September was a very unusual month for this monthly summary, as many of the groups that are normally included did not meet. Therefore, this seemed to be the perfect opportunity to jump into the near future and include an examination of the substantial reporting changes occurring in the reporting of investments beginning with the first quarterly statement of 2025.
But first, let’s take a look at one of the meetings that did occur.
Capital Adequacy Task Force – September 26, 2024
This very short meeting accomplished two things. The Task Force adopted revised procedures for submitting changes to the risk-based capital (RBC) formulas and adopted its 2025 charges. The most significant change in the procedures was the longer time frame for the submission and exposure of RBC changes. Both items had previously been exposed for comment during the NAIC Summer National Meeting. Originally, the agenda included addressing a memorandum to the Financials Conditions (E) Committee requesting the establishment of a new working group. However, the public discussion of the memorandum was delayed and will occur during the upcoming Fall National Meeting.
Now, let’s move on to 2025 quarterly statement reporting.
Those who follow this summary regularly are aware that the NAIC has adopted a principles-based definition of a bond to be used for statutory accounting and reporting beginning with January 1, 2025. At this time, we will not delve into that definition, but instead will concentrate on the corresponding reporting changes and, in particular, those changes that need to be addressed for the quarterly reporting. However, it should be noted that it is the reporting entity’s responsibility to review its current bond portfolio to determine if each item classified and reported as a bond will continue to be so reported. Insurers should work in tandem with their investment software vendors on this review and not solely rely upon the vendors to do the review. Also important to remember is an investment having an NAIC designation and/or that is rated by an NAIC-approved rating organization does not automatically qualify the investment as a bond. If an investment does not qualify as a bond, it is to be reported on Schedule BA. Now let’s move on.
Step One
The first step for 2025 quarterly preparation should be the review and restatement of the insurer’s year-end 2024 Schedule D – Part 1 (SCDPT1) and possibly Schedule BA – Part 1 (SCBAPT1). These inventory listings are not included in the quarterly, but the 2025 reporting categories are used to report acquisitions and disposals of these assets, as well as used to prepare verifications between the years, investment summary schedules, and—ultimately—possible reclassification on the balance sheet.
This step also should include the review of internal processes used to produce Schedule D and Schedule BA reporting. Some companies may be using Excel spreadsheets, or other programs, that can then be imported into the statement reporting software. Even if a company has no debt securities to reclassify, their internal processes may need to be changed before importing can occur, since numerous reporting categories have been added, deleted, and/or changed.
Transition Guidance
No gain or loss is recognized for the actual transition from one schedule to another. To move a security from SCDPT1 to SCBAPT1, first “unbook” any unrealized adjustments (if any) recorded on SCDPT1, bringing the security back to its amortized actual cost. Dispose of the security from Schedule D and acquire it on Schedule BA. After the move to Schedule BA, adjust the investment to its correct Schedule BA valuation, recording the valuation adjustment as an unrealized loss. No unrealized gain is to be recognized in the transition. This methodology allows the verifications to work properly without having to restate the previous year-end balance.
Transition Disclosure
For first quarter reporting only, companies are to include a transition disclosure in their Notes to Financial Statements (Notes) regarding any movement between schedules. The NAIC has specified this disclosure is not to be included in Note #2 as an accounting change. In fact, the NAIC has indicated the entire transition process is not to be considered a change in accounting. The NAIC has suggested the transition disclosure should be included in Note #21.
There also is no set format provided for the disclosure. The following elements are to be included:
- Aggregate book adjusted carrying value (BACV) reclassified off of SCDPT1.
- Aggregate BACV reclassified off of SCDPT1 with a change in measurement basis.
- Aggregate surplus impact reclassified off of SCDPT1 (defined as the BACV at December 31, 2024 and BACV at March 31, 2025).
Schedule D Bond Classifications
Beginning in 2025, there are two different sets of bond reporting categories; one set for bonds that are issuer credit obligations (ICOs) and one set for bonds that are asset-backed securities (ABSs). The following listed ICO and ABS reporting categories are used in the quarterly on Schedule D – Parts 3 & 4 and Schedule DL – Parts 1 & 2.
ICOs
- U.S. Government Obligations (Exempt for RBC)
- Other U.S. Government Obligations (Not Exempt from RBC)
- Non-U.S. Sovereign Jurisdiction Securities
- Municipal Bonds – General Obligations (Direct and Guaranteed)
- Includes bonds issued by states, cities, counties, and other governmental entities to fund the day-to-day obligations and finance capital projects that are not secured by specific assets but are backed by the full faith and credit (taxing power).
