NAIC proposes new restrictions on bond classification for ABS with significant ALM risk

At its August 12, 2026 meeting in Columbus, Ohio, the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles (E) Working Group voted to expose for public comment a proposed revision to Statement of Statutory Accounting Principles (SSAP) No. 26 that could significantly expand the requirements that asset-backed securities (ABS) must satisfy to qualify as bonds under the Principles-Based Bond Definition (PBBD). Comments on the proposal, Ref #2026-10, are due by October 2, 2026. The exposure draft does not include a proposed effective date or transition guidance, leaving open whether any final revisions would apply only prospectively to new issuances or would require insurers to re-evaluate the classification of securities they already hold, as was the case when the PBBD was adopted.

This alert summarizes the proposed revisions to SSAP No. 26, the regulatory concerns underlying the proposal, and potential implications for asset managers, insurers, and structured finance market participants.

Proposal background

The proposal was developed in response to regulator concerns regarding a growing category of investments referred to as “multi-collateral structured credit investments.” According to NAIC staff, these structures differ from more traditional securitizations because they may contain a broad range of collateral types, including combinations of investment-grade and non-investment-grade corporate credit, direct loans, mortgage loans, equity investments, and, in some cases, tranches of other securitizations. Although many of these structures currently qualify for bond treatment under the PBBD, regulators have increasingly questioned whether certain features of the structures are consistent with the underlying principles of the framework. 

One aspect of the August Working Group discussion was the indication that additional review of other asset classes may follow. The agenda item expressly states that a broader project is likely to follow to examine additional asset classes that have gained prominence since adoption of the PBBD, including feeder funds and other forms of fund finance. As a result, multi-collateral structured credit investments may represent the first phase of a wider NAIC review of evolving investment structures and their treatment under statutory accounting principles. For asset managers, the statement regarding future review may have implications beyond the current exposure draft. Rated note feeder funds, collateralized fund obligations, net asset value-based facilities, and other structured fund finance products are commonly used by private credit, secondaries, and infrastructure sponsors to provide Schedule D-1 eligible exposure to insurance company investors, and these structures were specifically identified for potential review in the Working Group materials. 

NAIC’s regulatory concerns 

The Working Group’s summary accompanying the exposure draft identifies two primary areas of concern.

• First, regulators expressed concerns regarding the complexity, transparency, and interconnectedness of multi-collateral structures. Because these vehicles may invest across numerous asset classes and, in some cases, acquire interests in other securitizations, regulators noted that it may become increasingly difficult to track economic exposures and identify situations in which insurers hold exposure to the same assets both directly and indirectly. The points raised highlight concerns regarding potential circular ownership arrangements and the broader interconnectedness that could emerge as the asset class grows. 
  
  
• Second, regulators focused on structures that contain significant ALM risk. According to the summary, some observed structures have debt tranches with durations extending up to 40 years, even though the underlying collateral may have weighted average durations of approximately eight years or less. Regulators expressed concern that these structures may depend upon the successful reinvestment of cash flows for extended periods to generate the contractual payments owed to investors, creating reinvestment risk and raising questions about whether the apparent long-duration profile is supported by the underlying assets. 

The summary acknowledges that various structural protections may mitigate these risks, including hedging arrangements, accelerated amortization triggers, and subordinated equity tranches that absorb losses arising from deteriorating reinvestment economics before impacting debt investors. Nevertheless, regulators concluded that significant embedded ALM risk may remain in certain structures and that the PBBD did not expressly contemplate this type of risk when the framework was originally developed.

Proposed revisions to SSAP No. 26

The proposal would add two new provisions to paragraph 9 of SSAP No. 26 governing ABS qualification under the PBBD. 

I. Non-self-liquidating ABS would be subject to additional qualification requirements

Proposed new paragraph 9.c would provide that, if the assets of an ABS issuer are not self-liquidating, the security would be required to satisfy the framework set forth in paragraphs 6.a through 6.d of SSAP No. 26 and overcome the existing rebuttable presumption applicable to debt instruments supported by equity instruments.

