PURPOSES AND PROCEDURES MANUAL OF THE NAIC INVESTMENT ANALYSIS OFFICE NAIC SECURITIES VALUATION OFFICE NAIC STRUCTURED SECURITIES GROUP Effective for Statements ending December 31, 2015 (volume/issue) SVO-PP-##-## © 2015 National Association of Insurance Commissioners All rights reserved. National Association of Insurance Commissioners Insurance Products & Services Division 816-783-8300 Fax 816-460-7493 www.naic.org [email protected] Printed in the United States of America No part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any storage or retrieval system, without written permission from the NAIC. NAIC Executive Office NAIC Central Office Capital Markets & Hall of States Building 1100 Walnut Street Investment Analysis Office 444 North Capitol Street, NW Suite 1500 One New York Plaza Suite 701 Kansas City, MO 64106 Suite 4210 Washington, DC 20001 Phone: (816) 842-3600 New York, NY 10004 Phone: (202) 471-3990 Fax: (816) 783-8175 Phone: (212) 398-9000 Fax: (816) 460-7493 Fax: (212) 382-4207 © 1990-2015 National Association of Insurance Commissioners i December 31, 2015 MAIN TABLE OF CONTENTS RECENT CHANGES TO THE SVO PURPOSES AND PROCEDURES MANUAL ......................................................... XVI PART ONE PURPOSES, GENERAL POLICIES AND INSTRUCTIONS TO THE SVO ....................................................... 21 SECTION 1. ABOUT THE NAIC ......................................................................................................................... 25 a) The NAIC ................................................................................................................................................... 25 b) The VOS/TF and the SVO Staff Function ................................................................................................... 25 SECTION 2. POLICIES DEFINING THE SVO STAFF FUNCTION .................................................................................... 27 a) Directive to Conduct Ongoing SVO Operations......................................................................................... 27 b) SVO Regulatory Products .......................................................................................................................... 27 (i) NAIC Designations ................................................................................................................................................ 27 (ii) Valuation of Securities .......................................................................................................................................... 28 (iii) Other Non-Payment Risk in Securities .................................................................................................................. 28 (iv) Authority to Direct Insurers on Reporting ............................................................................................................ 28 c) Special Instructions to the SVO ................................................................................................................. 29 (i) Authorization to Use Public Information Sources ................................................................................................ 29 (ii) Circular Transaction .............................................................................................................................................. 29 (iii) Special Instruction for Mandatorily Convertible Securities .................................................................................. 29 (iv) Limitations on Use of NAIC CRP Ratings ............................................................................................................... 30 (A) NAIC Designation Is Capped To Highest NAIC CRP Rating ............................................................................... 30 (B) Split Ratings ..................................................................................................................................................... 30 (C) Unrated Transaction of Issuer with NAIC CRP Rated Debt .............................................................................. 30 (v) Clarifying Instruction for Unrated Hybrid Securities ............................................................................................. 30 d) Application of Analytical Instructions ....................................................................................................... 30 (i) Relationship to Policy ........................................................................................................................................... 30 (ii) Parameters for Use of Instructions and Methodologies....................................................................................... 31 (iii) Use of Generally Accepted Techniques or Methodologies ................................................................................... 31 (iv) Updating Instructions and Methodologies ........................................................................................................... 31 e) SVO Responsibility for Investment Risk Analysis of New Financial Products ............................................ 31 f) Process for Placing Securities Under Regulatory Review; When Analytical Instructions Are Insufficient or Inadequate ......................................................................................................................................................... 32 (i) Notice ................................................................................................................................................................... 32 (ii) Deliberation .......................................................................................................................................................... 32 (iii) Hearing and Declaration ....................................................................................................................................... 32 (iv) Reporting Framework for Securities under Regulatory Review ........................................................................... 33 (v) Filing of Securities under Regulatory Review ....................................................................................................... 33 g) Review of SVO Credit, Classification or Valuation Decisions ..................................................................... 33 (i) Requests for Clarification of SVO Decisions .......................................................................................................... 33 (ii) Appeals of SVO Analytical Decisions ..................................................................................................................... 33 (A) Condition to Filing of an Appeal ...................................................................................................................... 33 (B) Procedure for Filing an Appeal ........................................................................................................................ 34 (iii) SVO Review of the Appeal .................................................................................................................................... 35 (iv) Status of NAIC Designation during Appeal ........................................................................................................... 36 (v) Review of SVO Decisions by the VOS/TF .............................................................................................................. 36 (A) Task Force Review for Alleged Violations of Procedures ................................................................................ 36 (vi) Review Timeline ................................................................................................................................................... 37 SECTION 3. INTERNAL ADMINISTRATION ............................................................................................................ 38 a) General ..................................................................................................................................................... 38 © 1990-2015 National Association of Insurance Commissioners i December 31, 2015 Main Table of Contents b) Definitions of NAIC Designation Categories, Valuation Indicators, Administrative Symbols and Conventions ........................................................................................................................................................ 38 (i) Definition of NAIC Designation Categories ........................................................................................................... 38 (ii) NAIC Designation subscript S ................................................................................................................................ 40 (A) Regulatory Objectives ..................................................................................................................................... 40 (B) Description of Other Non-Payment Risk ......................................................................................................... 40 (C) Meaning of the Subscript Symbol ................................................................................................................... 42 (D) Directive to Conduct Analysis for Other Non-Payment Risk ........................................................................... 42 (iii) SVO Notching