securities
Securities directly or indirectly secured by a lien on one or more parcels of commercial real state with one or more structures located on the real estate and subject to SSAP No. 43R
Other loan-backed and structured securities
Securities subject to guidance in SSAP No. 43R not included in RMBS or CMBS above
Code Code
Code Description Code Description
* Class 1 Bond Mutual Funds S Certificates of Deposit
# Exchange Traded Funds & TBA
@ Principal STRIP Bonds or Other Zero Coupon Bonds
˄ Assets Bifurcated Between Separate Accounts
LS Loaned or Leased to Others RA Subject to Repurchase Agreement
RR Subject to Reverse Repurchase Agreement DR Dollar Repurchase Agreement
DRR Dollar Reverse Repurchase Agreement C Pledged as Collateral
CF Pledged as Collateral to FHLB DB Placed Under an Option Agreement
DBP Option Agreement Involving “Asset Transfers with Put Options”
R Restricted
RF FHLB Capital Stock SD Placed on Deposit with State or Other Regulatory Body
M Not Under Exclusive Control of the Reporting Entity
O Other
Discloses information on investments that are not under the exclusive control of the reporting entity
Foreign Indicator Matrix
Code
Nationality of Issuer Country Issued In Currency of Security
US Canada Foreign US Canada Foreign US Canada Foreign
Y N N Y N N Y N N
A N Y N N Y N Y N N
B N Y N N N Y Y N N
C Y Y Y N Y Y N Y N
D N N N N N Y N N Y
E Y N N N N Y Y N N
F N N Y N N Y Y N N
G Y N N N Y N Y N N
I N Y N Y N N Y N N
R N N Y Y N N Y N N
T N Y N Y Y Y N N Y
U N Y N Y N N N Y N
O Y N N Y N N N N Y
Foreign Indicator
A – Canadian securities issued in Canada and denominated in U.S. Dollars
B – Canadian securities issued in foreign country but denominated in U.S. Dollars
C – Securities denominated in Canadian currency
D – Foreign Securities that are denominated in a foreign currency (excluding Canadian)
E - US securities issued in a foreign country other than Canada denominated in U.S. Dollars
F – Securitas issued in a foreign country that are denominated in U.S. dollar
I – Canadian securities issued in U.S. and denominated in U.S. dollar
R – Foreign Securities issued in the U.S. and denominated in U.S. Dollars
T – Canadian securities denominated in any other foreign currency
U – Canadian securities issued in U.S. but denominated in Canadian currency
O – U.S. securities issued in U.S. but denominated in any foreign currency other than Canadian
Example
“R” – foreign securities issued in the US and denominated in US dollars
Anheuser Busch – foreign or domestic?
Domicile United States
County Issued In United States
Local Currency United States
Country of Guarantee Belgium
County of Incorporation United States
Global Ultimate Country Belgium
State Code Missouri
NAIC Foreign Indicator R or ?
Bond Characteristics
If bonds have one or more of the following characteristics, then list the appropriate number(s)
Code Description
1 Call option
2 Securities where issuer has right to vary timing of principal and coupon payments
3 Variable coupon securities
4 Terms that may result in principal not being repaid in full
5 Payments linked to foreign exchange rates
6 Securities where payments are determined by the performance of a credit other than that of the issuer
7 Mandatory convertibles
8 Other type of options controlled by issuer
Electronic Only Columns – D Part 1
Column 23 – State abbreviations
Applies only to U.S. states, territories, political subdivision, U.S. special revenue
Column 24 – Fair value hierarchy (SSAP 100) and market indicator for rate used
– A – pricing service
– B – stock exchange
– C – broker or custodian
– D – by reporting entity
– E – unit price established by NAIC Valuation of Securities
Electronic Only Columns – D Part 1
Column 25 – Source
A: Identify the pricing service
B: Identify the specific stock exchange
C: Identify the specific broker or custodian
Electronic Only Columns – D Part 1, cont.
Column 26: Collateral type
Identify collateral with code for RMBS, CMBS and other loan back and structured securities
Column 27: Call date
Column 28: Call price
Column 29: Effective date of maturity
Column 30: Legal entity identifier
BA – Other Long Term Assets
Used as a catch all for all asset classes
Invested assets not clearly or normally includable in any other invested asset schedule
High RBC charges
BA – Categories
Fix/variable interest rate investments that have underlying characteristics of bonds, mortgage loans, and other fixed income instruments
– Real estate
– Mortgage loans
– Surplus debentures
– Collateral loans
– Non-collateral loans
– Capital notes
– Tax credits
– Working capital finance investments
Summary Schedules
Annual reports used to assist regulators in identifying risks
Report Description
Exhibit of Capital Gains (Losses) Summary of realized gains/losses, impairment/ losses, FX gains/ losses, and changes in unrealized gains/ losses by asset type
Exhibit of Net Investment Income Summary of collected & earned income and investment expenses) by asset type
Schedule D – Part 1B Simple B/ACV roll for “bonds" (CE, ST, LT) & preferreds by NAIC designation
Schedule D – Part 1A , Section 1 Distribution of expected principal repayment based on grouped times, NAIC category & designation
Schedule D – Part 1A, Section 2 Distribution of expected principal repayment based on grouped times, NAIC category & specific category
Summary Investment Schedule Summary of BACV of all Investments by detailed asset types
Schedule D – Summary By Country Summary of BACV of all Investments by country & NAIC category
43R Impairments Required disclosures on current year & some previous impairments of loan-backed securities
Summary Investment Schedule Groups securities with common risk characteristics
Footnotes at Year End
Part of annual instructions
– Note 5 – Investments
– Note 20 – Fair value measurement
Asset Valuation Reserve
Capital required to be set aside in order to cover a company against unexpected debt. The asset valuation reserve serves as a backup for equity and credit losses. A reserve will have capital gains or losses credited or debited against the reserve account.
Interest Maintenance Reserve (IMR)
Liability reserve, establishment required by the National Association of Insurance Commissioners (NAIC), the purpose of which is to accumulate realized capital gains and losses resulting from fluctuations in the interest rate.
These gains and losses in the IMR are amortized and shown as an adjustment to the net investment income over the remaining life of the sold assets.
Supplemental Investment Risk Interrogatories
Purpose: to assist regulators in identifying and analyzing the risks inherent in the entity’s investment portfolio
Based off net admitted assets
The SIRI filings are due by April 1 of the year following the filing date
What is Required?
• All reporting entities are required to answer Interrogatories 1–4, 11–16, 18–19, and if applicable 20–23
• Interrogatories 5–10 must be answered if the holdings of foreign investments is equal to or exceeds 2.5% of the reporting entity’s total admitted assets
• Interrogatory 17 must be answered if the holdings of mortgage loans is equal to or exceeds 2.5% of the reporting entity’s total admitted assets
Inconsistent definitions and guidance
Difficult to find an aggregated, automated solution
Data maintenance expense
Unable to tie back to other investment schedules
Manual intervention necessary
SIRI Key Challenges
What is RBC?– Method of measuring minimum amount of capital
required
Intended to limit risk by requiring more capital for more risk
Capital is intended to provide a cushion against insolvency
Giant formula calculated in Excel, filed annually w/ NAIC & state
Before RBC fixed capital standard based on state, line of business
What Are the Components?
3 main areas
– Asset risk (what Clearwater provides)
Focus is different for Life (interest rate) than P&C (credit)
This is a much bigger part for Life than for P&C
– Underwriting risk
Most of P&C RBC is here
– Other risk
catastrophe, fraud, etc.
What Do the Results Mean?
