Financial Condition (E) Committee Conference Call July 17, 2017

Transcription

1 Attachment One Draft: 7/20/17 Financial Condition (E) Committee Conference Call July 17, 2017 The Financial Condition (E) Committee met via conference call July 17, The following Committee members participated: Eric A. Cioppa, Chair (ME); Ken Selzer, Vice Chair, and Richard Ramos (KS); Dave Jones represented by Susan Bernard and Kim Hudson (CA); Chlora Lindley-Myers represented by John Rehagen (MO); Matthew Rosendale represented by Steve Matthews (MT); Barbara D. Richardson represented by Renee Hanshaw (NV); Richard J. Badolato and Kristine Maurer (NJ); Jillian Froment represented by Dwight Radel and Dale Bruggeman (OH); TBD represented by Doug Slape and James Kennedy (TX); Jacqueline K. Cunningham represented by Doug Stolte (VA); Allan L. McVey represented by Leah Cooper (WV); and Tom Glause and Linda Johnson (WY). 1. Adopted a Request for NAIC Model Law Development from the Receivership and Insolvency (E) Task Force Superintendent Cioppa stated that a Request for NAIC Model Law Development form to amend the Life and Health Insurance Guaranty Association Model Act (#520) was adopted during the Receivership and Insolvency (E) Task Force s June 28 conference call. He reminded the Committee that the NAIC has rules when it comes to considering changes to NAIC models. This includes requiring the parent committee to determine if a proposed new model law (or regulation) or amendment to an existing model law (or regulation) meets a two-pronged test: 1) the subject of the model necessitates a minimum national standard and/or requires uniformity amongst all states; and 2) where NAIC members are committed to devoting significant regulator and association resources to educate, communicate and support a model that has been adopted by the membership. He stated that this request is the result of the work at the Receivership Model Law (E) Working Group, which was charged to look at long-term care (LTC) insurance insolvency issues and the impact those issues have on the Model #520. He stated that, based on that work, it is expected the model will require amendments to address LTC issues. Ms. Maurer provided an overview of the request. She described how the work corresponded to a new charge given to the Receivership Model Law (E) Working Group for She discussed how the Working Group had been engaged with all interested parties, but it had been concluded that changes to Model #520 would be necessary to address the charge. Ms. Maurer said the Receivership and Insolvency (E) Task Force and the Receivership Model Law (E) Working Group are seeking the ability to consider changes to Model #520 to address guaranty fund assessment and coverage issues involving LTC insolvencies and the possible inclusion of health maintenance organizations (HMOs) as member insurers as part of the state guaranty association. Mr. Kennedy added that, during a recent conference call, the Receivership Model Law (E) Working Group agreed to consider two courses: 1) aggregating the life, annuity and health insurance guaranty accounts for the purpose of paying LTC claims; and 2) adding HMOs as guaranty fund members. He noted that there is a great deal of details to be studied. Ms. Maurer stated that what Mr. Kennedy was describing was, of course, contingent upon receiving approval from the Financial Condition (E) Committee and the Executive (EX) Committee of this Request for NAIC Model Law Development form. Commissioner Selzer asked if a decision had already been made relative to inclusion of HMOs or whether that issue was simply being studied. Ms. Maurer noted that a final determination had not been made, but the Working Group agreed inclusion needed to be considered and was the direction they were headed, given that a consensus group of health insurers and life insurers appeared to support this direction. Mr. Kennedy agreed that anything the Receivership Model Law (E) Working Group concluded would need to be considered more widely by the Receivership and Insolvency (E) Task Force and the Financial Condition (E) Committee, as well as the new Long-Term Care Insurance (B/E) Task Force. Therefore, the Working Group would need to get feedback from all of those groups as the work continues. Commissioner Selzer asked what type of feedback the Working Group had received from the HMOs. Mr. Kennedy responded that the Working Group is seeking input from those types of companies, as well as life insurers and health insurers. He noted that a drafting group is being formed with members from all of those parties. Commissioner Glause stated that Wyoming had placed an HMO into liquidation in 2016, noting that Wyoming has included HMOs in its guaranty fund since the early 1990s. He said this arrangement has provided a great deal of policyholder protections during this insolvency. Commissioner Glause made a motion, seconded by Commissioner Badolato, to adopt the Request for NAIC Model Law Development form (Attachment ). The motion passed unanimously National Association of Insurance Commissioners 1

2 Attachment One 2. Adopted Recommendation on Stays and Injunctions from the Receivership and Insolvency (E) Task Force Superintendent Cioppa stated that the Receivership and Insolvency (E) Task Force has submitted a referral requesting the Committee s support in encouraging the states to consider enhancements to state receivership laws to provide express recognition, full faith and credit, and reciprocity to other states stay orders and injunctions in receivership. He stated that it was recognized that there are variations in state laws with regard to this issue and, while this does not represent an amendment to the Insurer Receivership Model Act (#555), the Committee is asked to send the recommendation to the states to consider legislative changes in order to obtain more consistency across states laws and to improve interstate relations in receivership. Ms. Maurer described the request by noting how the Receivership and Insolvency (E) Task Force is currently engaged in studying state law and receivership laws and practices in comparison to the Financial Stability Board s Key Attributes of Effective Resolution Regimes for Financial Institutions and corresponding assessment methodologies. She said the Task Force is to consider recommendations, noting that the memorandum addresses some of the inconsistencies related to providing full faith and credit with respect to stays and injunctions issued in the state of domicile. She described how these provisions can force receivers to seek stays or defined laws, particularly during rehabilitation. Because uniformity and consistency would be beneficial, the request from the Task Force is to consider adoption and distribution of the memorandum to all of the states to support encouraging enhancements to state laws and to provide express recognition and full faith and credit and full reciprocity to another state s stay or injunction against an insurer in an insurance receivership proceeding. Mr. Kennedy described how the Receivership Model Law (E) Working Group had conducted a great deal of analysis in looking at various differences among the states around this particular area, in part due to the various times in which the various states had adopted legislation in these areas. This does not require adoption of the Model #555, but, rather, to consider particular aspects of the model in considering changes to legislation to address these specific issues. Mr. Kennedy made a motion, seconded by Commissioner Glause, to adopt the memorandum (Attachment?) and have it distributed to all states. The motion passed unanimously. Having no further business, the Financial Condition (E) Committee adjourned. W:\National Meetings\2017\Summer\Cmte\E\Attachment One E Minutes.docx 2017 National Association of Insurance Commissioners 2

3 Attachment One Draft: 5/31/17 Financial Condition (E) Committee Conference Call May 12, 2017 The Financial Condition (E) Committee met via conference call May 12, The following Committee members participated: Eric A. Cioppa, Chair, and Vanessa Leon (ME); Ken Selzer, Vice Chair, and Richard Ramos (KS); Dave Jones represented by Susan Bernard and Kim Hudson (CA); Artemio B. Ilagan represented by Alice Cruz (GU); Chlora Lindley- Myers and John Rehagen (MO); Matthew Rosendale represented by Steve Matthews (MT); Barbara D. Richardson represented by Omar Akel (NV); Richard J. Badolato (NJ); Jillian Froment, Dwight Radel and Dale Bruggeman (OH); TBD represented by Doug Slape (TX); Michael S. Pieciak represented by Karen Murphy (VT); Jacqueline K. Cunningham represented by Doug Stolte (VA); Allan L. McVey represented by Tonya Gillespie (WV); and Tom Glause (WY). 1. Discussed and Exposed Proposal from the Accounting Practices and Procedures (E) Task Force Regarding More Periodic Reporting of Investments Superintendent Cioppa summarized the materials of the call and asked Mr. Hudson to provide a summary of the proposal from the Task Force. Mr. Hudson stated that the discussion on the topic of more frequent reporting began at the Statutory Accounting Principles (E) Working Group in June Mr. Hudson stated that the driving force behind beginning such discussions was the view that such information could assist the NAIC Capital Markets Bureau in preparing macroprudential analysis of the industry s assets. Such analysis is used by state insurance regulators and the NAIC when discussing the condition of the industry as a whole. Mr. Hudson noted that the proposal for the Committee to consider is whether the NAIC should consider adding a new reporting requirement for insurers to report the following for all stocks and bonds as of June 30 of each year: 1) CUSIP; 2) par value; 3) book/adjusted carrying value (BACV); and 4) fair value. Mr. Hudson stated that when the Task Force discussed this proposal, most of the discussion was focused on the issue of costs versus benefits. He indicated that the interested parties (Attachment?) had stated that there is a cost for all insurers, but for small and medium-size companies the costs can potentially be significant, particularly if the entity outsources reporting. Mr. Hudson stated that, during the Task Force discussion, the NAIC Capital Markets Bureau elaborated on the benefits, noting that most of the benefits are driven from event-driven items, where there is a need to evaluate the impact of an event on the industry and individual insurers. These comments were partly in response to the interested parties suggestion that instead of the industry bearing the costs of such preparation, the NAIC should use the quarterly data to automate such data. It was stated that the NAIC Capital Markets Bureau had noted that even if this process could be easily done without reconciling items, such existing data does not include the most needed data elements of BACV or fair value, which are key to these event-driven data needs. Mr. Hudson stated that the industry had also expressed concern with the lack of any guardrails to the proposed mid-year filing to prevent regulators from requesting future expansions to the reported mid-year Schedule D data elements, future expansions to other investment schedules, or requests to receive the information more frequently. He also noted that during the Task Force call, StoneRiver, a software vender, stated there was a potential for increased costs for the annual financial statement software vendors to produce the software changes, noting that the software costs would be passed on to industry preparers. Mr. Hudson reported that on its May 2 conference call, the Task Force adopted, by roll-call vote, the policy issue of collecting this information, with 19 jurisdictions voting in favor of the motion, 10 jurisdictions voting against the motion and 6 jurisdictions abstaining. Commissioner Selzer asked if most of the industry objections were from the smaller companies. Mr. Hudson responded that he believed there were objections from a cross-section of the industry, but, from a proportionality standpoint, the objections would fall heaviest on the smaller companies. Jonathan Rodgers (National Association of Mutual Insurance Companies NAMIC) stated that when the topic was first introduced, it aimed to receive all investment schedules every 90 days and the current proposal will not accomplish that original goal, while the industry proposal will. He stated his difficulty was going back to NAMIC s smaller member companies and telling them to submit the same data but in a different format. He noted that there were real costs associated with the proposal, including some associated with many smaller companies that outsource this function. He stated that, in addition, some software vendors used by companies today are unable to meet this demand, and there is a costs associated with such a conversion. He stated NAMIC members were also concerned about scope creep National Association of Insurance Commissioners 1

4 Attachment One Commissioner Selzer asked how the Working Group addressed the issues brought up by NAMIC. Mr. Hudson responded that he believes the position supported by the Task Force was that the proposed data was needed for analysis. Ed Toy (NAIC) responded that the major issue with using NAIC quarterly data is that it is not clean enough. He noted NAIC staff has attempted to use such processes and it is not uncommon for the CUSIP reporting and category reporting to be wrong in the quarterly financial statements. Mr. Toy noted that while the annual schedules are not perfect, the amount of errors is within a reasonable tolerance. This is not the case with the quarterly statements, and this is the major issue. Mr. Slape stated that there are critical data points that would not be available in the data proposal from the industry; specifically, fair value and BACV, noting that, during the financial crisis, there could be material changes in valuation where the ins and the outs would not provide the ability to highlight and isolate the assets that have materially changed from yearend. He also discussed also how the industry proposal of using a pricing service for fair values likely would not work, as no individual pricing service covers all of the industry securities. Mr. Toy noted that while the greatest benefit is for macroprudential surveillance, it would also be used for individual companies. John Bauer (Prudential) reiterated the industry support for providing regulators with additional data used to monitor and identify solvency risks, but suggested the use of existing data already submitted to the NAIC. With respect to the suggestion for more timely fair value information, he suggested disclosure or data calls would be a more appropriate mechanism for such information. Greg Hendler (Brighthouse Financial) stated that from a total industry perspective, the suggested data request would provide useful information to regulators, but he questioned whether those benefits outweigh the costs. He highlighted that although this proposal provides more current information, the data can still be eight months stale. He argued that during volatile markets, it may not be that much more useful and noted that, in the past, the NAIC has used data calls and other methods for obtaining such information. He reminded the regulators how the proposal essentially asks every single insurance company to provide such data. Superintendent Cioppa suggested not taking action on this proposal and instead exposing it for an additional 30 days. The Accounting Practices and Procedures (E) Task Force proposal regarding semiannual reporting of investment information was exposed for a public comment period ending June 12. Having no further business, the Financial Condition (E) Committee adjourned. W:\National Meetings\2017\Spring\Cmte\E\ E Minutes.docx 2017 National Association of Insurance Commissioners 2

5 Draft Pending Adoption Attachment One Date: 4/14/17 Financial Condition (E) Committee Denver, Colorado April 10, 2017 The Financial Condition (E) Committee met in Denver, CO, April 10, The following Committee members participated: Eric A. Cioppa, Chair, and Vanessa Leon (ME); Ken Selzer, Vice Chair (KS); Dave Jones represented by John Finston and Susan Bernard (CA); Brian Maynard represented by Sandy Batts (KY); Chlora Lindley-Myers and John Rehagen (MO); Matthew Rosendale represented by Steve Matthews (MT); Barbara D. Richardson represented by Omar Akel (NV); Richard J. Badolato represented by Peter Hartt and Kristine Maurer (NJ); Jillian Froment represented by Dwight Radel and Dale Bruggeman (OH); David Mattax represented by Mike Boerner and Jamie Walker (TX); Michael S. Pieciak represented by Karen Murphy (VT); Jacqueline K. Cunningham represented by Doug Stolte and David Smith (VA); Allan L. McVey represented by Justin Parr (WV); and Tom Glause and Linda Johnson (WY). 1. Adopted its March 1, 2017 and 2016 Fall National Meeting Minutes Superintendent Cioppa stated the Committee conducted an e-vote that concluded March 1, 2017, and met at the 2016 Fall National Meeting. The March 1 minutes include adoption of the proposed membership of the new Valuation Analysis (E) Working Group, which is chaired by Mr. Boerner, and will play a critical role in the implementation of principle-based reserving (PBR). Commissioner Selzer made a motion, seconded by Director Hartt, to adopt the Committee s March 1, 2017 (Attachment One) and Dec. 12, 2016 (see NAIC Proceedings Fall 2016, Financial Condition (E) Committee) minutes. The motion passed unanimously. 2. Adopted the Reports of its Task Forces and Working Groups Superintendent Cioppa noted that items adopted within the Committee s task force and working group reports that are considered technical, noncontroversial and not significant by NAIC standards (i.e., they do not include model laws, model regulations, model guidelines or items considered to be controversial) will be considered for adoption by the Executive (EX) Committee and Plenary through the Financial Condition (E) Committee s technical changes report process. Pursuant to this process, which was adopted by the NAIC in 2009, a listing of the various technical changes will be sent to the NAIC members shortly after completion of the Fall National Meeting, and the members will have 10 days to comment with respect to those items. If no objections are received with respect to a particular item, the technical changes will be considered adopted by the NAIC membership and effective immediately. Mr. Parr made a motion, seconded by Mr. Finston, to adopt the following task force and working group reports: Accounting Practices and Procedures (E) Task Force; Capital Adequacy (E) Task Force; Examination Oversight (E) Task Force; Receivership and Insolvency (E) Task Force; Reinsurance (E) Task Force; Risk Retention Group (E) Task Force (Attachment Two); Valuation of Securities (E) Task Force; Group Capital Calculation (E) Working Group (Attachment Three); Group Solvency Issues (E) Working Group (Attachment Four); Mortgage Guaranty Insurance (E) Working Group (Attachment Five); National Treatment and Coordination (E) Working Group (Attachment Six); Risk-Focused Surveillance (E) Working Group (Attachment Seven); and Variable Annuities Issues (E) Working Group (Attachment Eight). The motion passed unanimously. The Financial Analysis (E) Working Group met in regulator-to-regulator session March 1 and Feb. 1 pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings. The Valuation Analysis (E) Working Group met in regulator-to-regulator session March 22 pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings in order to discuss some of the findings from the PBR pilot project. 3. Adopted Proposed Changes to the Charges of the Valuation Analysis (E) Working Group Mr. Boerner summarized the proposed changes to the charges of the Valuation Analysis (E) Working Group. Mr. Boerner made a motion, seconded by Mr. Finston to adopt the proposed changes (Attachment Nine). The motion passed unanimously National Association of Insurance Commissioners 1

6 Draft Pending Adoption Attachment One 4. Received a Summary of Recommendations from the 2016 Workers Compensation Large Deductible Study Mr. Finston provided a summary of the recommendations from the NAIC/IAIABC Joint (C) Working Group and as included in the 2016 Workers Compensation Large Deductible Study. He also provided certain background information to help provide the Committee some context for the study. Mr. Finston stated that concerns regarding financial issues related to, and the impact of, large deductible programs is not a new issue to the NAIC. As a result of several large insurance insolvencies in 2006, the NAIC and the International Association of Industrial Accident Boards and Commissions (IAIABC) produced a comprehensive analysis of large deductible programs and their potential impact on insurers and policyholders. He stated that the 2006 study resulted in 17 separate findings of potential problem areas. However, the recommendations resulting from the report were general in scope and generally focused on alerting the states to problems that could result from the availability of large deductible programs and encouraging the states to review their third party administrator (TPA), guaranty fund and other workers compensation laws to ensure they had sufficient protection in their statutes to protect insureds from some of the more abusive actions that had been identified during the course of the review. Mr. Finston noted that while the 2006 report identified many of the problems associated with large deductible programs, it did not recommend specific accounting, actuarial or legal changes to address those identified problems. As a result, with limited exception, the programs continued to operate as they had prior to the issuance of the 2006 report. While large national insurance carriers largely implemented stricter underwriting controls and guidelines to secure full collateralization of insured employers deductible obligations, many small carriers, especially those affiliated with or controlled by the owners of professional employment organizations (PEOs), did not implement such controls. Two insolvencies in particular highlighted the potential negative impact poorly managed large deductible programs could have on insurers: Lumbermens Underwriting Alliance and Ullico Casualty Company. Mr. Finston stated that when it became apparent to the Receivership and Insolvency (E) Task Force that abuses associated with the issuance of language deductible policies was a common thread in both of these insolvencies, the Task Force alerted the Property and Casualty Insurance (C) Committee that additional review of the problem was likely necessary. In both of these insolvencies, inadequate disclosure of the extent of the uncollateralized large deductible obligations and inadequate segregation of the assets allegedly pledged to secure the obligations resulted in the ultimate failure of the companies. In addition, the liquidators of Lumbermens Insurance Company in Illinois and Reliance Insurance Company in Pennsylvania discovered as they wound up those estates that some of the collateral they thought they had was, in fact, not available to the liquidator to pay claims. Mr. Finston stated that, in light of these developments, the NAIC/IAIABC (C) Working Group conducted a comprehensive study of this problem and has developed a set of recommendations for the Financial Condition (E) Committee to consider: Whether the existing reporting framework under Notes to Financial Statements, Note 31 High Deductibles should be enhanced by additional disclosures or replaced with a framework that books policy reserves on a gross basis and establishes explicit standards for credit for anticipated deductible reimbursements. Whether the existing risk-based capital (RBC) charges associated with large deductible business need to be enhanced to ensure that they properly reflect both the risk associated with reserves that are unsecured or undersecured and the risk that adverse development of reserves that are currently recognized might result in reimbursable losses that exceed the collateral. Whether other types of loss-sensitive programs, such as retrospective rating plans, should also be subject to some or all of the standards that apply to large deductible programs. The specific recommendations are as follows: o Enact legislation establishing financial requirements for large deductible workers compensation coverage, including the following: A definition of large deductible coverage that includes traditional policies subject to endorsements or side agreements that shift risk back to the employer. Size and financial strength requirements for insurers writing large deductible policies. Limitations on the risk employers may retain, relative to their financial capacity. Requirements for collateral, including prohibitions against commingling it with other assets of the insurer or pledging it for other competing purposes. Require the insurer s staff to evaluate the creditworthiness of policyholders. Where indicated, the underwriting department should bring in the other resources, such as the finance department. Establishing qualifying thresholds that, if exceeded, would require reporting to the regulator. Such a procedure would enable regulators to conduct a special examination, if warranted. o Enact legislation that governs the rights and duties of the various parties regarding deductible business in insolvencies; the NAIC and the National Conference of Insurance Guaranty Funds (NCIGF) have both developed model language on this point National Association of Insurance Commissioners 2

7 Draft Pending Adoption Attachment One If regulators detect that a company with this type of business may be financially troubled, regulators could conduct a special examination. Such examination would be conducted by an examiner with expertise in this business and could be paid for by the guaranty association. In those states that do not already have such language, provisions should be enacted that are substantially similar to the text below, which would permit the collection of large deductible reimbursements from insureds: o The Guaranty Association shall have no cause of action against the insured of the insolvent insurer for any sums it has paid out except such causes of action as the insolvent insurer would have had if such sums had been paid by the insolvent insurer. With respect to some of the specific recommendations, Mr. Finston noted that disclosure is an important consideration because the liabilities, if not fully disclosed, can make it hard for the regulator to fully appreciate the extent of the potential exposure to which the insurance company is subject. Mr. Finston also noted that the RBC suggestion may also be important, because a focus on only the risk in excess of the deductible may misjudge the risk within the deductible, thereby underestimating the capital needed to back the risk. Mr. Finston summarized by suggesting this Committee take appropriate action on the recommendations. He stated that, as chair of the Receivership and Insolvency (E) Task Force, he had already suggested appointing a working group to consider the receivership-related recommendations. Superintendent Cioppa stated his appreciation to the NAIC/IAIABC Joint (C) Working Group for its work in this area, agreeing that the 2006 issues seem to continue to be identified as problems that need to be addressed. He said many of the recommendations deserve strong consideration and noted that he already had some discussion with NAIC staff on first steps to considering the recommendations. More specifically, he recommends the NAIC collect more data on the gross exposure insurers have to high deductible policies to guide in evaluating the totality of the situation and asked NAIC staff to provide an update on such efforts. Dan Daveline (NAIC) noted that the Statutory Accounting Principles (E) Working Group and the Blanks (E) Working Group had agenda items that were discussed at this national meeting related to this additional gross reporting. He noted that the Blanks (E) Working Group exposed the specific blanks proposal ( BWG) that would require the gross reporting to which Superintendent Cioppa referred, noting that the proposal would be considered for adoption on a Blanks (E) Working Group conference call on June 14. If adopted, it would provide a data-capture of information that would assist the Committee in determining next best steps as suggested by Superintendent Cioppa. Superintendent Cioppa reiterated that collection of the data would be the first step. No concerns were noted with that being the first step taken by the Committee on this issue. 5. Discussed Proposed New Task Force Focusing on LTC Issues Superintendent Cioppa announced that the NAIC has a number of different groups that are addressing various items related to the regulation of long-term care (LTC) insurance. He stated that, during the April 11 meeting of the Executive (EX) Committee and Plenary, a proposal will be made to appoint a joint task force of the Health Insurance and Managed Care (B) Committee and the Financial Condition (E) Committee. If adopted, the joint task force will serve as the central forum for LTC insurance issues, noting that the primary purpose of the group will be to monitor and coordinate all aspects of the NAIC s LTC insurance work. Superintendent Cioppa expressed support for the proposal, noting that he has volunteered to serve as co-chair of the new task force along with Commissioner Al Redmer Jr. (MD). Commissioner Mike Kreidler (WA) has volunteered to serve as vice chair of the new task force. Having no further business, the Financial Condition (E) Committee adjourned. W:\National Meetings\2017\Spring\Cmte\E\ E Minutes.docx 2017 National Association of Insurance Commissioners 3

8 Attachment Two Long-Term Care Insurance (B/E) Task Force Proposed Charges The Joint Long Term Care Insurance Task Force of the Health Insurance (B) Committee and the Financial Condition (E) Committee is charged with coordinating all aspects of the NAIC's work regarding the long term care insurance (LTCI) market. In addition to coordinating current B and E Committee projects, the Joint LTCI Task Force should pursue the following general objectives: 1. To more rigorously assess the financial solvency of LTCI writers; 2. To evaluate the sufficiency of current financial reporting and actuarial valuation standards; 3. To assess state activities regarding the regulatory considerations on rate increase requests on blocks and to identify common elements for achieving greater transparency and predictability; 4. To coordinate state actions aimed at revising state guaranty fund laws; 5. To monitor the development of regulatory policy regarding short duration LTCI policies; and 6. To consider product innovations and the development of potential state and federal solutions for stabilizing the LTCI market. Provide periodic reports to the B and E Committees, and the Executive Committee, regarding key issues and progress toward the general objectives set forth above. Conduct meetings in regulator-only session, as appropriate National Association of Insurance Commissioners 1

9 Attachment Three 2017 Summer National Meeting Philadelphia, Pennsylvania ACCOUNTING PRACTICES AND PROCEDURES (E) TASK FORCE Monday, August 7, :00 1:00 p.m. Meeting Summary Report The Accounting Practices and Procedures (E) Task Force met Aug. 7, During this meeting, the Task Force: 1. Adopted its May 2 which referred a policy issue of mid-data collection to the Financial Condition (E) Committee and Spring National Meeting minutes. 2. Adopted the Aug. 6 report of the Statutory Accounting Principles (E) Working Group, which included the following: a. Adopted its June 8 minutes, which included adoption of six nonsubstantive agenda items and exposure of two agenda items, and adopted its Spring National Meeting minutes. The following nonsubstantive revisions to statutory accounting guidance were adopted: 1) revisions to incorporate enhanced disclosures for high-deductible policies to facilitate data-capture for year-end 2017 and add a materiality threshold to an existing disclosure on professional employer organizations; 2) revisions to the definition of mortgage loan ; 3) reject ASU Intra-Entity Transfers of Assets Other than Inventory; 4) revisions to incorporate the 2016 Cancer Claim Cost Valuation Tables into Appendix A-010: Minimum Reserve Standards for Individual and Accident and Health Insurance Contracts; 5) reject ASU Clarifying When a Not-for-Profit Entity that is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity; and 6) reject ASU Amendments to SEC Guidance. b. Adopted the following nonsubstantive revisions to statutory accounting guidance: 1) revisions clarify that recognized losses from other-than-temporary impairments of bonds shall be recorded entirely to either the asset valuation reserve (AVR) or the interest maintenance reserve (IMR) in accordance with the annual financial statement instructions; 2) revisions to reject Accounting Standards Update (ASU) : Premium Amortization on Purchased Callable Debt Securities and retain the current yield-to-worst amortization methodology; 3) adopt ASU : Statement of Cash Flows Restricted Cash, and related updates to the restricted asset disclosure. c. Adopted technical edits to Investments of Insurers Model Act (Defined Limits Version) (#280) to remove reference to class one money market mutual funds as that concept has been eliminated, and to correct the definitions for repurchase and reverse repurchase transactions. d. Exposed the following substantive revisions to statutory accounting guidance: 1) revisions to incorporate revised generally accepted accounting principles (GAAP) guidance from ASU , Leases modified to retain the operating lease concept for statutory accounting; 2) revisions reflect the principle that the net balance of a surplus note issued at a discount or zero coupon should never be greater than the amount of cash and liquid admitted assets received; 3) revisions allow net asset value (NAV) per share as a practical expedient to fair value either when specifically named in a Statement of Statutory Accounting Principles (SSAP) and allowing the use of NAV or fair value to be consistent with GAAP; 4) revisions to document for the historical record previous substantive changes adopted to SSAP No. 35R Guaranty Fund and Other Assessments related to assessments for insolvencies of entities that wrote long-term care insurance Issue Paper No. 143R Guaranty Fund Assessment; and 5) re-exposed revisions that propose a new policy statement on coordination with the Purposes and Procedures Manual of the NAIC Investment Analysis Office, the Securities Valuation Office (SVO) and the Valuation of Securities (E) Task Force pending a response from the Task Force. e. Exposed the following nonsubstantive revisions to statutory accounting guidance: 1) revisions clarify that acquisitions and disposals of shares in money market mutual funds are not subject to the wash sale disclosure; 2) revisions adopt, with modification, ASU : Improvements to Share-Based Payment Accounting; 3) revisions adopt with modification ASU : Determining the Customer of the Operation Services to clarify the customer of service concession arrangements; 4) revisions expand the definition of a bank loan to include bank loans directly issued by a reporting entity pending a referral response from the Valuation of Securities (E) Task Force; 5) a sponsor-submitted agenda item, which recommends that certain limited liability company (LLC) structures be eligible for inclusion in scope of SSAP No. 26R Bonds with a request for comments on the three alternative concept options proposed by NAIC staff; 6) revisions will require reporting entities to eliminate parentissued surplus notes held by a subsidiary, controlled and affiliated (SCA) entity similar to other equity investments; 7) revisions remove outdated transition guidance pertaining from SSAP No. 43R Loan-Backed and Structured 2017 National Association of Insurance Commissioners 1

10 Securities and update the Question and Answer Implementation Guide; 8) revisions clarify reinsurance contracts risk transfer requirements, provide clarifications that reinsurance accounting credit for contracts that pass risk transfer is only for the amount of risk ceded, updates terminology and incorporates new SSAP No. 61R Life, Deposit-Type and Accident and Health Reinsurance disclosures to assist in reviewing contracts, similar to existing disclosures in SSAP No. 62R Property and Casualty Reinsurance; 9) agenda item provides actual examples on the amount of goodwill recognized in comparison to the SCA equity value and requests comments on various options on whether to further limit the amount of admitted goodwill and/or improve the identification of goodwill in comparison to the SCA equity value; 10) revisions reject five ASUs related to intangibles and incorporates guidance pertaining to triggering events for impairment assessment into SSAP No. 68 Business Combinations and Goodwill; 11) disclosure revisions capture information on financing premiums in derivative contracts (in aggregate and in individual contracts). The exposed disclosures are proposed to be required in a narrative format for year-end 2017 and captured electronically (either in Schedule DB or in a data-captured note) for year-end 2018; 12) revisions clarify that variation margin changes shall be recognized as unrealized gains or unrealized losses until the derivative contract has matured, been terminated and/or expired; 13) revisions reject ASU : Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost with notation that existing statutory disclosures on the components of pension cost shall continue; 14) revisions to incorporate a 90-day time period to file a Sub 1 after an initial acquisition or formation of an SCA entity, and an Aug. 31 deadline for Sub 2 filings, with provisions to allow a company a one-month deadline after the audit date for an SCA entity that regularly receives its audit report after Aug. 31; 15) revisions provide a consistency edit that limited statutory adjustments are required for all foreign insurance SCA entities (8.b.iv. entities) regardless of whether they have audited U.S. GAAP or audited U.S. foreign GAAP financial statements; 16) revisions adopt ASU : Stock Compensation Scope of Modification Accounting; 17) revisions provide guidance to report high-cost risk pools, which were added to the federal Affordable Care Act (ACA) risk adjustment program, similar to an involuntary pool, incorporate new disclosures and recommend deletion of disclosures pertaining to the transitional ACA reinsurance program, and requested comments on the alternative accounting approach noted in the agenda item; 18) revisions reject ASU : Financial Services Investment Companies Amendments to the Scope, Measurement, and Disclosure Requirements; and 19) editorial process revisions delete transition footnotes for the 2016 year-end and interim 2017 reporting of money market mutual funds and remove Actuarial Guideline XXXIV Variable Annuity Minimum Guaranteed Death Benefit Reserves (AG 34) and Actuarial Guideline XXXIX Reserves for Variable Annuities with Guaranteed Living Benefits (AG 39) from Appendix C. Both AG 34 and AG 39 have not been in effect since f. Disposed agenda item : Definition of Loan-Backed and Structured Securities without statutory accounting revisions. g. Adopted a response to the Valuation of Securities (E) Task Force recommending revisions to the SVO procedures to clarify that an NAIC designation (or credit rating provider (CRP) rating) only reflects a credit assessment and does not consider related party elements. h. Disbanded the Restricted Asset (E) Subgroup, and the Working Group will address the remaining projects directly. i. Received an industry update on the Transition Resource Group formed to advise the Financial Accounting Standards Board (FASB) on implementation issues involving ASU : Credit Losses, noted that discussions would resume and directed NAIC staff to post the agenda item to allow for continued review. j. Received information on the American Institute of Certified Public Accountants (AICPA) audit guide changes. These changes note that GAAP disclosures shall be considered for inclusion in audited statutory financial statements prior to the review of the disclosure/related ASU under the Working Group s statutory accounting maintenance process. After the Working Group review is complete, whether disclosures are included in the audited financial statements is determined based on if the disclosure has been adopted, rejected or modified for statutory accounting. k. Received information on the updates to the Valuation Manual noting that separate discussion was not necessary. l. Received an industry update on the International Accounting Standards Board and the FASB, as well as information on current U.S. GAAP exposures, noting that no comments by the Working Group are planned. m. Received industry comments and NAIC staff recommendations from the exposure of an issue paper proposing special accounting treatment for limited derivatives. The Working Group noted that detailed discussion of the comments and recommendations would occur in a subsequent conference call. (Ref # ) n. Announced that the comment deadline for new and exposed items is Sept Adopted the Aug. 6 report of the Blanks (E) Working Group, which included the following actions: a. Adopted its June 14 minutes, during which it took the following actions: 1) adopted the report of the Investment Reporting (E) Subgroup; 2) deferred proposal BWG at the request of the Valuation of Securities (E) Task Force sponsor; 3) exposed three blanks proposals; 4) adopted the editorial listing; and 5) adopted 16 previously exposed blanks proposals: BWG Delete the Health Property Supplement instructions and related updates to the Supplemental Exhibits and Schedules Interrogatories to reflect the deletion National Association of Insurance Commissioners 2

11 BWG Replace the description of Other for Code 4 with Not Applicable for column 34, Capital Structure Code on Schedule D, Part BWG Modify the Committee on Uniform Security Identification Procedures (CUSIP) column for Schedule BA and Schedule DL and add an International Securities Identification Number (ISIN) column to Schedule DL for consistency with changes made to Schedule D. Add an additional header for Schedule DL to identify securities included in other investment schedule or items included in reflects one-line reporting BWG Clarifications on current requirements for 2017 P/C Statement of Actuarial Opinion and Actuarial Opinion Summary instructions. For 2017 title Statement of Actuarial Opinion instructions, the changes include incorporation of the same changes made to the 2016 and proposed 2017 P/C BWG Add clarification to the line of business definitions for property and health for determining which line of business to report riders, endorsements and floaters. Add clarification to the Analysis of Operation by Lines of Business instructions for life, health and fraternal BWG Add additional definitions to the property line of business definitions in the appendix BWG Modify Statement of Actuarial Opinion Instructions for Valuation Manual requirements BWG Modify the instructions for the Supplemental XXX/AXXX Reinsurance Exhibit to reflect changes to the Valuation of Life Insurance Policies Model Regulation (#830). Modify some of the column header descriptions in Part 1. Add additional columns to Part 1, Part 2A and Part 2B, and remove columns from Part 2A and Part 2B to allow room on the page for the columns added. Modify the lines used on Part BWG Remove the definition for notional amount from the Schedule DB General Instructions, Schedule DB, Part A General Instructions and replace with the definition of notional amount adopted by the Statutory Accounting Principles (E) Working Group for SSAP No. 86 Derivatives in the general instructions for Schedule DB. Modify the instruction for the Notional Amount column for Schedule DB, Part A and Part B BWG Modify the instructions and illustrations for Note 5A(4) and Note 5A(5) to reflect additional disclosures required by SSAP No. 37 Mortgage Loans BWG Add a code to the Code column to allow designation of SVO Identified Funds for valuation using systematic value and make the appropriate modifications to the instructions for the Book Adjusted/Carrying Value column, the Unrealized Valuation Increase/(Decrease) Column and the Current Year s (Amortization)/Accretion column for Schedule D (Part 1, Part 4 and Part 5) and Schedule DA (Part 1) BWG Remove the repurchase agreement and reverse-repurchase agreement disclosures from Note 5E and add new disclosures for them as Note 5F through Note 5I, and renumber the remaining Note 5 disclosures accordingly. The illustrations for Note 5F through Note 5I will be data-captured. Also, Note 17B(5) and modify Note 17B(7) instructions to remove references to repurchase agreements and reverse-repurchase agreements BWG Modify the current illustration for Note 31, High Deductibles and data-capture. Add additional illustration to Note 31 also for data-capture BWG Add additional disclosure item to Note 25, Change in Incurred Losses and Loss Adjustment Expenses (life, health, property, fraternal and title) and Note 32, Discounting of Liabilities for Unpaid Losses or Unpaid Loss Adjustment Expenses (property) BWG Add a new disclosure to Note 14, Liabilities, Contingencies and Assessments for Long-Term Care insolvencies related guaranty funds liabilities and assets. Data capture the new illustration. b. Received the Investment Reporting (E) Subgroup report. c. Deferred proposal BWG, which was previously deferred on its June 14 conference call. Adoptive action on the proposal is pending adoption of the additional designations by the Valuation of Securities (E) Task Force. The comment deadline is Oct. 2. d. Adopted the following three previously exposed blanks proposals and the editorial listing: BWG Add a new line B10 to the bond section of the Cash from Investments Worksheet in the Cash Flow Statement instructions, renumber the remaining lines in the bond section (B10 and B11) and update the formula for the existing line B11 to reflect the line addition BWG Move the total count of L (and D for property) status codes provided for Column 1 of Schedule T to footnote and provide in the footnote a count for each status provided in column 1. Add a crosscheck to ensure a status is provided for each jurisdiction on Line 1 through Line BWG Add a question to the General Interrogatories, Part 2 to help identify insurers that assume reinsurance business covering risks in at least two states. e. Exposed one new blanks proposal and a guidance document that notes that members of the life, health and annuity guaranty associations should complete the Life, Health and Annuity Guaranty Association Model Act Assessment Base Reconciliation Exhibit. The comment deadline is comment deadline of Sept. 6. W:\Summer\Summaries\Final Summaries\APP.docx 2017 National Association of Insurance Commissioners 3

12 Attachment Four 2017 Summer National Meeting Denver, Colorado CAPITAL ADEQUACY (E) TASK FORCE Monday, August 7, :00 6:00 p.m. Meeting Summary Report The Capital Adequacy (E) Task Force met Aug. 7, During this meeting, the Task Force: 1. Adopted its June 28 minutes, which included the following action: a. Adopted the Non-Government Money Market Mutual Funds (MMMFs) proposal to remove the factor to avoid double-counting of the non-government MMMFs. b. Adopted the Operational Risk (E) Subgroup s May 17 minutes. c. Adopted the Operational Risk proposal for instructions for an operational risk charge but reduced the factor to zero. d. Adopted the PropertyCasualty (P/C) Risk-Based Capital (RBC) proposals for Live 4 Ex-cat factors and the annual update to the Line 1 factors. e. Adopted the instructions for coordination between Actuarial Guideline XLVIII Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued Under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (AG 48) and the Term and Universal Life Insurance Reserve Financing Model Regulation (#787) for the shortfall reflected in the authorized control level. 2. Adopted the reports of the Health Risk-Based Capital (E) Working Group; the Life Risk-Based Capital (E) Working Group; the Investment Risk-Based Capital (E) Working Group; the Property and Casualty Risk-Based Capital (E) Working Group; and the Operational Risk (E) Subgroup. 3. Received a status update from the ad hoc group regarding the analysis of the affiliate investment page in all formulas health RBC; P/C RBC and life RBC in order to clarify the instructions and functionality of the formula page. 4. Adopted the Credit Risk Proposal. The purpose of this agenda item is to delete the PR012A and implement the revised methodology of the credit risk for reinsurance recoverable (PR012) into the RBC calculation for the 2018 reporting. 5. Adopted its 2018 proposed charges, which included one change to disband the Stress Testing (E) Subgroup and absorb that charge to its parent, the Life Risk-Based Capital (E) Working Group. 6. Adopted its 2017 working agenda, which included moving the task for the Stress Testing (E) Subgroup up to its parent the Life Risk-Based Capital (E) Working Group. 7. Discussed with NAIC legal staff the importance of confidentially regarding information sharing of RBC data with actuarial groups that provide formula and factor analysis to the Task Force and its supporting working groups. W:\National Meetings\2017\Summer\Summaries\Summaries\CADTF.docx 2017 National Association of Insurance Commissioners 1

13 Attachment Five 2017 Summer National Meeting Philadelphia, Pennsylvania EXAMINATION OVERSIGHT (E) TASK FORCE Monday, August 7, :00 1:00 p.m. Meeting Summary Report The Examination Oversight (E) Task Force met Aug. 7, During this meeting, the Task Force: 1. Adopted its Spring National Meeting minutes. 2. Adopted its 2018 Proposed Charges. 3. Adopted the reports of the Analyst Team Oversight (E) Working Group, Electronic Workpaper (E) Working Group and Financial Examiners Coordination (E) Working Group, which met in regulator-to-regulator session pursuant to paragraph 3 (specific companies, entities, or individuals) and paragraph 4 (internal or administrative matters of the NAIC). 4. Adopted the report and July 10 minutes of the Financial Analysis Handbook (E) Working Group, which included the following action: a. Heard a summary of the risk-focused analysis pilot project. b. Exposed revisions to clarify expectation related to annual filings received after the completion of the annual analysis. c. Exposed revisions to create a standardized company prioritization rating scale. d. Exposed revisions to enhance guidance related to insurers in run-off, communication between state insurance regulators in the case of a redomestication and pandemic prospective risk for health insurers. e. Adopted an amended referral to the Financial Regulation Standards and Accreditation related to the timing and type of communication expected between the analysis and the exam functions at the beginning of an exam. 5. Adopted the June 29 minutes of the Financial Examiners Handbook (E) Technical Group, which included the following action: a. Adopted a revision to incorporate a reference to the Own Risk and Solvency Assessment (ORSA) information sharing best practices document. b. Exposed guidance related to the communication between the exam and the analysis functions at the beginning of an exam. c. Adopted a recommendation to the Financial Regulation Standards and Accreditation related to the timing and type of communication expected between the analysis and the exam functions at the beginning of an exam. d. Exposed a new Procedures document that formalizes the process by which the group adopts changes to the Financial Condition Examiners Handbook (Handbook). e. Exposed revisions to incorporate guidance for principle-based reserving (PBR) into the Handbook. f. Exposed revisions to add guidance for the review of contract provisions within affiliated service agreements. g. Exposed revisions to the Capital & Surplus, Investment, Reinsurance and Related Party repositories related to the group s annual repository maintenance project. h. Discussed a referral received asking the Technical Group to consider enhancing guidance related to insurers in runoff, how an examiner considers a company s corporate governance, how an examiner communicates across states in case of a company redomestication and issues related to the evaluation of risks associated with expansion of business. 6. Adopted the July 27 minutes of the IT Examination (E) Working Group, which included the following action: a. Exposed revisions to enhance guidance related to how an examiner can address cybersecurity risks during a financial exam. b. Received an update on the Insurance Data Security Model Law. c. Exposed a new Procedures document that formalizes the process by which the group adopts changes to the IT Guidance in the Handbook. W:\National Meetings\2017\Summer\TF\Examo\EOTF Summer 2017 Summary.docx 2017 National Association of Insurance Commissioners 1

14 Attachment Six 2017 Summer National Meeting Philadelphia, Pennsylvania RECEIVERSHIP AND INSOLVENCY (E) TASK FORCE Monday, August 7, :00 a.m. 12:00 p.m. Meeting Summary Report The Receivership and Insolvency (E) Task Force met August 7, During this meeting, the Task Force: 1. Adopted its 2017 Spring National Meeting Minutes and its June 28 conference call minutes, which included the following actions: a. Adopted a Request for Model Law Development form to amend the Life and Health Insurance Guaranty Association Model Act (#520) to address guaranty association assessments and coverage issues regarding long-term care insurer insolvencies, which may include the potential inclusion of HMOs as member insurers of a state guaranty association; b. Adopted a recommendation for the states to review and consider improvements in their states receivership laws relating to receivership stays, injunctions and reciprocity provisions, and referral of the recommendation to the Financial Condition (E) Committee. 2. Adopted proposed 2018 charges for the Task Force and its working groups, including the formation of the new Receivership Large Deductible Workers Compensation (E) Working Group. 3. Adopted the report of the Receivership Financial Analysis (E) Working Group, which met Aug. 7 in regulator-toregulator session pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings. During these meetings, the Working Group discussed the status of individual receiverships and related issues. 4. Adopted the report of the Receivership Model Law (E) Working Group, which met on Aug. 6 and via conference call on July 10, June 21, June 1, May 16 and May 2. During these meetings, the Working Group took the following actions: a. Adopted its July 10, June 21, June 1, May 16, May 2, Apr. 8 minutes as, which included the following actions: i. Adopted a request for Model Law Development form to amend the Life and Health Insurance Guaranty Association Model Act (#520) to address long-term care (LTC) insolvencies as discussed above. ii. Adopted a referral to the Financial Analysis Handbook (E) Working Group and the Financial Examiners Handbook (E) Technical Group requesting the Financial Analysis Handbook and the Financial Condition Examiners Handbook regarding instructions for analysis and examination with regard to affiliated iii. management, service and cost-sharing agreements receiverships. Adopted recommendations for the states to review and consider improvements in their states receivership laws relating to receivership stays, injunctions and reciprocity provisions. b. Decided to focus the Working Group s work on long-term care on the adjustment of the allocation of guaranty fund assessments for long-term care insurer insolvencies among the health, life and annuity accounts, and to consider inclusion of HMOs in the state guaranty fund system. Discussed a plan for the drafting group to begin proposed revisions to Model #520 for guaranty association assessment and coverage issues for LTC insurance insolvencies, subject to Executive (EX) Committee approval of the Request for NAIC Model Law Development form during its Aug. 7 meeting, along this direction. 5. Heard an international resolution update from Texas and New Jersey that highlighted activities of the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB). The IAIS is developing the Insurance Core Principle 12 Exit from the Market and Resolution and related Com-Frame sections. The FSB is drafting revisions to the Key Attributes Assessment Methodology for the Insurance Sector. 6. Heard a federal legislative and regulatory update from NAIC Staff, including that a federal review is being conducted of the Dodd-Frank Act Orderly Liquidation Authority. W:\National Meetings\2017\Spring\Summaries\Final Summaries\RITF.docx 2017 National Association of Insurance Commissioners 1

15 Attachment Seven 2017 Summer National Meeting Philadelphia, Pennsylvania REINSURANCE (E) TASK FORCE Monday, August 7, :30 5:00 p.m. Meeting Summary Report The Reinsurance (E) Task Force met August 7, During this meeting, the Task Force: 1. Adopted its June 13 and Spring National Meeting minutes. 2. Adopted a proposed accreditation standard for the Term and Universal Life Insurance Reserve Financing Model Regulation (#787) for referral to the Financial Regulation Standards and Accreditation (F) Committee. 3. Heard a status report on the Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance (covered agreement). The covered agreement will eliminate reinsurance collateral requirements for European Union (EU) reinsurers that maintain a minimum amount of own funds equivalent to $250 million and a solvency capital ratio (SCR) of 100% under Solvency II. 4. Adopted the report of the Qualified Jurisdiction (E) Working Group. The Task Force directed the Working Group to terminate further work on its report on EU member state implementation of Solvency II and the potential impact on the qualified jurisdiction status of France, Germany, Ireland and the United Kingdom (UK), pending the signing of the covered agreement. The Task Force also directed the Working Group to consider the application of an additional EU jurisdiction as a qualified jurisdiction. 5. Adopted the report of the Reinsurance Financial Analysis (E) Working Group. The Working Group met June 29 in regulator-to-regulator session, pursuant to paragraph 3 (specific companies, entities or individuals) of the NAIC Policy Statement on Open Meetings, to discuss actions taken with respect to the passporting of certified reinsurers by the states and about the inclusion of an additional nationally recognized statistical rating organization (NRSRO) as an acceptable rating agency for certified reinsurer purposes. 6. Adopted the report of the Reinsurance Investment Security (E) Subgroup. The Task Force exposed a memorandum from the Subgroup that evaluates new products within the investment market and if these products would qualify for use as either reinsurance collateral or as primary security for a 30-day public comment period ending Sept Received a status report on the states implementation of the 2011 revisions to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). Effective Jan. 1, 2019, the NAIC membership adopted changes to the current optional accreditation standard for certified reinsurers to make it a mandatory accreditation standard. W:\Summer\Summaries\Final Summaries\Posted to Web\ReinsuranceTF.docx 2017 National Association of Insurance Commissioners 1

16 Attachment Eight 2017 Summer National Meeting Philadelphia, Pennsylvania VALUATION OF SECURITIES (E) TASK FORCE Monday, August 7, :00 3:30 p.m. Meeting Summary Report The Valuation of Securities (E) Task Force met Aug. 7, During this meeting, the Task Force: 1. Adopted its Spring National Meeting minutes. Adopted its July 14, June 22 and June 15 and May 18 minutes, which included the following action: a. Received and discussed three referrals from the Statutory Accounting Principles (E) Working Group. The Task Force discussed: i) a referral concerning bank loans and received an Investment Analysis Office (IAO) research report on the subject and discussed the other items of information requested by the Working Group; ii) a response to a referral on the definition of Loan Backed and Structured Securities, the Task Force determined it would not pursue a proposed redefinition of the term and; iii) a new clause proposed by industry for a policy statement outlining the Financial Regulatory Services (Financial Regulatory Services-FRS) and IAO staff interaction and adopted revised text as the basis of its response to the Working Group. b. Adopted edits to the text in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) for the List of Qualified U.S. Financial Institutions and an amendment to clarify the procedure for monitoring credit quality of financial institutions. c. Proposed and subsequently adopted policies to enhance the administration of the filing exempt process and initiated a discussion of topics and proposed P&P Manual amendments to implement the policies. d. Received a cumulative staff report/recommendations to remove the 5*/6* certification processes from Task Force oversight/securities Valuation Office (SVO) auspices and move them to an Interrogatory. e. Received a joint IAO/American Council of Life Insurers (ACLI) proposed P&P Manual amendment to add a Power Generation/Renewable Power Projects methodology. f. Received an SVO report on administrative errors in compilation of U.S. Direct Obligations/Full Faith and Credit Obligations of the U.S. Government Exempt List and a related proposal to expand the List. 2. Adopted its 2018 Proposed Charges. 3. Adopted an amendment to the P&P Manual to add filing, documentation, and analytical methodology instructions for Power Generation and Renewable Energy Projects. 4. Received a report from the FRS staff on projects before the Statutory Accounting Principles (E) Working Group. 5. Adopted a response to the Statutory Accounting Principles (E) Working Group on a referral requesting information on bank loans. The Task Force directed the SVO staff to forward the response to the Working Group. 6. Reported that on Aug. 1, the Task Force adopted an amendment to the P&P Manual to remove the 5*/6* certification procedures from the P&P Manual and place them in an Interrogatory. Under the amendment the Task Force retains oversight of the NAIC 5* and NAIC 6* Designations. The policy that permits the use of these Designations in the Interrogatory is retained in the P&P Manual. The Task Force had agreed to continue discussion of how to modify the Z administrative symbol and procedures as a separate project. 7. Heard an SVO report outlining that statutory accounting, reporting rules and the P&P Manual do not contemplate the assignment of NAIC Designations to investments in shares of funds whether reported on Schedule D or Schedule BA. The sole exception is certain Exchange Traded Funds reported on Schedule D. The SVO requested an instruction that it prepare an amendment to the P&P Manual to clarify that point. The Task Force exposed the report for a 45-day public comment period ending Sept National Association of Insurance Commissioners 1

17 8. Heard an SVO research report describing the characteristics of funds issued by investment companies other than open end management companies under the Investment Company Act of 1940, which the SVO recommends be forwarded to the Statutory Accounting Principles (E) Working Group for use in their planned consideration of funds after the comment period. The report was received and exposed for a 45-day comment period ending Sept Adopted a report of the IAO responding to a referral from the Investment Risk-Based-Capital (E) Working Group and referred the report to the Working Group as its response to the referral. The report states that the IAO will create a new NAIC Designation Category used to produce the required 20 delineations of credit assessment the Working Group requires to increase the granularity of the risk-based capital framework. The NAIC Designation Category will be a more granular subset of NAIC Designations for the Working Group s use. The Task Force clarified that the IAO would prepare a straight-forward mapping of NAIC CRP credit ratings to NAIC Designation Categories. NAIC 1 through NAIC 6 Designations will continue to be used in statutory accounting, reporting, state investment laws and other current uses. The Task Force directed the staff to coordinate a meeting between the Task Force, the Investment Risk-Based- Capital (E) Working Group and the Capital Adequacy (E) Task Force to consider the adoption of the proposed increase in granularity. 10. Heard a report from the Structured Securities Group (SSG) that no technical comments have been received from industry on the proposed application of through-the-cycle macroeconomic scenarios to financial modeling of the Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities (CMBS). ACLI stated robust agreement with the proposed change in the approach to financial modeling. 11. Heard a status report from the SSG regarding changes in BlackRock s CMBS credit model. The Task Force mentioned that the purpose of the report was to alert industry to the potential changes to the risk-based capital (RBC) of insurer owned CMBS. 12. Heard a report from the SVO and FRS staff on the response of the Statutory Accounting Principles (E) Working Group to a referral from the Task Force requesting assistance in the development of regulatory criteria for use in assigning NAIC Designations to subsidiary controlled and affiliated (SCA) bond and preferred stock investments. The Working Group opined that the economic purpose and rationale of an inter-affiliated company investment is outside of the scope of an NAIC Designation. The Working Group therefore recommended that the SVO assign NAIC Designations only to those investments that were identical to investments between unaffiliated transactions; that the P&P Manual make clear that the designation only communicated credit risk and not a statutory accounting conclusion and that prior to undertaking an assignment the SVO contact the state insurance department to ensure the SCA transactions were approved by the state for admittance under SSAP No. 25. The report of the Working Group was exposed for a 45-day comment period ending Sept Reported that on Aug. 1, the Task Force adopted a response to a referral from the Statutory Accounting Principles (E) Working Group on a policy statement for the Accounting Practices and Procedures Manual (AP&PM) outlining principles and expectations related to interactions between the Task Force and Working Group staff and coordination of NAIC guidance in the P&P Manual and AP&PM. In its response, the Task Force recommends alternative text to the clause that was the subject of the referral. The FRS staff was instructed to forward the response to the Working Group. 14. Heard a report from the SVO staff that it held a meeting with the ACLI to review any changes to the adopted national financial presentation standards. The SVO staff reported that there were no significant changes disclosed. w:\national Meetings\2017\Summer\Summaries\Final Summaries\VOSTF Summer 2017.docx 2017 National Association of Insurance Commissioners 2

18 Attachment Nine 2017 Summer National Meeting Philadelphia, Pennsylvania GROUP CAPITAL CALCULATION (E) WORKING GROUP Sunday, August 6, :00 9:00 a.m. Meeting Summary Report The Group Capital Calculation (E) Working Group met Aug. 6, During this meeting, the Working Group: 1. Adopted its 2017 Spring National Meeting minutes. 2. Adopted its June 29 and April 28 minutes, which included the following action: a. Discussed comments received related to U.S. insurers that do not file risk-based capital (RBC) reports and permitted and prescribed accounting practices. b. Discussed jurisdictions for which a scalar should be developed and requested feedback from interested stakeholders. c. Heard an update on the baseline exercise. d. Discussed scalars for non-u.s. jurisdictions and agreed to field test both the excess relative ratio approach and the pure relative ratio approach. 3. Exposed an NAIC staff memorandum on the treatment of captives in the group capital calculation for a 30-day public comment period ending Sept. 5. The memorandum includes specific proposed adjustments for captives that assume XXX/AXXX business. 4. Discussed how permitted and prescribed accounting practices should be treated in the group capital calculation and agreed to collect data from Note 1 of the annual financial statements to determine the extent of permitted and prescribed practices. 5. Discussed a compiled listing of recommended jurisdictions for which a scalar should be developed. The compiled listing includes recommended data sources from which the jurisdiction s average capital ratio may be obtained. The Working Group directed NAIC staff to begin calculating scalars for those jurisdictions based on the pure relative ratio approach and the excess relative ratio approach. 6. Heard an update on the baseline exercise, the purpose of which is to help inform the decisions of the Working Group. W:\Summer\Cmte\E\Materials\Attachment 9-Group Cap WG.docxx 2017 National Association of Insurance Commissioners 1

19 Attachment Ten Draft: 7/26/17 Group Solvency Issues (E) Working Group Conference Call July 20, 2017 The Group Solvency Issues (E) Working Group of the Financial Condition (E) Committee met via conference call July 20, The following Working Group members participated: Christy Neighbors, Chair (NE); Doug Slape, Vice Chair (TX); Michelle Lo (CA); Kathy Belfi (CT); Charles Santana (DE); Joel Meyer (FL); Jim Armstrong (IA); Eric Moser (IL); John Turchi (MA); Judy Weaver (MI); Leslie Nehring (MO); Steve Kerner (NJ); Margot Small (NY); Dale Bruggeman (OH); Joe DiMemmo (PA); David Smith (VA); and Steve Junior (WI). Also participating was: Justin Schrader (NE). 1. Heard an Update on IAIS Activities Ms. Neighbors provided an update on group-related activities of the International Association of Insurance Supervisors (IAIS), stating that the Insurance Groups Working Group (IGWG) met July in Bermuda to review comments received on materials related to the Insurance Core Principles (ICPs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) during a recent consultation period. Ms. Neighbors stated that many of the comments received were somewhat repetitive, which made it difficult for the IGWG to address them. Therefore, interested parties are encouraged to consider joint letter submissions in the future when responding to IAIS consultations. Ms. Neighbors stated that the IGWG was able to address each of the comments submitted and will be releasing a response chart indicating how the comments were addressed as soon as it is finalized. Ms. Neighbors stated that the IGWG also discussed issues related to defining the head of an internationally active insurance group (IAIG) for ComFrame purposes. After considering some real-life examples, members of the IGWG are beginning to recognize that it may not be possible to develop a bright-line test for identifying the head of an IAIG. However, the IGWG has scheduled another meeting in September to discuss this topic further and to work on some issues related to the IAIS insurance capital standard. Morag Fullilove (Fullilove Consulting Group) asked whether there would be a role for the private sector to play in determining the definition of the head of an IAIG. Ms. Neighbors stated that the IGWG will eventually release proposed guidance in this area for public consultation, to which the industry will be asked to respond. Jeff Alton (CNA Insurance) asked whether revisions to ICP 23, Group-Wide Supervision, would be released for consultation to address the issue. Ms. Neighbors stated that ComFrame elements related to ICP 23 are likely to address this topic and should be released in fourth quarter of 2017 or the first quarter of Heard an Update on Progress of the Form F Drafting Group Ms. Neighbors stated that during the Working Group s last meeting at the Spring National Meeting, it was determined that an impasse had been reached in developing guidance for use in improving the quality of Form F reporting. Therefore, the Working Group decided to appoint a drafting group to identify and evaluate various options available to regulators in addressing this issue. Connecticut, Illinois, Nebraska and Texas volunteered to participate in a drafting group to develop recommendations for consideration by the Working Group. Mr. Schrader provided a report on the progress of the drafting group, indicating that the states are currently reviewing and comparing Form F and Own Risk and Solvency Assessment (ORSA) Summary Report filings they have received from various groups in order to consider similarities and differences between the filings. Mr. Schrader stated that the states plan to organize their thoughts on this topic in written form for further discussion later this summer, before presenting the results to the Working Group. Michelle Rogers (National Association of Mutual Insurance Companies NAMIC) asked what the goal of the drafting group is and whether those states are considering the development of educational materials. Ms. Neighbors stated that the goal of the drafting group is to identify and evaluate various options available to regulators in addressing the problems identified related to the quality of Form F reporting. Ms. Neighbors stated that the drafting group was first asked to focus on evaluating similarities and differences between Form F and ORSA, but all options are still on the table for addressing Form F concerns, including proposing revisions to model laws, if necessary National Association of Insurance Commissioners 1

20 Attachment Ten Jigar Gandhi (American Council of Life Insurers ACLI) asked if there was a timeline for the drafting group s work. Mr. Schrader stated that members of the drafting group plan to meet in late August or early September to discuss the results of their reviews. Ms. Neighbors suggested that the Working Group meet again via conference call in September or October to hear from drafting group members, and Mr. Schrader agreed. 3. Discussed Other Matters Ms. Neighbors stated that the Working Group will not meet at the Summer National Meeting and is not likely to meet at the Fall National Meeting. Therefore, the Working Group will likely be conducting most of its business via conference call throughout the rest of the year. Ms. Neighbors stated that in light of recent developments related to the covered agreement with the European Union (EU), the Working Group is expected to become more active in addressing the Group Supervision section of the agreement in the coming months. Having no further business, the Group Solvency Issues (E) Working Group adjourned. W:\National Meetings\2017\Summer\Cmte\E\GSIWG\GSIWG Call Minutes.docx 2017 National Association of Insurance Commissioners 2

21 Attachment Eleven 2017 Summer National Meeting Philadelphia, Pennsylvania MORTGAGE GUARANTY INSURANCE (E) WORKING GROUP Monday, August 7, :00 3:00 p.m. Meeting Summary Report The Mortgage Guaranty Insurance (E) Working Group met Aug. 7, During this meeting, the Working Group: 1. Adopted its Spring National Meeting minutes. 2. Discussed revisions to the draft Mortgage Guaranty Insurance Model Act (#630) and directed the Working Group chair to develop a revised draft to address comments received during the exposure period. The revisions to Model #630 are proceeding as planned and are expected to be completed by spring Heard a summary on the progress and intended timeline for completion of the NAIC mortgage guaranty capital model. W:\Summer\Summaries\Final Summaries\MGIWG Summary.docx 2017 National Association of Insurance Commissioners 1

22 Attachment Twelve Draft: 7/20/17 NAIC/AICPA (E) Working Group Conference Call July 17, 2017 The NAIC/AICPA (E) Working Group of the Financial Condition (E) Committee met via conference call July 17, The following Working Group members participated: Doug Stolte, Chair (VA); Jim Armstrong, Vice Chair (IA); Laura Clements (CA); Rylynn Brown (DE); Judy Weaver (MI); Leslie Nehring (MO); Justin Schrader (NE); Colin Wilkins (NH); Dale Bruggeman (OH); Joe DiMemmo (PA); and Johanna Nickelson (SD). 1. Discussed Premium Threshold Mr. Stolte said the Working Group is responsible for reviewing the premium threshold amounts contained within the Annual Financial Reporting Model Regulation (#205) on an annual basis. Bruce Jenson (NAIC) gave an update on the results of the annual review of premium threshold amounts in Model #205, noting that, as of Dec. 31, 2016, 90.3% of all direct written premiums and 92.7% of all gross written premiums would be subject to reporting requirements. Mr. Stolte noted that these results were within the Working Group s expectations and that no action to adjust the threshold was deemed necessary at this time. Mr. Jenson stated that the process to identify insurers included in the scope of publicly traded groups for premium threshold analysis is manual and very time-consuming for staff. Mr. Jenson suggested that the Working Group consider sponsoring a blanks proposal to require more direct reporting from insurers as to whether they are part of a publicly traded group. Working Group members indicated their willingness to sponsor such a proposal and Mr. Stolte asked Mr. Jenson to develop a draft for consideration by the Working Group. 2. Reviewed State Adoption of Internal Audit Requirements Mr. Stolte stated that, in 2014, the Corporate Governance (E) Working Group developed and adopted revisions to Model #205 that require large insurers to establish and maintain an effective internal audit function. Mr. Stolte said the NAIC/AICPA (E) Working Group assisted in the development of the revisions and is generally responsible for the review and maintenance of Model #205. Therefore, the Working Group is tracking the progress of the states in adopting these revisions. Mr. Stolte stated that, as of June 2017, 11 states have adopted the internal audit revisions, compared to four states that had adopted the revisions at the same time in Mr. Stolte stated that the internal audit function requirements are expected to be required through the NAIC Financial Regulation Standards and Accreditation Program as of Jan. 1, Therefore, Mr. Stolte encouraged the states to continue their efforts in enacting the revisions. Mr. Armstrong stated that Iowa enacted the revisions subsequent to the most recent review by NAIC staff in June. 3. Received an Update on Recent Accounting and Auditing Pronouncements Jean Connolly (PricewaterhouseCoopers) provided an overview of recent accounting and auditing pronouncements affecting statutory audit reports. Ms. Connolly noted that recent revisions to AU-C Section 800, Special Considerations Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, adopted by the American Institute of Certified Public Accountants (AICPA) clarify the treatment of disclosures in statutory audit reports. Prior to this change, auditors were required to consider whether generally accepted accounting principles (GAAP) disclosures not required for statutory reporting purposes were necessary to be reported as required supplementary information to achieve fair presentation. The new guidance, as approved by the AICPA Auditing Standards Board, allows auditors to omit GAAP disclosures from statutory audit reports if the NAIC has determined that such disclosures are not required for statutory reporting purposes. Ms. Connolly stated that this change was approved in recognition of the comprehensive basis of accounting that has been developed and maintained by the NAIC. Mr. Stolte stated his appreciation for the change and thanked Ms. Connolly for her efforts in this area. Having no further business, the NAIC/AICPA (E) Working Group adjourned. W:\National Meetings\2017\Summer\Cmte\E\AICPA\ AICPAWGmin.docx 2017 National Association of Insurance Commissioners 1

23 Attachment Thirteen Draft: 7/28/17 National Treatment and Coordination (E) Working Group Conference Call July 25, 2017 The National Treatment and Coordination (E) Working Group of the Financial Condition (E) Committee met via conference call July 25, The following Working Group members participated: Jill Jacobi, Co-Chair (CA); Jeff Hunt, Co-Chair (TX); Rolf Kaumann (CO); Maura Welch (CT); Alison Sterett (FL); Annette Gunter (IN); Barry Ward (LA); Debbie Doggett (MO); Wesley Leyba (NM); Greg Lathrop (OR); Cressinda Bybee (PA); Eric Showgren (UT); and Susan Baker (WA). Also participating were: Kathy Lamb (NV); and Cameron Piatt (OH). 1. Adopted its June 22 Minutes Ms. Jacobi summarized the actions taken on the last call, as reflected in the minutes. Mr. Showgren made a motion, seconded by Mr. Hunt, to adopt the Working Group s June 22 minutes (Attachment). The motion passed. 2. Exposed Checklist (Form 1) and Application Instructions Proposal Crystal Brown (NAIC) summarized the Biographical Third-Party Review (E) Subgroup s proposal to align the checklist s detail wording for the biographical affidavit for the expansion and corporate amendment applications. The additional verbiage identifies who should complete a biographical affidavit for the various application types. Ms. Doggett made a motion, seconded by Mr. Showgren, to expose the checklist and application instruction proposal for a 30-day public comment period ending Aug. 25 (Attachment). The motion passed. 3. Exposed the Biographical Affidavit Proposal Ms. Brown explained the purpose of this proposal is to have the affiant acknowledge that information provided on the biographical affidavit that requires international searches may require additional information and documentation be provided to the third-party vendor regarding education/training or employment. These changes were proposed at the suggestion of some of the vendors. Ms. Jacobi noted the footnote indicates the affiant may also attach a foreign diploma or certificate of attendance as supporting documentation for verification. Mr. Showgren made a motion, seconded by Ms. Gunter, to expose the updates to the biographical affidavit for a 45-day public comment period ending Sept. 8. The motion passed. 4. Adopted Modifications to the Independent Third-Party Vendors Listing Ms. Brown summarized the purpose of this modification is to provide additional language that all vendors are subject to continued compliance with the NAIC Background Investigation Guidelines and Best Practices for Background Investigations. She noted that references to company were clarified and changed to vendor. Jane Barr (NAIC) suggested removing company/vendor from the column heading Year Founded. Ms. Gunter made a motion, seconded by Mr. Showgren, to adopt the modified language on the Independent Third-Party Vendors for Furnishing Background Investigation Reports in All States listing, with the one amendment to remove company/vendor from the column heading Year Founded (Attachment). The motion passed. 5. Adopted the Proforma FAQs Ms. Jacobi said the proforma included edits that were highlighted and noted a few corrections that were not made since the last conference call: 1) remove the duplicate words the state(s) in the answer to question 7; and 2) delete the heading label Cash Flow. Mr. Showgren noted the word for should be removed after 300% in the third sentence for the answer to question 8 to read, Any RBC ratio below 300% will be. Mr. Showgren made a motion, seconded by Mr. Lathrop, to adopt the proforma frequently asked questions (FAQs), with the three modifications discussed (Attachment). The motion passed National Association of Insurance Commissioners 1

24 Attachment Thirteen 6. Adopted its 2018 Proposed Charges Mr. Hunt said the Working Group s charges remain the same from 2017, with the exception of charge D, which was modified to remove update the Form A Database, as that charge has been completed, and replace it with continue to monitor the usage and enhancements to the Form A Database. Mr. Kaumann made a motion, seconded by Mr. Showgren, to adopt the Working Group s 2018 proposed charges (Attachment). The motion passed. 7. Adopted the Form A Review Best Practices Ms. Jacobi summarized the timeline involved with the development of the Form A Review Best Practices, which has completed the formal exposure for comments, referral to the Group Solvency Issues (E) Working Group and the Financial Analysis Handbook (E) Working Group for their recommendations and/or edits. Ms. Jacobi said the options for placement into the Form A Review Best Practices would be in either the review process for the application types or as an appendix. She suggested NAIC staff could decide the proper placement. Ms. Doggett made a motion, seconded by Mr. Kaumann, to adopt the Form A Review Best Practices (Attachment) for inclusion in the Company Licensing Best Practices Handbook. The motion passed. 8. Discussed Other Matters Mr. Hunt said the proforma ad hoc group met July 12 via conference call to discuss the scope of the project, which is to review the balance sheet and cash flow, and then evaluate the supporting schedules for modifications. Although various amounts of input/comments were provided, the ad hoc group will move forward with the current template provided by NAIC staff and suggest any necessary modifications. Ms. Jacobi said the Working Group will continue to follow the work of the Cybersecurity (EX) Working Group and its development of the proposed Insurance Data Security Model Law, in addition to the New York regulation on cybersecurity. Ms. Barr said the Uniform Certificate of Authority Application (UCAA) webinars are scheduled as follows: Tuesday, Sept. 19, 11 a.m. 1 p.m. CT for regulators; Wednesday, Sept. 20, 1 3 p.m. CT for company applications; and Thursday, Sept. 21, 12 2 p.m. CT for regulators. Registration is still open. Ms. Barr explained that the registration link is available on the NAIC/UCAA website, and no confirmation will be sent until two weeks prior to the webinar. The regulator training consists of utilizing the electronic application for the review process, presented by NAIC staff and Texas regulatory staff to assist those states that are moving toward a paperless process. Ms. Sterett asked if other states are requesting biographical affidavits for actuaries and certified public accountants (CPAs) because it is part of the accreditation review process. Ms. Jacobi said actuaries were included as key employees in regard to the biographical affidavit requirements in the Company Licensing Best Practices Handbook, but she is unsure about whether CPAs were included. Ms. Barr suggested that the Biographical Third-Party Review (E) Subgroup review the list of individuals that are required to provide a biographical affidavit. Florida s concern is that those two types of individuals may not be employees of the insurer. Ms. Jacobi said the requirement can be stated, but if they are not employed by the company, then the company cannot provide a biographical affidavit on them. Mr. Hunt said the accreditation team may be looking for the key individuals who are preparing the financials for startup companies. The Working Group does not plan to meet at the Summer National Meeting. It plans to meet Sept. 6 via conference call. Having no further business, the National Treatment and Coordination (E) Working Group adjourned. W:\National Meetings\2017\Summer\Cmte\E\NTCWG\7_25_ntcwgmin.docx 2017 National Association of Insurance Commissioners 2

25 Attachment Fourteen 2017 Summer National Meeting Philadelphia, Pennsylvania RISK-FOCUSED SURVEILLANCE (E) WORKING GROUP Sunday, August 6, :00 a.m. 12:00 p.m. Meeting Summary Report The Risk-Focused Surveillance (E) Working Group met Aug. 6, During this meeting, the Working Group: 1. Heard a presentation from a joint group of interested parties on reducing redundancies in solvency-monitoring processes. The presentation focused on efficiencies that can be gained in financial examinations through additional communication with, and reliance on, financial analysts. Interested parties presented some specific areas where redundancies between the two processes might be reduced as a result of financial analysis moving toward a risk-focused approach. The Working Group agreed to form a drafting group to develop proposed revisions to the Financial Condition Examiners Handbook in response to recommendations received from interested parties. 2. Discussed the 2017 sessions of the NAIC Peer Review Project, which include two sessions focused on financial analysis and two sessions focused on financial examinations. One financial analysis session and one financial examination session have been completed to date, with best practices on holding company analysis and coordinated examinations being identified and shared with regulators through the creation of sound practices documents posted to StateNet. One financial analysis session and one financial examination session are scheduled to be completed this fall. 3. Discussed the progress of the Working Group in addressing its charges related to department staffing and compensation. The Working Group is currently conducting a detailed survey to collect and analyze information on state compensation practices for financial analysts and financial examiners. As the survey concludes, the Working Group will analyze the results to determine the next steps in moving forward with the project. W:\Summer\Cmte\E\Materials\Attachment 14-SurveillanceWG.docx 2017 National Association of Insurance Commissioners

26 Attachment Fifteen Draft: 7/25/17 Variable Annuities Issues (E) Working Group Conference Call July 20, 2017 The Variable Annuities Issues (E) Working Group of the Financial Condition (E) Committee met via conference call May 20, The following Working Group members participated: Jim Armstrong, Chair, and Mike Yanacheak (IA); Kim Hudson and Perry Kupferman (CA); Michael Colburn (CT); Judy Weaver (MI); Fred Andersen and John Robinson (MN); John Rehagen and William Leung (MO); Rhonda Ahrens (NE); William Carmello (NY); and Peter Weber and Dale Bruggeman (OH). 1. Adopted its May 11 Minutes Mr. Hudson made a motion, seconded by Mr. Rehagen, to adopt the Working Group s May 11 minutes (Attachment??). The motion was unanimously adopted. 2. Heard a Presentation from Oliver Wyman Peter Tian (Oliver Wyman) provided a summary of the update on the Quantitative Impact Study II (QIS 2) (Attachment??). Some of the highlights included in the summary were focused on the cycle 1 results of that study. Cycle 1 is focused on the stochastic modeling results. This includes the removal of the working reserve, which was previously included as the cash surrender value. This was causing temporary mark-to-market losses. Another item was the removal of the requirement to runoff of currently held hedge assets. Currently, the calculation requires currently held assets on the valuation date to be run off fulfilling without rebalancing, while the change allows these to be liquidated immediately. The next item allows higher credit for liability projections with a clearly defined hedging strategy (CDHS). Currently, the effectiveness factor, which is the weight that can be attributed to be run, is limited to 70% for all companies and 30% if not reflecting hedging explicitly. The change being tested under QIS 2 allows an E factor up to 100% if back-testing is completed in accordance with the criteria. Another item was aligning the risk-based capital (RBC) and Actuarial Guideline XLIII CARVM for Variable Annuities (AG 43) calculation, but by using different conditional tail expectation (CTE) intervals. Previously, these were different methodologies, creating unnecessary volatility. The high CTE is still being modified based on further testing of different scalars. Finally, stochastic scenarios and general account modeling is being standardized, using the American Academy of Actuaries (Academy) economic scenario generator, with volatility controlled by the company s own modeling. This differs from the current calibration criteria that are only set for U.S. diversified equity fund returns. Mr. Tian highlighted other items, including the objective that funding requirements would still be robust. He noted that Oliver Wyman believes it improves the risk sensitivity by removing non-economic volatility and disincentivizing the use of voluntary reserves. Separately, Oliver Wyman believes the revisions thus far also increase comparability through the use of harmonized capital market scenarios. Also included in the highlights was an Oliver Wyman self-evaluation of how well the changes tested in cycle 1 of the QIS help to address four of the five cited motivations for captive usage on variable annuities. Mr. Tian also noted the self-evaluation also considers separately framework enhancement objectives and how those have been met when considering the changes tested in cycle 1. Mr. Robinson s question clarified that this was a self-evaluation by Oliver Wyman. Paul Graham (American Council of Life Insurers ACLI) added to the comments on the self-evaluation by stating that, while things seem to be moving in the correct direction, the industry is yet to conclude how effective the changes are until some of the rest of the parts of the testing are completed. This includes the equity scenarios and the standard scenario; therefore, the self-evaluation will need to be revisited. Aaron Sarfatti (Oliver Wyman) agreed, emphasizing that this was based on only the cycle 1 items tested. Mr. Sarfatti stated that the equity calibration could have some impact, but should not radically impact the result. Mr. Sarfatti also discussed some aspects of the testing in cycle 2, including the five key items that will be tested. He emphasized the difficulty in having one standard that works for all companies, given differences in products and other characteristics. With respect to cycle 3, it could be described as a combination of testing revised cycle 1 and cycle 2, noting that Oliver Wyman would focus on keeping run times limited to the focus can be on analysis. Revenue-sharing and behavior assumptions and equity calibration testing will also be important National Association of Insurance Commissioners 1

27 Attachment Fifteen 3. Adopted a Response to Referral from the Statutory Accounting Principles (E) Working Group Mr. Armstrong described how a compromise proposal was offered as an exposure. He noted that the ACLI had not made any change in its proposal, and he would consider a response that a compromise was offered but that the ACLI did not want to compromise; therefore, it had no opinion. Mr. Hudson stated that he is not opposed to the compromise proposal and the ACLI reaction, but he believes the compromise position is much better than the position of the ACLI. Although it is ultimately a decision to be made by the Statutory Accounting Principles (E) Working Group, Mr. Hudson expressed support for the compromise position. Mr. Colburn agreed with Mr. Hudson. Mr. Graham indicated that the ACLI staff member working on this project was not able to be on the conference call, noting that the letter was developed by the ACLI accounting group. He stated he was not in a position to speak to the ACLI response (Attachment?), and he asked that if a letter is going to be sent back to the ACLI, that it discusses the compromise and the industry position because the ACLI believes it would be better than the original proposal from the Statutory Accounting Principles (E) Working Group. Mr. Carmello described how he was opposed to the original proposal by the Statutory Accounting Principles (E) Working Group and how New York could only support a deferral and amortization up to the amount of the liability run-off, but the difference should be recorded to income and to the hedge. Mr. Hudson made a motion, seconded by Mr. Colburn, to send a letter to the Statutory Accounting Principles (E) Working Group that summarizes and supports the compromise and refers to the position of the ACLI. The motion was unanimously adopted. Having no further business, the Variable Annuities Issues (E) Working Group adjourned. W:\National Meetings\2017\Summer\Cmte\E\VAIWG\ VAIWGmin.docx 2017 National Association of Insurance Commissioners 2

28 Attachment Sixteen To: Superintendent Eric A. Cioppa, Chair of the Financial Condition (E) Committee From: Dale Bruggeman, Chair of the Statutory Accounting Principles (E) Working Group Re: Technical Edits to Model #280 Date: July 11, 2017 In 2016, the Valuation of Securities (E) Task Force and the Statutory Accounting Principles (E) Working Group, in response to regulations adopted by the U.S. Securities and Exchange Commission (SEC), adopted revisions impacting the accounting and reporting of money market mutual funds. As part of the revisions, the concept of a Class One Money Market Mutual Fund List was eliminated. With the changes in statutory accounting guidelines, it was identified that reference to class one money market mutual funds is included in the Investments of Insurers Model Act (#280). Although states have already been contacted to review and update state statutes / legislation accordingly, technical edits were suggested to remove reference to the Class One list from Model #280. Per an assessment from NAIC legal, these technical edits would fall within an exception to the normal Model Law update process and are necessitated as the concept of a Class One list no longer exists. Additionally, technical edits were supported to correct the definitions for repurchase and reverse repurchase transactions. (These definitions were reversed between the two terms.) During the 2017 Spring National Meeting, the Statutory Accounting Principles (E) Working Group exposed technical edits to Model #280 to remove reference to the Class One list as well as to correct the repurchase and reverse repurchase terms. No comments were received from the exposure and the Working Group adopted the proposed edits during the 2017 Summer National Meeting. With this action, the Working Group directed that the edits be submitted as requested revisions to Model #280. Pursuant to the direction of the Working Group, this memorandum requests that the Accounting Practices and Procedures (E) Task Force and Financial Condition (E) Committee consider for approval the proposed technical edits to Model #280 and communicate to the NAIC Executive/Plenary Committee. Please contact Julie Gann (NAIC) with any questions regarding this request. Cc: Julie Gann/Robin Marcotte/Fatima Sediqzad/Jake Stultz/Dan Daveline W:\Summer\Cmte\E\Materials\Attachment 16 - SAPWG Memo - Model Law Revisions docx

29 Attachment Sixteen Statutory Accounting Prinicples (E) Working Group Model 280: Investments of Insurers Model Act Attachment Sixteeen With the elimination of the Class 1 concept for money market mutual funds, NAIC staff inquired with NAIC legal on possible updates to remove this term from Model 280: Investments of Insurers Model Act. Per the response from NAIC legal, technical edits to remove the Class 1 reference to the Model would fall within an exception to the normal Model Law update process. These changes are necessitated as the concept of Class 1 MMMFs no longer exist. NAIC staff has proposed revisions to the Model to remove the references to Class 1. In addition to the Class 1 edits, revisions are proposed to correct the definitions for repurchase and reverse repurchase transactions. (These definitions are flipped between the two terms.) (This change was also noted to NAIC legal, and no concerns for these changes were noted as long as the changes are technical and noncontroversial.) (Staff has identified that there are no references to Class 1 in Model 283, Investments of Insures Model Act, therefore no revisions are needed to this Model.) Status: On April 8, 2017, the Statutory Accounting Principles (E) Working Group exposed revisions to Model 280. The proposed revisions are technical changes to remove reference to Class 1 Money Market Mutual Funds as the concept for those securities no longer exists. Additionally, the proposed revisions correct the definitions for repurchase and reverse repurchase agreements, and the use of those terms throughout the Model. W:\Summer\Cmte\E\Materials\Attachment 16- MO doc 2017 National Association of Insurance Commissioners

30 Attachment Sixteen Model Regulation Service April 2001 INVESTMENTS OF INSURERS MODEL ACT (Defined Limits Version) ARTICLE I. GENERAL PROVISIONS Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Section 8. Purpose and Scope Definitions General Investment Qualifications Authorization of Investments by the Board of Directors Prohibited Investments Loans to Officers and Directors Valuation of Investments Regulations ARTICLE II. LIFE AND HEALTH INSURERS Section 9. Section 10. Section 11. Section 12. Section 13. Section 14. Section 15. Section 16. Section 17. Section 18. Section 19. Section 20. Applicability General Three Percent Diversification, Medium and Lower Grade Investments and Canadian Investments Rated Credit Instruments Insurer Investment Pools Equity Interests Tangible Personal Property Under Lease Mortgage Loans and Real Estate Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions Foreign Investments and Foreign Currency Exposure Derivative Transactions Policy Loans Additional Investment Authority ARTICLE III. PROPERTY AND CASUALTY, FINANCIAL GUARANTY AND MORTGAGE GUARANTY INSURERS Section 21. Section 22. Section 23. Section 24. Section 25. Section 26. Section 27. Section 28. Section 29. Section 30. Section 31. Section 32. Applicability Reserve Requirements General Five Percent Diversification, Medium and Lower Grade Investments and Canadian Investments Rated Credit Instruments Insurer Investment Pools Equity Interests Tangible Personal Property Under Lease Mortgage Loans and Real Estate Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions Foreign Investments and Foreign Currency Exposure Derivative Transactions Additional Investment Authority Statement of Principles The development of regulation of the investments of insurers requires an analysis of the complexities, uncertainties, competitive forces and frequent changes in the investment markets and in the insurance business, the diversity among insurers, and the need for a balance among risk, reward and liquidity of an insurer s investments. It also requires an analysis of how to safeguard the 2017 National Association of Insurance Commissioners 280-1

31 Attachment Sixteen Investments of Insurers Model Act financial condition of domestic insurers and at the same time to permit domestic insurers to be competitive with insurer s domiciled in other states and with other financial industries that operate under different regulatory regimes. Each state is urged to determine through independent study which methods are best suited to its needs and whether its existing regulatory structure may be improved by using provisions of model laws recommended by the National Association of Insurance Commissioners (NAIC) or existing regulatory structures in other states or industries. This model law is not considered by the NAIC to exhaust regulatory methods to address the regulation of investments of insurers. Nor is this model law recommended by the NAIC to be used as a standard for the examination of insurers unless substantially similar provisions are found in the statutes and regulations of the state of domicile of the insurer. ARTICLE I. GENERAL PROVISIONS Section 1. Purpose and Scope A. Purpose B. Scope The purpose of this Act is to protect the interests of insureds by promoting insurer solvency and financial strength. This will be accomplished through the application of investment standards that facilitate a reasonable balance of the following objectives: (1) To preserve principal; (2) To assure reasonable diversification as to type of investment, issuer and credit quality; and (3) To allow insurers to allocate investments in a manner consistent with principles of prudent investment management to achieve an adequate return so that obligations to insureds are adequately met and financial strength is sufficient to cover reasonably foreseeable contingencies. This Act shall apply only to investments and investment practices of domestic insurers and United States branches of alien insurers entered through this state. This Act shall not apply to separate accounts of an insurer except to the extent that the provisions of [see Drafting Note 2] so provide. Drafting Note 1: This Act does not define the types of insurers subject to its provisions, leaving this to other sections of the code since state laws treat insurers writing various lines of insurance differently. For example, if an entity is authorized to operate as a health maintenance organization, the state may provide additional investment authority commensurate to operating as a health maintenance organization. Drafting Note 2: Insert a cross-reference to the section of the code governing separate accounts that states when the provisions of this Act are applicable to investments in separate accounts, either aggregated with an insurer s general account investments or treated as if the assets in each separate account were all of an insurer s admitted assets. Except to the extent specifically provided in that section, this Act has no application to the investments of separate accounts. If the code does not so provide, then Section 1B must be amended to provide that this Act does not apply to separate accounts National Association of Insurance Commissioners

32 Attachment Sixteen Model Regulation Service April 2001 Section 2. Definitions For purposes of this Act: A. Acceptable collateral means: (1) As to securities lending transactions, and for the purpose of calculating counterparty exposure amount, cash, cash equivalents, letters of credit, direct obligations of, or securities that are fully guaranteed as to principal and interest by, the government of the United States or any agency of the United States, or by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, and as to lending foreign securities, sovereign debt rated 1 by the SVO; (2) As to reverse repurchase transactions, cash, cash equivalents and direct obligations of, or securities that are fully guaranteed as to principal and interest by, the government of the United States or an agency of the United States, or by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation; and (3) As to reverse repurchase transactions, cash and cash equivalents. B. Acceptable private mortgage insurance means insurance written by a private insurer protecting a mortgage lender against loss occasioned by a mortgage loan default and issued by a licensed mortgage insurance company, with an SVO 1 designation or a rating issued by a nationally recognized statistical rating organization equivalent to an SVO 1 designation, that covers losses to an eighty percent (80%) loan-to-value ratio. C. Accident and health insurance means protection which provides payment of benefits for covered sickness or accidental injury, excluding credit insurance, disability insurance, accidental death and dismemberment insurance and long-term care insurance. D. Accident and health insurer means a licensed life or health insurer or health service corporation whose insurance premiums and required statutory reserves for accident and health insurance constitute at least ninety-five percent (95%) of total premium considerations or total statutory required reserves, respectively. E. Admitted assets means assets [see Drafting Note 3] permitted to be reported as admitted assets on the statutory financial statement of the insurer most recently required to be filed with the commissioner, but excluding assets of separate accounts, the investments of which are not subject to the provisions of this Act. Drafting Note 3: If the code contains a definition of admitted assets, insert determined in accordance with the requirements of [insert section defining admitted assets]. Drafting Note 4: Whenever the term commissioner appears, the title of the chief insurance regulatory official shall be inserted. F. Affiliate means, as to any person, another person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the person National Association of Insurance Commissioners 280-3

33 Attachment Sixteen Investments of Insurers Model Act G. Asset-backed security means a security or other instrument, excluding a mutual fund, evidencing an interest in, or the right to receive payments from, or payable from distributions on, an asset, a pool of assets or specifically divisible cash flows which are legally transferred to a trust or another special purpose bankruptcy-remote business entity, on the following conditions: (1) The trust or other business entity is established solely for the purpose of acquiring specific types of assets or rights to cash flows, issuing securities and other instruments representing an interest in or right to receive cash flows from those assets or rights, and engaging in activities required to service the assets or rights and any credit enhancement or support features held by the trust or other business entity; and (2) The assets of the trust or other business entity consist solely of interest bearing obligations or other contractual obligations representing the right to receive payment from the cash flows from the assets or rights. However, the existence of credit enhancements, such as letters of credit or guarantees, or support features such as swap agreements, shall not cause a security or other instrument to be ineligible as an asset-backed security. H. Business entity includes a sole proprietorship, corporation, limited liability company, association, partnership, joint stock company, joint venture, mutual fund, trust, joint tenancy or other similar form of business organization, whether organized for-profit or not-for-profit. I. Cap means an agreement obligating the seller to make payments to the buyer, with each payment based on the amount by which a reference price or level or the performance or value of one or more underlying interests exceeds a predetermined number, sometimes called the strike rate or strike price. J. Capital and surplus means the sum of the capital and surplus of the insurer required to be shown on the statutory financial statement of the insurer most recently required to be filed with the commissioner. K. Cash equivalents means short-term, highly rated and highly liquid investments or securities readily convertible to known amounts of cash without penalty and so near maturity that they present insignificant risk of change in value. Cash equivalents include money market mutual fundsgovernment money market mutual funds and class one money market mutual funds. For purposes of this definition: (1) Short-term means investments with a remaining term to maturity of ninety (90) days or less; and (2) Highly rated means an investment rated P-1 by Moody s Investors Service, Inc., or A-1 by Standard and Poor s division of The McGraw Hill Companies, Inc. or its equivalent rating by a nationally recognized statistical rating organization recognized by the SVO. L. Class one bond Listed bond mutual fund means a mutual fund that at all times qualifies for investment using the bond class one reserve factor inclusion on the bond fund list under within the Purposes and Procedures of the Securities Valuation Office NAIC Investment Analysis Office or any successor publication National Association of Insurance Commissioners

34 Attachment Sixteen Model Regulation Service April 2001 Drafting Note 5: SVO publications are currently under revision. Certain references to the Purposes and Procedures of the Securities Valuation Office may, after these revisions are complete, require reference to the Valuations of Securities publication or other NAIC publications. M. Class one money market mutual fund means a money market mutual fund that at all times qualifies for investment using the bond class one reserve factor under the Purposes and Procedures of the Securities Valuation Office or any successor publication. [Class one money market mutual fund list eliminated September 30, 2016] N. Code means [insert reference to adopting state s insurance code]. O. Collar means an agreement to receive payments as the buyer of an option, cap or floor and to make payments as the seller of a different option, cap or floor. P. Commercial mortgage loan means a loan secured by a mortgage, other than a residential mortgage loan. Q. Construction loan means a loan of less than three (3) years in term, made for financing the cost of construction of a building or other improvement to real estate, that is secured by the real estate. R. Control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or non-management services), or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be presumed to exist if a person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing ten percent (10%) or more of the voting securities of another person. This presumption may be rebutted by a showing that control does not exist in fact. The commissioner may determine, after furnishing all interested persons notice and an opportunity to be heard and making specific findings of fact to support the determination, that control exists in fact, notwithstanding the absence of a presumption to that effect. S. Counterparty exposure amount means: (1) The net amount of credit risk attributable to a derivative instrument entered into with a business entity other than through a qualified exchange, qualified foreign exchange, or cleared through a qualified clearinghouse ( over-thecounter derivative instrument ). The amount of credit risk equals: (a) (b) The market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or Zero if the liquidation of the derivative instrument would not result in a final cash payment to the insurer. (2) If over-the-counter derivative instruments are entered into under a written master agreement which provides for netting of payments owed by the respective parties, and the domiciliary jurisdiction of the counterparty is either within the United States or if not within the United States, within a foreign jurisdiction listed in the Purposes and Procedures of the NAIC 2017 National Association of Insurance Commissioners 280-5

35 Attachment Sixteen Investments of Insurers Model Act Investment Analysis Securities Valuation Office as eligible for netting, the net amount of credit risk shall be the greater of zero or the net sum of: (a) (b) The market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment to the insurer; and The market value of the over-the-counter derivative instruments entered into under the agreement, the liquidation of which would result in a final cash payment by the insurer to the business entity. (3) For open transactions, market value shall be determined at the end of the most recent quarter of the insurer s fiscal year and shall be reduced by the market value of acceptable collateral held by the insurer or placed in escrow by one or both parties. T. Covered means that an insurer owns or can immediately acquire, through the exercise of options, warrants or conversion rights already owned, the underlying interest in order to fulfill or secure its obligations under a call option, cap or floor it has written, or has set aside under a custodial or escrow agreement cash or cash equivalents with a market value equal to the amount required to fulfill its obligations under a put option it has written, in an income generation transaction. U. Credit tenant loan means a mortgage loan which is made primarily in reliance on the credit standing of a major tenant, structured with an assignment of the rental payments to the lender with real estate pledged as collateral in the form of a first lien. V. (1) Derivative instrument means an agreement, option, instrument or a series or combination thereof: (a) (b) To make or take delivery of, or assume or relinquish, a specified amount of one or more underlying interests, or to make a cash settlement in lieu thereof; or That has a price, performance, value or cash flow based primarily upon the actual or expected price, level, performance, value or cash flow of one or more underlying interests. (2) Derivative instruments include options, warrants used in a hedging transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards, futures and any other agreements, options or instruments substantially similar thereto or any series or combination thereof and any agreements, options or instruments permitted under regulations adopted under Section 8. Derivative instruments shall not include an investment authorized by Sections 11 through 17, 19 and 24 through 30. W. Derivative transaction means a transaction involving the use of one or more derivative instruments. X. Direct or directly, when used in connection with an obligation, means that the designated obligor is primarily liable on the instrument representing the obligation National Association of Insurance Commissioners

36 Attachment Sixteen Model Regulation Service April 2001 Y. Dollar roll transaction means two (2) simultaneous transactions with different settlement dates no more than ninety-six (96) days apart, so that in the transaction with the earlier settlement date, an insurer sells to a business entity, and in the other transaction the insurer is obligated to purchase from the same business entity, substantially similar securities of the following types: (1) Asset-backed securities issued, assumed or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation or their respective successors; and (2) Other asset-backed securities referred to in Section 106 of Title I of the Secondary Mortgage Market Enhancement Act of 1984 (15 U.S.C. 77r-1), as amended. Z. Domestic jurisdiction means the United States, Canada, any state, any province of Canada or any political subdivision of any of the foregoing. AA. Equity interest means any of the following that are not rated credit instruments: (1) Common stock; (2) Preferred stock; (3) Trust certificate; (4) Equity investment in an investment company other than a money market mutual fund or a class one listed bond mutual fund; (5) Investment in a common trust fund of a bank regulated by a federal or state agency; (6) An ownership interest in minerals, oil or gas, the rights to which have been separated from the underlying fee interest in the real estate where the minerals, oil or gas are located; (7) Instruments which are mandatorily, or at the option of the issuer, convertible to equity; (8) Limited partnership interests and those general partnership interests authorized under Section 5D; (9) Member interests in limited liability companies; (10) Warrants or other rights to acquire equity interests that are created by the person that owns or would issue the equity to be acquired; or (11) Instruments that would be rated credit instruments except for the provisions of Subsection 2RRR (2) of this section. BB. Equivalent securities means: (1) In a securities lending transaction, securities that are identical to the loaned 2017 National Association of Insurance Commissioners 280-7

37 Attachment Sixteen Investments of Insurers Model Act securities in all features including the amount of the loaned securities, except as to certificate number if held in physical form, but if any different security shall be exchanged for a loaned security by recapitalization, merger, consolidation or other corporate action, the different security shall be deemed to be the loaned security; (2) In a repurchase transaction, securities that are identical to the purchased sold securities in all features including the amount of the purchased sold securities, except as to the certificate number if held in physical form; or (3) In a reverse repurchase transaction, securities that are identical to the sold purchased securities in all features including the amount of the sold purchased securities, except as to the certificate number if held in physical form. CC. DD. Floor means an agreement obligating the seller to make payments to the buyer in which each payment is based on the amount by which that a predetermined number, sometimes called the floor rate or price, exceeds a reference price, level, performance or value of one or more underlying interests. Foreign currency means a currency other than that of a domestic jurisdiction. EE. (1) Foreign investment means an investment in a foreign jurisdiction, or an investment in a person, real estate or asset domiciled in a foreign jurisdiction, that is substantially of the same type as those eligible for investment under this Act, other than under Sections 17 and 30. An investment shall not be deemed to be foreign if the issuing person, qualified primary credit source or qualified guarantor is a domestic jurisdiction or a person domiciled in a domestic jurisdiction, unless: (a) (b) The issuing person is a shell business entity; and The investment is not assumed, accepted, guaranteed or insured or otherwise backed by a domestic jurisdiction or a person, that is not a shell business entity, domiciled in a domestic jurisdiction. (2) For purposes of this definition: (a) (b) (c) Shell business entity means a business entity having no economic substance, except as a vehicle for owning interests in assets issued, owned or previously owned by a person domiciled in a foreign jurisdiction; Qualified guarantor means a guarantor against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction; and Qualified primary credit source means the credit source to which an insurer looks for payment as to an investment and against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction National Association of Insurance Commissioners

38 Attachment Sixteen Model Regulation Service April 2001 FF. GG. HH. II. Foreign jurisdiction means a jurisdiction other than a domestic jurisdiction. Forward means an agreement (other than a future) to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests. Future means an agreement, traded on a qualified exchange or qualified foreign exchange, to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one or more underlying interests. Government money market mutual fund means a money market mutual fund that at all times: (1) Invests only in obligations issued, guaranteed or insured by the federal government of the United States or collateralized repurchase agreements composed of these obligations; and (2) Qualifies for investment without a reserve under the Purposes and Procedures of the NAIC Investment Analysis Securities Valuation Office or any successor publication. JJ. Government sponsored enterprise means a: (1) Governmental agency; or (2) Corporation, limited liability company, association, partnership, joint stock company, joint venture, trust or other entity or instrumentality organized under the laws of any domestic jurisdiction to accomplish a public policy or other governmental purpose. KK. Guaranteed or insured, when used in connection with an obligation acquired under this Act, means that the guarantor or insurer has agreed to: (1) Perform or insure the obligation of the obligor or purchase the obligation; or (2) Be unconditionally obligated until the obligation is repaid to maintain in the obligor a minimum net worth, fixed charge coverage, stockholders equity or sufficient liquidity to enable the obligor to pay the obligation in full. LL. Hedging transaction means a derivative transaction which is entered into and maintained to reduce: (1) The risk of a change in the value, yield, price, cash flow or quantity of assets or liabilities which the insurer has acquired or incurred or anticipates acquiring or incurring; or 2017 National Association of Insurance Commissioners 280-9

39 Attachment Sixteen Investments of Insurers Model Act (2) The currency exchange rate risk or the degree of exposure as to assets or liabilities which an insurer has acquired or incurred or anticipates acquiring or incurring. MM. NN. OO. PP. QQ. RR. SS. TT. High grade investment means a rated credit instruments rated 1 or 2 by the SVO. Income means, as to a security, interest, accrual of discount, dividends or other distributions, such as rights, tax or assessment credits, warrants and distributions in kind. Income generation transaction means a derivative transaction involving the writing of covered call options, covered put options, covered caps or covered floors that is intended to generate income or enhance return. Initial margin means the amount of cash, securities or other consideration initially required to be deposited to establish a futures position. Insurance future means a future relating to an index or pool that is based on insurance-related items. Insurance futures option means an option on an insurance future. Investment company means an investment company as defined in Section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), as amended, and a person described in Section 3(c) of that Act. Investment company series means an investment portfolio of an investment company that is organized as a series company and to which assets of the investment company have been specifically allocated. UU. Investment practices means transactions of the types described in Sections 16, 18, 29 or 31. VV. Investment subsidiary means a subsidiary of an insurer engaged or organized to engage exclusively in the ownership and management of assets authorized as investments for the insurer if each subsidiary agrees to limit its investment in any asset so that its investments will not cause the amount of the total investment of the insurer to exceed any of the investment limitations or avoid any other provisions of this Act applicable to the insurer. As used in this subsection, the total investment of the insurer shall include: (1) Direct investment by the insurer in an asset; and (2) The insurer s proportionate share of an investment in an asset by an investment subsidiary of the insurer, which shall be calculated by multiplying the amount of the subsidiary s investment by the percentage of the insurer s ownership interest in the subsidiary. WW. Investment strategy means the techniques and methods used by an insurer to meet its investment objectives, such as active bond portfolio management, passive bond portfolio management, interest rate anticipation, growth investing and value investing National Association of Insurance Commissioners

40 Attachment Sixteen Model Regulation Service April 2001 XX. YY. ZZ. AAA. Letter of credit means a clean, irrevocable and unconditional letter of credit issued or confirmed by, and payable and presentable at, a financial institution on the list of financial institutions meeting the standards for issuing letters of credit under the Purposes and Procedures of the NAIC Investment Analysis Securities Valuation Office or any successor publication. To constitute acceptable collateral for the purposes of Sections 16 and 29, a letter of credit must have an expiration date beyond the term of the subject transaction. Limited liability company means a business organization, excluding partnerships and ordinary business corporations, organized or operating under the laws of the United States or any state thereof that limits the personal liability of investors to the equity investment of the investor in the business entity. Lower grade investment means a rated credit instrument rated 4, 5 or 6 by the SVO. Market value means: (1) As to cash and letters of credit, the amounts thereof; and (2) As to a security as of any date, the price for the security on that date obtained from a generally recognized source or the most recent quotation from such a source or, to the extent no generally recognized source exists, the price for the security as determined in good faith by the parties to a transaction, plus accrued but unpaid income thereon to the extent not included in the price as of that date. BBB. Medium grade investment means a rated credit instrument rated 3 by the SVO. CCC. Money market mutual fund means a mutual fund that meets the conditions of 17 Code of Federal Regulations Par a-7, under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), as amended or renumbered. DDD. EEE. FFF. Mortgage loan means an obligation secured by a mortgage, deed of trust, trust deed or other consensual lien on real estate. Multilateral development bank means an international development organization of which the United States is a member. Mutual fund means an investment company or, in the case of an investment company that is organized as a series company, an investment company series, that, in either case, is registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), as amended. GGG. NAIC means the National Association of Insurance Commissioners. HHH. Obligation means a bond, note, debenture, trust certificate including an equipment certificate, production payment, negotiable bank certificate of deposit, bankers acceptance, credit tenant loan, loan secured by financing net leases and other evidence of indebtedness for the payment of money (or participations, certificates or other evidences of an interest in any of the foregoing), whether constituting a general obligation of the issuer or payable only out of certain revenues or certain funds 2017 National Association of Insurance Commissioners

41 Attachment Sixteen Investments of Insurers Model Act pledged or otherwise dedicated for payment. III. JJJ. Option means an agreement giving the buyer the right to buy or receive (a call option ), sell or deliver (a put option ), enter into, extend or terminate or effect a cash settlement based on the actual or expected price, level, performance or value of one or more underlying interests. Person means an individual, a business entity, a multilateral development bank or a government or quasi-governmental body, such as a political subdivision or a government sponsored enterprise. KKK. Potential exposure means the amount determined in accordance with the NAIC Annual Statement Instructions. LLL. Preferred stock means preferred, preference or guaranteed stock of a business entity authorized to issue the stock, that has a preference in liquidation over the common stock of the business entity. MMM. Qualified bank means: (1) A national bank, state bank or trust company that at all times is no less than adequately capitalized as determined by standards adopted by United States banking regulators and that is either regulated by state banking laws or is a member of the Federal Reserve System; or (2) A bank or trust company incorporated or organized under the laws of a country other than the United States that is regulated as a bank or trust company by that country s government or an agency thereof and that at all times is no less than adequately capitalized as determined by the standards adopted by international banking authorities. NNN. Qualified business entity means a business entity that is: (1) An issuer of obligations or preferred stock that are rated 1 or 2 by the SVO or an issuer of obligations, preferred stock or derivative instruments that are rated the equivalent of 1 or 2 by the SVO or by a nationally recognized statistical rating organization recognized by the SVO; or (2) A primary dealer in United States government securities, recognized by the Federal Reserve Bank of New York. OOO. Qualified clearinghouse means a clearinghouse for, and subject to the rules of, a qualified exchange or a qualified foreign exchange, which provides clearing services, including acting as a counterparty to each of the parties to a transaction such that the parties no longer have credit risk as to each other. PPP. Qualified exchange means: (1) A securities exchange registered as a national securities exchange, or a securities market regulated under the Securities Exchange Act of 1934 (15 U.S.C. 78 et seq.), as amended; (2) A board of trade or commodities exchange designated as a contract market by National Association of Insurance Commissioners

42 Attachment Sixteen Model Regulation Service April 2001 the Commodity Futures Trading Commission or any successor thereof; (3) Private Offerings, Resales and Trading through Automated Linkages (PORTAL); (4) A designated offshore securities market as defined in Securities Exchange Commission Regulation S, 17 C.F.R. Part 230, as amended; or (5) A qualified foreign exchange. QQQ. Qualified foreign exchange means a foreign exchange, board of trade or contract market located outside the United States, its territories or possessions: (1) That has received regulatory comparability relief under Commodity Futures Trading Commission (CFTC) Rule (as set forth in Appendix C to Part 30 of the CFTC s Regulations, 17 C.F.R. Part 30); (2) That is, or its members are, subject to the jurisdiction of a foreign futures authority that has received regulatory comparability relief under CFTC Rule (as set forth in Appendix C to Part 30 of the CFTC s Regulations, 17 C.F.R. Part 30) as to futures transactions in the jurisdiction where the exchange, board of trade or contract market is located; or (3) Upon which foreign stock index futures contracts are listed that are the subject of no-action relief issued by the CFTC s Office of General Counsel, provided that an exchange, board of trade or contract market that qualifies as a qualified foreign exchange only under this subsection shall only be a qualified foreign exchange as to foreign stock index futures contracts that are the subject of no-action relief. RRR. (1) Rated credit instrument means a contractual right to receive cash or another rated credit instrument from another entity which instrument: (a) (b) (c) (d) (e) Is rated or required to be rated by the SVO; In the case of an instrument with a maturity of 397 days or less, is issued, guaranteed or insured by an entity that is rated by, or another obligation of such entity is rated by, the SVO or by a nationally recognized statistical rating organization recognized by the SVO; In the case of an instrument with a maturity of 90 days or less is issued by a qualified bank; Is a share of a class one listed bond mutual fund; or Is a share of a money market mutual fund. (2) However, rated credit instrument does not mean: (a) (b) An instrument that is mandatorily, or at the option of the issuer, convertible to an equity interest; or A security that has a par value and whose terms provide that the 2017 National Association of Insurance Commissioners

43 Attachment Sixteen Investments of Insurers Model Act issuer s net obligation to repay all or part of the security s par value is determined by reference to the performance of an equity, a commodity, a foreign currency or an index of equities, commodities, foreign currencies or combinations thereof. SSS. Real estate means: (1) (a) Real property; (b) (c) (d) Interests in real property, such as leaseholds, minerals and oil and gas that have not been separated from the underlying fee interest; Improvements and fixtures located on or in real property; and The seller s equity in a contract providing for a deed of real estate. (2) As to a mortgage on a leasehold estate, real estate shall include the leasehold estate only if it has an unexpired term (including renewal options exercisable at the option of the lessee) extending beyond the scheduled maturity date of the obligation that is secured by a mortgage on the leasehold estate by a period equal to at least twenty percent (20%) of the original term of the obligation or ten (10) years, whichever is greater. TTT. Replication transaction means a derivative transaction that is intended to replicate the performance of one or more assets that an insurer is authorized to acquire under this Act. A derivative transaction that is entered into as a hedging transaction shall not be considered a replication transaction. UUU. Repurchase transaction means a transaction in which an insurer sells purchases securities from to a business entity that and is obligated to repurchase the purchased sold securities or equivalent securities from the insurer business entity at a specified price, either within a specified period of time or upon demand. VVV. Required liabilities means total liabilities required to be reported on the statutory financial statement of the insurer most recently required to be filed with the commissioner. WWW. Residential mortgage loan means a loan primarily secured by a mortgage on real estate improved with a one-to-four family residence. XXX. YYY. ZZZ. Reverse repurchase transaction means a transaction in which an insurer sells purchases securities to from a business entity and that is obligated to repurchase the sold purchased securities or equivalent securities from the business entityinsurer at a specified price, either within a specified period of time or upon demand. Secured location means the contiguous real estate owned by one person. Securities lending transaction means a transaction in which securities are loaned by an insurer to a business entity that is obligated to return the loaned securities or equivalent securities to the insurer, either within a specified period of time or upon demand. AAAA. Series company means an investment company that is organized as a series National Association of Insurance Commissioners

44 Attachment Sixteen Model Regulation Service April 2001 company, as defined in Rule 18f-2(a) adopted under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), as amended. BBBB. Sinking fund stock means preferred stock that: (1) Is subject to a mandatory sinking fund or similar arrangement that will provide for the redemption (or open market purchase) of the entire issue over a period not longer than forty (40) years from the date of acquisition; and (2) Provides for mandatory sinking fund installments (or open market purchases) commencing not more than ten and one half (10.5) years from the date of issue, with the sinking fund installments providing for the purchase or redemption, on a cumulative basis commencing ten (10) years from the date of issue, of at least two and one half percent (2.5%) per year of the original number of shares of that issue of preferred stock. CCCC. Special rated credit instrument means a rated credit instrument that is: (1) An instrument that is structured so that, if it is held until retired by or on behalf of the issuer, its rate of return, based on its purchase cost and any cash flow stream possible under the structure of the transaction, may become negative due to reasons other than the credit risk associated with the issuer of the instrument; however, a rated credit instrument shall not be a special rated credit instrument under this subsection if it is: (a) (b) (c) (d) (e) A share in a class one listed bond mutual fund; An instrument, other than an asset-backed security, with payments of par value fixed as to amount and timing, or callable but in any event payable only at par or greater, and interest or dividend cash flows that are based on either a fixed or variable rate determined by reference to a specified rate or index; An instrument, other than an asset-backed security, that has a par value and is purchased at a price no greater than one hundred ten percent (110%) of par; An instrument, including an asset-backed security, whose rate of return would become negative only as a result of a prepayment due to casualty, condemnation or economic obsolescence of collateral or change of law; An asset-backed security that relies on collateral that meets the requirements of Subparagraph (b) of this paragraph, the par value of which collateral: (i) (ii) Is not permitted to be paid sooner than one half of the remaining term to maturity from the date of acquisition; Is permitted to be paid prior to maturity only at a premium sufficient to provide a yield to maturity for the investment, considering the amount prepaid and reinvestment rates at the time of early repayment, at least equal to the yield to 2017 National Association of Insurance Commissioners

45 Attachment Sixteen Investments of Insurers Model Act maturity of the initial investment; or (iii) Is permitted to be paid prior to maturity at a premium at least equal to the yield of a treasury issue of comparable remaining life; or (f) An asset-backed security that relies on cash flows from assets that are not prepayable at any time at par, but is not otherwise governed by Subparagraph (e) of this paragraph, if the asset-backed security has a par value reflecting principal payments to be received if held until retired by or on behalf of the issuer and is purchased at a price no greater than one hundred five percent (105%) of such par amount. (2) An asset-backed security that: (a) (b) (c) Relies on cash flows from assets that are prepayable at par at any time; Does not make payments of par that are fixed as to amount and timing; and Has a negative rate of return at the time of acquisition if a prepayment threshold assumption is used with such prepayment threshold assumption defined as either: (i) (ii) Two (2) times the prepayment expectation reported by a recognized, publicly available source as being the median of expectations contributed by broker dealers or other entities, except insurers, engaged in the business of selling or evaluating such securities or assets. The prepayment expectation used in this calculation shall be, at the insurer s election, the prepayment expectation for pass-through securities of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, or for other assets of the same type as the assets that underlie the asset-backed security, in either case with a gross weighted average coupon comparable to the gross weighted average coupon of the assets that underlie the asset-backed security; or Another prepayment threshold assumption specified by the commissioner by regulation promulgated under Section National Association of Insurance Commissioners

46 Attachment Sixteen Model Regulation Service April 2001 (3) For purposes of Subparagraph 2 of this subsection, if the asset-backed security is purchased in combination with one or more other asset-backed securities that are supported by identical underlying collateral, the insurer may calculate the rate of return for these specific combined asset-backed securities in combination. The insurer must maintain documentation demonstrating that such securities were acquired and are continuing to be held in combination. DDDD. State means a state, territory or possession of the United States of America, the District of Columbia or the Commonwealth of Puerto Rico. EEEE. Substantially similar securities means securities that meet all criteria for substantially similar specified in the NAIC Accounting Practices and Procedures Manual, as amended, and in an amount that constitutes good delivery form as determined from time to time by the Public Securities Administration. FFFF. SVO means the Securities Valuation Office of the NAIC or any successor office established by the NAIC. GGGG. Swap means an agreement to exchange or to net payments at one or more times based on the actual or expected price, level, performance or value of one or more underlying interests. HHHH. Underlying interest means the assets, liabilities, other interests or a combination thereof underlying a derivative instrument, such as any one or more securities, currencies, rates, indices, commodities or derivative instruments. IIII. Unrestricted surplus means the amount by which total admitted assets exceed 125 percent of the insurer s required liabilities. JJJJ. Section 3. Warrant means an instrument that gives the holder the right to purchase an underlying financial instrument at a given price and time or at a series of prices and times outlined in the warrant agreement. Warrants may be issued alone or in connection with the sale of other securities, for example, as part of a merger or recapitalization agreement, or to facilitate divestiture of the securities of another business entity. General Investment Qualifications A. Insurers may acquire, hold or invest in investments or engage in investment practices as set forth in this Act. Investments not conforming to this Act shall not be admitted assets. Drafting Note 6: It may be necessary to modify the language in Section 3A to address investments in affiliated entities permitted under other portions of the code. B. Subject to Subsection C of this section, an insurer shall not acquire or hold an investment as an admitted asset unless at the time of acquisition it is: (1) Eligible for the payment or accrual of interest or discount (whether in cash or other securities), eligible to receive dividends or other distributions or is otherwise income producing; or 2017 National Association of Insurance Commissioners

47 Attachment Sixteen Investments of Insurers Model Act (2) Acquired under Sections 15C, 16, 18, 20, 28C, 29, 31 or 32 or under the authority of sections of the code other than this Act. C. An insurer may acquire or hold as admitted assets investments that do not otherwise qualify as provided in this Act if the insurer has not acquired them for the purpose of circumventing any limitations contained in this Act, if the insurer acquires the investments in the following circumstances and the insurer complies with the provisions of Sections 5 and 7 as to the investments: (1) As payment on account of existing indebtedness or in connection with the refinancing, restructuring or workout of existing indebtedness, if taken to protect the insurer s interest in that investment; (2) As realization on collateral for an obligation; (3) In connection with an otherwise qualified investment or investment practice, as interest on or a dividend or other distribution related to the investment or investment practice or in connection with the refinancing of the investment, in each case for no additional or only nominal consideration; (4) Under a lawful and bona fide agreement of recapitalization or voluntary or involuntary reorganization in connection with an investment held by the insurer; or (5) Under a bulk reinsurance, merger or consolidation transaction approved by the commissioner if the assets constitute admissible investments for the ceding, merged or consolidated companies. D. An investment or portion of an investment acquired by an insurer under Subsection C of this section shall become a nonadmitted asset three (3) years (or five (5) years in the case of mortgage loans and real estate) from the date of its acquisition, unless within that period the investment has become a qualified investment under a section of this Act other than Subsection C of this section, but an investment acquired under an agreement of bulk reinsurance, merger or consolidation may be qualified for a longer period if so provided in the plan for reinsurance, merger or consolidation as approved by the commissioner. Upon application by the insurer and a showing that the nonadmission of an asset held under Subsection C of this section would materially injure the interests of the insurer, the commissioner may extend the period for admissibility for an additional reasonable period of time. E. Except as provided in Subsections F and H of this section, an investment shall qualify under this Act if, on the date the insurer committed to acquire the investment or on the date of its acquisition, it would have qualified under this Act. For the purposes of determining limitations contained in this Act, an insurer shall give appropriate recognition to any commitments to acquire investments. F. (1) An investment held as an admitted asset by an insurer on the effective date of this Act which qualified under [insert reference to state s prior code provisions on insurer investments] shall remain qualified as an admitted asset under this Act National Association of Insurance Commissioners

48 Attachment Sixteen Model Regulation Service April 2001 (2) Each specific transaction constituting an investment practice of the type described in this Act that was lawfully entered into by an insurer and was in effect on the effective date of this Act shall continue to be permitted under this Act until its expiration or termination under its terms. G. Unless otherwise specified, an investment limitation computed on the basis of an insurer s admitted assets or capital and surplus shall relate to the amount required to be shown on the statutory balance sheet of the insurer most recently required to be filed with the commissioner. For purposes of computing any limitation based upon admitted assets, the insurer shall deduct from the amount of its admitted assets the amount of the liability recorded on its statutory balance sheet for: (1) The return of acceptable collateral received in a reverse repurchase transaction or a securities lending transaction; (2) Cash received in a dollar roll transaction; and (3) The amount reported as borrowed money in the most recently filed financial statement to the extent not included in Paragraphs (1) and (2) of this subsection. H. An investment qualified, in whole or in part, for acquisition or holding as an admitted asset may be qualified or requalified at the time of acquisition or a later date, in whole or in part, under any other section, if the relevant conditions contained in the other section are satisfied at the time of qualification or requalification. I. An insurer shall maintain documentation demonstrating that investments were acquired in accordance with this Act, and specifying the section of this Act under which they were acquired. J. An insurer shall not enter into an agreement to purchase securities in advance of their issuance for resale to the public as part of a distribution of the securities by the issuer or otherwise guarantee the distribution, except that an insurer may acquire privately placed securities with registration rights. K. Notwithstanding the provisions of this Act, the commissioner, for good cause, may order under the state s administrative procedures or equivalent, an insurer to nonadmit, limit, dispose of, withdraw from or discontinue an investment or investment practice. The authority of the commissioner under this subsection is in addition to any other authority of the commissioner. L. Insurance futures and insurance futures options are not considered investments or investment practices for purposes of this Act. Section 4. Authorization of Investments by the Board of Directors A. An insurer s board of directors shall adopt a written plan for acquiring and holding investments and for engaging in investment practices that specifies guidelines as to the quality, maturity and diversification of investments and other specifications including investment strategies intended to assure that the investments and investment practices are appropriate for the business conducted by the insurer, its liquidity needs and its capital and surplus. The board shall review and assess the insurer s technical investment and administrative capabilities and expertise before 2017 National Association of Insurance Commissioners

49 Attachment Sixteen Investments of Insurers Model Act adopting a written plan concerning an investment strategy or investment practice. B. Investments acquired and held under this Act shall be acquired and held under the supervision and direction of the board of directors of the insurer. The board of directors shall evidence by formal resolution, at least annually, that it has determined whether all investments have been made in accordance with delegations, standards, limitations and investment objectives prescribed by the board or a committee of the board charged with the responsibility to direct its investments. C. On no less than a quarterly basis, and more often if deemed appropriate, an insurer s board of directors or committee of the board of directors shall: (1) Receive and review a summary report on the insurer s investment portfolio, its investment activities and investment practices engaged in under delegated authority, in order to determine whether the investment activity of the insurer is consistent with its written plan; and (2) Review and revise, as appropriate, the written plan. D. In discharging its duties under this section, the board of directors shall require that records of any authorizations or approvals, other documentation as the board may require and reports of any action taken under authority delegated under the plan referred to in Subsection A of this section shall be made available on a regular basis to the board of directors. E. In discharging their duties under this section, the directors of an insurer shall perform their duties in good faith and with that degree of care that ordinarily prudent individuals in like positions would use under similar circumstances. F. If an insurer does not have a board of directors, all references to the board of directors in this Act shall be deemed to be references to the governing body of the insurer having authority equivalent to that of a board of directors. Section 5. Prohibited Investments An insurer shall not, directly or indirectly: A. Invest in an obligation or security or make a guarantee for the benefit of or in favor of an officer or director of the insurer, except as provided in Section 6; B. Invest in an obligation or security, make a guarantee for the benefit of or in favor of, or make other investments in a business entity of which ten percent (10%) or more of the voting securities or equity interests are owned directly or indirectly by or for the benefit of one or more officers or directors of the insurer, except as authorized in the [insert reference to holding company law] or provided in Section 6; C. Engage on its own behalf or through one or more affiliates in a transaction or series of transactions designed to evade the prohibitions of this Act; D. (1) Invest in a partnership as a general partner, except that an insurer may make an investment as a general partner: (a) If all other partners in the partnership are subsidiaries of the insurer; National Association of Insurance Commissioners

50 Attachment Sixteen Model Regulation Service April 2001 (b) For the purpose of: (i) (ii) (iii) Meeting cash calls committed to prior to the effective date of this Act; Completing those specific projects or activities of the partnership in which the insurer was a general partner as of the effective date of this Act that had been undertaken as of that date; or Making capital improvements to property owned by the partnership on the effective date of this Act if the insurer was a general partner as of that date; or (c) In accordance with Section 3C; (2) This subsection shall not prohibit a subsidiary or other affiliate of the insurer from becoming a general partner; or E. Invest in or lend its funds upon the security of shares of its own stock, except that an insurer may acquire shares of its own stock for the following purposes, but the shares shall not be admitted assets of the insurer: (1) Conversion of a stock insurer into a mutual or reciprocal insurer or a mutual or reciprocal insurer into a stock insurer; (2) Issuance to the insurer s officers, employees or agents in connection with a plan approved by the commissioner for converting a publicly held insurer into a privately held insurer under [insert reference to the section of the code providing for approval of a conversion plan] or in connection with other stock option and employee benefit plans; or (3) In accordance with any other plan approved by the commissioner. Section 6. Loans to Officers and Directors A. (1) Except as provided in Section 6B, an insurer shall not, without the prior written approval of the commissioner, directly or indirectly: (a) (b) Make a loan to or other investment in an officer or director of the insurer or a person in which the officer or director has any direct or indirect financial interest; Make a guarantee for the benefit of or in favor of an officer or director of the insurer or a person in which the officer or director has any direct or indirect financial interest; or (c) Enter into an agreement for the purchase or sale of property from or to an officer or director of the insurer or a person in which the officer or director has any direct or indirect financial interest. (2) For purposes of this section, an officer or director shall not be deemed to have a financial interest by reason of an interest that is held directly or indirectly through the ownership of equity interests representing less than two percent 2017 National Association of Insurance Commissioners

51 Attachment Sixteen Investments of Insurers Model Act (2%) of all outstanding equity interests issued by a person that is a party to the transaction, or solely by reason of that individual s position as a director or officer of a person that is a party to the transaction. (3) This subsection does not permit an investment that is prohibited by Section 5. (4) This subsection does not apply to a transaction between an insurer and any of its subsidiaries or affiliates that is entered into in compliance with the [insert reference to holding company law], other than a transaction between an insurer and its officer or director. B. An insurer may make, without the prior written approval of the commissioner: (1) Policy loans in accordance with the terms of the policy or contract and Section 19; (2) Advances to officers or directors for expenses reasonably expected to be incurred in the ordinary course of the insurer s business or guarantees associated with credit or charge cards issued or credit extended for the purpose of financing these expenses; (3) Loans secured by the principal residence of an existing or new officer of the insurer made in connection with the officer s relocation at the insurer s request, if the loans comply with the requirements of Section 15 or 28 and the terms and conditions otherwise are the same as those generally available from unaffiliated third parties; (4) Secured loans to an existing or new officer of the insurer made in connection with the officer s relocation at the insurer s request, if the loans: (a) (b) (c) (d) Do not have a term exceeding two (2) years; Are required to finance mortgage loans outstanding at the same time on the prior and new residences of the officer; Do not exceed an amount equal to the equity of the officer in the prior residence; and Are required to be fully repaid upon the earlier of the end of the two (2) year period or the sale of the prior residence; and (5) Loans and advances to officers or directors made in compliance with state or federal law specifically related to the loans and advances by a regulated noninsurance subsidiary or affiliate of the insurer in the ordinary course of business and on terms no more favorable than available to other customers of the entity National Association of Insurance Commissioners

52 Attachment Sixteen Model Regulation Service April 2001 Section 7. Valuation of Investments For the purposes of this Act, the value or amount of an investment acquired or held, or an investment practice engaged in, under this Act, unless otherwise specified in this code, shall be the value at which assets of an insurer are required to be reported for statutory accounting purposes as determined in accordance with procedures prescribed in published accounting and valuation standards of the NAIC, including the Purposes and Procedures of the Securities Valuation NAIC Investment Analysis Office, the Valuation of Securities manual, the Accounting Practices and Procedures manual, the Annual Statement Instructions or any successor valuation procedures officially adopted by the NAIC. Section 8. Regulations The commissioner may, in accordance with [insert reference to administrative procedures act or other statutes concerning promulgation of regulations], promulgate regulations implementing the provisions of this Act. ARTICLE II. LIFE AND HEALTH INSURERS Section 9. Applicability This Article shall apply to the investments and investment practices of life and health insurers, subject to the provisions of Section 1B. Section 10. General Three Percent Diversification, Medium and Lower Grade Investments and Canadian Investments A. General Three Percent Diversification (1) Except as otherwise specified in this Act, an insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under this Act if, as a result of and after giving effect to the investment, the insurer would hold more than three percent (3%) of its admitted assets in investments of all kinds issued, assumed, accepted, insured or guaranteed by a single person, or five percent (5%) of its admitted assets in investments in the voting securities of a depository institution or any company that controls the institution. (2) This three percent (3%) limitation shall not apply to the aggregate amounts insured by a single financial guaranty insurer with the highest generic rating issued by a nationally recognized statistical rating organization. (3) Asset-backed securities shall not be subject to the limitations of Paragraph (1) of this subsection, however an insurer shall not acquire an asset-backed security if, as a result of and after giving effect to the investment, the aggregate amount of asset-backed securities secured by or evidencing an interest in a single asset or single pool of assets held by a trust or other business entity, then held by the insurer would exceed three percent (3%) of its admitted assets National Association of Insurance Commissioners

53 Attachment Sixteen Investments of Insurers Model Act B. Medium and Lower Grade Investments (1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under Sections 11, 14, 17 or counterparty exposure under Section 18D if, as a result of and after giving effect to the investment: (a) (b) (c) (d) (e) The aggregate amount of medium and lower grade investments then held by the insurer would exceed twenty percent (20%) of its admitted assets; The aggregate amount of lower grade investments then held by the insurer would exceed ten percent (10%) of its admitted assets; The aggregate amount of investments rated 5 or 6 by the SVO then held by the insurer would exceed three percent (3%) of its admitted assets; The aggregate amount of investments rated 6 by the SVO then held by the insurer would exceed one percent (1%) of its admitted assets; or The aggregate amount of medium and lower grade investments then held by the insurer that receive as cash income less than the equivalent yield for Treasury issues with a comparative average life, would exceed one percent (1%) of its admitted assets. (2) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under Sections 11, 14, 17 or counterparty exposure under Section 18D if, as a result of and after giving effect to the investment: (a) (b) The aggregate amount of medium and lower grade investments issued, assumed, guaranteed, accepted or insured by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed one percent (1%) of its admitted assets; or The aggregate amount of lower grade investments issued, assumed, guaranteed, accepted or insured by any one person or, as to assetbacked securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed one half of one percent (.5%) of its admitted assets. (3) If an insurer attains or exceeds the limit of any one rating category referred to in this subsection, the insurer shall not thereby be precluded from acquiring investments in other rating categories subject to the specific and multi-category limits applicable to those investments. C. Canadian Investments (1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, a Canadian investment authorized by this Act, if as a result of and after giving effect to the investment, the aggregate amount of these investments then held by the insurer would exceed forty percent (40%) of its National Association of Insurance Commissioners

54 Attachment Sixteen Model Regulation Service April 2001 admitted assets, or if the aggregate amount of Canadian investments not acquired under Section 11B then held by the insurer would exceed twentyfive percent (25%) of its admitted assets. (2) However, as to an insurer that is authorized to do business in Canada or that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in Canada and denominated in Canadian currency, the limitations of Paragraph (1) of this subsection shall be increased by the greater of: (a) (b) The amount the insurer is required by Canadian law to invest in Canada or to be denominated in Canadian currency; or One hundred fifteen percent (115%) of the amount of its reserves and other obligations under contracts on lives or risks resident or located in Canada. Section 11. Rated Credit Instruments Subject to the limitations of Subsection F of this section, an insurer may acquire rated credit instruments: A. Subject to the limitations of Section 10B, but not to the limitations of Section 10A, an insurer may acquire rated credit instruments issued, assumed, guaranteed or insured by: (1) The United States; or (2) A government sponsored enterprise of the United States, if the instruments of the government sponsored enterprise are assumed, guaranteed or insured by the United States or are otherwise backed or supported by the full faith and credit of the United States. B. (1) Subject to the limitations of Section 10B, but not to the limitations of Section 10A, an insurer may acquire rated credit instruments issued, assumed, guaranteed or insured by: (a) (b) Canada; or A government sponsored enterprise of Canada, if the instruments of the government sponsored enterprise are assumed, guaranteed or insured by Canada or are otherwise backed or supported by the full faith and credit of Canada; (2) However, an insurer shall not acquire an instrument under this subsection if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subsection would exceed forty percent (40%) of its admitted assets National Association of Insurance Commissioners

55 Attachment Sixteen Investments of Insurers Model Act C. (1) Subject to the limitations of Section 10B, but not to the limitations of Section 10A, an insurer may acquire rated credit instruments, excluding asset-backed securities: (a) (b) (c) (d) Issued by a government money market mutual fund, a class one money market mutual fund or a class one listed bond mutual fund; Issued, assumed, guaranteed or insured by a government sponsored enterprise of the United States other than those eligible under Subsection A of this section; Issued, assumed, guaranteed or insured by a state, if the instruments are general obligations of the state; or Issued by a multilateral development bank; (2) However, an insurer shall not acquire an instrument of any one fund, any one enterprise or entity or any one state under this subsection if, as a result of and after giving effect to the investment, the aggregate amount of investments then held in any one fund, enterprise or entity or state under this subsection would exceed ten percent (10%) of its admitted assets. D. Subject to the limitations of Section 10, an insurer may acquire preferred stocks that are not foreign investments and that meet the requirements of rated credit instruments if, as a result of and after giving effect to the investment: (1) The aggregate amount of preferred stocks then held by the insurer under this subsection does not exceed twenty percent (20%) of its admitted assets; and (2) The aggregate amount of preferred stocks then held by the insurer under this subsection which are not sinking fund stocks or rated P1 or P2 by the SVO does not exceed ten percent (10%) of its admitted assets. E. Subject to the limitations of Section 10, in addition to those investments eligible under Subsections A, B, C and D of this section, an insurer may acquire rated credit instruments that are not foreign investments. F. An insurer shall not acquire special rated credit instruments under this section if, as a result of and after giving effect to the investment, the aggregate amount of special rated credit instruments then held by the insurer would exceed five percent (5%) of its admitted assets. Drafting Note 7: In states which have not adopted Secondary Mortgage Market Enhancement Act of 1984, as amended (SMMEA) override legislation, obligations of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and other mortgage-backed or mortgage related securities as defined in Section 106 of Title I of SMMEA (15 U.S.C. 77r-1) may be invested in to the same extent as allowed under Section 11A, whether or not they are rated credit instruments authorized in Section 11A. Appropriate changes to Section 11 or other Sections of this Act may be necessary National Association of Insurance Commissioners

56 Attachment Sixteen Model Regulation Service April 2001 Section 12. Insurer Investment Pools A. An insurer may acquire investments in investment pools that: (1) Invest only in: (a) Obligations that are rated 1 or 2 by the SVO or have an equivalent of an SVO 1 or 2 rating (or, in the absence of a 1 or 2 rating or equivalent rating, the issuer has outstanding obligations with an SVO 1 or 2 or equivalent rating) by a nationally recognized statistical rating organization recognized by the SVO and have: (i) (ii) A remaining maturity of 397 days or less or a put that entitles the holder to receive the principal amount of the obligation which put may be exercised through maturity at specified intervals not exceeding 397 days; or A remaining maturity of three (3) years or less and a floating interest rate that resets no less frequently than quarterly on the basis of a current short-term index (federal funds, prime rate, treasury bills, London InterBank Offered Rate (LIBOR) or commercial paper) and is subject to no maximum limit, if the obligations do not have an interest rate that varies inversely to market interest rate changes; (b) (c) Government money market mutual funds or class one money market mutual funds; or Securities lending, repurchase and reverse repurchase transactions that meet all the requirements of Section 16, except the quantitative limitations of Section 16D; or (2) Invest only in investments which an insurer may acquire under this Act, if the insurer s proportionate interest in the amount invested in these investments does not exceed the applicable limits of this Act. B. For an investment in an investment pool to be qualified under this Act, the investment pool shall not: (1) Acquire securities issued, assumed, guaranteed or insured by the insurer or an affiliate of the insurer; (2) Borrow or incur any indebtedness for borrowed money, except for securities lending and reverse repurchase transactions that meet the requirements of Section 16 except the quantitative limitations of Section 16D; or (3) Permit the aggregate value of securities then loaned or sold to, purchased from or invested in any one business entity under this section to exceed ten percent (10%) of the total assets of the investment pool. C. The limitations of Section 10A shall not apply to an insurer s investment in an investment pool, however an insurer shall not acquire an investment in an investment pool under this section if, as a result of and after giving effect to the 2017 National Association of Insurance Commissioners

57 Attachment Sixteen Investments of Insurers Model Act investment, the aggregate amount of investments then held by the insurer under this section: (1) In any one investment pool would exceed ten percent (10%) of its admitted assets; (2) In all investment pools investing in investments permitted under Subsection A(2) of this section would exceed twenty-five percent (25%) of its admitted assets; or (3) In all investment pools would exceed thirty-five percent (35%) of its admitted assets. D. For an investment in an investment pool to be qualified under this Act, the manager of the investment pool shall: (1) Be organized under the laws of the United States or a state and designated as the pool manager in a pooling agreement; (2) Be the insurer, an affiliated insurer or a business entity affiliated with the insurer, a qualified bank, a business entity registered under the Investment Advisors Act of 1940 (15 U.S.C. 80a-1 et seq.), as amended or, in the case of a reciprocal insurer or interinsurance exchange, its attorney-in-fact, or in the case of a United States branch of an alien insurer, its United States manager or affiliates or subsidiaries of its United States manager; (3) Compile and maintain detailed accounting records setting forth: (a) (b) (c) The cash receipts and disbursements reflecting each participant s proportionate investment in the investment pool; A complete description of all underlying assets of the investment pool (including amount, interest rate, maturity date (if any) and other appropriate designations); and Other records which, on a daily basis, allow third parties to verify each participant s investment in the investment pool; and (4) Maintain the assets of the investment pool in one or more accounts, in the name of or on behalf of the investment pool, under a custody agreement with a qualified bank. The custody agreement shall: (a) (b) State and recognize the claims and rights of each participant; Acknowledge that the underlying assets of the investment pool are held solely for the benefit of each participant in proportion to the aggregate amount of its investments in the investment pool; and (c) Contain an agreement that the underlying assets of the investment pool shall not be commingled with the general assets of the custodian qualified bank or any other person. E. The pooling agreement for each investment pool shall be in writing and shall provide that: National Association of Insurance Commissioners

58 Attachment Sixteen Model Regulation Service April 2001 (1) An insurer and its affiliated insurers or, in the case of an investment pool investing solely in investments permitted under Subsection A(1) of this section, the insurer and its subsidiaries, affiliates or any pension or profit sharing plan of the insurer, its subsidiaries and affiliates or, in the case of a United States branch of an alien insurer, affiliates or subsidiaries of its United States manager, shall, at all times, hold one hundred percent (100%) of the interests in the investment pool; (2) The underlying assets of the investment pool shall not be commingled with the general assets of the pool manager or any other person; (3) In proportion to the aggregate amount of each pool participant s interest in the investment pool: (a) (b) Each participant owns an undivided interest in the underlying assets of the investment pool; and The underlying assets of the investment pool are held solely for the benefit of each participant; (4) A participant, or in the event of the participant s insolvency, bankruptcy or receivership, its trustee, receiver or other successor-in-interest, may withdraw all or any portion of its investment from the investment pool under the terms of the pooling agreement; (5) Withdrawals may be made on demand without penalty or other assessment on any business day, but settlement of funds shall occur within a reasonable and customary period thereafter not to exceed five (5) business days. Distributions under this paragraph shall be calculated in each case net of all then applicable fees and expenses of the investment pool. The pooling agreement shall provide that the pool manager shall distribute to a participant, at the discretion of the pool manager: (a) (b) (c) In cash, the then fair market value of the participant s pro rata share of each underlying asset of the investment pool; In kind, a pro rata share of each underlying asset; or In a combination of cash and in kind distributions, a pro rata share in each underlying asset; and (6) The pool manager shall make the records of the investment pool available for inspection by the commissioner. Section 13. Equity Interests A. Subject to the limitations of Section 10, an insurer may acquire equity interests in business entities organized under the laws of any domestic jurisdiction National Association of Insurance Commissioners

59 Attachment Sixteen Investments of Insurers Model Act B. An insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section would exceed twenty percent (20%) of its admitted assets, or the amount of equity interests then held by the insurer that are not listed on a qualified exchange would exceed five percent (5%) of its admitted assets. An accident and health insurer shall not be subject to this section but shall be subject to the same aggregate limitation on equity interests as a property and casualty insurer under Section 26 and also to the provisions of Section 22 of this Act. C. An insurer shall not acquire under this section any investments that the insurer may acquire under Section 15. D. An insurer shall not short sell equity investments unless the insurer covers the short sale by owning the equity investment or an unrestricted right to the equity instrument exercisable within six (6) months of the short sale. Section 14. Tangible Personal Property Under Lease A. (1) Subject to the limitations of Section 10, an insurer may acquire tangible personal property or equity interests therein located or used wholly or in part within a domestic jurisdiction either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates or other similar instruments. (2) Investments acquired under Paragraph (1) of this subsection shall be eligible only if: (a) (b) The property is subject to a lease or other agreement with a person whose rated credit instruments in the amount of the purchase price of the personal property the insurer could then acquire under Section 11; and The lease or other agreement provides the insurer the right to receive rental, purchase or other fixed payments for the use or purchase of the property, and the aggregate value of the payments, together with the estimated residual value of the property at the end of its useful life and the estimated tax benefits to the insurer resulting from ownership of the property, shall be adequate to return the cost of the insurer s investment in the property, plus a return deemed adequate by the insurer. B. The insurer shall compute the amount of each investment under this section on the basis of the out-of-pocket purchase price and applicable related expenses paid by the insurer for the investment, net of each borrowing made to finance the purchase price and expenses, to the extent the borrowing is without recourse to the insurer. C. An insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under this section would exceed: National Association of Insurance Commissioners

60 Attachment Sixteen Model Regulation Service April 2001 (1) Two percent (2%) of its admitted assets ; or (2) One half of one percent (.5%) of its admitted assets as to any single item of tangible personal property. D. For purposes of determining compliance with the limitations of Section 10, investments acquired by an insurer under this section shall be aggregated with those acquired under Section 11, and each lessee of the property under a lease referred to in this section shall be deemed the issuer of an obligation in the amount of the investment of the insurer in the property determined as provided in Subsection B of this section. E. Nothing in this section is applicable to tangible personal property lease arrangements between an insurer and its subsidiaries and affiliates under a cost sharing arrangement or agreement permitted under [insert reference to holding company law]. Section 15. Mortgage Loans and Real Estate A. Mortgage Loans (l) Subject to the limitations of Section 10, an insurer may acquire, either directly, indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments, obligations secured by mortgages on real estate situated within a domestic jurisdiction, but a mortgage loan which is secured by other than a first lien shall not be acquired unless the insurer is the holder of the first lien. The obligations held by the insurer and any obligations with an equal lien priority, shall not, at the time of acquisition of the obligation, exceed: (a) (b) Ninety percent (90%) of the fair market value of the real estate, if the mortgage loan is secured by a purchase money mortgage or like security received by the insurer upon disposition of the real estate; Eighty percent (80%) of the fair market value of the real estate, if the mortgage loan requires immediate scheduled payment in periodic installments of principal and interest, has an amortization period of thirty (30) years or less and periodic payments made no less frequently than annually. Each periodic payment shall be sufficient to assure that at all times the outstanding principal balance of the mortgage loan shall be not greater than the outstanding principal balance that would be outstanding under a mortgage loan with the same original principal balance, with the same interest rate and requiring equal payments of principal and interest with the same frequency over the same amortization period. Mortgage loans permitted under this subsection are permitted notwithstanding the fact that they provide for a payment of the principal balance prior to the end of the period of amortization of the loan. For residential mortgage loans, the eighty percent (80%) limitation may be increased to ninety-seven percent (97%) if acceptable private mortgage insurance has been obtained; or 2017 National Association of Insurance Commissioners

61 Attachment Sixteen Investments of Insurers Model Act (c) Seventy-five percent (75%) of the fair market value of the real estate for mortgage loans that do not meet the requirements of Subparagraphs (a) or (b) of this paragraph. (2) For purposes of Paragraph (1) of this subsection, the amount of an obligation required to be included in the calculation of the loan-to-value ratio may be reduced to the extent the obligation is insured by the Federal Housing Administration or guaranteed by the Administrator of Veterans Affairs, or their successors. (3) A mortgage loan that is held by an insurer under Section 3F or acquired under this section and is restructured in a manner that meets the requirements of a restructured mortgage loan in accordance with the NAIC Accounting Practices and Procedures Manual or successor publication shall continue to qualify as a mortgage loan under this Act. (4) Subject to the limitations of Section 10, credit lease transactions that do not qualify for investment under Section 11 with the following characteristics shall be exempt from the provisions of Paragraph (1) of this subsection: (a) (b) (c) (d) (e) (f) The loan amortizes over the initial fixed lease term at least in an amount sufficient so that the loan balance at the end of the lease term does not exceed the original appraised value of the real estate ; The lease payments cover or exceed the total debt service over the life of the loan; A tenant or its affiliated entity whose rated credit instruments have a SVO 1 or 2 designation or a comparable rating from a nationally recognized statistical rating organization recognized by the SVO has a full faith and credit obligation to make the lease payments; The insurer holds or is the beneficial holder of a first lien mortgage on the real estate; The expenses of the real estate are passed through to the tenant, excluding exterior, structural, parking and heating, ventilation and air conditioning replacement expenses, unless annual escrow contributions, from cash flows derived from the lease payments, cover the expense shortfall; and There is a perfected assignment of the rents due pursuant to the lease to, or for the benefit of, the insurer. B. Income Producing Real Estate (1) An insurer may acquire, manage and dispose of real estate situated in a domestic jurisdiction either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments. The real estate shall be income producing or intended for improvement or development for investment purposes under an existing National Association of Insurance Commissioners

62 Attachment Sixteen Model Regulation Service April 2001 program (in which case the real estate shall be deemed to be income producing). (2) The real estate may be subject to mortgages, liens or other encumbrances, the amount of which shall, to the extent that the obligations secured by the mortgages, liens or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with Subsections D(2) and D(3) of this section. C. Real Estate for the Accommodation of Business An insurer may acquire, manage, and dispose of real estate for the convenient accommodation of the insurer s (which may include its affiliates) business operations, including home office, branch office and field office operations. (1) Real estate acquired under this subsection may include excess space for rent to others, if the excess space, valued at its fair market value, would otherwise be a permitted investment under Subsection B of this section and is so qualified by the insurer; (2) The real estate acquired under this subsection may be subject to one or more mortgages, liens or other encumbrances, the amount of which shall, to the extent that the obligations secured by the mortgages, liens or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with Subsection D(4) of this section; and (3) For purposes of this subsection, business operations shall not include that portion of real estate used for the direct provision of health care services by an accident and health insurer for its insureds. An insurer may acquire real estate used for these purposes under Subsection B of this section. D. Quantitative Limitations (1) An insurer shall not acquire an investment under Subsection A of this section if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under Subsection A of this section would exceed: (a) (b) (c) One percent (1%) of its admitted assets in mortgage loans covering any one secured location; One quarter of one percent (.25%) of its admitted assets in construction loans covering any one secured location; or Two percent (2%) of its admitted assets in construction loans in the aggregate. (2) An insurer shall not acquire an investment under Subsection B of this section if, as a result of and after giving effect to the investment and any outstanding guarantees made by the insurer in connection with the investment, the aggregate amount of investments then held by the insurer under Subsection 2017 National Association of Insurance Commissioners

63 Attachment Sixteen Investments of Insurers Model Act B of this section plus the guarantees then outstanding would exceed: (a) (b) One percent (1%) of its admitted assets in one parcel or group of contiguous parcels of real estate, except that this limitation shall not apply to that portion of real estate used for the direct provision of health care services by an accident and health insurer for its insureds, such as hospitals, medical clinics, medical professional buildings or other health facilities used for the purpose of providing health services; or Fifteen percent (15%) of its admitted assets in the aggregate, but not more than five percent (5%) of its admitted assets as to properties that are to be improved or developed. (3) An insurer shall not acquire an investment under Subsections A or B of this section if, as a result of and after giving effect to the investment and any guarantees made by the insurer in connection with the investment, the aggregate amount of all investments then held by the insurer under Subsections A and B of this section plus the guarantees then outstanding would exceed forty-five percent (45%) of its admitted assets. However, an insurer may exceed this limitation by no more than thirty percent (30%) of its admitted assets if: (a) (b) (c) (d) (e) (f) This increased amount is invested only in residential mortgage loans; The insurer has no more than ten percent (10%) of its admitted assets invested in mortgage loans other than residential mortgage loans; The loan-to-value ratio of each residential mortgage loan does not exceed sixty percent (60%) at the time the mortgage loan is qualified under this increased authority, and the fair market value is supported by an appraisal no more than two (2) years old, prepared by an independent appraiser; A single mortgage loan qualified under this increased authority shall not exceed one half of one percent (0.5%) of its admitted assets; The insurer files with the commissioner, and receives approval from the commissioner for, a plan that is designed to result in a portfolio of residential mortgage loans that is sufficiently geographically diversified; and The insurer agrees to file annually with the commissioner records that demonstrate that its portfolio of residential mortgage loans is geographically diversified in accordance with the plan. (4) The limitations of Section 10 shall not apply to an insurer s acquisition of real estate under Subsection C of this section. An insurer shall not acquire real estate under Subsection C of this section if, as a result of and after giving effect to the acquisition, the aggregate amount of real estate then held by the insurer under Subsection C of this section would exceed ten percent (10%) of its admitted assets. With the permission of the commissioner, additional amounts of real estate may be acquired under Subsection C of this section National Association of Insurance Commissioners

64 Attachment Sixteen Model Regulation Service April 2001 Section 16. Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions An insurer may enter into securities lending, repurchase, reverse repurchase and dollar roll transactions with business entities, subject to the following requirements: A. The insurer s board of directors shall adopt a written plan that is consistent with the requirements of the written plan in Section 4A that specifies guidelines and objectives to be followed, such as: (1) A description of how cash received will be invested or used for general corporate purposes of the insurer; (2) Operational procedures to manage interest rate risk, counterparty default risk, the conditions under which proceeds from reverse repurchase transactions may be used in the ordinary course of business and the use of acceptable collateral in a manner that reflects the liquidity needs of the transaction; and (3) The extent to which the insurer may engage in these transactions. B. The insurer shall enter into a written agreement for all transactions authorized in this section other than dollar roll transactions. The written agreement shall require that each transaction terminate no more than one year from its inception or upon the earlier demand of the insurer. The agreement shall be with the business entity counterparty, but for securities lending transactions, the agreement may be with an agent acting on behalf of the insurer, if the agent is a qualified business entity, and if the agreement: (1) Requires the agent to enter into separate agreements with each counterparty that are consistent with the requirements of this section; and (2) Prohibits securities lending transactions under the agreement with the agent or its affiliates. C. Cash received in a transaction under this section shall be invested in accordance with this Act and in a manner that recognizes the liquidity needs of the transaction or used by the insurer for its general corporate purposes. For so long as the transaction remains outstanding, the insurer, its agent or custodian shall maintain, as to acceptable collateral received in a transaction under this section, either physically or through the book entry systems of the Federal Reserve, Depository Trust Company, Participants Trust Company or other securities depositories approved by the commissioner: (1) Possession of the acceptable collateral; (2) A perfected security interest in the acceptable collateral; or (3) In the case of a jurisdiction outside of the United States, title to, or rights of a secured creditor to, the acceptable collateral. D. The limitations of Sections 10 and 17 shall not apply to the business entity 2017 National Association of Insurance Commissioners

65 Attachment Sixteen Investments of Insurers Model Act counterparty exposure created by transactions under this section. For purposes of calculations made to determine compliance with this subsection, no effect will be given to the insurer s future obligation to resell securities, in the case of a reverse repurchase transaction, or to repurchase securities, in the case of a reverse repurchase transaction. An insurer shall not enter into a transaction under this section if, as a result of and after giving effect to the transaction: (1) The aggregate amount of securities then loaned, sold to or purchased from any one business entity counterparty under this section would exceed five percent (5%) of its admitted assets. In calculating the amount sold to or purchased from a business entity counterparty under repurchase or reverse repurchase transactions, effect may be given to netting provisions under a master written agreement; or (2) The aggregate amount of all securities then loaned, sold to or purchased from all business entities under this section would exceed forty percent (40%) of its admitted assets. E. In a securities lending transaction, the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to 102 percent of the market value of the securities loaned by the insurer in the transaction as of that date. If at any time the market value of the acceptable collateral is less than the market value of the loaned securities, the business entity counterparty shall be obligated to deliver additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals 102 percent of the market value of the loaned securities. F. In a reverse repurchase transaction, other than a dollar roll transaction, the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to ninety-five percent (95%) of the market value of the securities transferred by the insurer in the transaction as of that date. If at any time the market value of the acceptable collateral is less than ninety-five percent (95%) of the market value of the securities so transferred, the business entity counterparty shall be obligated to deliver additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals ninety-five percent (95%) of the market value of the transferred securities. G. In a dollar roll transaction, the insurer shall receive cash in an amount at least equal to the market value of the securities transferred by the insurer in the transaction as of the transaction date. H. In a reverse repurchase transaction, the insurer shall receive as acceptable collateral transferred securities having a market value at least equal to 102 percent of the purchase price paid by the insurer for the securities. If at any time the market value of the acceptable collateral is less than 100 percent of the purchase price paid by the insurer, the business entity counterparty shall be obligated to provide additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals 102 percent of the purchase price. Securities acquired by an insurer in a reverse repurchase transaction shall not be sold in a reverse repurchase transaction, loaned in a securities lending transaction or otherwise pledged. Drafting Note 8: Subsections E, F, and H of this section contain requirements that at the time of drafting this model act National Association of Insurance Commissioners

66 Attachment Sixteen Model Regulation Service April 2001 were contained in the Purposes and Procedures of the Securities Valuation Office. However, concomitant with the drafting of this model act, a separate task force was considering a revised publication which did not contain these requirements inasmuch as the SVO considered these requirements as accounting-type rules which were deemed not suitable to such a publication. Moreover, another working group was developing a draft of a revised accounting manual but had not considered proposing separate accounting guidance regarding these requirements. Instead, the accounting manual implicitly referred to the requirements stipulated in this model act. Pending the results of consideration of these requirements by the three groups, in concert, these requirements have been included in this model act. If after due consideration, these requirements are included in the revised accounting manual as representative of statutory accounting principles or, in the alternative, are inserted in the revised Purposes and Procedures of the Securities Valuation Office, then States may opt not to codify these requirements within their insurer investment code. Section 17. Foreign Investments and Foreign Currency Exposure A. Subject to the limitations of Section 10, an insurer may acquire foreign investments, or engage in investment practices with persons of or in foreign jurisdictions, of substantially the same types as those that an insurer is permitted to acquire under this Act, other than of the type permitted under Section 12, if, as a result and after giving effect to the investment: (1) The aggregate amount of foreign investments then held by the insurer under this subsection does not exceed twenty percent (20%) of its admitted assets; and (2) The aggregate amount of foreign investments then held by the insurer under this subsection in a single foreign jurisdiction does not exceed ten percent (10%) of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or three percent (3%) of its admitted assets as to any other foreign jurisdiction. B. Subject to the limitations of Section 10, an insurer may acquire investments, or engage in investment practices denominated in foreign currencies, whether or not they are foreign investments acquired under Subsection A of this section, or additional foreign currency exposure as a result of the termination or expiration of a hedging transaction with respect to investments denominated in a foreign currency, if: (1) The aggregate amount of investments then held by the insurer under this subsection denominated in foreign currencies does not exceed ten percent (10%) of its admitted assets; and (2) The aggregate amount of investments then held by the insurer under this subsection denominated in the foreign currency of a single foreign jurisdiction does not exceed ten percent (10%) of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or three percent (3%) of its admitted assets as to any other foreign jurisdiction. (3) However, an investment shall not be considered denominated in a foreign currency if the acquiring insurer enters into one or more contracts in transactions permitted under Section 18 and the business entity counterparty agrees under the contract or contracts to exchange all payments made on the foreign currency denominated investment for United States currency at a rate which effectively insulates the investment cash flows against future changes in currency exchange rates during the period the contract or contracts are in effect National Association of Insurance Commissioners

67 Attachment Sixteen Investments of Insurers Model Act C. In addition to investments permitted under Subsections A and B of this section, an insurer that is authorized to do business in a foreign jurisdiction, and that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in that foreign jurisdiction and denominated in foreign currency of that jurisdiction, may acquire foreign investments respecting that foreign jurisdiction, and may acquire investments denominated in the currency of that jurisdiction, subject to the limitations of Section 10. However, investments made under this subsection in obligations of foreign governments, their political subdivisions and government sponsored enterprises shall not be subject to the limitations of Section 10 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection shall not exceed the greater of: (1) The amount the insurer is required by the law of the foreign jurisdiction to invest in the foreign jurisdiction; or (2) One hundred fifteen percent (115%) of the amount of its reserves, net of reinsurance, and other obligations under the contracts on lives or risks resident or located in the foreign jurisdiction. D. In addition to investments permitted under Subsections A and B of this section, an insurer that is not authorized to do business in a foreign jurisdiction, but which has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in that foreign jurisdiction and denominated in foreign currency of that jurisdiction, may acquire foreign investments respecting that foreign jurisdiction, and may acquire investments denominated in the currency of that jurisdiction subject to the limitations of Section 10. However, investments made under this subsection in obligations of foreign governments, their political subdivisions and government sponsored enterprises shall not be subject to the limitations of Section 10 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection shall not exceed 105 percent of the amount of its reserves, net of reinsurance, and other obligations under the contracts on lives or risks resident or located in the foreign jurisdiction. E. Investments acquired under this section shall be aggregated with investments of the same types made under all other sections of this Act, and in a similar manner, for purposes of determining compliance with the limitations, if any, contained in the other sections. Investments in obligations of foreign governments, their political subdivisions and government sponsored enterprises of these persons, except for those exempted under Subsections C and D of this section, shall be subject to the limitations of Section National Association of Insurance Commissioners

68 Attachment Sixteen Model Regulation Service April 2001 Section 18. Derivative Transactions An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this section under the following conditions : A. General Conditions (1) An insurer may use derivative instruments under this section to engage in hedging transactions and certain income generation transactions, as these terms may be further defined in regulations promulgated by the commissioner. (2) An insurer shall be able to demonstrate to the commissioner the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of the transactions through cash flow testing or other appropriate analyses. B. Limitations on Hedging Transactions An insurer may enter into hedging transactions under this section if, as a result of and after giving effect to the transaction : (1) The aggregate statement value of options, caps, floors and warrants not attached to another financial instrument purchased and used in hedging transactions does not exceed seven and one half percent (7.5%) of its admitted assets; (2) The aggregate statement value of options, caps and floors written in hedging transactions does not exceed three percent (3%) of its admitted assets; and (3) The aggregate potential exposure of collars, swaps, forwards and futures used in hedging transactions does not exceed six and one-half percent (6.5%) of its admitted assets. C. Limitations on Income Generation Transactions An insurer may only enter into the following types of income generation transactions if as a result of and after giving effect to the transactions, the aggregate statement value of the fixed income assets that are subject to call or that generate the cash flows for payments under the caps or floors, plus the face value of fixed income securities underlying a derivative instrument subject to call, plus the amount of the purchase obligations under the puts, does not exceed ten percent (10%) of its admitted assets: (1) Sales of covered call options on non-callable fixed income securities, callable fixed income securities if the option expires by its terms prior to the end of the noncallable period or derivative instruments based on fixed income securities; (2) Sales of covered call options on equity securities, if the insurer holds in its portfolio, or can immediately acquire through the exercise of options, warrants or conversion rights already owned, the equity securities subject to call during the complete term of the call option sold; 2017 National Association of Insurance Commissioners

69 Attachment Sixteen Investments of Insurers Model Act (3) Sales of covered puts on investments that the insurer is permitted to acquire under this Act, if the insurer has escrowed, or entered into a custodian agreement segregating, cash or cash equivalents with a market value equal to the amount of its purchase obligations under the put during the complete term of the put option sold; or (4) Sales of covered caps or floors, if the insurer holds in its portfolio the investments generating the cash flow to make the required payments under the caps or floors during the complete term that the cap or floor is outstanding. D. Counterparty Exposure An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of Section 10. E. Additional Transactions Pursuant to regulations promulgated under Section 8, the commissioner may approve additional transactions involving the use of derivative instruments in excess of the limits of Subsection B of this section or for other risk management purposes under regulations promulgated by the commissioner, but replication transactions shall not be permitted for other than risk management purposes. Section 19. Policy Loans A life insurer may lend to a policyholder on the security of the cash surrender value of the policyholder s policy a sum not exceeding the legal reserve that the insurer is required to maintain on the policy. Section 20. Additional Investment Authority A. Solely for the purpose of acquiring investments that exceed the quantitative limitations of Sections 10 through 17, an insurer may acquire under this subsection an investment, or engage in investment practices described in Section 16, but an insurer shall not acquire an investment, or engage in investment practices described in Section 16, under this subsection if, as a result of and after giving effect to the transaction: (1) The aggregate amount of investments then held by an insurer under this subsection would exceed three percent (3%) of its admitted assets; or (2) The aggregate amount of investments as to one limitation in Sections 10 through 17 then held by the insurer under this subsection would exceed one percent (1%) of its admitted assets. B. (1) In addition to the authority provided under Subsection A of this section, an insurer may acquire under this subsection an investment of any kind, or engage in investment practices described in Section 16, that are not specifically prohibited by this Act, without regard to the categories, conditions, standards or other limitations of Sections 10 through 17 if, as a result of and after giving effect to the transaction, the aggregate amount of investments then held under this subsection would not exceed the lesser of: National Association of Insurance Commissioners

70 Attachment Sixteen Model Regulation Service April 2001 (a) (b) Ten percent (10%) of its admitted assets; or Seventy-five percent (75%) of its capital and surplus. (2) However, an insurer shall not acquire any investment or engage in any investment practice under this subsection if, as a result of and after giving effect to the transaction, the aggregate amount of all investments in any one person then held by the insurer under this subsection would exceed three percent (3%) of its admitted assets. C. In addition to the investments acquired under Subsections A and B of this section, an insurer may acquire under this subsection an investment of any kind, or engage in investment practices described in Section 16, that are not specifically prohibited by this Act without regard to any limitations of Sections 10 through 17 if: (1) The commissioner grants prior approval; (2) The insurer demonstrates that its investments are being made in a prudent manner and that the additional amounts will be invested in a prudent manner; and (3) As a result of and after giving effect to the transaction the aggregate amount of investments then held by the insurer under this subsection does not exceed the greater of: (a) (b) Twenty-five percent (25%) of its capital and surplus; or One hundred percent (100%) of capital and surplus less ten percent (10%) of its admitted assets. D. An investment prohibited under Section 5, not permitted under Section 18 or additional derivative instruments acquired under Section 18 shall not be acquired under this section. ARTICLE III. PROPERTY AND CASUALTY, FINANCIAL GUARANTY AND MORTGAGE GUARANTY INSURERS Section 21. Applicability This Article shall apply to the investments and investment practices of property and casualty, financial guaranty and mortgage guaranty insurers, subject to the provisions of Section 1B. Section 22. Reserve Requirements A. Reserve Requirements (1) Subject to all other limitations and requirements of this Act, a property and casualty, financial guaranty, mortgage guaranty or accident and health insurer shall maintain an amount at least equal to one hundred percent (100%) of adjusted loss reserves and loss adjustment expense reserves, one hundred percent (100%) of adjusted unearned premium reserves and one hundred percent (100%) of statutorily required policy and contract reserves in: 2017 National Association of Insurance Commissioners

71 Attachment Sixteen Investments of Insurers Model Act (a) Cash and cash equivalents; (b) High and medium grade investments that qualify under Sections 24 or 25; (c) (d) (e) (f) (g) Equity interests that qualify under Section 26 and that are traded on a qualified exchange; Investments of the type set forth in Section 30 if the investments are rated in the highest generic rating category by a nationally recognized statistical rating organization recognized by the SVO for rating foreign jurisdictions and if any foreign currency exposure is effectively hedged through the maturity date of the investments; Qualifying investments of the type set forth in Subparagraphs (b), (c) or (d) of this paragraph that are acquired under Section 32; Interest and dividends receivable on qualifying investments of the type set forth in Subparagraphs (a) through (e) of this subsection; or Reinsurance recoverable on paid losses. (2) Reserve Requirement Amount (a) (b) For purposes of determining the amount of assets to be maintained under this subsection, the calculation of adjusted loss reserves and loss adjustment expense reserves, adjusted unearned premium reserves and statutorily required policy and contract reserves shall be based on the amounts reported as of the most recent annual or quarterly statement date. Adjusted loss reserves and loss adjustment expense reserves shall be equal to the sum of the amounts derived from the following calculations: (i) (ii) (iii) (iv) The result of each amount reported by the insurer as losses and loss adjustment expenses unpaid for each accident year for each individual line of business; multiplied by The discount factor that is applicable to the line of business and accident year published by the Internal Revenue Service under Internal Revenue Code Section 846 (26 U.S.C. 846), as amended, for the calendar year that corresponds to the most recent annual statement of the insurer; minus Accrued retrospective premiums discounted by an average discount factor. The discount factor shall be calculated by dividing the losses and loss adjustment expenses unpaid after discounting (the product of Items (i) and (ii) in this subparagraph) by loss and loss adjustment expense reserves before discounting Item (i) of this subparagraph. For purposes of these calculations, the losses and loss National Association of Insurance Commissioners

72 Attachment Sixteen Model Regulation Service April 2001 adjustment expenses unpaid shall be determined net of anticipated salvage and subrogation, and gross of any discount for the time value of money or tabular discount. (c) Adjusted unearned premium reserves shall be equal to the result of the following calculation: (i) (ii) The amount reported by the insurer as unearned premium reserves; minus The admitted asset amounts reported by the insurer as: (I) (II) (III) Premiums in and agents balances in the course of collection, accident and health premiums due and unpaid and uncollected premiums for accident and health premiums; Premiums, agents balances and installments booked but deferred and not yet due; and Bills receivable, taken for premium. Drafting Note 9: The amounts to be subtracted are the amounts allowed to be reported as admitted assets on lines 9.1, 9.2 and 11 of page 2 of the Property and Casualty Annual Statement, line 15 of page 2 of the Life and Accident and Health Annual Statement, or line 9 of the Hospital Medical and Dental Service or Indemnity Corporations Annual Statement in accordance with the applicable Annual Statement Instructions and the applicable Accounting Practices and Procedures Manual of the NAIC and like amounts reported in quarterly statements. (d) Statutorily required policy and contract reserves also shall include, in the case of a financial guaranty insurer, the amounts required by [cite sections of the code that require contingency reserves and any other reserves that are not covered by the terms loss reserves, loss adjustment expense reserves and unearned premium reserves for financial guaranty insurers] and, in the case of a mortgage guaranty insurer, the amounts required by [cite sections of the code that require contingency reserves and any other reserves that are not covered by the terms loss reserves, loss adjustment expense reserves and unearned premium reserves for mortgage guaranty insurers] and, in the case of an accident and health insurer, the amounts required by [cite sections of the code that require additional or contingency reserves and any other reserves that are not covered by the terms loss reserves, loss adjustment expense reserves and unearned premium reserves for accident and health insurers]. B. Monitoring and Reporting A property and casualty, financial guaranty, mortgage guaranty or accident and health insurer shall supplement its annual statement with a reconciliation and summary of its assets and reserve requirements as required in Subsection A of this section. A reconciliation and summary showing that an insurer s assets as required in Subsection A of this section are greater than or equal to its undiscounted reserves referred to in Subsection A of this section shall be sufficient to satisfy this requirement. Upon prior notification, the commissioner may require an insurer to submit such a reconciliation and summary with any quarterly statement filed during 2017 National Association of Insurance Commissioners

73 Attachment Sixteen Investments of Insurers Model Act the calendar year. Drafting Note 10: The supplement to the annual statement is not intended to be a new exhibit to the NAIC Annual Statement blank. This filing is a state specific filing required by those states adopting this Model Act. Upon adoption by a significant number of states, a change to the NAIC Annual Statement blank to incorporate this exhibit may be considered. C. Notification Requirements and Mandatory Safeguards If a property and casualty, financial guaranty, mortgage guaranty or accident and health insurer s assets and reserves do not comply with Subsection A of this section, the insurer shall notify the commissioner immediately of the amount by which the reserve requirements exceed the annual statement value of the qualifying assets, explain why the deficiency exists and within thirty (30) days of the date of the notice propose a plan of action to remedy the deficiency. D. Authority of the Commissioner (1) If the commissioner determines that an insurer is not in compliance with Subsection A of this section, the commissioner shall require the insurer to eliminate the condition causing the noncompliance within a specified time from the date the notice of the commissioner s requirement is mailed or delivered to the insurer. (2) If an insurer fails to comply with the commissioner s requirement under Paragraph (1) of this subsection, the insurer is deemed to be in hazardous financial condition, and the commissioner shall take one or more of the actions authorized by law as to insurers in hazardous financial condition. Section 23. General Five Percent Diversification, Medium and Lower Grade Investments and Canadian Investments A. General Five Percent Diversification (1) Except as otherwise specified in this Act, an insurer shall not acquire directly or indirectly through an investment subsidiary an investment under this Act if, as a result of and after giving effect to the investment, the insurer would hold more than five percent (5%) of its admitted assets in investments of all kinds issued, assumed, accepted, insured or guaranteed by a single person. (2) This five percent (5%) limitation shall not apply to the aggregate amounts insured by a single financial guaranty insurer with the highest generic rating issued by a nationally recognized statistical rating organization. (3) Asset-backed securities shall not be subject to the limitations of paragraph (1) of this subsection, however an insurer shall not acquire an asset-backed security if, as a result of and after giving effect to the investment, the aggregate amount of asset-backed securities secured by or evidencing an interest in a single asset or single pool of assets held by a trust or other business entity, then held by the insurer would exceed five percent (5%) of its admitted assets. B. Medium and Lower Grade Investments (1) An insurer shall not acquire, directly or indirectly through an investment National Association of Insurance Commissioners

