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Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley, I'll be your host. Welcome back. It's so nice to have you. A lot of you are going to really enjoy this podcast because it is tips for ensuring a smooth year-end filing process.
I think there's going to be some practical stuff, some technical stuff, too. But I think the idea here is you're going to get a lot out of this. We are actually going to have a follow-up live Q&A that you can join about a week from the release of this podcast, which we've never done before. But we're thinking that if we can go through these points and then if you have questions, you can actually ask these same panelists a year later.
Just speaking of our same panelists, we have none other than Sam Jones, who is a senior director of statutory reporting at SS&C Technologies. Sam, welcome to the party. You are the only newbie, but we're very happy to have you.
Sam: Glad to be here, Stewart. Thank you for inviting me.
Stewart: It is your first podcast, so welcome. You're among friends.
Sam: I'm glad to hear that.
Stewart: You're also joined today by Amnon Levy, who is the founder and CEO of Bridgeway Analytics, a RegTech firm based out in San Francisco. Amnon, thanks for being on, man. Thanks for bringing the regulatory perspective into the house.
Amnon: Always a pleasure, Stew. Thanks for having me.
Stewart: The only way you can get more people to listen to a podcast is if we had Bono on, for heaven's sake, with you. And last but certainly not least, Scott Kurland, who's the managing director and head of SS&C's Insurance Solutions Group. Scott, thanks for being on.
Scott: Thanks for having me as well, Stewart. Looking forward to this session.
Stewart: This session was your idea and it's a darn good one. I think that before we get going too far, and just in fairness, we've all done a prep call. The place that we agreed would be the best one to start is on data management and controls. To pick it up there, I want to turn it over to Scott Kurland. Scott, getting your data in order is the first order of business to a smooth year-end filing process. Can you expand on that?
Scott: Yeah, absolutely. Thanks, Stewart. I think it does really start with data management and controls. If you think about it, the typical investment portfolio for an insurance carrier today, it's far more diverse and complex than it was 10 years ago. You've got a mix of public and private investments. You've got equity and credit structures. You've got structured products. You've got increased use of derivatives to manage and hedge risk. Things like interest rate risk, credit default risk, things that I think everybody's got in their visor looking forward for the year ahead.
All of these types of instruments have to be properly classified. They have to have appropriate ratings associated with them. And in turn, they have to have the respective NAIC SVO designations tied to them when you go ahead to file, both at the end of the year and each quarter. I think Sam and Amnon will elaborate in a little bit on what happens if you don't, but there are adverse effects if you don't.
And so if you think about breaking that down a little bit for your public investments, you should be able to have, or your accounting provider and technology infrastructure, a direct link to be able to pull in the latest SVO designations from the NAIC and to pull them in and refresh them frequently. Certainly ahead of any quarterly or annual filing so that you have the latest designations. Because those impact the reporting schedules you put the investments on, as well as things like RBC calculation and capital surplus information and so forth.
In the event that you don't have an available designation from the SVO, you'd also need to have links in place with the appropriate major rating agencies. Folks like S&P, Moody's financial, list goes on, in order to be able to either pull a rating and derive a rating equivalent for those particular public investments. Having no rating is not the way you want to go.
And so you should make sure that your provider has in place both the links to the SVO and the links to the rating agencies to pull in for any publicly traded security the appropriate rating and designation where you can, and to do that ahead of your filing process.
The second thing is when you look at private investment, you really need to look for a technology infrastructure and a SOC one approved or provider, technology provider, service provider, that has the appropriate SOC one controls in place to be able to go out and proactively collect all of the documents and data surrounding those private investments.
If you think about the alternative space, being able to have the provider go out and proactively collect capital calls, distribution notices, new valuations, commitment letters, agent bank notices for changes in rates or paydowns, all of which can impact the valuation of those instruments as well as the associated cash flow with those instruments. To bring them in to your accounting system in a timely manner so that when you are reporting quarterly or annual, you have the appropriate valuations. You have the appropriate cash positions on those private investments, be they equity or credit investments.
And then I'd say a third point to mention is you want to be able to have, in whatever system or service you're using, a single holistic view of all of the investments in your portfolio. In particular, for example, to be able to view a hedge-linked association between a credit default swap or an interest rate swap and a fixed income or underlying equity position. To know where you are with those investments and to know the overall portfolio, and ultimately to manage risk, to manage capital, and all of the things that fall out of that along the way.
