BlackRock previously put forth an alternative amortized cost valuation methodology (known as "Systematic Valuation") for fixed income exchange-traded funds (ETFs) which is akin to the modified amortized cost calculation of other fixed income investments with multiple individual positions and fluctuating cash flows. The proposed valuation method is similar to the effective interest method applied to individual fixed income securities, but also reflects the changing composition of the ETF's underlying bond portfolio over time without introducing noise (in the form of interest rate fluctuations and market influences) into the valuation process, which should not be present from a statutory accounting perspective for fixed income investments.
Since fixed income ETFs simply hold a portfolio of bonds, under normal circumstances the value of those bond portfolios goes down as interest rates rise and vice versa (just as an insurer's own portfolio of bonds would behave if they were marked to market). Thus, a fair value-based standard would introduce volatility to an insurer's balance sheet and significantly impair an insurer's ability to invest in NAIC designated bond ETFs (particularly smaller to mid-sized insurers). Systematic Valuation provides a solution that is both relatively simple to calculate and auditable. Anyone with access to an Excel spreadsheet can calculate the necessary values.
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