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Advisory NAIC Bond Project

NAIC Bond Project - Principles-Based Bond Definition

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Principles-based bond definition update

Insurance Accounting Change
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  • New principles-based bond definition 鈥� emphasis on substance rather than legal form of the security
  • Judgment required to assess whether a security meets the definition of a bond
  • Determination of which annual statement schedule a security is reported on (e.g. Schedule D, Schedule BA, or other) is data driven, requiring underlying security information; potentially more challenging due to investment structure complexity which is believed to have accelerated in recent years
  • Annual statement schedules being expanded to capture more granular information about investments
    (e.g., Schedule D will separate issuer credit obligations from asset-backed securities (ABSs); expanded data categories for Schedule BA investments)
  • Potential for reclassification of investments between SSAPs 26, 43, 21, and 2R means changes in classification, measurement, recognition, and admissibility; reclassification between Schedule D and Schedule BA likely means changes in RBC

Key Considerations

1

There were no grandfathering provisions, so all investments held as of January 1, 2025 will need to be evaluated under the revised definitions.

2

This is not a one-time exercise, as all new investments purchased after the transition date will be evaluated under the principles-based bond definition on a go forward basis.

3

Investments designed and marketed only to insurance companies to obtain favorable risk-based capital (RBC) treatment should be subject to careful consideration and evaluation.

4

Certain securities designed to have an original maturity of less than one year will no longer be allowed to be reported as short-term investments on Schedule E.

5

Investments involving special purpose vehicles with separate debt and equity components will need to be assessed to determine if the underlying equity risk can be overcome to classify the debt portion as a bond.

6

ABSs backed by cash generating non-financial assets require a meaningful level of cash flows test to determine if a sufficient level of cash flows (more than 50% as a practical expedient) are from sources other than sale or refinance of collateral.

7

All ABSs must have substantive credit enhancement to be classified as a bond, which may be more challenging to document for non-investment grade securities.

8

Investments impacted may not be what you expect, as some GNMA securities, municipal bonds, ESG bonds and corporate debt have non-debt variables such as inverted interest rates or multipliers similar to embedded derivatives and impact the scheduled principal and interest by more than a nominal amount.

9

Residual interests have an updated accounting model using either allowable effective yield method or cost recovery (as a practical expedient).

10

Investments reclassified from Schedule D-1 to Schedule BA will need to be re-assessed for admissibility.

Accounting change framework

乐鱼（Leyu）体育官网 point of view

Our approach tailors an industry-proven methodology with your current state of readiness across each business team to accelerate and drive efficiencies. We have a team of dedicated and qualified professionals ready to help you assess the impact of the new bond definition on your investment strategies, policies, capital management, and financial reporting.聽

Accounting, investments & reporting

  • The NAIC鈥檚 updates from the Bond Project have resulted in聽substantial changes to the accounting for investments聽and redefined the definition of a bond using a principles-based approach.
  • Making the聽鈥渞ight鈥� choice聽means clearly defining the approach, outlining key accounting policy decisions, and revisiting these choices throughout the project.
  • The standard requires a more granular assessment of securities considering their聽substance rather than聽their form.
  • Ensure the聽evaluation is done at the appropriate time聽whether it be at origination of the investment or the date the investment is acquired by the Company.

Data, systems & processes

  • Additional data points are needed to complete the assessment, particularly as it relates to testing for聽meaningful level of cash flows,聽assessing embedded features for other than nominal impacts to the scheduled cash flows, or evaluating whether equity risks in a debt instrument can be overcome for bond treatment.
  • Companies need to develop processes for accumulating and storing all necessary data to support classification decisions both at transition and beyond. Companies will need to centralize the collection of investment data聽in a cost-efficient way.
  • Updates to existing recordkeeping systems may be necessary to appropriately track and support decisions reached both at transition and moving forward.

Business implications

  • The principles-based bond definition may result in Investments聽reclassified between investment schedules聽which could impact RBC charges, asset valuation reserve, and admissibility considerations.
  • Investment strategies that have prioritized RBC treatment or have sought out opportunities to achieve RBC arbitrage will need to be聽reconsidered and closely monitored and evaluated.
  • Additional implications are expected with聽internal controls聽and potential adjustment to聽investment strategies and policies.
  • Partnership with external service providers, particularly investment advisors or third party recordkeepers聽to ensure availability of data and accuracy of reporting will be vital to successful implementation and ongoing compliance efforts.

Organizational change

  • An appropriate聽program structure聽will drive decision-making, improve efficiency and help ensure accountability. Companies will need to聽strike the right balance聽between centralized and de-centralized structure to enable successful programs across all entities.
  • 础听roadmap聽will help stakeholders understand the scope of the project, timing of activities, and provide a basis for detailed action plans.
  • 础辫辫谤辞辫谤颈补迟别听governance聽(e.g., status update meetings, steering committee involvement and project risk management) are vital to the success of a large-scale accounting change implementation.

Dive into our thinking

Advisory NAIC Bond Project

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Meet our team

Image of Michael Lammons
Michael Lammons
Partner, 乐鱼（Leyu）体育官网 Insurance Accounting Change Co-Lead, 乐鱼（Leyu）体育官网 US
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Image of Pixi Sofian
Pixi Sofian
Director, Accounting Advisory Services, 乐鱼（Leyu）体育官网 US
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Image of Brandon Honnold
Brandon Honnold
Director Advisory, Accounting Advisory Services, 乐鱼（Leyu）体育官网 LLP
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Image of William Chan
William Chan
Advisory Managing Director, Accounting Advisory Services, 乐鱼（Leyu）体育官网 US
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Image of Michael Lammons
Michael Lammons
Partner, 乐鱼（Leyu）体育官网 Insurance Accounting Change Co-Lead, 乐鱼（Leyu）体育官网 US
Read bio
Image of Pixi Sofian
Pixi Sofian
Director, Accounting Advisory Services, 乐鱼（Leyu）体育官网 US
Read bio
Image of Brandon Honnold
Brandon Honnold
Director Advisory, Accounting Advisory Services, 乐鱼（Leyu）体育官网 LLP
Read bio
Image of William Chan
William Chan
Advisory Managing Director, Accounting Advisory Services, 乐鱼（Leyu）体育官网 US
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The information contained herein is not intended to be 鈥渨ritten advice concerning one or more Federal tax matters鈥� subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

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