Stewart: It has issuer concentration limit implications too, right? If I own PepsiCo equity and I own PepsiCo fixed income, I need to be able to look at those in an aggregated way, correct?
Scott: That's right. When you think about how that translates from the filing perspective, you have your investment policy limits, which are set by the carrier. And then you also have the regulatory limits. Depending on which states you operate in, and Amnon and Sam can also elaborate on this, there are specific concentration and issuer limits based on the states in which you operate or underwrite it.
That's yet another reason to have a single holistic view of all of the investments and how they roll up, based on the different investment structure types that are in your portfolio. But those are all fair points.
Stewart: I don't want to steal Sam's thunder, but one of the things that you and Sam brought to my attention when we did our prep call, and I was astonished at this, is that this speaks to your point earlier about data integrity. But if your security is missing a rating, it just is blank, what happens?
Scott: Sam, will you take that one?
Sam: Sure, I'll go ahead and answer that. Yeah, what will happen is it'll automatically default to a grade five, for example, for a bond because it has nothing to go out there and look to see what bucket it can go into. Until you provide something, it's going to be treated as non-rated. It's going to affect in particular, your risk-based capital. The percentage goes up because you didn't do that; you didn't do the homework and go ahead and get that submitted. You're going to be dinged for that for not filing it. It's going to be an increase to your capital requirement.
It's worth the time and effort to take those steps, and have a plan in place. You may know that the bond is quality. You know that, I know that, but the NAIC does not know that. It behooves you to take the steps, get what documentation you need, and file it in plenty of time before year-end. Otherwise, when you do get that rating, you're going to want to amend, obviously.
It's going to improve your RBC capital position, and obviously, your auditors would like to see it be properly classified as well. It makes sense to spend the time and prepare. Not discourage private investment, but go ahead and take those steps ahead ready for the year-end.
Stewart: Scott, what else on the data side to cover before we move on?
Scott: I mean, there are other things to think about. If you are subject to tax considerations or in particular tax base accounting, you should be looking or working with a technology platform or provider that can properly support the appropriate tax basis elections and accounting methods. Things like original issue discount tracking, wash sales, de minimus, appropriate amortization and accretion, and reconciliation controls in place to be able to reconcile the delta between, for example, your statutory accounting and the tax basis of accounting.
That doesn't have to be done manually externally and can also add a lot of work and burden to the tax teams and accounting teams as part of the year-end process. That's something to think about as well.
Stewart: Sam, let's talk a little bit about now that I've got my data in order, I've got to file, right? You have some very helpful tips for our audience. Where should we start on filing?
Sam: Well, obviously when you're ready to file, you've got everything done, investments and premiums, losses, everything's ready to file, you do your valuations within your statement software, any errors you address. Obviously, you got to have those errors addressed before you file. When it's ready to go, you upload and file with the NAIC. You'll do what's called zip file, which is basically fancy for having a PDF by sections that they want.
When you go ahead and file with the NAIC electronically, you'll get steps to upload. You go ahead and upload. It will acknowledge that it's been uploaded. But one thing I highly encourage listeners to do: when you have uploaded it, I would go back and look a couple of hours later to make sure it was accepted. And then do a printout that it was completed and received, especially if you're doing this February 28th at 11:50 Eastern time, to make sure you got it submitted on time.
Think about how many others are doing it at the same time. Granted, technology's wonderful. We're away from putting stuff in the mail on February 28th, but go ahead and check and make sure it's there before you turn in or you shut down for the day. It's worth that extra. Even on a court, anytime you file with them. Always go back and look, but more in particular with your annual filings.
Stewart: That's a great tip. I thought that was a great tip, Sam, because I would be the first to be like, "Oh yeah, I sent it." It's like, "Well, they didn't get it." "What are you talking about?" You got to go check.
Sam: And you know what happens when you assume.
Stewart: That's true. It's not good. What else? What's the next tip?
Sam: Well, that was the tips with the filings for year-end or anytime, just to make sure you go back with the NAIC and just check that everything's been filed. Same with your state of domicile. If you're filing, you don't go through the zip file with them. But you just make sure what they're looking for and you upload and make sure they have received it as well. Because obviously they're a little more in control as your main regulator, and the NAIC won't be finding you. It'll be the state regulator that will find you if it wasn't submitted on time.
