Insurers and other capital markets participants, including sponsors of structured assets, should note an important development from the National Association of Insurance Commissioners (NAIC) that could result in regulatory challenges to ratings assigned by rating agencies to securities held in insurance companies’ portfolios. On Aug. 29, 2024, the NAIC’s Financial Condition (E) Committee voted to adopt new procedures by which the NAIC’s Investment Analysis Office (IAO) can essentially override such a rating for the purpose of denying a security “filing exempt” (FE) status when the IAO concludes that the rating agency rating is an overly optimistic view of the security’s investment risk. (The IAO comprises the Securities Valuation Office (SVO) and the Structured Securities Group (SSG).) This proposal, which takes the form of amendments to the Purposes & Procedures Manual of the NAIC Investment Analysis Office, has drawn controversy from industry and would go into effect Jan. 1, 2026, although this effective date could be amended. The proposal adopted by E Committee is accessible here.
Generally, FE status refers to the assignment of an IAO designation based on mapping an existing rating agency rating to a preassigned IAO designation (e.g., a Fitch rating of A– through AAA automatically maps to an NAIC 1 designation, BBB– through BBB+ maps to NAIC 2, etc.). This FE grant of an NAIC designation is in lieu of requiring a formal submission to the IAO regarding the security. NAIC designations determine how much additional capital insurers have to hold against the applicable security under the NAIC’s risk-based capital (RBC) rules. Under the new proposal, the IAO would be able to rescind the FE status of a security, and require a formal submission regarding such security, even where a rating has been granted by a rating agency, if the IAO concludes that the NAIC designation equivalent “does not provide a reasonable assessment of investment risk for regulatory purposes.”
The proposal adopted by E Committee reflects changes to a prior version of the proposal, discussed here, adopted by the NAIC’s Valuation of Securities Task Force (VOSTF) at the NAIC’s Summer National Meeting in mid-August. The changes between the VOSTF-approved version and the new E Committee version, as outlined by the NAIC in an accompanying memorandum, include the following: