b'TABLE OF CONTENTSgranular reporting of investment categories ondesignation (other than NAIC-6) into categories that Schedule D-1 to go along with the principles- mapped onto the notched ratings in the rating based bond definition. Among other things, thesystem used by NAIC-recognized credit rating proposal includes a new sub-schedule toproviders (CRPs). For example, an NAIC-1 used to Schedule D-1 to capture individual investmentencompass the entire range from AAA/Aaa to A/detail for ABS where (i) the underlying collateralA3. However, under the more granular system, are not self-liquidating financial assets or (ii) theNAIC-1 is divided into seven categories, with NAIC underlying collateral are cash-generating non- 1.A being equivalent to AAA/Aaa and NAIC 1.G financial assets that do not meet the less thanbeing equivalent to A/A3. Until 2021, however, the 50% test described above for satisfying theRBC factors had not been revised to match the meaningful cash flow criterion. granularity of the designation categories. As a result, there was a practical incentive for insurers to The Path Forward invest at the lower end of a designation, because NAIC staff announced at the December 11, 2021they could capture the incremental yield without SAP WG meeting that draft revisions to SSAP No.incurring a higher RBC charge.43R and SSAP No. 26R, and an accompanying draftThat has now changed. On June 30, 2021, the NAIC issue paper, are expected to be released in earlyCapital Adequacy (E) Task Force (Cap Ad TF) 2022. Although the forecasted date for any changesadopted more granular RBC factors for life insurers to the SSAPs to become effective is January 1, 2024,to correlate with the more granular designation at the earliest, the time to focus on the work of thecategories, and the new RBC factors are effective SAP WG is now, as the changes being hammeredfor the December 31, 2021 annual statements. To out will have a major impact on the treatment ofillustrate the impact, the pre-tax RBC factor for a structured investments for insurers.life insurer was 40 bps for an NAIC-1 investment, regardless of category, but that RBC factor is now More Granular RBC Factorsreduced to 15.8 bps for an NAIC 1.A investmentNow in Effect and increased to 101.6 bps for an NAIC 1.G Historically, the credit quality of an insurers bondinvestment. To the extent that life insurers have or preferred stock investment has been signifiedinvested at the lower end of a designation, the new by a designation (essentially equivalent to amore granular RBC factors will produce an rating) between NAIC-1 and NAIC-6, with NAIC-1immediate increase in the RBC factors applicable to indicating the lowest credit risk and NAIC-6 thethose investments, increasing required RBC and highest credit risk. The RBC factors associatedexerting downward pressure on the insurers RBC with these investments are determined by theratios in the near term. NAIC designations.Also on June 30, 2021, the Cap Ad TF significantly Several years ago, the NAIC increased thereduced the RBC factors applicable to life insurers granularity of its designations by sub-dividing eachinvestments in real estate. The RBC factor for wholly-owned real estate (reported on Schedule A) MAYER BROWN |65'