Scott: Sam, I know I talked briefly about tax-based accounting, but are there any other tax considerations that they should think about as part of the year-end process?
Sam: Yeah, absolutely. It's just, again, when you're looking at your deferred tax implications, and I would make sure that you have worked with your tax accountant ahead of time and to review your DTA or your DTL and whatever updates you need to make for your notes. Go ahead and plan accordingly to get those in time to have a pre-draft, if you will, of your annual statement so you've got everything in order. They give you the sign-off, then you should be good to go.
Because again, you don't want to be going back and amending for something that could have been done ahead of time. Obviously, if you couldn't get it done by March 1st for whatever reason. But those are good steps is to work with your tax accountant and get everything lined up. Get your notes put in for when your senior management reviews and signs off it that it's all there and you're ready to go. That's my portion of what to do on the pre-tax side, if you will.
Stewart: That's really helpful, Sam. Those tips are incredibly helpful. If you were going to give somebody some advice, and you've been at this for a minute, what advice would you give someone who's been at it a while or somewhat new to it?
Sam: One of the first things I would give advice to is that make sure when you're proofing, even though the validations are done and you're pretty confident you got everything in the right buckets, so to speak, go back and look. Make sure your reportings are on the correct line.
I know that sounds very simplistic, but to make sure you didn't put a receivable on a... Not an interest accrued, but another line item that's right next to it. Sometimes when you're doing this and you get tired or whatever, it's something you should think about and just... I call it the eyeball test also just to go through things that were... Everything's great, it's validated, but go back through and just give it the eyeball test. Check for spelling or an inside amount was correctly filled out. It's just little things like that.
It may not be caught by a regulator or a manager, but I always think I'd rather catch it myself than be reported, whether it's by management or external. That would be my final thoughts on the filing process, if you will.
Stewart: That's terrific, Sam. Thanks so much. We've covered now data and data integrity. We've talked about filing. But now last but certainly not least, we're going to talk about regulatory considerations. Amnon, I'll just get out of the way. Take it away.
Amnon: Thanks, Stew. Scott and Sam really touched on several important aspects associated with ensuring that reporting is compliant. It's an issue that we are seeing is becoming increasingly complicated. There are several initiatives, the regulatory front in particular. Issues related to the classification of debt and the classification of equity and residual interests that folks should really be prepared for.
Over the last couple of years, the NAIC has taken on a significant initiative of reevaluating what is classified as a bond that receives favorable capital treatment. A bond is, in spirit, a debt instrument that adheres to certain characteristics, ensured that its cash flows are stable, that if it's issued by investment vehicles, that there's sufficient subordination to justify the more favorable treatment.
The bond definition that was adopted, it continues to be refined, well, is being planned to go into effect in 2025. It's actually not that far away when you think about the vast set of nuances associated with different types of debt instruments and the different types of issuers of debt. What's expected is for this precedence-based approach to take time for regulators in the industry to converge on how different types of debt will ultimately be classified and the sort of justification that is expected of insurers when they do choose to classify an asset one way or another.
Stewart: Maybe this is an inappropriate question or a weird question, but is that related at all to rated note feeders?
Amnon: Yeah, yeah, it is. It is. To bring that in there, and I know this is really an important issue for your constituents still, so I think it's worth diving in and certainly important for SS&C.
There's the bond definition that separates that issue that's classified as an issuer credit obligation. Should think about that in spirit as debt issued by an operating company and debt issued by an investment vehicle or say a feeder note.
I should be careful actually when associating a feeder note with an investment vehicle that's classified as an asset-backed security, or an ABS, using the terminology of the NAIC. The reason that is important to delineate is that some debt issued by investment vehicles will be classified as an issue or credit obligation. It's actually going to be treated as debt issued by an operating company.
There's a lot of nuance with thinking about what constitutes an operating company and what constitutes an asset-backed security as far as the NAIC is concerned. There's some points of reference that the NAIC is provided to help guide institutions, but it by far hasn't been finalized.
I think helpful points of reference are CLOs that are often referenced as having very high leverage. CLOs will often have leverage in the order of 90%. That that issue by CLOs will be classified as those of ABS and the equity or the residual of the CLO will be classified as a residual interest. For context, this is relevant because residual interests currently are what will receive more punitive capital treatment than, say, equity.
Stewart: Is it 45%?
Amnon: 45% for life companies rather than the 30% that equity of, say, corporate equity would be allocated.
