2025 NAIC Bond Project – The Insurer’s Guide

Seth Kernodle
November 4, 2024

This blog was last updated on November 14, 2024

The regulatory landscape for insurance companies is undergoing significant changes with the Principles-Based Bond Project which is set to take effect on January 1, 2025. These changes, driven by the National Association of Insurance Commissioners (NAIC), will impact how insurance companies classify and value bond investments, which constitute a substantial portion of their financial assets. 

What is the 2025 Bond Project? 

Effective January 1, 2025, insurance companies will face significant changes in how they classify, value, and report bond investments. The NAIC’s Principles-Based Bond Project introduces more judgment in assessing bonds, focusing on elements such as the creditor relationship, level of cash flows, and substantive credit enhancements. These changes aim to ensure that bond classifications better reflect the substance of the transaction.  

For insurance companies, this means they will no longer categorize bonds solely based on legal structure. Consequently, the changes will have a direct impact on portfolio management. Statutory filings, particularly Schedule D Part 1 and Schedule BA, will need to be updated to reflect the revised classifications, impacting both capital management and regulatory compliance. 

Key elements of the 2025 NAIC Bond Project include:  

  • Bond Reclassification: Bonds will need to be reclassified according to the NAIC standards, which consider the level of cash flows, and the substantive credit enhancement attached to the bond. This ensures that insurance companies report bonds more accurately in their statutory filings, such as Schedule D, Part 1. 
  • Valuation Adjustments: These changes in classification will affect the valuation of bonds and other financial assets held by insurance companies. The new valuation criteria will influence risk assessments and reporting on critical documents like Schedule D and Schedule BA, where miscellaneous investments are recorded. 
  • Risk-Based Capital (RBC): The reclassification and valuation of bonds might impact insurers’ Risk-Based Capital (RBC) calculations. With changes to how bonds are reported, insurers must ensure that their capital strategies align with the new guidelines to maintain compliance and manage risk appropriately. 

These changes are not merely procedural updates; they may affect how insurers manage their portfolios, assess their capital levels, and comply with regulations. Given that bond investments often represent a substantial portion of an insurer’s assets, proper implementation of these new guidelines is essential for maintaining financial stability and regulatory compliance. 

What Insurance Companies Need to Know About Bond Reporting 

For insurers, the 2025 Bond Project represents more than just a technical change in reporting; it will significantly affect their investment strategies and statutory compliance efforts. The added complexity requires insurers to update their systems, data, and reporting processes to align with the NAIC’s principles-based bond standards.  

Below are the critical steps insurers must incorporate into their statutory compliance efforts: 

  1. Address Updates to RBC Calculations
    Companies need to ensure that these updates are accurately reflected in their financial reports, particularly as RBC calculations play a critical role in ensuring financial stability and compliance with NAIC’s Statement of Statutory Accounting Principles (SSAPs).

    How Sovos Helps
    : Sovos Stat Software integrates the latest NAIC guidelines into its RBC calculation tools, ensuring insurers can automate the process and stay compliant. Sovos also provides functionality to assess and validate RBC calculations before the 2025 deadline. 
  2. Assess Impact on Capital
    Bond reclassification will also affect an insurer’s capital levels, as changes to bond valuations impact liquidity and reserves. Insurers must ensure their capital management strategies align with the new guidelines.

    How Sovos Helps
    : Sovos provides tools to simulate the financial impact of bond reclassifications on RBC and capital reserves. This gives insurers a clear picture of how their portfolios will be affected and helps them make informed decisions to maintain financial stability.
  3. Update Investment Strategies and Reporting Processes
    Insurers will need to adjust their investment strategies and reporting processes to meet the new NAIC standards. This involves updating classifications for bonds with substantive credit enhancements and ensuring accurate filings for investments reflected in Schedule D Part 1 and Schedule BA.

    How Sovos Helps
    : Sovos provides exclusive early access to the 2025 schedules and reporting workflows, allowing insurers to work directly within the updated system to refine their processes ahead of the regulatory deadline. Supported by our expert in-house technical trainers, Sovos clients have a head start on preparing, using our comprehensive tools to manage portfolio adjustments efficiently while ensuring compliance with NAIC’s Statement of Statutory Accounting Principles (SSAPs). 