- Municipal Bonds – Special Revenues
- Includes bonds, issued by states, cities, counties, and other governmental entities to finance projects not backed by the taxing power of the issuer, but by revenues from a specific project or source (for example, highway tolls). Also included are bonds that do not qualify as general obligations, such as pre-funded and insured bonds.
- Project Finance Bonds Issued by Operating Entities (Unaffiliated)
- Project Finance Bonds Issued by Operating Entities (Affiliated)
- The above two reporting categories do not easily align with previous reporting. Included are non-municipal bonds issued by an operating entity as defined in Statement of Statutory Accounting Principle No. 26 – Bonds (SSAP No. 26), 2025 edition, used to finance a single asset or operation (like a power plant) by collateralizing the issuance and the cash flows produced to satisfy debt payments.
- Corporate Bonds (Unaffiliated)
- Corporate Bonds (Affiliated)
- Mandatory Convertible Bonds (Unaffiliated)
- Mandatory Convertible Bonds (Affiliated)
- Single Entity Backed Obligations (Unaffiliated)
- Single Entity Backed Obligations (Affiliated)
- The above two types of obligations exist where repayment is completely supported by an underlying contractual obligation of a single operating entity; for example, equipment trust certificates, single-tenant lease-backed securities, and funding agreement-backed notes. Repayment is considered fully supported by the underlying operating entity if, at origination, it provides cash flows to satisfy all interest and at least 95% of the principal. These categories do not include corporate bonds or project finance structures.
- SVO-Identified Bond Exchange Traded Funds – Fair Value
- SVO-Identified Bond Exchange Traded Funds – Systematic Value
- Bonds issued from SEC-Registered Business Development Corps, Closed End Funds & REITS (Affiliated)
- Bonds issued from SEC-Registered Business Development Corps, Closed End Funds & REITS (Unaffiliated)
- Bank Loans – Issued (Unaffiliated)
- Bank Loans – Issued (Affiliated)
- Bank Loans – Acquired (Unaffiliated)
- Bank Loans – Acquired (Affiliated)
- Mortgage Loans that Qualify as SVO-Identified Credit Tenant Loans (Unaffiliated)
- Mortgage Loans that Qualify as SVO-Identified Credit Tenant Loans (Affiliated)
- Certificates of Deposit (Unaffiliated)
- Certificates of Deposit (Affiliated)
- Other Issuer Credit Obligations (Unaffiliated)
- Other Issuer Credit Obligations (Affiliated)
Most of the ICO reporting categories are the same or very similar to categories already used for Schedule D reporting. Additional definitions, where needed, can be found in the Investment Schedules General Instructions.
ABS
- Financial Asset-Backed – Self-Liquidating
- Agency Residential Mortgage-Backed Securities – Guaranteed (Exempt from RBC)
- Agency Commercial Mortgage-Backed Securities – Guaranteed (Exempt from RBC)
- Agency Residential Mortgage Back Securities – Not/Partially Guaranteed (Not Exempt from RBC)
- Agency Commercial Mortgage Back Securities – Not/Partially Guaranteed (Not Exempt from RBC)
- Non-Agency Residential Mortgage-Backed Securities (Unaffiliated)
- Non-Agency Residential Mortgage-Backed Securities (Affiliated)
- Non-Agency Commercial Mortgage-Backed Securities (Unaffiliated)
- Non-Agency Commercial Mortgage-Backed Securities (Affiliated)
- Non-Agency – CLOs/CBOs/CDOs (Unaffiliated)
- Non-Agency – CLOs/CBOs/CBOs (Affiliated)
- Other Financial Asset-Backed Securities – Self-Liquidating (Unaffiliated)
- Other Financial Asset-Backed Securities – Self-Liquidating (Affiliated)
- Financial Asset-Backed – Not Self-Liquidating
- Equity Backed Securities (Unaffiliated)
- Equity Backed Securities (Affiliated)
- Other Financial Asset-Backed Securities – Self-Liquidating (Unaffiliated)
- Other Financial Asset-Backed Securities – Self-Liquidating (Affiliated)
- Non-Financial Asset-Backed Securities – Practical Expedient
- Lease-Backed Securities – Practical Expedient (Unaffiliated)
- Lease-Backed Securities – Practical Expedient (Affiliated)
- Other Non-Financial Asset-Backed Securities – Practical Expedient (Unaffiliated)
- Other Non-Financial Asset-Backed Securities – Practical Expedient (Affiliated)
- Non-Financial Asset-Backed Securities – Full Analysis
- Lease-Backed Securities – Full Analysis (Unaffiliated)
- Lease-Backed Securities – Full Analysis (Affiliated)
- Other Non-Financial Asset-Backed Securities - Full Analysis (Unaffiliated)
- Other Non-Financial Asset-Backed Securities – Full Analysis (Affiliated)
Compared to pre-2025 reporting, the above ABS categories are totally different.