Stewart: You got to be surprised that I got that right. I got that from him. I didn't come up with that on my own. I want to make sure people know that.
Amnon: The nuance here is when you look at what entities would issue debt that would receive the favorable bond treatment as and classified as an issue of credit obligation.
Now, corporate credit, that's a no-brainer. What becomes nuanced is certain funds receive that classification. Like a business development corporation, which looks a lot like a CLO, but generally have much lower leverage because of legal limitations that are placed on them by the SEC. Their leverage is closer to about 65%, 66% in terms of the upper bound. Or closed-end mutual funds. Those are not treated as ABS but rather as the debt is an issue or credit obligation.
There's going to be a full spectrum of different types of investment vehicles. What's important is that this hasn't been finalized yet in terms of, well, how will the NAIC ultimately view these different types of entities. A bank, for example, is generally pretty heavily leveraged. A bank leveraged could be in the order of 85% plus, 90%. While those are operating entities, and currently their debt would be treated as that of an issue of credit obligation.
Obviously, the regulatory oversight of banks is very different from a CLO, but it does raise observations that highlight the difficulties that institutions will face and regulators will face as they converge on how to classify these assets and the sort of documentation that they'll need to demonstrate and justify how these assets are ultimately classified.
Stewart: I know how seriously you're going to take this question, so I'm a little hesitant to ask. If there was a piece of advice that you would give insurance companies about the world of regulation and the state of regulation today, what would it be?
Amnon: Wow. Yeah, that's a really, really important question.
Stewart: Let's just play in our heads the theme to Jeopardy while you think about this because I know you want to think about it for a second.
While you do, let me go to Sam and Scott and just say from a data and filings perspective, and these guys have already had a chance. But Scott, from a data perspective, and I know that for example, I just happen to know that SS&C uses AI and natural language processing to try and improve the straight-through processing percentage on private assets as an example. What advice would you give? Or where have you seen the most dramatic process improvement where insurance companies' investment data is concerned?
Scott: Yeah, I think across the spectrum, both public and private, I'll break it down just quickly into both, right?
On the private side, and you look at the things like partnership investments or what typically be reported on as a scheduled BA asset, we've been able to go out on behalf of insurance carriers and create an automated process to proactively collect those notices from the GPs or the LPs. Bring them into basically a digital Dropbox, and use natural language processing, optical character recognition into machine learning to scan through those documents digitally, pull out the six or seven data points. Whether that be a rate, a dollar amount, a security ID or loan ID, whatever it might be, and turn that into a digital message. That can then be sent downstream to the accounting system and processed so that investment is effectively marked to market from a valuation perspective, as well as any impact on cash flows and associated transactions.
That's important when you need to do that at scale, right? If you're an insurance company and you've got four of those investments, okay. Maybe your team can go down and sort of bug the GP or LP to go collect those notices yourself and keep punch them in. If you've got 80 of them or 150 of them, it's impractical. A lot of times those notices are going to come at the very end of the quarter, the very end of the month, the very end of the year. They may not all come at once. They may not all come in the same format. They may not even be delivered the same way twice, right? And so it's a daunting task to be able to try to do that manually.
If you have the right SOC one control in place, you have the right alert system and provider and technology to know to go out and get those proactively, or if they haven't received the notice, go out and get it. And then to have some of those AI technologies to process them at scale. There's still a human element to, as Sam would test, make sure the numbers look good and the valuation for this quarter versus last quarter on the LP is a massive swing that you can't explain, scratching your head. I think that's a big part of it.
And then on the public investments, just general data integrity, right? You talk about even looking at your global security master. There should be a place in that security master that identifies the appropriate line item on the NAIC schedule that should be reported. The appropriate product classification, product group, product type, and make sure that that translation between what maybe your external manager has classified that investment as from a trading perspective and an allocation perspective to what you're classifying it as in your holdings, in your rollout process. Ultimately in the schedules that you have to deliver in the report, right? That all comes into play both on the public side and the private side.