Getting Ahead of the 2025 Bond Project 

The 2025 Bond Project marks a major shift in how insurers classify, value, and report bond investments, with significant implications for regulatory compliance, capital management, and investment strategies. While these changes present challenges, they also offer an opportunity for insurers to improve the accuracy of their financial reporting and better align their portfolios with risk-based capital requirements. 

Early preparation is key to navigating this transition successfully. By updating systems, re-evaluating bond portfolios, and ensuring compliance with new NAIC standards, insurers can mitigate risks and avoid last-minute complications. Sovos is uniquely positioned to support this effort as the only vendor to release an advance version of the updated 2025 schedules, enabling insurers to start working within the new system now. This head start is a critical differentiator, helping insurers test and refine workflows ahead of the deadline. 

Beyond cutting-edge software, Sovos offers extensive educational support to help insurance companies understand and implement the 2025 Bond Project changes. Sovos’s team of industry experts, including CPAs and actuaries, delivers detailed training and resources that guide insurers through the complexities of the principles-based bond standards. 

  • 2025 Handbooks: Sovos offers exclusive handbooks that provide in-depth explanations of the new bond classification rules, complete with practical examples. These handbooks serve as an essential reference for insurers navigating the new requirements. 
  • Live Training: Sovos’s instructor-led training sessions provide hands-on guidance to help insurers accurately apply the new bond standards in their financial reporting, ensuring full compliance with NAIC’s SSAPs. 

Start preparing today with Sovos Stat Software and take control of the regulatory changes coming in 2025. 

Learn More

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Seth Kernodle

As vice president of regulatory education and consulting services, Seth Kernodle provides clients with the information and education needed to stay on top of regulatory change, ensuring more successful business outcomes. A firm believer in the adage that knowledge is power, Seth makes it his mission to translate our collective expertise into best-in-class products to improve the lives of our customers.
Share this post

retail delivery fees for alcohol shipping
North America ShipCompliant
December 5, 2024
Navigating Retail Delivery Fees: A Guide for DtC Alcohol Sellers

This blog was last updated on December 5, 2024 Direct-to-consumer (DtC) alcohol shippers are no strangers to navigating a complex regulatory landscape. However, recently, a new challenge has emerged—the rise of retail delivery fees. From excise taxes to shipping restrictions, the industry has long dealt with a maze of state-specific rules that require careful attention […]

form 1099-k reporting
North America Tax Information Reporting
November 25, 2024
Form 1099-K Reporting: What TPSOs Should Know

This blog was last updated on November 27, 2024 As tax year 2024 approaches, third-party settlement organizations (TPSOs) are keeping a close watch on IRS guidance regarding their obligations under the IRS’s Form 1099-K reporting requirements. Recent changes to the 1099-K reporting threshold, coupled with delayed enforcement and conflicting guidance, have left many TPSOs uncertain […]

2025 tax filing season
North America Tax Information Reporting
November 21, 2024
Top 5 FAQs to Prepare for the 2025 Tax Filing Season

This blog was last updated on November 21, 2024 While “spooky season” may be over for most of us, the scariest time of year for many businesses is right around the corner: tax filing season. As they brace themselves for the flood of forms, regulatory updates, and tight deadlines, the fear of missing a critical […]

dtc shipping law updates
North America ShipCompliant
November 13, 2024
DtC Shipping Laws: Key Updates for Alcohol Shippers

This blog was last updated on November 13, 2024 When engaging in direct-to-consumer (DtC) shipping of alcohol, compliance with different state laws is paramount and so keeping up with law changes is critical. In 2024, the rules in several states for DtC have already been adjusted or will change soon. Here is a review of […]

sales tax vs. use taxes
North America Sales & Use Tax
November 8, 2024
Sales Tax vs. Use Tax, Explained. Who Reports What, and When?

This blog was last updated on November 19, 2024 One of the core concepts in sales tax compliance is also one of the most frequently misunderstood: the differences between sales tax and use tax. These tax types may look similar on the surface, but knowing the differences is essential for staying compliant and avoiding costly […]