Financial assets are defined in SSAP No. 103 – Transfers and Servicing of Financial Assets and Extinguishments of Liabilities as:
“… cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right (a) to receive cash or another financial instrument from a second entity or (b) to exchange other financial instruments on potentially favorable terms with the second entity.”
Financial assets do not include assets where the realization of the benefits expressed above depends on the completion of a performance obligation, such as leases, mortgage servicing rights, royalty rights, etc. Those assets would be classified as non-financial assets. To be reported on SCDPT1 as non-financial assets, a meaningful level of cash flows must be generated by means other than the sale or refinancing of the assets to service debt. Otherwise, the asset is moved to Schedule BA.
Under SSAP No. 43 – Asset-Backed Securities (SSAP No. 43), 2025 edition, a practical expedient may be used to support the claim of meaningful cash flows. To support the asset having meaningful cash flows, less than 50% of the original principal relied on the sales or refinancing of the underlying assets. Only contractual cash flows are considered when using the practical expedient. Alternatively, where the non-financial asset-backed security does not qualify with the practical expedient, a full analysis may be used to prove meaningful cash flows. If there is no proof of meaningful cash flows, the security is moved to Schedule BA.
Self-liquidating bonds contain terms where the contractual principal and interest, where applicable, are paid over a stated period of time and ultimately are fully paid off by the maturity date.
Equity-backed securities include structures where the financial assets backing the structure reflect equity. In general, equity-backed securities cannot be reported in SCDPT1. However, those securities that have overcome the rebuttable presumption requirement and where the reporting company has appropriate reporting documentation supporting the rebuttable presumption are reported as ABS on SCDPT1. Those not overcoming the rebuttable presumption are reported on Schedule BA.
Complete definitions can be found in the Investment Schedules General Instructions.
Schedule DA – Part 1 & Schedule E – Part 2
Only the ICO categories are used for the reporting of short-term investments in Schedule DA – Part 1 and cash equivalents in Schedule E – Part 2. ABS are no longer allowed to be reported as cash equivalents or short-term investments but must be reported as long-term investments. Assets that no longer can be reported as cash equivalents and short-term investments beginning in 2025 are:
- All ABS under the scope of SSAP No. 43.
- Investments that are reported in Schedule BA, regardless of maturity date.
- Mortgage loans in scope of SSAP No. 37 – Mortgage Loans.
- Derivatives in scope of SSAP No. 86 – Derivatives or SSAP No. 108 – Derivatives Hedging Variable Annuity Contracts.
- Securities that are reset at predefined dates or have other features an investor may believe results in a different term than the related contractual maturity.
Schedule BA Reporting
With the possibility that some debt securities currently being reported as bonds may no longer qualify as bonds and need to be reported as other invested assets, new reporting categories were established to provide more granular reporting categories on Schedule BA. A few reporting categories were moved, and several reporting categories were deleted.
New Reporting Categories
Note that the 2025 reporting categories divide the reporting into the three reasons why a debt security may not qualify as a bond: there is no creditor relationship in substance, a lack of substantive credit enhancement, and lack of meaningful cash flows.
- Debt Securities That Do Not Qualify as Bonds
- Debt Securities That Do Not Reflect a Credit Relationship in Substance
- NAIC Designation Assigned by the Securities Valuation Office (SVO)
- Unaffiliated
- Affiliated
- NAIC Designation Not Assigned by the Securities Valuation Office (SVO)
- Unaffiliated
- Affiliated
- NAIC Designation Assigned by the Securities Valuation Office (SVO)
- Debt Securities That Lack Substantive Credit Enhancement
- NAIC Designation Assigned by the Securities Valuation Office (SVO)
- Unaffiliated
- Affiliated
- NAIC Designation Not Assigned by the Securities Valuation Office (SVO)
- Unaffiliated
- Affiliated
- NAIC Designation Assigned by the Securities Valuation Office (SVO)
- Debt Securities That Do Not Qualify as Bonds Solely to a Lack of Meaningful Cash Flows
- NAIC Designation Assigned by the Securities Valuation Office (SVO)
- Unaffiliated
- Affiliated
- NAIC Designation Not Assigned by the Securities Valuation Office (SVO)
- Unaffiliated
- Affiliated
- NAIC Designation Assigned by the Securities Valuation Office (SVO)
- Debt Securities That Do Not Reflect a Credit Relationship in Substance
Investments categorized as having an NAIC designation assigned by the SVO must actually have been analyzed by the SVO and then assigned an NAIC designation. The designation cannot have been derived from an SEC NRSRO (nationally recognized statistical rating organization) and then converted to an NAIC designation.