Those provisions generally require, among other things, that cash flows supporting repayment arise from the underlying assets rather than from the sale or appreciation of equity interests and establish a rebuttable presumption that instruments primarily supported by equity-like assets do not qualify as bonds. As a result, non-self-liquidating ABS structures would be required to demonstrate that they satisfy the PBBD’s equity-backed debt criteria, rather than relying solely on existing ABS-specific provisions. For sponsors, this proposal may have more immediate implications than proposed paragraph 9.d. Rated notes issued by feeder vehicles whose only assets are limited partnership interests in a private equity, secondaries, infrastructure, or other equity-oriented fund are, by their nature, not self-liquidating and would need to overcome the rebuttable presumption rather than rely on the ABS-specific pathway.

II. Securities with significant embedded ALM risk could lose bond treatment

Proposed new paragraph 9.d would apply to self-liquidating ABS. If approved, insurers would be required to evaluate whether an ABS contains significant embedded ALM risk when contractual cash flows may be reinvested rather than used immediately to retire debt. Embedded ALM risk would be considered significant if the ability to make scheduled contractual payments could be adversely affected by changes in reinvestment interest rates or investment spreads. ABS containing significant embedded ALM risk would not qualify as bonds under the PBBD. 

The accounting consequences could be significant. A security that fails bond classification would generally move off Schedule D-1 and be reported on Schedule BA or, depending on the asset, as an equity interest. The risk-based capital charge could move from bond-level capital charges that are often below one percent for highly rated bonds to a charge that may approach 30 percent. The change could also affect asset valuation reserve and interest maintenance reserve treatment, admitted asset and investment limitation testing under state investment statutes, and the capital models used for reinsurance and rating agency purposes. A note can remain investment grade for rating agency purposes while still failing the statutory definition of a bond, so a rating designation alone would not resolve the issue for an insurer or its asset manager.

Why it matters

The proposal reflects a potential evolution in how regulators view certain structured finance transactions.

• The NAIC’s concern with multi-collateral structured credit investments does not appear to be whether contractual cash flows exist, but whether those cash flows are generated by the underlying assets or instead depend upon assumptions regarding future reinvestment opportunities. Historically, PBBD debates have largely focused on the existence and sufficiency of cash flows. Regulators now appear to be considering the emerging question of whether those cash flows are self-generating or whether they rely on future portfolio management decisions and market conditions to support long-dated obligations.
  
  
• The core regulatory concern appears to be that certain multi-collateral securitizations may effectively create asset-liability duration transformation. Regulators have observed structures in which debt tranches extend as long as 40 years while the underlying collateral may have weighted average durations of roughly eight years or less. Regulators therefore appear focused on whether this type of duration transformation should automatically qualify for bond treatment. 
  
  
• While the summary discussion is focused largely on multi-collateral structured credit investments, the operative language of proposed paragraph 9.d is not expressly limited to that asset class. As drafted, the provision could potentially apply more broadly to other ABS structures that present significant embedded ALM risk. The scope of the final proposal is therefore expected to be a central issue during the exposure process.
  
  
• More fundamentally, the proposal reflects a regulatory view that ALM risk does not disappear because it is embedded within an investment vehicle. The NAIC appears concerned that certain structures may transfer duration mismatch from an insurer’s balance sheet into a securitization vehicle without eliminating the underlying economic risk. 
  
  
• The discussion of circular ownership, interconnectedness, and transparency concerns is also noteworthy. However, those concepts may be best understood as part of the broader policy rationale motivating renewed regulatory scrutiny rather than issues directly addressed by the proposed amendments themselves. The proposed revisions focus more narrowly on non-self-liquidating structures and embedded ALM risk.

