News & In Print
Impactful innovation is core to our DNA. Maybe that’s how we stay ahead of the game in what we do. Here, in our News & In Print Center, our team shares our media coverage and our guidance on best practice. Discover all the latest developments of our growing business.
Following the Global Financial Crisis (GFC), insurers faced a low-yield environment, prompting a significant shift towards higher-yielding alternative assets. This transition encompassed various strategies, such as private debt and equity placements, structured products, and cost-effective investment vehicles, including custom-designed, non-SEC registered funds tailored to their specific requirements. Up to the present, regulations have been tactically modified to evolving market dynamics. An August 2023 memo from the Financial Condition (E) Committee proposes a comprehensive reassessment of the regulatory framework for insurers' investments. This initiative acknowledges the imperative to modernize the existing structure to better align with contemporary needs. This report builds on the memo’s aspirational vision to modernize the NAIC’s oversight of investment risk and to use available resources cost-effectively, aiming to achieve the principle of “Equal Capital for Equal Risk.”Given the complexities involved with the needed depth and breadth of tools with considerations for the broad set of capital markets, statutory accounting, RBC, etc., this report introduces candidate core principles for investment risk oversight:
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Clarity–ensuring each component of the framework has a well-articulated objective and definition.
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Consistency–ensuring different types of investments are handled objectively and consistently across the framework.
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Governance–ensuring ongoing governance across the framework, including a model risk management framework with defined standards.
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This report also introduced supervisory roles and responsibilities for insurers, NAIC staff, regulators, and external consultants, with deliberate considerations for potential conflicts of interest that tie back to the core principles. By deliberately leveraging resources efficiently and approaching the redesign to balance prudence and cost-efficiency while incorporating lessons learned from initiatives such as CCAR and Solvency II, we are confident that the U.S. insurance regulatory framework can be adapted to benefit policyholders and insurers
The post-Global Financial Crisis (GFC) low-yield environment had insurers move more heavily toward higher-yielding alternative assets. These included strategies using private placements of debt and equity, structured products, and lower-cost, efficient investment vehicles, often bespoke private, non-SEC registered funds designed to address insurers’ unique needs. To date, the changes to investment guidelines have tactically responded to changing market conditions. The Financial Condition (E) Committee August 2023 memo outlines a holistic rethink of how insurers' investments are regulated, recognizing the need to modernize the framework.
This report addresses one aspect of the proposal by outlining candidate principles along with roles and responsibilities for overseeing designations, a mechanism that would allow for the prudent use of rating agencies – without mechanist reliance on such ratings or wholesale outsourcing of risk analysis to the NAIC. The mechanisms we propose to oversee designations deliberately consider the efficient use of resources, including NAIC staff, rating agencies, and other external solution providers. They also deliberately address challenges in credit risk measures and assessing their performance, including:
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Measures of default risk, an inherently remote event, cannot be assessed robustly given the dearth of default data.
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Level-setting risk across asset classes is challenging because different risk factors impact different credit segments (e.g., corporate vs. municipal).
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Controlling for variation in methods and standards across Credit Assessment Providers whose methods necessarily involve subjectivity.
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Avoiding conflicts of interest driven by rating agencies’ commercial incentives.
Statutory Accounting Principles are designed to provide transparency over solvency by separately reporting the value of reserves and surplus that are part of admitted assets. Reserves represent the value of assets required to support financial risks, benefits, and guarantees associated with the policies, with the remaining value of admitted assets reported as surplus, sometimes referred to as 'Capital and Surplus,' and used in to provide an adequate margin of safety. Life insurance policies and fixed-income assets are largely accounted for symmetrically at cost and insulated from interest rate fluctuations. Interest Maintenance Reserve (IMR) is an accounting construct designed to safeguard against the potential misrepresentation of surplus due to asset sales and keep the anticipated investment yield consistent with that needed to support the policies.
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In a declining interest rate environment, an insurer could sell fixed-income assets, recognize gains, and increase surplus. In reality, the sale and reinvestment would be in lower-yield assets with insufficient interest payments to support policies. This shortfall highlights the ongoing need for the gains to support the policy block rather than, say, be paid off as a dividend. To align the balance sheet with the economic reality, IMR defers interest rate-related gains from fixed-income asset sales and requires them to be amortized through income over their remaining life. Without the IMR offset (i.e., through the deferral of the gains), the surplus would inappropriately portray a false representation of financial strength.
