b'Insurance Regulatory | US/NAIC | NAIC Investment-Related Initiatives On May 14, 2020, the VOS Task Force adoptedinvestments in addition to the contractually amendments to the P&P Manual that significantlypromised cash flows paid to such repackaged changed the treatment of investments in principalsecurity according to a fixed schedule; orprotected securities (PPS) for RBC purposes. Asb. The contractual interest rate paid by the PPS is of January 1, 2021, insurers now need to file PPSzero, below market or, in any case, equal to or investments with the SVO for review and assignmentbelow the comparable risk-free rate.of an NAIC designation, rather than using the NAIC designation equivalent to the credit rating assignedThe amendments provide three examples of transac-by a CRP. Because the designations assigned by thetions that fall within the PPS definition:SVO are expected to be lower than the designations A note issued by a special purpose vehicle based on CRP ratings, this will significantly increase(SPV) that holds two underlying investments: the RBC charges associated with these securities.(i) a Treasury zero-coupon bond purchased at a The VOS Task Force took this action in response todiscount with a face value equal to the principal a concern by the SVO that the CRP methodologyamount of the note at maturity; and (ii) a return was not accurately reflecting the risks of PPSlinked to any positive performance of call options investments from a regulatory, as distinct from aon the S&P 500 Index.credit, perspective. The new requirement is A note issued by an SPV that holds multiple designed to protect insurer solvency by ensuringunderlying components: (i) a corporate bond that regulatory evaluations of those investmentspaying a fixed coupon with a stated maturity would accurately reflect the ability of insurers todate; and (ii) additional undisclosed and unrated use them to pay policyholders claims. performance assets.The amendments to the P&P Manual define a PPS as A repackaging of collateralized loan obligations a type of security that repackages one or more(CLOs) into a CLO combination note (often underlying investments and for which contractuallycalled a combo note). promised payments according to a fixed scheduleThe amendments also include the following exclu-are satisfied by proceeds from an underlying bond(s)sions from the definition of PPS: (including principal and, if applicable, interest, make whole payments and fees thereon) that if purchased Defeased or pre-refunded securities which have by an insurance company on a stand-alone basisseparate instructions in the P&P Manual. would be eligible for Filing Exemption, and for Broadly syndicated securitizations, such as CLOs which two additional conditions are satisfied: (including middle-market CLOs) and asset backed 1. The insurer would obtain a more favorable RBCsecurities (ABS)but excluding the examples charge or regulatory treatment for the PPS throughlisted above (e.g., CLO combo notes).filing exemption than it would if it were to sepa-CLO or ABS issuances held for purposes of risk rately file the underlying investments inretention as required by a governing law or accordance with the P&P Manual; and regulation.2. Either: It is no surprise that the SVO has indicated that the a.The repackaged security structure enablesdesignation it would assign to a PPS is lower than a potential returns from the underlyingdesignation based on a CRP rating. That is certainly the case for the three examples below:58 GLOBAL INSURANCE INDUSTRY|YEAR IN REVIEW 2020'