The ability to make interest and principal payments through only underlying interest and principal repayment is the key distinction. Regulators also require the rated note structures to have substantial credit enhancement over their equity-like characteristics.Cash flows (interest) that vary based on underlying holdings, varying principal payments based on performance on underlying holdings or required sales to meet principal requirements will disqualify such holdings as being categorized as a bond. Rather, in classifying a feeder structure, regulators will assess the certainty of cash flows to the ultimate creditors. The guidance notes that no rated note feeder structure will automatically qualify for, or be automatically disqualified from, bond treatment. Similarly, the revised proposal adds guidance on the application of the bond principles to rated note structures.Particularly, the updates include a revision to a key component of the definition of ABS, and would require that an issuer must have pre-determined and contractual principal and interest payments. Based on the updated bond definition, the guidance would relax the restriction on ABS collateralized with equity interests (examples would include debt issued by special purpose vehicles and backed by private equity, hedge fund and/or limited partnership interests).“A bond shall be defined 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.” The NAIC is updating the definition of bond to be principle based: insurers, by requiring additional filing information on existing holdings and potentially moving assets that now qualify as bonds to a different reporting schedule with more punitive capital treatment.Ģ. These changes will have material impact on U.S. If the proposals are approved, the likely effective date of the new rules is January 1, 2025. ![]() ![]() The new proposals are currently taking public comments until October 7, 2022. The proposal to split the statutory reporting schedule for bonds (Schedule D) into two sections from one in order to distinguish more traditional issuer obligation bonds from structured securities.Updates to the NAIC’s proposed principles-based bond definition, which focuses on defining what qualifies as a bond and, in turn, what qualifies for inclusion on Schedule D – Part 1 and the resulting favorable capital treatment that comes with it.Two areas we highlight that are of high importance to insurers are: The National Association of Insurance Commissioners (NAIC) recently held its Summer National Meeting and provided updates regarding proposals related to insurance company investments.
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