National Association of Insurance Commissioners



To:Stewart Guerin, Chair of the Valuation of Securities (E) Task ForceMembers of the Valuation of Securities (E) Task ForceFrom: Elaine Wieche, Chair of the Invested Assets (E) Working Group Re: Structured NotesDate: February xx, 2014At the NAIC’s 2013 Summer National Meeting, the Valuation of Securities (E) Task Force (VOSTF) charged the Invested Assets (E) Working Group (IAWG) with determining the accounting and reporting for mortgaged-referenced transactions, as exemplified by the Structured Agency Credit Risk (STACR) transaction that was discussed at the meeting, for year-end 2013 and with determining the regulatory reporting framework for structured notes in general.At the NAIC’s 2013 Fall National Meeting, the VOSTF adopted a definition of Structured Note and Mortgage-Referenced Security for the Purposes and Procedures Manual of the NAIC Securities Valuation Office as recommended by the IAWG. The IAWG has held further discussions about Structured Notes as defined. Before considering whether substantive recommendations are necessary for the treatment of Structured Notes, such as valuation and risk-based capital, the IAWG felt it was important to gain an understanding about exposure across the industry and within individual insurance companies. Structured Notes are difficult to find when relying on standard data sources. Based on some preliminary analysis, the total exposure does not appear to be significant across the entire industry, but it may be material for individual insurance companies, either as a percent of admitted assets or as a percent of capital and surplus.The IAWG recommends that an additional disclosure requirement be added to Statement of Statutory Accounting Principles No. 26 – Bonds, Excluding Loan-Backed and Structured Securities (SSAP No. 26). To move forward with this recommendation, IAWG requests that the VOSTF send a referral to the Statutory Accounting Principles (E) Working Group requesting revisions to SSAP No. 26 for a Structured Note disclosure that could initially be data-captured from the year-end 2014 financial statements. The IAWG suggests that the disclosure include the following information:Structured NotesDisclose the following for Structured Notes as defined per the Purposes and Procedures Manual of the NAIC Securities Valuation Office:CUSIP identification numberActual CostFair ValueBook/Adjusted Carrying ValueAlso disclose if the Structured Note is a Mortgage–Referenced Security, also as defined in the Purposes and Procedures Manual of the NAIC Securities Valuation Office.Illustration:Structured NotesCUSIP IdentificationActual CostFair ValueBook/Adjusted Carrying ValueMortgage- Referenced Security(Y/N)$$$Total$$$XXXStructured Note Definition as adopted by the Valuation of Securities (E) Task Force for the Purposes and Procedures Manual of the NAIC Securities Valuation OfficeA Structured Note is a direct debt issuance by a corporation, municipality, or government entity, ranking pari-passu with the issuer’s other debt issuance of equal seniority where either: The coupon and/or principal payments are linked, in whole or in part, to prices or payment streams from index or indices, or assets deriving their value from other than the issuer’s credit quality, or The coupon and/or principal payments are leveraged by a formula that is different from either a fixed coupon, or a non-leveraged floating rate coupon linked to an interest rate index, including but not limited to LIBOR or the prime rate. Analytically, a Structured Note can be divided into the issuer’s debt issue and an embedded derivative. Securities with certain embedded derivatives are not considered Structured Notes, including but not limited to bonds with standard call or put options. When the issuer is a trust, the source of payments on the security is the assets in the trust, and investors’ recourse is limited to the assets in that trust, the security is not a Structured Note. ................
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