b'INSURANCE REGULATORY|US/NAICDefeased or pre-refunded securities which haveinvestment grade tranches. By contrast, the separate instructions in the P&P Manual.WARF methodology would result in an NAIC Broadly syndicated securitizations, such as4.B (RBC factor 9.535%) when the exposure to CLOs (including middle market CLOs) andthe below investment grade and unrated ABSbut excluding the examples listedtranches is included.above (e.g., CLO combo notes). Since the amendments to the P&P Manual denying CLO or ABS issuances held for purposesfiling exemption status to PPS became effective on of risk retention as required by aJanuary 1, 2021, there has been uncertainty about governing law or regulation. some aspects of the PPS definition. Structured notes have been a prominent example. We use the It is no surprise that the SVO has indicated that theterm structured note to refer to a debt security designation it would assign to a PPS is lower than aissued by a financial institution that obligates the designation based on a CRP rating. That is certainlyissuer to pay principal at maturity plus a premium the case for the three examples above, and thereturn based on the performance of an index, which consequences for RBC treatment are significant: may be comprised of equities, fixed-income The PPS with the underlying US Treasury zeroinstruments, futures or other financial assets. coupon bond and the S&P 500 Index-linked returnIn contrast to the PPS examples in the P&P Manual, would have a CRP rating of AAA/AA+ or an NAICthere is no literal repackaging of underlying assets 1.A (RBC factor 0.158%), based solely on the risk ofin an SPV structure. The structured note is not the the US Treasury bond. In contrast, the Weightedobligation of an SPV that holds underlying assets, Average Ratings Factor (WARF) methodologybut of a substantial financial institution. There was applied by the SVO would result in an NAIC 4.Btherefore a hope that this type of structured note (RBC factor 9.535%) when it includes the exposurecould avoid being classified as a PPS. to the call options on the S&P 500 Index. However, at the December 12, 2021 VOS TF The PPS with the underlying corporate bond andmeeting, the SVO staff presented a the other performance assets would have a CRPrecommendation that the VOS TF amend the rating of BBB or NAIC 2.B (RBC factor 1.523%),definition of PPS in the P&P Manual to include these based solely on the corporate bonds. In contrast,types of structured notes as well, because in the the WARF methodology would result in an NAICSVO staffs opinion a structured note with a variable 4.C (RBC factor 12.428%) when the exposure to allreturn tied to reference assets poses similar risks to of the underlying investments is included.PPS that utilize a repackaging SPV structure with The combo note would have a BBB-rating orunderlying performance assets. The VOS TF voted NAIC 2.C (RBC factor 2.168%) on the notionalto expose the SVO staffs recommendation for a based on payments from the underlyingcomment period ending on February 11, 2022.68|Global Insurance Industry Year in Review 2021'