<Title> NAIC Spring 2017 National Meeting Update

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2 NAIC Spring 2017 Meeting Update National Association of Insurance Commissioners Table of Contents NAIC Spring 2017 National Meeting Update... 1 Guaranty Fund Credits... 1 Investment Classification Review Project... 1 Asset Valuation Reserve (AVR) and Interest Maintenance Reserve (IMR)... 2 Short Duration Insurance Contract Disclosures... 2 Inflation Indexed Securities... 3 Mortgage Loans... 3 Accounting Standards Updates Issued by the Financial Accounting Standards Board... 3 Other Working Groups... 3 Learn More... 4 Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International. Crowe Horwath International does not render any professional services and does not have an ownership or partnership interest in Crowe Horwath LLP. Crowe Horwath International and its other member firms are not responsible or liable for any acts or omissions of Crowe Horwath LLP and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath LLP.

3 NAIC Spring 2017 Meeting Update National Association of Insurance Commissioners 1 NAIC Spring 2017 National Meeting Update The National Association of Insurance Commissioners (NAIC) held its Spring 2017 National Meeting in April. The following summarizes selected updates on the activities of the Statutory Accounting Principles Working Group (SAPWG) that took place both during this meeting and SAPWG s March 16, 2017 conference call. More information is available on the NAIC website at Guaranty Fund Credits During the Fall 2016 National Meeting, SAPWG adopted revisions to SSAP No. 35R Guaranty Fund and Other Assessments. The revisions were adopted upon concerns expressed by writers of short-duration health insurance products that are subject to retrospective guaranty fund assessments as the result of the insolvency of a long-term care provider. In accordance with SSAP No. 35R, the retrospective guaranty fund liability is established gross of any recoverable and estimable assets such as premium tax credits and surcharges from business currently in-force. Concerns were previously expressed by interested parties that the current guidance in SSAP No. 35R limits the ability of writers of short-duration health insurance contracts to record an asset for the full amount of accrued assessments expected to be recovered as SSAP 35R excludes expected renewals of short-duration insurance contracts when determining the asset. The adopted revisions to SSAP No. 35R modify the existing guidance to allow for the inclusion of such renewals only when the associated guarantee fund assessment liability is imposed on the writers of short-duration contracts for the insolvency of writers of long-duration insurance contracts (i.e. long-term care policies). These changes have an effective date of January 1, During its March 16, 2017 conference call, SAPWG adopted further revisions to SSAP No. 35R to allow for the discounting of these guaranty fund assessment liabilities. Investment Classification Review Project SAPWG adopted revisions to SSAP No. 26R Bonds and corresponding issue paper regarding changes to the accounting for investments in bond exchange-traded funds (bond ETFs) and bond mutual funds. Previously, SAPWG had exposed two different accounting treatments for consideration. The first proposed the use of fair value. The second approach provides an option for an alternative accounting treatment utilizing what the SAPWG has described as a systematic value approach, which refers to a documented method to amortize or accrete the investment in a manner that represents the expected cash flows from the underlying bond holdings. Some of the more pertinent revisions adopted are as follows: 1) Incorporates into the scope of SSAP No. 26R bond ETFs and bond mutual funds as identified in Part Six, Section 2 of the Purposes and Procedures Manual of the NAIC Investment Analysis Office. 2) Allows for the recording of bond ETFs and bond mutual funds within the scope of SSAP No. 26R at fair value (utilizing net asset value as the practical expedient) or at systematic value. 3) Establishes a standardized systematic value approach. 4) Designates use of the systematic value approach as an irrevocable election made at acquisition (by CUSIP) and can only be applied to qualifying investments with an NAIC designation of 1 to 5 for asset valuation reserve (AVR) filers and 1 or 2 for non-avr filers. 5) Establishes other-than-temporary impairment (OTTI) guidance for these type of securities including securities with fair value less than systematic value or securities with significant declines in the net present value of the projected cash flows of the underlying bond securities as potential OTTI indicators.

