b'Insurance Regulatory | US/NAIC | NAIC Investment-Related InitiativesABS represent debt issued through the securitizationThe Iowa proposal would define ABS as debt issued of financial assets. There are two defining character- through the securitization of financial assets, but it istics that must be present in order for a security todoes not define the key term financial assets. From meet the definition of an ABS:speaking with one of the authors of the Iowa pro-The financial assets collateralizing the debtposal, it seems that the omission of a definition of issuance are expected to be the primary sourcefinancial assets was intended to leave this point of cash flows for repayment of the debt; andopen for further discussion. Significantly, the Iowa proposal does not say that securitized financial The securitization of the financial assets collater- assets must have bond-like cash flows (which was alizing the debt issuance redistributes the creditthe formulation in the draft issue paper that aroused risk of the underlying financial assets, such thatsuch concern). Assuming that the Iowa proposal the creditor is in a different position than if thebecomes the template for eventual action by the underlying collateral were held directly. SAP WG, how financial assets are ultimately ABS are typically issued from a trust or specialdefined will be quite important. purpose vehicle, but the presence or lack of a trust orThe emergence of the Iowa proposal as an alterna-SPV would not be a definitive criterion for determin- tive to the more draconian approach proposed in ing that a security meets the definition of an ABS. the draft issue paper was a welcome development in The key to the Iowa proposals definition of a bond 2020, and shows that the members of the SAP WG whether represented by an issuer obligation orrespond thoughtfully to feedback from industry. ABSis the notion of subordination: that the holderThere is great anticipation for the SAP WGs next has a senior interest in the assets of the issuer.meeting on March 15, 2021, when it is expected thatThe most subordinated interest, sometimesthe Iowa proposal will be further hammered out.referred to as the first-loss position, represents theConclusioninterest of an equity holder, rather than a creditor. Therefore, in order to meet the definition of aAll of the developments discussed above will have a bond, a more than insignificant subordinatedsignificant impact on the investments of US insur-interest must be present. ersparticularly life insurers who have made long-term commitments in anticipation of achieving Another way of putting it is that an ABS redistributesa certain level of investment returns. And coming in the risk of the underlying collateral, such that thethe midst of the COVID-19 pandemic, these devel-investor is in a different position than if the underly- opments will certainly add to the unprecedented ing collateral were held directly. On that principle,challenges that insurers are already facing. gthe Iowa proposal suggests that an entity that simply passes through the proceeds of the underlying collateral has done nothing to alter the nature of the investment, has no economic substance and should therefore be looked through to determine the appropriate accounting.MAYER BROWN 63'