NAIC Adopts New Bonds Definition: Impact on U.S. Life Insurers

The National Association of Insurance Commissioners (NAIC) has adopted a new principles-based definition for bonds, highlighting evolving investment strategies among U.S. life and annuity insurers. This shift emerges amid increased private placements and allocations to asset-backed securities, as outlined in a recent AM Best report.

The revised definition, effective 2025, prioritizes the security's substance over its legal structure. Consequently, certain bonds have transitioned from Schedule D to Schedule BA, incurring a higher risk-based capital charge. The report, "Bond Shifts Highlight Evolving Investment Strategies Among US Life/Annuity Insurers," notes insurers' diversification of asset strategies post-Great Financial Crisis to enhance yields, with risks related to liquidity, valuation, and transparency.

Corporate bonds remain central within insurer portfolios, yet there is a significant rise in asset-backed securities allocations, potentially introducing credit and default risks. Emerging private credit forms could further complicate valuation, with diminished traditional financial covenants. Kaitlin Piasecki, an AM Best industry research analyst, emphasizes the importance of outsourcing investment management to high-quality fund managers for effective underwriting and monitoring capabilities. For more insights, the full report is available for purchase on AM Best's website.