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Similarly, fixed-income portfolio sales in rising interest rate environments could result in a misleading reduction of surplus. The economics mirror those above, with the company reinvesting in higher-yielding assets with interest payments that exceed those needed to support policies that directionally offset the realized loss. The NAIC only recently adopted admittance of negative IMR as an asset in surplus and capital, with qualifications on an interim basis; amortized negative IMR had already been incorporated into earnings. Prior to allowing for admittance of IMR offset (i.e., through the deferral of the losses), the surplus was inappropriately showing decreased financial strength, which was increasingly constrained in the context of the recent dramatic rise in interest rates. The perverse incentives had insurers focus on managing statutory financial outcomes, limiting fixed-income transactions, and deviating from long-standing investment practices, including prudent asset-liability management (ALM) and risk management behaviors related to portfolio rebalancing. This seemingly obscure piece of accounting is impacting a broad set of investment strategies and business models, including the likes of pension risk transfer (PRT).
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Life insurers' balance sheets in the United States are robust, and solvency is not under question, with insurance policies experiencing directionally equivalent movements in valuation as fixed-income assets. Nevertheless, the stakes are high, with life insurers facing close to an estimated $700 billion of unrealized losses on fixed-income investments reported on Schedule D alone, coupled with our empirical analysis of insurers’ fixed-income trading activity that suggests qualifications for admittance possibility resulting in life insurers facing continued constraints with managing their fixed income portfolios prudently. Acknowledging the need for a more thoughtful long-term solution, an ad hoc group is likely to be formed to explore long-term solutions reflecting the 2025 sunset of the temporary guidelines.
The rate of change to the regulatory landscape governing US insurance investments is only accelerating, with broad implications for investment strategy. This report explores developments from the National Association of Insurance Commissioners (NAIC) 2023 Summer National Meeting with possible changes to the treatment of investments. Several initiatives have the potential to result in far-reaching implications for insurers’ investment strategies and capital markets:
• Classification of investment vehicles, including bonds and residual interest of structured products.
• Revisions to the definition and oversight of ratings-based designations.
• Revisions to the capital framework to potentially differentiate Collateral Loan Obligations (CLOs) and structured assets more broadly.
In addition, the investment community closely watched the Financial (E) Committee (E-Committee) meeting to deliberate on its memo that proposes a holistic framework for investment guidelines. The memo could lead to significant implications for the path and outcome of how investment guidelines will be revised. While potential long-term implications are noteworthy, the E-Committee Chair clarified that they "do plan to hear from all interested parties as we finalize this document, but we do not plan to stop any of the work that is currently ongoing," citing three current initiatives (i.e., those related to CLO model-based designations, differentiation of C-1 capital for structured assets, and SVO discretion over designations). However, it was noted that these are deliberative processes that will continue with no commitment to adoption in their current form.
This report reviews recent developments with efforts to revise NAIC investment guidelines, their potential implications for investment strategy, and what might happen next.
What’s next for the rules that govern insurers’ investments: An update from the 2023 NAIC Summer National Meeting
The NAIC Summer National Meeting is having the investment community focused on the announcement by regulators for an evaluation of the overall framework that governs insurers’ investments. Noticeable shifts in the investment strategies toward private assets, along with structured and complex assets, had the NAIC embark on significant multi-year updates to the RBC and STAT frameworks ranging from asset classification (i.e., proposed definitions for bonds and residual interests), designations (e.g., proposed definition), cashflow testing (AG 53) to capital assignment (e.g., CLOs and ABS). Join Chair of the Valuation of Securities (E) Task Force and Iowa's Chief Investment Specialist Carrie Mears and Bridgeway Analytics' Amnon Levy on Stewart Foley's InsuranceAUM.com August 23 live webinar (register here). The three will unpack developments from the 2023 NAIC Summer National Meeting and provide insights into potential implications of the changing landscape that governs insurers’ investments, including:
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Designations, and the use of rating agencies
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Revisions to the treatment of structured assets and investment vehicles
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Potential implications from a proposed revision to modernize investment governance
The changing rules governing US insurers’ investments: Capital requirements and the role of agency ratings
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Synopsis
In response to shifting investment strategies, insurance regulators and the National Association of Insurance Commissioners (NAIC) have embarked on a multi-pronged revision to investment guidelines that will better align with the new landscape, including the following: ï‚·
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Classification of assets, with principles-based approaches which will impact the likes of debt issued by investment vehicles and structured assets, as well as their equity and residual interests
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Designation process which relies on agency ratings, with NAIC staff and regulators vocalizing concerns of rating agencies lacking consistent standards, notably private ratings that, by their private nature, are not subject to market oversight
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Capital allocation across assets, with an initial focus on addressing potential capital arbitrage for structured assets and investment vehicles, and broader aspirations of aligning capital requirements across investments with their economic risks to avoid perverse incentives
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With trillions of dollars in insurers' investments likely impacted, the multi-year effort will have broad implications.
