NAIC Statutory Accounting Principles (E) Working Group Exposes Important Investment-Related Proposals for Comment

The NAIC Statutory Accounting Principles (E) Working Group (SAPWG) met on August 12, 2026. The agenda and official summary are available at the SAPWG web page, which we discussed in a separate Legal Update. This Legal Update discusses in more detail three of the new initiatives that the SAPWG exposed for comment at the meeting.

The SAPWG has proposed revisions to the PBBD relating to ABS

The SAPWG exposed for comment a new agenda item, 2026-10, that would amend SSAP No. 26—Bonds to require asset-backed securities (ABS) that are backed by underlying financial assets to satisfy additional tests in order to qualify as bonds under the principles-based bond definition (PBBD).

The staff memo states that this agenda item was “prepared in response to regulator identification of an emerging asset class that is quickly growing among life insurers, referred to as multi-collateral structured credit investments.” As the name implies, multi-collateral structured credit investments are supported by multiple types of underlying collateral—primarily fixed income investments such as investment grade and non-investment grade bonds and direct loans, unrated loans, unrated debt securities, and mortgage loans, but potentially also including allocations to equity investments.

One of the concerns raised by regulators about multi-collateral structures relates to complexity, transparency and interconnectedness. They are concerned that an insurer could be exposed to the same underlying asset through direct investment and also through one or more indirect investments through multi-collateral vehicles. They are also concerned that a multi-collateral structure could invest in an asset that in turn holds an investment in the multi-collateral structure, thereby creating circular ownership.

The foregoing concerns, however, are not the focus of the specific revisions to the PBBD that have currently been proposed. Rather the focus is on asset-liability management (ALM) risk, which the staff memo explains as follows:

A subset of these multi-collateral structures also contain a significant amount of asset-liability duration mismatch within the structure, whereby the duration of the debt tranches is significantly longer than the duration of the assets supporting them. While it is not uncommon for other types of structured credit to have reinvestment periods to accommodate prepayments, manage deployment of cash and other purposes prior to reaching the amortization phase, these periods are typically 5 years or less and contain provisions to end the reinvestment phase early if certain triggers are breached. In some of the noted multi-collateral structures, the duration of the debt tranches have been observed to be up to 40 years while the assets inside the structure are significantly shorter with a weighted average duration of 8 years or in some cases, significantly less. This can create significant reinvestment risk whereby the ability to pay contractual principal and interest is reliant upon the ability to reinvest at sufficient yields over several decades. […]

Regulators have concerns about whether investors in these structures understand the ALM risk that they contain, whether they have the modeling capability to incorporate this embedded risk into their asset adequacy testing and stress testing frameworks and whether regulators have the transparency to identify structures that contain this degree of ALM risk. Additionally, the PBBD did not contemplate embedded ALM risk when it was developed. The substantive credit enhancement concept contemplates subordinated positions that absorb credit losses on the underlying assets to support the transformation of underlying risk to bond risk. However, it did not contemplate this subordination to also be used to absorb significant ALM risk. Therefore, this agenda item proposes to add a provision to the PBBD in SSAP No. 26—Bonds that addresses embedded ALM risk and precludes structures containing significant embedded ALM risk from being classified as bonds [emphasis in original].

To understand the impact of the proposed additions to the PBBD, a brief review of key elements of the PBBD is in order:

• Paragraph 5 of SSAP No. 26 defines a bond as “any security representing a creditor relationship, whereby there is a fixed schedule for one or more future payments, and which qualifies as either an issuer credit obligation or an asset-backed security as described in this statement.”
• Subparagraph 6.a. of SSAP No. 26 sets out a rebuttable presumption that a debt instrument collateralized by equity interests does not represent a creditor relationship in substance. In order to overcome that presumption, an insurer must perform a documented analysis when it acquires such an investment, determining that the characteristics of the underlying equity interests lend themselves to the production of predictable cash flows and that the underlying equity risks have been sufficiently redistributed through the capital structure of the issuer.
• Paragraph 10 of SSAP No. 26 requires all ABS structures to provide “substantive credit enhancement,” which means that the holder of the ABS must be in a substantively better economic position that it would be if it held the underlying collateral directly. Such enhancement can take the form of guarantees (or other similar forms of recourse), subordination and/or overcollateralization.
• As SSAP No. 26 is currently written, an ABS satisfies the PBBD when (i) it represents a creditor relationship; (ii) the underlying assets of an ABS are debt instruments that constitute financial assets; and (iii) substantive credit enhancement is present.
• When the underlying assets of an ABS are cash-generating non-financial assets, paragraph 9 of SSAP No. 26 imposes a further requirement: there must be a “meaningful level of cash flows” to service the debt from sources other than the sale or refinancing of the underlying collateral.