If you don’t meet RBC:
“Tripwire system”
Confidential filings—cannot view on SNL
Company action File a report
Regulatory action Increased scrutiny on report
Authorized control Commissioner can take over
Mandatory control Commissioner must take over
Schedule A
Report Content Notes
A – 1 Real estate held at period end Only required at year end
A – 2 Acquisitions of real estate during the period Required every quarter, normally don’t include transfers, exchanges, or CACs
A – 3 Disposals of real estate during the period Required every quarter, normally don’t include transfers, exchanges, or CACs
A – Verification Year-to-date roll forward of book/adjusted carrying value
Required every quarter
Reports on all directly owned real estate
Includes: land, buildings, or permanent improvements
Excludes: indirectly owned real estate (ex. Joint venture owned)
Used to identify property occupied by reporting entity, property held for income completion, and property held for sale
Schedule B
Report Content Notes
B – 1 Mortgage loans held at period end Only required at year end
B – 2 Acquisitions of mortgage loans during the period
Required every quarter, normally don’t include transfers, exchanges, or CACs
B – 3 Disposals of mortgage loans during the period Required every quarter, includes transfers but normally don’t include exchanges, or CACs
B – Verification Year-to-date roll forward of book/ adjusted carrying value
Required every quarter
Reports on mortgage loans
Includes: residential, commercial, and other real estate backed and owned loans
Used to identify mortgages in good standing, restructured mortgages, mortgages in and at risk of foreclosures
Schedule DBReports on all derivative instruments
Includes: options, warrants, caps, floors, collars, swaps, forwards, futures
SSAP No. 86 – Hedging, income generation, replication strategies
Used to determine intent (SSAP No. 86) of derivative investment strategy and the associated risk and exposures of each
Report Content Notes
DB – A1 Options, caps, floors, collars, swaps, and forwards open at period end
Only required at year end
DB – A2 Options, caps, floors, collars, swaps, and forwards terminated during the period
Required every quarter
DB – B1 Futures open at period end Only required at year end
DB – B2 Futures terminated during the period Required every quarter
DB – D1 Counterparty exposure for all derivatives open at period end Only required at year end
DB – B2 Collateral for all derivatives open at period end Only required at year end
DB – Part A Verification
Year-to-date roll forward of book/adjusted carrying value for DB part A, sections 1 & 2
Required every quarter
DB – Part B Verification
Year-to-date roll forward of book/adjusted carrying value for DB part B, sections 1 & 2
Required every quarter
DB – C1 Replication/ synthetic assets (RSATs) open at period end Only required at year end
DB – C2 Year-to-date roll forward of open RSATs Required every quarter
DB – Verification Year-to-date roll forward of book/ adjusted carrying value, fair value and potential exposure
Required every quarter
SVO Policies and Responsibilities
1. Analysis of credit risk for purposes of NAIC designation
2. Valuation analysis to determine a unit price
3. Identification and analysis of securities that contain other non-payment risk
4. Other analytical assignments requested by the VOS/TF or members of the regulatory community
SVO Designation Process
Most securities do not require filing
– Government-backed or sponsored
– Automatically NAIC 1
– Rated & monitored by an approved rating organization
– Credit rating is converted into designation
Securities not meeting a filing exemption must be filed annually
Exception for loan-backed and structured securities
NAIC Designations
1 – Highest quality investment (A – AAA)
2 – Investment grade (BBB)
3 – Medium quality (BB)
4 – Low quality (B)
5 – Lowest quality not in/near default
6 – In or near default
NAIC Designations, cont.
P&C holds only investment grade 1 and 2 at amortized cost
Life holds only investment grade 1 – 5 at amortized cost
Worse designation = higher RBC charge
Proposal to increase number of designation classes in the works
Filing Exempt & NRSRO
Filing exempt – exempt from filing with certain conditions
National Recognized Statistical Rating Organization
– Must be rated at least annually
Moody’s Investors' Service
Standard and Poor’s
Fitch Ratings
Dominion Bond Ratings Service (DBRS)
AM Best Company (A.M. Best)
Morningstar Credit Ratings
Kroll Bond Rating Agency
Egan Jones Rating Company
5 Star/6 Star
5
– Only assigned by SVO for corporate, municipal, and structured securities that have never been rated by an NAIC CRP
– Given after review of completed and executed principal and interest certification form
6
– May be assigned by the insurer for corporate, municipal and to structured securities that have never been rated by an NAIC CRP
– SVO may assign if security was a 5* in the past and no newer documentation received
Not Rated NR
For bonds:
– Information to arrive at NAIC designation not available to SVO
– Received too late to be processed
Bonds with NR will be deleted from the VOS database if is not fixed by end of the first quarter following year end
Z
NAIC designation reported by the insurance company was not derived or obtained form the SVO
Submit to SVO within 120 days of acquisition
Not be used for securities that are exempt from filing
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