4 NAIC Spring 2017 Meeting Update National Association of Insurance Commissioners 2 6) Incorporates various disclosures pertaining to the use of the systematic value method. These disclosures include whether the reporting entity consistently uses the same measurement method for all bond ETFs and bond mutual funds within the scope of SSAP No. 26R, whether these investments are being reported at a different measurement method from prior reporting periods, and identification of securities still held that no longer qualify for the systematic value approach. 7) States specifically that these revisions are not intended to contradict state law regarding the classification of these types of investments. Implementation guidance is as follows: 1) As of December 31, 2017, reporting entities must identify the securities that will be reported at systematic value. For December 31, 2017, securities designated for systematic valuation will continue to be reported with the previously-used 2017 measurement method with the change to the systematic value method effective for January 1, A valuation change for these securities is therefore effective as of January 1, ) If securities affected by these revisions are not identified for the systematic value approach by December 31, 2017, then such securities must be recorded at fair value. Additionally, as part of the Investment Classification Review project, SAPWG previously exposed potential revisions to SSAP No. 43R Loan-Backed and Structured Securities. Interested parties upon review of the proposed revisions expressed concerns that such revisions could result in unintended consequences including requirements to non-admit certain structured finance securities within the scope of SSAP No. 43R. Upon review of these concerns, SAPWG exposed this agenda item with intent to dispose without any revisions to SSAP No. 43R. Asset Valuation Reserve (AVR) and Interest Maintenance Reserve (IMR) SAPWG previously requested information from both interested parties and regulators regarding the current practices of how industry is allocating losses between AVR and IMR when an other-thantemporary impairment is recognized. NAIC staff noticed inconsistencies in the guidance for this allocation between the annual statement instructions and SSAP No. 26R Bonds. Interested parties commented that industry generally follows the guidance in SSAP No. 26R requiring credit-related losses to AVR and interest-related losses to IMR and uses the guidance within the annual statement instructions to determine what losses are credit-related versus interest-related. Interested parties also commented that current allocation practices do not present a solvency concern for regulators and any changes in practices would result in costly investment system changes. NAIC staff recommended to SAPWG clarification within SSAP No. 26R regarding the allocation of losses between AVR and IMR as well as recommended a referral to the Blanks Working Group to modify the annual statement instructions for any revisions needed to clarify the guidance. Short Duration Insurance Contract Disclosures SAPWG formally rejected FASB ASU Financial Services Insurance (Topic 944): Disclosures about Short-Duration Contracts. Upon recommendation from interested parties, SAPWG adopted proposed revisions to SSAP No. 55 Unpaid Claims, Losses and Loss Adjustment Expenses and SSAP No. 65 Property and Casualty Contracts. These revisions relate to the following disclosure items and are considered by both interested parties and SAPWG as useful to users of statutory financial statements: 1) Information about significant changes in methodologies and assumptions used in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements for the most recent reporting period presented. 2) In regards to unpaid losses and loss adjustment expenses that are discounted, the amount of interest accretion recognized in the statement of income and the line item(s) in the statement of income in which the interest accretion is classified.

