New Reporting Guidance for Holders of Surplus Notes

Submitted by Cynthia Braman on Wed, 07/12/2017 - 10:28am

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By Barry Cohen

New NAIC Reporting GuidanceThe NAIC has changed the way investments in surplus notes are valued and reported. 

Effective January 1, 2017, surplus notes with an equivalent NAIC 1 or NAIC 2 designation are valued at amortized cost. Those with an NAIC designation below NAIC 2 or nonrated must be valued at the lower of amortized cost or fair value.

Prior to the change, only surplus notes with a NAIC 1 designation were allowed to be valued at amortized cost.

The new guidance also requires surplus notes to be nonadmitted if the issuer is in liquidation, conservation, rehabilitation or subject to any RBC regulatory action level. The admitted value cannot exceed the amount that would be admitted if considered an equity instrument and added to another equity instrument held either directly or indirectly by the holder.

Revisions were made to the Purposes and Procedures Manual of the NAIC Investment Analysis Office to allow surplus notes rated by an NAIC Credit Rating Provider (CRP) to be treated as filing exempt. Non-CRP rated notes must be filed with the Securities Valuation Office (SVO).

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