Key takeaways for asset managers and insurance company investors

• Rated note feeder funds may receive increased regulatory scrutiny. Many sponsors offer insurance company investors a rated note tranche issued by a feeder vehicle that holds an interest in the master fund, sized and structured with a view to Schedule D-1 eligibility. Where the master fund holds equity or equity-like assets, proposed paragraph 9.c would require the structure to overcome the rebuttable presumption in paragraphs 6.a through 6.d rather than rely on the ABS provisions. Feeders backed by self-liquidating private credit collateral may be less directly affected by proposed paragraph 9.c, provided they also satisfy proposed paragraph 9.d.
  
  
• Reinvestment features may become a more prominent factor in bond classification analyses. As proposed, reinvestment features, not just duration mismatch, are the trigger. Proposed paragraph 9.d is engaged whenever contractual terms permit cash flows of the underlying assets to be reinvested rather than applied to repay the notes. Reinvestment periods are a standard feature of collateralized loan obligations, middle-market loan warehouses, asset-based lending vehicles, and evergreen private credit structures. As drafted, the test asks only whether the ability to pay scheduled cash flows could be impacted by changes in reinvestment rates or spreads, which may capture many structures that have historically qualified for bond treatment.
  
  
• Duration transformation may require further analysis. Structures that rely on duration transformation may face additional scrutiny under the proposal. For structures with note terms of 20 to 40 years, questions may arise regarding whether the note tenor is supported by the weighted average life of the collateral without reliance on reinvestment. Structural features that may be relevant to this analysis include shortening the stated maturity, converting to sequential pay or turbo amortization after a defined reinvestment period, hard-wiring cash flow diversion and early amortization triggers, adding interest rate and spread hedges, and increasing the size of the subordinated equity tranche.
  
  
• Separately managed accounts (SMAs) may present different classification considerations than wrapped note structures. Because an SMA is analyzed asset by asset rather than as a single wrapped security, a managed account holding directly originated, self-liquidating loans avoids the classification question that proposed paragraphs 9.c and 9.d create for a wrapped note structure and may be viewed more favorably. Insurer clients may adopt more restrictive investment guidelines around bond eligibility, NAIC designation, and Schedule D-1 reporting, and may request look-through data sufficient to support their own classification determinations.
  
  
• Existing fund and note documentation may warrant review in light of the proposal. Sponsors may review outstanding rated notes and feeder structures, map stated maturities against collateral weighted average life, and review offering documents, indentures, note purchase agreements, investment management agreements, and side letters for covenants regarding bond or Schedule D-1 treatment, capital-treatment covenants, regulatory event and adverse regulatory change provisions, restructuring or exchange mechanics, and redemption, transfer, or withdrawal rights that could be triggered if bond treatment is lost.
  
  
• Classification considerations may become a more prominent factor in evaluating new structures. Even before any final guidance, insurance company investment teams may place greater emphasis on classification certainty when evaluating new commitments, structural terms, and reporting considerations. Market participants with rated note offerings may evaluate whether disclosure regarding the exposure draft and the possibility of a change in statutory treatment is appropriate.
  
  
• Affiliated managers may face additional scrutiny related to interconnectedness and circular ownership concerns. Managers that both originate assets and sponsor the vehicles that acquire them, particularly those affiliated with an insurer, may face heightened regulatory scrutiny of affiliate transaction approvals, holding company act filings, disclosure of indirect exposure to the same underlying credits, and the possibility of look-through reporting requirements.
  
  
• The comment period provides an opportunity to address scope. Comments are due October 2, 2026. Sponsors and insurer clients, directly or through trade associations, may comment on the breadth of the reinvestment trigger; the meaning of significant embedded ALM risk; whether a quantitative or duration-based standard would be workable; whether structural mitigants such as amortization triggers, hedging, and subordination should be given express credit; the interaction with SSAP No. 43R and the existing rebuttable presumption framework; and the need for prospective application and grandfathering of existing holdings.

Looking ahead

Stakeholders may wish to monitor the exposure draft and any follow-on project involving feeder funds and other fund finance structures. For additional information regarding these developments, please contact the authors or your usual DLA Piper contact.