Trends in the Ownership Structure of US Insurers and the Evolving Regulatory Landscape, Q2 2023 Insurance AUM Journal
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Synopsis
The United States insurance regulatory landscape is experiencing broad changes in reaction to noticeable shifts in ownership structure that have resulted in changing conditions in investment markets and the financial services industry. This report explores insurance industry trends and evolving NAIC guidelines designed to support the new landscape. The report includes a review of the ways in which the new rules help address possible concerns with conflicts of interest associated with forms of ownership and control.
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About the Authors
Amnon Levy founded Bridgeway Analytics which supports the investment and regulatory community navigate complex capital markets. Amnon has led the development of award-winning quantitative solutions actively used by 200+ financial institutions and their regulators, including 2021 redesigned NAIC C1 bond factors.
Bill Poutsiaka is a senior financial services executive with considerable experience and accomplishments, including successful strategic and operational transformation, as CEO, Chief Investment Officer, and board member for global insurance and asset management businesses.
Scott White is the Virginia Commissioner of Insurance and Secretary-Treasurer of the National Association of Insurance Commissioners (NAIC). He is also a member of the International Association of Insurance Supervisors (IAIS) Macroprudential Committee. He served as Chair of the NAIC’s Financial Condition (E) Committee from 2020-2022.
Efforts to Reform NAIC Investment Guidelines: Lessons Learned from History
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Shifts in insurers’ investment strategy over the last decade have motivated state regulators to embark on broad reforms to govern the new landscape better. Given the scope of change, possible unintended consequences are top of mind. Our latest report explores the lessons learned from past revisions to guidelines and unintended consequences for investment strategy and capital markets more broadly. Importantly, we relate those lessons to current efforts to revise guidelines, including:
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Proposals related to designations and limiting the use of agency ratings
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The proposed interim increase in capital to 45% for residual tranches of structured assets
We do this through two case studies:
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The 2009 Mortgage-Backed Securities (MBS) reform introduced model-based designations to replace agency ratings. The change was partly to provide capital relief for insurers holding MBS tranches that were downgraded due to deteriorated real estate values that came with the Great Financial Crisis (GFC). However, the change also incentivized insurers to hold on to and invest in new sub-investment grade MBS. In their study, Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class, Becker, Opp and Saidi, show that by 2015, insurers’ sub-investment grade MBS comprised over one-third of their overall MBS holdings, dwarfing the 5% observed for other asset classes (figure 1 from their study reproduced)
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The so-called C1 bond factor cliff associated with the punitive pre-2021 NAIC 3 designation, is roughly equivalent to the S&P BB credit rating. In a separate study, Regulatory Pressure and Fire Sales in the Corporate Bond Market, Ellul, Jotikasthira, and Lundblad explore patterns related to insurers selling bonds when downgraded below investment grade. With insurers being the most significant single bond market participant, often holding one-third of all outstanding investment-grade corporate bonds, the collective divesting of downgraded issues resulted in a ‘fire sale’ with transaction prices deviating from fundamental values by a substantial median of 11%. Unfortunately, insurance companies that faced capital structure constraints were more likely to sell downgraded bonds, putting further strain on their solvency.
The United States insurance regulatory landscape is experiencing broad changes in reaction to noticeable shifts in ownership structure that have resulted in changing conditions in investment markets and the financial services industry.
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Join Virginia Commissioner of Insurance and Secretary -Treasurer of the NAIC Scott White, Bridgeway Analytics' Amnon Levy, and InsuranceAUM's Stewart Foley explore insurance industry trends and the evolving NAIC guidelines designed to support the new landscape.
The NAIC Spring National Meeting brought progress as regulators gained a better understanding of the issues that need to be addressed with the Risk Based Capital framework treatment of investments. Regulators and NAIC staff are finding a need to refine the rules to better align with the growth of insurers’ investments in the likes of CLO tranches, feeder notes and the broad set of structured assets. Amnon Levy's session on InsuranceAUM.coma and our report review recent developments along with possible outcomes and their implications.
Warren Buffet famously said, “You can’t tell who’s swimming naked until the tide goes out.”
Liquidity Matters: A Panel of Experts' Discussion explores the regulatory and practical considerations with liquidity management in the insurance industry. With a troubled banking system in the backdrop, along with possible changes to NAIC reserving, and balance sheet and liquidity management guidelines, understanding practical considerations with liquidity management couldn't be more critical.
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Join Amnon Levy on a panel with Bill Poutsiaka, who had first hand experience recapitalizing AIG as a CIO after their collapse, Geoffrey Cornell, former CIO of Corebridge Financial and Michael Ashton, the Inflation Guy on a panel moderated by InsuranceAUM.com's Stewart Foley to explore these issues.
The proposed model-based designations for CLOs, and the broader move away from agency ratings, is resolving in some dimensions and increasingly uncertain in others. With the NAIC and regulators citing concerns over rating agency commercial interests biasing risk assessments and the appropriateness of using agency ratings in capturing tail risks, questions remain over what designations are intended to measure, and the degree to which the proposed intrinsic-price approach is an improvement. This report benchmarks the performance of NAIC intrinsic price designations against market-based measures, and explores the lessons learned from the treatment of structured assets across regulatory jurisdictions. We find that:
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Intrinsic-price-based designations benchmark poorly to market spreads when compared to agency ratings. Despite data quality limitations, our analysis suggests the poor performance is, in part, inherent with the methodology whereby credit will generally receive higher quality designations as it approaches maturity. This maturity effect is a departure from the C1 framework, and can result in shorter dated, high-spread credit with low quality agency ratings (e.g., BB or B) assigned high quality intrinsic price designations (e.g., 1.a or 1.d)
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Other regulatory frameworks often differentiate credit across agency rating categories and remaining maturity. Our estimates suggest remaining maturity may receive more punitive capital treatment under intrinsic-price-based NAIC designations than any other regulatory framework explored, including Solvency II and IAIS ICS
Critical to the discussion, we provide possible approaches that can more closely align the intrinsic price approach with the C1 RBC framework and identify characteristics that are associated with assets whose designations benchmark poorly, which can be used as a starting point for a more comprehensive study that can be used by the NAIC to improve upon their methodologies.
We hope you find this resource helpful – it is consistent with our goal of bringing value to our community.
By Amnon Levy and Brett Manning
Our report, Benchmarking the Treatment of CLOs, was recently featured in Green Street's Asset Backed Alert!
Our latest publication in Insurance Asset Risk. The NAIC and regulators have been deliberate about ensuring the process of revising the treatment of CLOs remains transparent and importantly, have been open for feedback and discussion, with requests by the NAIC staff for actionable alternatives to proposed models. While increased involvement from interested parties will involve distillation of more information, we believe the end result will lead to an improved framework.
An important trend is taking place in financial services: the formation of Advisor-As-Owner (AAO) insurance entities. This corporate form has critical governance and regulatory implications centered on conflict of interests. As a result of these implications and the complex jurisdictional fabric of insurance and advisory regulation, the growth of AAOs has drawn the attention of multiple regulatory bodies. These organizations are in various stages of forming policy responses. Our discussions with senior industry leaders confirm that the potential business benefits enabled by the AAO model are closely aligned with the governance and risk controls (both operational and portfolio related) essential to its implementation. Our goal with this paper is to make recommendations on these AAO-related governance policies and management practices, many of which also apply to non-AAO insurers investing in alternatives.
By Bill Poutsiaka, Deborah Gero and Amnon Levy
Level-setting risks across credit segments is an ongoing challenge for capital markets. The National Association of Insurance Commissioners (NAIC)'s initiative to have NAIC designations no longer be based on agency ratings may have far reaching implications for the insurance industry and more broadly. In our most recent Insurance Asset Risk article, Bridgeway Analytics' William Poutsiaka and I explore the aspirational standards that need to be achieved in order to address this critical issue, and how other regulatory bodies have navigated similar challenges.
Stewart Foley and I explore the evolving US insurance regulatory landscape on his InsuranceAUM.com podcast. Discussions at the recent National Association of Insurance Commissioners (NAIC) Summer National Meeting reaffirmed that the rate of change to the rules that govern insurance investments is accelerating. More than ever, the insurance and regulatory community need smart tools to navigate ever increasingly complex capital markets and regulations that promote competition and fair practice.
CLOs have been called out by the NAIC and insurance regulators as an asset class that should be treated differently than other credit assets. Broad limitations with the C1 framework were acknowledged in the 2021 redesign effort, and evidenced by the debate for how to level-set the differentiated risks of corporate bonds and CLOs. The challenges with using the C1 factors to describe lifetime loss of assets other than 10-year corporate bonds, can be inferred from the observed differences in recovery, maturity, offsetting coupons, and other risk factors.
The rate of change to the regulatory landscape governing US insurance investments is only accelerating, with broad implications for investment strategy. This report explores the evolving guidelines from the National Association of Insurance Commissioners (NAIC) and the International Association of Insurance Supervisors (IAIS) and assesses implications for US insurers and capital markets more broadly.
Amnon Levy, Brett Manning and Nitsa Einan
The NAIC is proposing to change the treatment of insurers' ~$200 billion CLOs holdings, moving away from relying on agency ratings and toward a modeled-based approach in assigning designations. The changes can have a material impact on CLO investment strategies. With a comment period ending December 5, insurers, insurers’ asset managers, and participants in the syndicated loan market are assessing the potential implications of this proposal in the context of the broader changes to NAIC guidelines.
Amnon Levy led the team that redesigned the NAIC c1 factors that governing $3 trillion in US insurers’ credit assets. An important milestone and a testament to consensus building through collaboration with the NAIC, ACLI, the insurance industry and regulators
The velocity of change to the rules that insurers must navigate is staggering. The implications transcend insurers' investment strategies and business models across the US and Europe with potentially profound implications for capital markets.
Insurers use of ETFs is growing, but continues to remain at a formative stage with newly designed products by BondBloxx and others better addressing unique and varied needs. This highly efficient vehicle can transform insurers' investment process in ways we are only beginning to understand. Thankfully, proper oversight by the National Association of Insurance Commissioners (NAIC) and state insurance regulators will avoid past pitfalls. Thrilled to have Bridgeway Analytics' latest thought piece published in Insurance Asset Risk.
Thrilled to explore the National Association of Insurance Commissioners (NAIC)’s efforts in possibly improving the treatment of investment risk with Vincent Huck of Insurance Asset Risk. With a desire to refine guidelines for structured assets in 2022, the RBC framework will possibly increase in granularity and hopefully better level-set an articulation of risk across investments, providing regulators with the needed tools to better identify potentially weakly capitalized companies.
Bridgeway Analytics showcased in Green Street's Asset-Backed Alert.
The Changing Climate of Credit Risk Management, ABA Banking Journal
Exploring why credit investors should care about climate
The impact of accounting standard on credit portfolio management can be substantial, with far reaching implications to various business models.
Still a bestseller! Amnon’s book on credit risk measurement and management
The impact of accounting standard on credit portfolio management can be substantial, with far reaching implications to various business models.
Join Amnon and other panelists as they discuss implications of regulatory changes the upcoming ACLI Senior Investment Management Seminar
The effects of COVID-19 coupled with the ongoing impact of structural economic change – and policy responses to both – have resulted in unparalleled uncertainty around future interest rate and credit environments. This uncertainty calls for a heightened focus on duration risk management.
Designing regulatory capital aware investment strategies
A comprehensive list of publications, including technical material
