LATF Would Make Undocumented Asset Splits Take the Higher Reserve

NAIC's Life Actuarial (A) Task Force exposed an amendment on October 22 that would make a life insurer split a shared general account portfolio the same way for every principle-based reserve and for its asset adequacy opinion. A company that cannot document its split would carry whichever of two allocations produces the higher reserve. Comments on APF 2026-09, Asset Selection, run 57 days to December 18 (NAIC, October 2026).

Ben Slutsker, acting deputy commissioner at the Minnesota Department of Commerce, filed the form. It names the January 1, 2027 Valuation Manual, touches 14 locations across VM-20, VM-21, VM-22, VM-30 and VM-31, and follows an August concept document titled "Concept for APF to Limit Cherry-Picking Assets in PBR" (NAIC LATF materials, August 2026). An asset allocation template was exposed with it. Its stated reason is to let regulators review "that modeled assets used to support specific liabilities within a portfolio are consistent with actual asset portfolio management and investment practices, both for asset adequacy analysis and principle-based reserving requirements" (NAIC LATF, APF 2026-09, October 2026).

Key Takeaways

LATF exposed APF 2026-09 on October 22 for a 57-day comment period ending December 18, with an asset allocation template attached.
Only VM-20 today says how to split a shared portfolio, asking for an "equitable method"; VM-21 and VM-22 have no apportionment rule.
Without VM-31 documentation a company holds the higher reserve of a pro rata slice and its management-practice split, a penalty rather than a safe harbor.
Surplus-portfolio assets could no longer sit in a modeled liability portfolio, and one asset could not back both VM-21 and VM-22 in the same scenario.

What the redline changes

Today's Valuation Manual has one apportionment rule in its reserve chapters. VM-20 Section 7.D.2 says that for a portfolio supporting both subject and non-subject policies "the company shall determine an equitable method to apportion the total amount of starting assets between the subject and non-subject policies" (NAIC Valuation Manual, 2026 edition). VM-21 and VM-22 set no rule at all; VM-31 only asks for the method to be disclosed.

APF 2026-09 writes one in. New paragraphs at VM-21 Section 4.D.4.d and VM-22 Section 4.D.3.d cover a general account portfolio supporting "both contracts that are subject and not subject to these requirements, both liabilities and surplus, or across multiple reserving categories." The same words go into VM-21 Section 4.B.3.a and VM-22 Section 4.B.3.a, which define the additional invested asset portfolio whose net asset earned rate discounts each scenario's accumulated deficiencies.

Location	2026 Valuation Manual	Under APF 2026-09
VM-20 7.D.2	"Equitable method" to split starting assets	Documented practice, else the higher-reserve default; no surplus assets in liability portfolios
VM-21 4.D.4.d, VM-22 4.D.3.d	No apportionment rule	Same rule and default; covers liabilities vs. surplus and reserving categories
VM-21 4.B.3.a, VM-22 4.B.3.a	Additional invested assets; no double counting across PBR	Same rule and default; no double counting against VM-30
VM-30 3.B.7 (new)	Memorandum discloses the selection method	No allocation differences between asset adequacy analysis and PBR

VM-31 would require Template F, ALM and governance documentation, crediting-rate evidence, a proportional comparison and an officer certification. The template asks whether each PBR portfolio is supported pro rata and whether liabilities and surplus share an allocation.

The default when documentation is missing

One sentence appears four times, once per starting-asset and additional-asset section. "If documentation is not provided for VM-31 Section 3.F.6.d, then the company shall apportion assets from a single portfolio across liability segments that generate the higher reserves between the following two approaches," a pro rata slice of the portfolio or a split "consistent with company management and asset segmentation practices across business functions" (NAIC LATF, APF 2026-09, October 2026).

The August concept said pro rata would not be a safe harbor and that the manual "will not require two runs to determine whether prorata or anticipated portfolio is greater (as is the case with the reinvestment guardrail)" (NAIC LATF, August 2026). The exposed text does require both figures from an undocumented company, since the higher reserve cannot be identified without them.