SAPWG agenda item 2026-10 proposes to add the following two subparagraphs to paragraph 9 that would impose additional requirements when the underlying assets are financial assets:

• c. Financial assets of an ABS issuer can either be self-liquidating or not. Self-liquidating means that the assets convert themselves to cash over a defined period in accordance with their contract terms, as is the case with most types of receivables. If the assets of the ABS issuer are not self-liquidating, the rebuttable presumption detailed in paragraphs 6.a.-6.d. must be overcome in order for the security to meet the definition of a bond.
• d. If the financial assets are self-liquidating, they must produce cash flows that are sufficient to pay all contractual amounts due in order to be considered meaningful. To the extent that the contractual terms permit cash flows of the financial assets to be reinvested rather than used to repay the debt security, the reporting entity should evaluate whether the debt security is subject to significant embedded asset-liability management (ALM) risk. Embedded ALM risk is to be considered significant if the ability to pay contractual cash flows of the debt security as scheduled could be impacted by changes in reinvestment interest rates or investment spreads. Securities that include significant embedded ALM risk do not meet the definition of a bond.

New subparagraph 9.c. would define self-liquidating assets as assets that convert themselves to cash over a defined period in accordance with their contract terms. It would also require ABS structures with underlying financial assets that are not self-liquidating to overcome the rebuttable presumption in paragraph 6 in order to qualify as a bond. In other words, the rebuttable presumption would apply not only to debt instruments collateralized by equity interests, as is the case currently, but also to debt instruments collateralized by non-self-liquidating financial assets.

New subparagraph 9.d. would apply an additional test to ABS structures with underlying financial assets that are self-liquidating when the contractual terms permit cash flows of the underlying assets to be reinvested rather than used to repay the debt security. In that case, the debt security will fail to satisfy the PBBD if there is significant embedded ALM risk, which is deemed to exist “if the ability to pay contractual cash flows of the debt security as scheduled could be impacted by changes in reinvestment interest rates or investment spreads.”

Comments on the proposal are due on October 2, 2026. But speaking of embedded risks, there is a paragraph embedded in the memo for agenda item 2026-10 that indicates that ABS with embedded ALM risk are only the first asset class that regulators are concerned about and that the current proposed change is only the first revision to the PBBD that the SAPWG may be contemplating:

While this agenda item is limited to addressing the treatment of embedded ALM risk under the PBBD, a separate project to consider reporting refinements related to several asset classes that have gained prominence since the finalization of the PBBD will likely follow. These include but are not limited to multi-collateral credit structures, feeder funds and other forms of fund finance.

In other words, stay tuned. It appears that PBBD version 2.0 could be in the making.

SAPWG has requested comments on potential changes to the definition and reporting of residential mortgage loans.

This agenda item reflects a new focus on residential mortgage loan investments that began with a presentation given by Neuberger Berman at the March 24, 2026 meeting of the Invested Assets (E) Task Force (IATF). A summary of that presentation is available in the minutes of the March 24, 2026 IATF meeting.

Following up on that presentation, on May 26, 2026, one of the IATF’s subgroups, the Investment Analysis (E) Working Group (INVAWG), sent a referral letterto the SAPWG and the Life Risk-Based Capital (E) Working Group (Life RBC WG) regarding the statutory accounting and risk-based capital (RBC) treatment of residential mortgage loans. The INVAWG referral letter noted the following:

• Residential mortgage loan exposure has grown consistently and rapidly since 2021, particularly among life insurers, averaging 36.3% annual growth in that time period (37.1% for just life insurers).
• Exposure growth as a percentage of invested assets has become material as well, with several insurers having over 10% of their portfolio invested in residential mortgage loans.
• Some insurers hold individual high balance residential mortgage loans, with 129 individual loans with balances over $50 million. These high balance loans constitute approximately 15% of all residential mortgage loans. Some of these large balances may be due to reporting multiple mortgage loans in the aggregate as a single line item on Schedule B (which is the statutory reporting schedule that insurers use to report their investments in mortgage loans)..
• Many of the line items in Schedule B list the location as “various” or “multiple,” which limits the ability to assess the geographical exposure of the loans or evaluate loans on an individual loan basis.
• Current reporting requirements lack granularity to highlight potential key characteristics of residential mortgage loans, including identification of non-first lien loans, whether the residencies are owner occupied or investment properties, or loan-to-value (LTV) metrics, among others.
• Despite possessing varying characteristics, residential mortgage loans are assigned an RBC charge of 0.68% for life insurers, without risk sensitivity to underlying factors. Additionally, this RBC factor was established using commercial mortgage loan factors as an anchor point without any calibration to data specific to residential mortgage loans.

Based on the foregoing, the INVAWG referral letter asked the SAPWG to consider whether additional clarification or refinement within SSAP No. 37—Mortgage Loans is warranted to better define residential mortgage loans and improve consistency in application. The referral letter identified the following areas for potential consideration by the SAPWG:

• Clarification of the characteristics that distinguish residential mortgage loans from commercial-like or other mortgage loan types, including consideration of property type, scale, and risk attributes.
• Consideration of whether certain large multi-unit, development-stage, or transitional properties should be subject to different classification or disclosure considerations.
• Evaluation of whether enhancements to reporting guidance or disclosures to identify more granular individual loan characteristics within Schedule B may improve transparency, comparability across reporting entities, and individual loan risk-assessment usability by state insurance regulators and users of statutory financial statements.
• Evaluation of whether aggregation of individual loans could be appropriate for reporting purposes, including guidance on which loans can be aggregated to retain benefits of disclosure of key risk characteristics.

The INVAWG referral letter also asked the Life RBC WG to address the following RBC-related considerations in coordination with the SAPWG:

• Provide input on the potential RBC implications of mortgage loan exposures that, while currently classified as residential, may exhibit characteristics more consistent with commercial or development-type lending.
• Consider whether additional guidance or clarification may be warranted regarding the application of residential RBC factors, including additional reporting items required to differentiate variations in risk, including due to underlying borrower creditworthiness.

Accordingly, on August 12, 2026, the SAPWG exposed for comment a new concept agenda item 2026-11, which includes proposals for addressing the two topics identified in the INVAWG referral: (1)clarifying the distinction between residential and commercial mortgage loans for statutory accounting purposes; and (2)considering whether additional attributes of residential mortgages should be captured for statutory reporting purposes (which would enable such attributes to be taken into account in determining RBC charges).

On the first topic, the NAIC staff have recommended incorporating into SSAP No. 37—Mortgage Loans an explicit definition of a residential mortgage loan as a mortgage loan secured by a “one-to-four-family property” (as defined in 12 CFR 1266.1 within the Federal Home Loan Bank regulations). However, they have also recommended that the language from the federal definition be further refined to address the following points:

• Establish a threshold for determining when a mixed-use property with both residential and commercial units can be considered either a one-to-four family or multifamily property (e.g., 60% residential to commercial square footage, 50% of loan value related to residential, or some other appropriate measure).
• Consider whether one-to-four family properties and multifamily properties should both be classified as residential mortgage loans with separate reporting, or whether multifamily properties should be included as a component of commercial mortgage reporting.
• Clarify that a mortgage loan, including a construction loan, secured by a project involving multiple one-to-four family properties cannot be reported as a single residential loan when the collateral is the project or development as a whole. Each individual one-to-four family property, including condominium dwelling units within the scope of one-to-four family property definition, may qualify for residential mortgage loan reporting if each property is reported individually and the mortgage is legally separate and divisible from other properties in the project, development, or condominium.
• Consider whether there should be LTV limits on individual residential mortgage loans.
• (5) Provide specific guidance on residential mortgage loans secured by accessory dwelling units, non-owner occupied one-to-four family properties, residential construction loans, fix and flip loans, lines of credit, home equity loans, and transitional properties.