5 NAIC Spring 2017 Meeting Update National Association of Insurance Commissioners 3 Inflation Indexed Securities Discussion occurred at the meeting regarding recent questions received by NAIC staff as to whether the accounting for foreign inflation-indexed securities should be allowed to follow the guidance in INT Accounting for U.S. Treasury Inflation-Indexed Securities. SAPWG confirmed that this is not the intent of INT and exposed revisions to INT to restrict foreign inflation-indexed securities from using the guidance in INT Previously, NAIC staff requested specific input from interested parties and industry as to whether specific statutory guidance should be developed for foreign inflation-indexed securities. Interested parties commented that investment in inflation indexed securities other than U.S. Treasury Inflation-Indexed Securities are rare and that additional guidance is not necessary at this time. SAPWG adopted exposed revisions to INT stating that INT is limited to treasury inflationindexed securities backed by the full faith and credit of the United States government and that foreign inflation-indexed securities do not follow the guidance within INT but are accounted and reported in accordance with the applicable SSAP without adjustments for the inflation factor. Mortgage Loans SAPWG exposed non-substantive revisions to SSAP No. 37 Mortgage Loans clarifying the definition of a mortgage loan, with revisions to include examples of investments intended to be captured within the scope of SSAP No. 37 and considered to not meet any of the required characteristics of a security. Examples include a mortgage loan defined as a debt obligation that is not a security, which is secured by a mortgage on real estate, mortgage loans directly originated and mortgages acquired through assignment, syndication or participation. Accounting Standards Updates Issued by the Financial Accounting Standards Board SAPWG adopted with modification the following FASB ASU recently issued by the FASB: 1) FASB ASU Investments Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. SAPWG adopted without modification the following FASB ASU recently issued by the FASB: 1) FASB ASU Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Upon request from interested parties, SAPWG added a revision within SSAP No. 69 Statement of Cash Flow clarifying that the related effective date and transition guidance be consistent with the guidance stipulated in FASB ASU SAPWG re-exposed for comment with the intent to reject the following FASB ASU recently issued by the FASB: 1) FASB ASU Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. Other Working Groups In addition to SAPWG, several other committees, working groups, and task forces met during the NAIC Spring 2017 National Meeting. The following represents selected updates concerning the activities of some of these committees, working groups and task forces.

6 NAIC Spring 2017 Meeting Update National Association of Insurance Commissioners 4 Accounting Practices and Procedures Task Force On May 2, 2017, the Accounting Practices and Procedures Task Force met via conference call to discuss the insurance regulators need for timely reporting of complete investment information. NAIC staff have expressed concerns that their access to insurance carrier investment information is limited to full investment schedules filed per the year-end annual reporting, which could be outdated by the time quarterly reporting is completed. Insurance regulators and NAIC staff have commented that more current investment information is important for purposes of analysis especially during time of market downturn or financial crisis. NAIC staff have put forth a proposal for mid-year investment reporting that would include all Schedule D investments with information on CUSIP, par value, book/adjusted carrying value and fair value to be received with the second quarter statutory financial statements. The matter was referred to the task force by SAPWG. The Accounting Practices and Procedures Task Force voted in favor of the mid-year filing requirement for Schedule D holdings, subject to approval by the Finance (E) Committee, with a recommendation that the first mid-year filing take place during the second quarter The Finance (E) Committee reviewed and exposed this agenda item until June 12, Investment Risk-Based Capital Working Group The Investment Risk-Based Capital Working Group previously exposed a document entitled A Way Forward, outlining the group s current proposal to update the bond factors in the current Life RBC formula. The document proposes expanding the granularity of NAIC bond designations from the current six to 20 for purposes of RBC. However, for statutory accounting purposes the six-designation system will still apply. At the NAIC Spring 2017 National Meeting, the group continued its discussion regarding finalization of the updated bond factors for Life RBC purposes, including adjustments to reduce the factors for investment grade securities. The group also exposed changes to both the health and property and casualty RBC formula in which the NAIC bond designation granularity will be increased to 20, consistent with the Life RBC formula. The Investment Risk-Based Capital Working Group also exposed potential changes to the RBC factors for real estate. Given that real estate is not material overall to the industry, this matter will not be addressed until after finalization of the new Life RBC bond factors. Learn More If you would like additional information, please contact: Art Salvadori Managing Director Crowe Horwath LLP arthur.salvadori@crowehorwath.com

NAIC Summer 2017 National Meeting Update

NAIC Summer 2017 National Meeting Update NAIC Summer 2017 Meeting Update National Association of Insurance Commissioners Table of Contents NAIC Summer 2017 National Meeting Update... 1 Asset Valuation