Investments included in the “NAIC Designation Not Assigned by the SVO” category are permitted to report an NAIC designation derived from an SEC NRSRO, but it is not a requirement.
All debt securities that do not qualify as bonds fall under the accounting guidance in SSAP No. 21 – Other Admitted Assets (SSAP No. 21), 2025 edition. Any investment that does not qualify as a security (under SSAP No. 26 definition, which also is the GAAP definition) is excluded from the above categories. Also excluded is any investment that is not a debt security and does not qualify as a bond under SSAP No. 21.
Categories That Were Deleted
- Oil and Gas Production
- Transportation Equipment
- Mineral Rights
- Investments in the above three categories are to be reported as “Any Other Class of Asset” on Schedule BA.
- Non-Registered Private Funds with Underlying Assets Having Characteristics of Bonds, Mortgage Loans and Other Fixed Income Instruments
- This category was not exactly deleted but was included in the “Interests in Joint Ventures, Partnerships or Limited Liability Companies (Including Non-Registered Private Funds with Underlying Assets Having the Characteristics of: Bonds, Preferred Stocks, Common Stocks, Real Estate, Mortgage Loans, and Other” category).
- Investments in this category include items that fall within the scope of SSAP No. 48 – Joint Ventures, Partnerships or Limited Liability Companies and are reported entirely in a subcategory based on the underlying characteristics. Investments are not to be bifurcated between subcategories.
- Structured security payments falling under SSAP No. 21 and that have an SVO-Assigned designation are included in this category. If there is no SVO-Assigned designation, they are reported as “Any Other Class of Asset.”
Investments should be reported in the reporting category that best represents the investment. Investments that do not fit within any specific reporting line are classified as “Any Other Class of Asset.”
In preparing the quarterly Schedule BA – Parts 3 and 4, be aware that several new reporting categories for collateral loans were adopted for 2024 reporting and will continue to be used in 2025. Those categories are not detailed here. In addition, reporting categories for Schedule BA will most likely undergo more changes for 2026 reporting.
Other Reporting Format Changes
There are a few format changes in place for the 2025 quarterly reporting.
The LEI column, which was an electric-only reporting column, has been removed from all of the investment schedules except for Schedule DB.
The previous “Code” column was renamed “Restricted Asset Code” and the instructions for that column were updated accordingly for all appropriate investment schedules. Review the instructions for the column carefully for correct input to be used.
The “Foreign” column was removed from the printed Schedule D – Part 3 and Schedule D – Part 4 and is now an electronic reporting column. This also is true of the “Foreign” column in the Annual Statement on any of the investment schedules where it previously appeared as a printed column.
Schedule D – Part 1B has the same columns as before, but the reporting categories have changed.
| NAIC Designation | |
|---|---|
| BONDS ISSUER CREDIT OBLIGATIONS (ICO) | |
| 1. | NAIC 1 (a).......... |
| 2. | NAIC 2 (a).......... |
| 3. | NAIC 3 (a).......... |
| 4. | NAIC 4 (a).......... |
| 5. | NAIC 5 (a).......... |
| 6. | NAIC 6 (a).......... |
| 7. | Total ICO |
| ASSET-BACKED SECURITIES (ABS) | |
| 8. | NAIC 1 (a).......... |
| 9. | NAIC 2 (a).......... |
| 10. | NAIC 3 (a).......... |
| 11. | NAIC 4 (a).......... |
| 12. | NAIC 5 (a).......... |
| 13. | NAIC 6 (a).......... |
| 14. | Total ABS |
| PREFERRED STOCK | |
| 15. | NAIC 1.......... |
| 16. | NAIC 2.......... |
| 17. | NAIC 3.......... |
| 18. | NAIC 4.......... |
| 19. | NAIC 5.......... |
| 20. | NAIC 6.......... |
| 21. | Total Preferred Stock |
| 22. | Total – ICO, ABS, & Preferred Stock |
If you have any questions or need more information, please reach out to a professional at Forvis Mazars.