On the second topic identified in the INVAWG referral, the NAIC staff have requested comment on whether additional attributes should be incorporated into Schedule B reporting, whether through new columns, reporting codes, or separate loan reporting. Some of the potential risk factors could include lien position such as 1st lien (senior) or 2nd lien (subordinated), the LTV ratio, and the borrower’s credit risk profile (e.g., FICO score).

The staff have also requested comment on whether an alternative reporting approach should be considered for residential mortgage loans, in which they would be carved out from the traditional Schedule B reporting and instead reported in predefined aggregated categories.

As noted above, residential mortgage loans are a significant and growing asset class for life insurer investments, and the 0.68% RBC charge for residential mortgage loans in good standing is attractively low (roughly equivalent to an A+/A1 bond). Accordingly, the decisions that the SAPWG and the Life RBC WG will ultimately make regarding this proposal could have a meaningful impact.

Comments are due on October 2, 2026.

The SAPWG has requested comments on the treatment of ICOLI policies

The SAPWG exposed for comment a new concept agenda item 2026-08 relating to Insurance Company Owned Life Insurance (ICOLI) policies. When an insurance company is the owner and beneficiary of a life insurance policy (or has otherwise obtained the rights to control the policy), the current statutory accounting guidance in paragraph 9 of SSAP No. 21—Other Admitted Assets recognizes the amount the insurance company can realize on the policy as an admitted asset. The SSAP No. 21 guidance requires the policy to meet the definition of a “life insurance contract” in Section 7702 of the Internal Revenue Code and also requires the policy to be acquired primarily to defray the costs related to employee benefit programs or to compensate for the loss of a key executive.

Although the current guidance recognizes the amount realizable on an ICOLI policy as an admitted asset, that amount is not classified as an “invested asset,” which means it is reported outside of the balance sheet investment categories under the special category of “aggregate write-ins for other-than-invested assets.” Being reported as an “other-than-invested” asset means that the amount does not currently receive an RBC charge for life insurers. For property/casualty and health insurers, there is an existing 5% RBC charge for amounts reported as “other-than-invested assets.”

It is common for the cash value underlying ICOLI policies to be held in investment vehicles that in turn invest in various types of underlying assets. Insurers’ annual statements are required to disclose the cash surrender value (CSV) that is held within such investment vehicles, subdivided by broad investment category. A review of those disclosures by NAIC staff indicated that the amount of CSV held within investment vehicles has more than doubled in the four years from 2021 to 2025, and that of the 143 entities that completed the disclosure, 59 entities reported that over 40% of the CSV was captured in an investment vehicle holding assets that would be reportable on Schedule BA if held by an insurer directly. In addition, NAIC staff observed at least one instance where a manager of ICOLI funds cited the ability to invest in private fund holdings without holding RBC as a selling point for ICOLI.

Based on the foregoing, and prompted by a regulator request, the NAIC staff recommended, and the SAPWG voted, to expose this concept agenda item with a request for comment on whether the amounts reported under SSAP No. 21, paragraph 9, should be captured as “other invested assets” on Schedule BA, with a new reporting category for “Realizable Amounts Under ICOLI Policies,” with reporting lines to capture the amount outside of an investment vehicle, and the amounts within an investment vehicle, divided by investment category.

To be clear, this agenda item does not propose to eliminate the status of amounts realizable under ICOLI policies as admitted assets, but is only seeking comments on whether such amounts should continue to be treated as “other-than-invested assets,” which are excluded from RBC for life insurers. Because this is a concept agenda item, the SAPWG will consider the comments received as a conceptual matter before deciding whether to formally move this item to its active agenda.

As recommended by staff, the SAPWG also sent a referral to the Capital Adequacy (E) Task Force to inform it of this exposure and request initial feedback on the potential inclusion of these items as an invested asset, with assessment of RBC factors.

This topic is expected to garner significant attention from the entire ICOLI ecosystem, which includes not only insurers that own ICOLI policies, but also life insurers that issue ICOLI policies, as well as specialized brokers and consultants who advise on setting up and administering ICOLI programs, asset managers who provide insurance dedicated funds that underlie ICOLI policies, and providers of stable value wraps for ICOLI policies.

Comments are due on October 2, 2026.