On May 21 Slutsker told the Task Force that "companies can assign the lowest-yielding assets to non-PBR blocks and include the highest-yielding assets in PBR, but that this is not a simple issue to resolve because legitimate risk management practices should be reflected in PBR" (NAIC LATF minutes, May 2026). A PBR segment holding the higher-yielding assets reserves less under management practice than under a pro rata slice, so the default takes the pro rata figure. A segment holding the lower-yielding assets keeps its own split.

Risk & Regulatory Consulting asked in its September 10 letter for "safe-harbor concepts that provide companies and regulators with greater clarity regarding acceptable approaches" (RRC, September 2026). Exemptions are what the exposed text offers instead. Items (i) through (iv) of the documentation fall away for a company that supports a whole portfolio pro rata and manages it that way, and for one that values all annuity business written since the manual's operative date under VM-21 or VM-22, pre-need excepted.

That second exemption answers the ACLI's June objection that applying VM-22 "prospectively or retrospectively, should not create new prescriptive requirements focused on tracing particular assets to particular liabilities" (ACLI letter to the VM-22 (A) Subgroup, June 18, 2026). A company with its whole annuity book under VM-22 has no non-PBR block to split against.

Surplus, double counting and the VM-30 sentence

Each amended section ends with the same clause: "To the degree that liabilities and surplus are held in separate portfolios, assets from a surplus portfolio may not be reflected in modeled liability portfolios." Under VM-21 and VM-22 the additional invested asset portfolio may hold only general account assets outside the starting portfolio and cash, and it sets the net asset earned rate. A company that modeled liabilities against a blended pool with surplus assets inside would lose those assets from both portfolios, with the discount rate following.

Existing no-double-counting language in VM-21 and VM-22 is widened to the asset adequacy analyses behind VM-30: an asset counted in VM-30 starting assets is not available to the additional invested asset portfolio, and the same asset cannot be "transferred to the portfolio from the general account" for both VM-21 and VM-22 in one scenario.

Current VM-30 Section 3.B.6 asks only that the method of selecting assets be disclosed in the memorandum. The new Section 3.B.7 reads: "There shall be no differences between asset adequacy analyses and principles-based reserving (VM-20, VM-21, and VM-22) regarding how assets within a single portfolio for a general account or non-insulated separate account are assigned to support specific groups of policies or contracts, including differences in allocation between assets supporting liabilities and assets supporting surplus." A guidance note lets only the level of aggregation differ, documented as a simplification.

Sequenced ahead of the discount-rate change

This APF is the guardrail the Task Force decided in May to put in front of APF 2023-10, which would move the VM-20 stochastic reserve discount rate from 105% of the one-year Treasury rate to the net asset earned rate of the additional asset portfolio. Texas's Rachel Hemphill said then that "concerns have been raised about how starting asset selection heavily affects the NAER." Slutsker proposed delaying the discount-rate change to the 2028 Valuation Manual (NAIC LATF minutes, May 2026).

NAIC staff put a size on the deferred change. Model office testing showed "a 7.7% decrease in the stochastic reserve for a universal life with secondary guarantees (ULSG) product when using the NAER discount rate methodology compared to 105% of the one-year Treasury rate" (NAIC LATF minutes, May 2026). Brian Bayerle of the ACLI said there was "no philosophical disagreement that the discount rate update is the right direction" and backed the 2028 target.

APF 2026-09 names the 2027 manual, one edition earlier. The concept slides set it beside the reinvestment guardrail already in the manual: that guardrail compares two runs for every company, while the new default applies only when documentation is absent.

The same call exposed APF 2026-08, a Texas proposal adding a PBR Template D for expense allocation, with comments due December 4 (NAIC LATF, October 2026), and a six-day markup of the year-end 2026 AG 55 guidance, to October 28. Comments on the asset selection APF and its template are due December 18.