Stewart: You make a great point, and I don't know how often anybody ever talks about this, and I'll go back to my old shop, NEAM. There's a considerable difference between the way a portfolio manager thinks about an asset allocation, a portfolio, and the way that it's classified for statutory accounting. I mean, it's night and day. NEAM, when I worked there back when the earth was cooling, they had a toggle. You could toggle the system and it would literally rearrange your portfolio to be looked at whether you were an investment manager or whether you were doing statutory accounting. Your point's very well taken there. There is a translation, and I don't know why necessarily it ever got this way. But PMs and investment folks talk about these investments in different ways than they were accounted for sometimes. It's a great-
Scott: And it's compounded, Stewart. If you are a mid to large size, let's say, life or health insurer, and you have a dozen or 20 external managers and 10 different custodians, every one of those managers may classify or categorize a security investment a different way. They may each be using different market data vendors. One might be using Bloomberg, the other might be using Reuters or market or IDC. Your custodian also may be classifying it differently. Having that process to normalize. And then when you roll it all up at the aggregate level, again looking at issuer concentrations, sector concentrations, asset type concentrations, you need to have that extra data management and control process to have that. Call it one source of truth. It needs to be reconciled daily because you don't want to wait until the end of the month of the quarter to do that. That's a recipe for disaster, right?
And then make sure you understand how all of that translates into the line item, as Sam says, on the schedule. That's only going to be more complex with some of the things Amnon has talked about with respect to the reclassification of some of these securities. How they're going to be reported, and ultimately how they're going to be treated from an RBC and a capital standpoint.
Stewart: All right, so the Jeopardy music winds down. We're back to Amnon. What advice would you give to the insurance investment community from a regulatory perspective?
Amnon: First, for life companies whose holdings tend to be longer dated, they really need to think about potential long-term implications associated with their strategy.
There are two aspects to that. One obviously is the direct impact that a change in guidelines results in. Whether it's more punitive treatment or more favorable treatment for certain asset classes or whether it requires them to have more sophisticated, involved processes in place to ensure they're compliant.
But also the implications for capital markets more broadly. Life and the insurance industry in the US, it has a sizable footprint. When investment strategy changes, possibly because it changes to guidelines, that change impacts capital markets. We see over time how issuance patterns change as a result of shifting strategies for insurers. And so if a particular-
Scott: Even the rise and rated note structures is an example of that, right? I mean, managers marketing these concept of rated notes. That was created out of an opportunity to potentially invest in something that has more favorable capital treatment in the way it's structured.
Amnon: Yeah, absolutely. We're seeing a lot of changes beyond the bond definition. We're seeing the possible extension of discretion by NAIC staff over the use of rating-based designations. That could have significant implications for this use of ratings for certain asset classes, or certain agencies that the NAIC staff use as employing methodologies that aren't sufficiently appropriate.
That could also have significant implications if certain agencies are viewed as really not sufficiently prudent. We're seeing new asset classes receiving more favorable treatment possibly. There's the new market tax credit for example. Those assets likely receive more favorable treatment, and that has implications for filings. That has implications for possible strategies in that space.
I encourage insurers of all forms to try to stay on top of it, which is a near-impossible task because their changes are so far-reaching and there's so much nuance associated with every aspect of the change.
Stewart: I mean, just I realize we're not trying to plug your update, but…
Amnon: But feel free, Stew. That shouldn't hold it back.
Stewart: Yeah, I was going to say you don't mind. But you do have a newsletter that comes out weekly with regulatory updates. It's outstanding.
You call it something unusual. You call it the ‘art newsreel’, but what it actually is a synopsis of all of the goings-on in insurance investment regulation across the industry. It's under 500 bucks a year. I mean, I think it's a great... It's a tremendous value. Without going too far down the bunny hole here, I want to make sure that we have maintained our reputation of being able to make regulatory accounting and technology fun in the insurance investment space, and we've done that today.
We've been joined today by Amnon Levy, who's the CEO and founder of Bridgeway Analytics, a RegTech firm based in San Francisco, and Scott Kurland, who's the managing director and head of the Insurance Solutions Group at SS&C Technologies, and Sam Jones, who's a senior director and head of statutory reporting for SS&C Technologies.
Sam, I know it's your first podcast. You did an awesome job. Thanks for being on.
Sam: Thanks. Enjoyed it.
Stewart: That's great. Before I go through the outro deal, remember that I mentioned at the top of the show that we are going to do a live Q&A on this topic with these panelists in about a week. Keep your eyes open for that.
Thanks for listening. We get a great response from these regulatory and accounting updates, and we want to keep doing that. If you find them helpful, let us know and we'll certainly do our best to get more content on. You've been listening to Stewart Foley, the host of the InsuranceAUM.com podcast. Thanks for listening.
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