74 Attachment Sixteen Model Regulation Service April 2001 subsidiary, an investment under Sections 24, 27, 30 or counterparty exposure under Section 31D if, as a result of and after giving effect to the investment: (a) (b) (c) (d) (e) The aggregate amount of all medium and lower grade investments then held by the insurer would exceed twenty percent (20%) of its admitted assets; The aggregate amount of lower grade investments then held by the insurer would exceed ten percent (10%) of its admitted assets; The aggregate amount of investments rated 5 or 6 by the SVO then held by the insurer would exceed five percent (5%) of its admitted assets; The aggregate amount of investments rated 6 by the SVO then held by the insurer would exceed one percent (1%) of its admitted assets; or The aggregate amount of medium and lower grade investments then held by the insurer that receive as cash income less than the equivalent yield for Treasury issues with a comparative average life, would exceed one percent (1%) of its admitted assets. (2) An insurer shall not acquire, directly or indirectly through an investment subsidiary, an investment under Sections 24, 27, 30 or counterparty exposure under Section 31D if, as a result of and after giving effect to the investment: (a) (b) The aggregate amount of medium and lower grade investments issued, assumed, guaranteed, accepted or insured by any one person or, as to asset-backed securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed one percent (1%) of its admitted assets; or The aggregate amount of lower grade investments issued, assumed, guaranteed, accepted or insured by any one person or, as to assetbacked securities secured by or evidencing an interest in a single asset or pool of assets, then held by the insurer would exceed one half of one percent (.5%) of its admitted assets. (3) If an insurer attains or exceeds the limit of any one rating category referred to in this subsection, the insurer shall not thereby be precluded from acquiring investments in other rating categories subject to the specific and multi-category limits applicable to those investments. C. Canadian Investments (1) An insurer shall not acquire, directly or indirectly through an investment subsidiary, any Canadian investments authorized by this Act, if as a result of and after giving effect to the investment, the aggregate amount of these investments then held by the insurer would exceed forty percent (40%) of its admitted assets, or if the aggregate amount of Canadian investments not acquired under Section 24B then held by the insurer would exceed twentyfive percent (25%) of its admitted assets National Association of Insurance Commissioners

75 Attachment Sixteen Investments of Insurers Model Act (2) However, as to an insurer that is authorized to do business in Canada or that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in Canada and denominated in Canadian currency, the limitations of Paragraph (1) of this subsection shall be increased by the greater of: (a) (b) The amount the insurer is required by Canadian law to invest in Canada or to be denominated in Canadian currency; or One hundred twenty-five percent (125%) of the amount of its reserves and other obligations under contracts on risks resident or located in Canada. Section 24. Rated Credit Instruments Subject to the limitations of Subsection F of this section, an insurer may acquire rated credit instruments: A. Subject to the limitations of Section 23B, but not to the limitations of Section 23A, an insurer may acquire rated credit instruments issued, assumed, guaranteed or insured by: (1) The United States; or (2) A government sponsored enterprise of the United States, if the instruments of the government sponsored enterprise are assumed, guaranteed or insured by the United States or are otherwise backed or supported by the full faith and credit of the United States. B. (1) Subject to the limitations of Section 23B, but not to the limitations of Section 23A, an insurer may acquire rated credit instruments issued, assumed, guaranteed or insured by: (a) (b) Canada; or A government sponsored enterprise of Canada, if the instruments of the government sponsored enterprise are assumed, guaranteed or insured by Canada or are otherwise backed or supported by the full faith and credit of Canada; (2) However, an insurer shall not acquire an instrument under this subsection if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this subsection would exceed forty percent (40%) of its admitted assets. C. (1) Subject to the limitations of Section 23B, but not to the limitations of Section 23A, an insurer may acquire rated credit instruments, excluding asset-backed securities: (a) Issued by a government money market mutual fund, a class one money market mutual fund or a class one listed bond mutual fund; National Association of Insurance Commissioners

76 Attachment Sixteen Model Regulation Service April 2001 (b) (c) (d) Issued, assumed, guaranteed or insured by a government sponsored enterprise of the United States other than those eligible under Subsection A of this section; Issued, assumed, guaranteed or insured by a state, if the instruments are general obligations of the state; or Issued by a multilateral development bank. (2) However, an insurer shall not acquire an instrument of any one fund, any one enterprise or entity, or any one state under this subsection if, as a result of and after giving effect to the investment, the aggregate amount of investments then held in any one fund, enterprise or entity or state under this subsection would exceed ten percent (10%) of its admitted assets. D. Subject to the limitations of Section 23, an insurer may acquire preferred stocks that are not foreign investments and that meet the requirements of rated credit instruments if, as a result of and after giving effect to the investment: (1) The aggregate amount of preferred stocks then held by the insurer under this subsection does not exceed twenty percent (20%) of its admitted assets; and (2) The aggregate amount of preferred stocks then held by the insurer under this subsection which are not sinking fund stocks or rated P1 or P2 by the SVO does not exceed ten percent (10%) of its admitted assets. E. Subject to the limitations of Section 23 in addition to those investments eligible under Subsections A, B, C and D of this section, an insurer may acquire rated credit instruments that are not foreign investments. F. An insurer shall not acquire special rated credit instruments under this section if, as a result of and after giving effect to the investment, the aggregate amount of special rated credit instruments then held by the insurer would exceed five percent (5%) of its admitted assets. Drafting Note 11: In states which have not adopted Secondary Mortgage Market Enhancement Act of 1984, as amended (SMMEA) override legislation, obligations of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and other mortgage-backed or mortgage related securities as defined in Section 106 of Title I of SMMEA (15 U.S.C. 77r-1) may be invested in to the same extent as allowed under Section 24A, whether or not they are rated credit instruments authorized in Section 24A. Appropriate changes to Section 24 or other Sections of this Act may be necessary. Section 25. Insurer Investment Pools A. An insurer may acquire investments in investment pools that: (1) Invest only in: (a) Obligations that are rated 1 or 2 by the SVO or have an equivalent of an SVO 1 or 2 rating (or, in the absence of a 1 or 2 rating or equivalent rating, the issuer has outstanding obligations with an SVO 1 or 2 or equivalent rating) by a nationally recognized statistical rating organization recognized by the SVO and have: (i) A remaining maturity of 397 days or less or a put that entitles the holder to receive the principal amount of the obligation 2017 National Association of Insurance Commissioners

77 Attachment Sixteen Investments of Insurers Model Act which put may be exercised through maturity at specified intervals not exceeding 397 days; or (ii) A remaining maturity of three (3) years or less and a floating interest rate that resets no less frequently than quarterly on the basis of a current short-term index (federal funds, prime rate, treasury bills, London InterBank Offered Rate (LIBOR) or commercial paper) and is subject to no maximum limit, if the obligations do not have an interest rate that varies inversely to market interest rate changes; (b) (c) Government money market mutual funds or class one money market mutual funds; or Securities lending, repurchase and reverse repurchase transactions that meet all the requirements of Section 29, except the quantitative limitations of Section 29D; or (2) Invest only in investments which an insurer may acquire under this Act, if the insurer s proportionate interest in the amount invested in these investments does not exceed the applicable limits of this Act. B. For an investment in an investment pool to be qualified under this Act, the investment pool shall not: (1) Acquire securities issued, assumed, guaranteed or insured by the insurer or an affiliate of the insurer; (2) Borrow or incur any indebtedness for borrowed money, except for securities lending and reverse repurchase transactions that meet the requirements of Section 29 except the quantitative limitations of Section 29D; or (3) Permit the aggregate value of securities then loaned or sold to, purchased from or invested in any one business entity under this section to exceed ten percent (10%) of the total assets of the investment pool. C. The limitations of Section 23A shall not apply to an insurer s investment in an investment pool, however an insurer shall not acquire an investment in an investment pool under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section: (1) In any one investment pool would exceed ten percent (10%) of its admitted assets; (2) In all investment pools investing in investments permitted under Subsection A(2) of this section would exceed twenty-five percent (25%) of its admitted assets; or (3) In all investment pools would exceed forty percent (40%) of its admitted assets. D. For an investment in an investment pool to be qualified under this Act, the manager National Association of Insurance Commissioners

78 Attachment Sixteen of the investment pool shall: Model Regulation Service April 2001 (1) Be organized under the laws of the United States or a state and designated as the pool manager in a pooling agreement; (2) Be the insurer, an affiliated insurer or a business entity affiliated with the insurer, a qualified bank, a business entity registered under the Investment Advisors Act of 1940 (15 U.S.C. 80a-1 et seq.), as amended or, in the case of a reciprocal insurer or interinsurance exchange, its attorney-in-fact, or in the case of a United States branch of an alien insurer, its United States manager or affiliates or subsidiaries of its United States manager; (3) Compile and maintain detailed accounting records setting forth: (a) (b) (c) The cash receipts and disbursements reflecting each participant s proportionate investment in the investment pool; A complete description of all underlying assets of the investment pool (including amount, interest rate, maturity date (if any) and other appropriate designations); and Other records which, on a daily basis, allow third parties to verify each participant s investment in the investment pool; and (4) Maintain the assets of the investment pool in one or more accounts, in the name of or on behalf of the investment pool, under a custody agreement with a qualified bank. The custody agreement shall: (a) (b) (c) State and recognize the claims and rights of each participant; Acknowledge that the underlying assets of the investment pool are held solely for the benefit of each participant in proportion to the aggregate amount of its investments in the investment pool; and Contain an agreement that the underlying assets of the investment pool shall not be commingled with the general assets of the custodian qualified bank or any other person. E. The pooling agreement for each investment pool shall be in writing and shall provide that: (1) An insurer and its affiliated insurers or, in the case of an investment pool investing solely in investments permitted under Subsection A(1) of this section, the insurer and its subsidiaries, affiliates or any pension or profit sharing plan of the insurer, its subsidiaries and affiliates or, in the case of a United States branch of an alien insurer, affiliates or subsidiaries of its United States manager, shall, at all times, hold one hundred percent (100%) of the interests in the investment pool; (2) The underlying assets of the investment pool shall not be commingled with the general assets of the pool manager or any other person; (3) In proportion to the aggregate amount of each pool participant s interest in 2017 National Association of Insurance Commissioners

79 Attachment Sixteen the investment pool: Investments of Insurers Model Act (a) (b) Each participant owns an undivided interest in the underlying assets of the investment pool; and The underlying assets of the investment pool are held solely for the benefit of each participant; (4) A participant, or in the event of the participant s insolvency, bankruptcy or receivership, its trustee, receiver or other successor-in-interest, may withdraw all or any portion of its investment from the investment pool under the terms of the pooling agreement; (5) Withdrawals may be made on demand without penalty or other assessment on any business day, but settlement of funds shall occur within a reasonable and customary period thereafter not to exceed five (5) business days. Distributions under this paragraph shall be calculated in each case net of all then applicable fees and expenses of the investment pool. The pooling agreement shall provide that the pool manager shall distribute to a participant, at the discretion of the pool manager: (a) (b) (c) In cash, the then fair market value of the participant s pro rata share of each underlying asset of the investment pool; In kind, a pro rata share of each underlying asset; or In a combination of cash and in kind distributions, a pro rata share in each underlying asset; and (6) The pool manager shall make the records of the investment pool available for inspection by the commissioner. Section 26. Equity Interests A. Subject to the limitations of Section 23, an insurer may acquire equity interests in business entities organized under the laws any domestic jurisdiction. B. An insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of investments then held by the insurer under this section would exceed the greater of twenty-five percent (25%) of its admitted assets or one hundred percent (100%) of its surplus as regards policyholders. C. An insurer shall not acquire under this section any investments that the insurer may acquire under Section 28. D. An insurer shall not short sell equity investments unless the insurer covers the short sale by owning the equity investment or an unrestricted right to the equity instrument exercisable within six (6) months of the short sale. Section 27. Tangible Personal Property Under Lease A. (1) Subject to the limitations of Section 23, an insurer may acquire tangible personal property or equity interests therein located or used wholly or in part National Association of Insurance Commissioners

80 Attachment Sixteen Model Regulation Service April 2001 within a domestic jurisdiction either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates or other similar instruments. (2) Investments acquired under Paragraph (1) of this subsection shall be eligible only if: (a) (b) The property is subject to a lease or other agreement with a person whose rated credit instruments in the amount of the purchase price of the personal property the insurer could then acquire under Section 24; and The lease or other agreement provides the insurer the right to receive rental, purchase or other fixed payments for the use or purchase of the property, and the aggregate value of the payments, together with the estimated residual value of the property at the end of its useful life and the estimated tax benefits to the insurer resulting from ownership of the property, shall be adequate to return the cost of the insurer s investment in the property, plus a return deemed adequate by the insurer. B. The insurer shall compute the amount of each investment under this section on the basis of the out-of-pocket purchase price and applicable related expenses paid by the insurer for the investment, net of each borrowing made to finance the purchase price and expenses, to the extent the borrowing is without recourse to the insurer. C. An insurer shall not acquire an investment under this section if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under this section would exceed: (1) Two percent (2%) of its admitted assets; or (2) One half of one percent (.5%) of its admitted assets as to any single item of tangible personal property. D. For purposes of determining compliance with the limitations of Section 23, investments acquired by an insurer under this section shall be aggregated with those acquired under Section 24, and each lessee of the property under a lease referred to in this section shall be deemed the issuer of an obligation in the amount of the investment of the insurer in the property determined as provided in Subsection B of this section. E. Nothing in this section is applicable to tangible personal property lease arrangements between an insurer and its subsidiaries and affiliates under a cost sharing arrangement or agreement permitted under [insert reference to holding company law]. Section 28. Mortgage Loans and Real Estate A. Mortgage Loans 2017 National Association of Insurance Commissioners

81 Attachment Sixteen Investments of Insurers Model Act (l) Subject to the limitations of Section 23, an insurer may acquire, either directly, indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments, obligations secured by mortgages on real estate situated within a domestic jurisdiction, but a mortgage loan which is secured by other than a first lien shall not be acquired unless the insurer is the holder of the first lien. The obligations held by the insurer and any obligations with an equal lien priority, shall not, at the time of acquisition of the obligation, exceed: (a) (b) (c) Ninety percent (90%) of the fair market value of the real estate, if the mortgage loan is secured by a purchase money mortgage or like security received by the insurer upon disposition of the real estate; Eighty percent (80%) of the fair market value of the real estate, if the mortgage loan requires immediate scheduled payment in periodic installments of principal and interest, has an amortization period of thirty (30) years or less and periodic payments made no less frequently than annually. Each periodic payment shall be sufficient to assure that at all times the outstanding principal balance of the mortgage loan shall be not greater than the outstanding principal balance which would be outstanding under a mortgage loan with the same original principal balance, with the same interest rate and requiring equal payments of principal and interest with the same frequency over the same amortization period. Mortgage loans permitted under this subsection are permitted notwithstanding the fact that they provide for a payment of the principal balance prior to the end of the period of amortization of the loan. For residential mortgage loans, the eighty percent (80%) limitation may be increased to ninety-seven percent (97%) if acceptable private mortgage insurance has been obtained; or Seventy-five percent (75%) of the fair market value of the real estate for mortgage loans that do not meet the requirements of Subparagraphs (a) or (b) of this paragraph. (2) For purposes of Paragraph (1) of this subsection, the amount of an obligation required to be included in the calculation of the loan-to-value ratio may be reduced to the extent the obligation is insured by the Federal Housing Administration or guaranteed by the Administrator of Veterans Affairs, or their successors. (3) A mortgage loan that is held by an insurer under Section 3F or acquired under this section and is restructured in a manner that meets the requirements of a restructured mortgage loan in accordance with the NAIC Accounting Practices and Procedures Manual or successor publication shall continue to qualify as a mortgage loan under this Act. (4) Subject to the limitations of Section 23, credit lease transactions that do not qualify for investment under Section 24 with the following characteristics shall be exempt from the provisions of Paragraph (1) of this subsection: National Association of Insurance Commissioners

82 Attachment Sixteen Model Regulation Service April 2001 (a) (b) (c) (d) (e) (f) The loan amortizes over the initial fixed lease term at least in an amount sufficient so that the loan balance at the end of the lease term does not exceed the original appraised value of the real estate; The lease payments cover or exceed the total debt service over the life of the loan; A tenant or its affiliated entity whose rated credit instruments have a SVO 1 or 2 designation or a comparable rating from a nationally recognized statistical rating organization recognized by the SVO has a full faith and credit obligation to make the lease payments; The insurer holds or is the beneficial holder of a first lien mortgage on the real estate; The expenses of the real estate are passed through to the tenant, excluding exterior, structural, parking and heating, ventilation and air conditioning replacement expenses, unless annual escrow contributions, from cash flows derived from the lease payments, cover the expense shortfall; and There is a perfected assignment of the rents due pursuant to the lease to, or for the benefit of, the insurer. B. Income Producing Real Estate (1) An insurer may acquire, manage and dispose of real estate situated in a domestic jurisdiction either directly or indirectly through limited partnership interests and general partnership interests not otherwise prohibited by Section 5D, joint ventures, stock of an investment subsidiary or membership interests in a limited liability company, trust certificates, or other similar instruments. The real estate shall be income producing or intended for improvement or development for investment purposes under an existing program (in which case the real estate shall be deemed to be income producing). (2) The real estate may be subject to mortgages, liens or other encumbrances, the amount of which shall, to the extent that the obligations secured by the mortgages, liens or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with Subsections D(2) and D(3) of this section. C. Real Estate for the Accommodation of Business An insurer may acquire, manage, and dispose of real estate for the convenient accommodation of the insurer s (which may include its affiliates) business operations, including home office, branch office and field office operations. (1) Real estate acquired under this subsection may include excess space for rent to others, if the excess space, valued at its fair market value, would otherwise be a permitted investment under Subsection B of this section and is so qualified by the insurer; 2017 National Association of Insurance Commissioners

83 Attachment Sixteen Investments of Insurers Model Act (2) The real estate acquired under this subsection may be subject to one or more mortgages, liens or other encumbrances, the amount of which shall, to the extent that the obligations secured by the mortgages, liens or encumbrances are without recourse to the insurer, be deducted from the amount of the investment of the insurer in the real estate for purposes of determining compliance with Subsection D(4) of this section; and (3) For purposes of this subsection, business operations shall not include that portion of real estate used for the direct provision of health care services by an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least ninety-five percent (95%) of total premium considerations or total statutory required reserves, respectively. An insurer may acquire real estate used for these purposes under Subsection B of this section. D. Quantitative Limitations (1) An insurer shall not acquire an investment under Subsection A of this section if, as a result of and after giving effect to the investment, the aggregate amount of all investments then held by the insurer under Subsection A of this section would exceed: (a) (b) (c) One percent (1%) of its admitted assets in mortgage loans covering any one secured location; One quarter of one percent (.25%) of its admitted assets in construction loans covering any one secured location; or One percent (1%) of its admitted assets in construction loans in the aggregate. (2) An insurer shall not acquire an investment under Subsection B of this section if, as a result of and after giving effect to the investment and any outstanding guarantees made by the insurer in connection with the investment, the aggregate amount of investments then held by the insurer under Subsection B of this section plus the guarantees then outstanding would exceed: (a) (b) One percent (1%) of its admitted assets in any one parcel or group of contiguous parcels of real estate, except that this limitation shall not apply to that portion of real estate used for the direct provision of health care services by an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least ninety-five percent (95%) of total premium considerations or total statutory required reserves, respectively, such as hospitals, medical clinics, medical professional buildings or other health facilities used for the purpose of providing health services; or The lesser of ten percent (10%) of its admitted assets or forty percent (40%) of its surplus as regards policyholders in the aggregate, except for an insurer whose insurance premiums and required statutory reserves for accident and health insurance constitute at least ninetyfive percent (95%) of total premium considerations or total statutory National Association of Insurance Commissioners

84 Attachment Sixteen Model Regulation Service April 2001 required reserves, respectively, this limitation shall be increased to fifteen percent (15%) of its admitted assets in the aggregate. (3) An insurer shall not acquire an investment under Subsection A or B of this section if, as a result of and after giving effect to the investment and any guarantees it has made in connection with the investment, the aggregate amount of all investments then held by the insurer under Subsections A and B of this section plus the guarantees then outstanding would exceed twentyfive percent (25%) of its admitted assets. (4) The limitations of Section 23 shall not apply to an insurer s acquisition of real estate under Subsection C of this section. An insurer shall not acquire real estate under Subsection C of this section if, as a result of and after giving effect to the acquisition, the aggregate amount of all real estate then held by the insurer under Subsection C of this section would exceed ten percent (10%) of its admitted assets. With the permission of the commissioner, additional amounts of real estate may be acquired under Subsection C of this section. Section 29. Securities Lending, Repurchase, Reverse Repurchase and Dollar Roll Transactions An insurer may enter into securities lending, repurchase, reverse repurchase and dollar roll transactions with business entities, subject to the following requirements: A. The insurer s board of directors shall adopt a written plan that is consistent with the requirements of the written plan in Section 4A that specifies guidelines and objectives to be followed, such as: (1) A description of how cash received will be invested or used for general corporate purposes of the insurer; (2) Operational procedures to manage interest rate risk, counterparty default risk, the conditions under which proceeds from reverse repurchase transactions may be used in the ordinary course of business and the use of acceptable collateral in a manner that reflects the liquidity needs of the transaction; and (3) The extent to which the insurer may engage in these transactions. B. The insurer shall enter into a written agreement for all transactions authorized in this section other than dollar roll transactions. The written agreement shall require that each transaction terminate no more than one year from its inception or upon the earlier demand of the insurer. The agreement shall be with the business entity counterparty, but for securities lending transactions, the agreement may be with an agent acting on behalf of the insurer, if the agent is a qualified business entity, and if the agreement: (1) Requires the agent to enter into separate agreements with each counterparty that are consistent with the requirements of this section; and (2) Prohibits securities lending transactions under the agreement with the agent or its affiliates National Association of Insurance Commissioners

85 Attachment Sixteen Investments of Insurers Model Act C. Cash received in a transaction under this section shall be invested in accordance with this Act and in a manner that recognizes the liquidity needs of the transaction or used by the insurer for its general corporate purposes. For so long as the transaction remains outstanding, the insurer, its agent or custodian shall maintain, as to acceptable collateral received in a transaction under this section, either physically or through the book entry systems of the Federal Reserve, Depository Trust Company, Participants Trust Company or other securities depositories approved by the commissioner: (1) Possession of the acceptable collateral; (2) A perfected security interest in the acceptable collateral; or (3) In the case of a jurisdiction outside of the United States, title to, or rights of a secured creditor to, the acceptable collateral. D. The limitations of Sections 23 and 30 shall not apply to the business entity counterparty exposure created by transactions under this section. For purposes of calculations made to determine compliance with this subsection, no effect will be given to the insurer s future obligation to resell securities, in the case of a reverse repurchase transaction, or to repurchase securities, in the case of a reverse repurchase transaction. An insurer shall not enter into a transaction under this section if, as a result of and after giving effect to the transaction: (1) The aggregate amount of securities then loaned, sold to or purchased from any one business entity counterparty under this section would exceed five percent (5%) of its admitted assets. In calculating the amount sold to or purchased from a business entity counterparty under repurchase or reverse repurchase transactions, effect may be given to netting provisions under a master written agreement; or (2) The aggregate amount of all securities then loaned, sold to or purchased from all business entities under this section would exceed forty percent (40%) of its admitted assets but the limitation of this subsection shall not apply to reverse repurchase transactions for so long as the borrowing is used to meet operational liquidity requirements resulting from an officially declared catastrophe and subject to a plan approved by the commissioner. E. In a securities lending transaction, the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to 102 percent of the market value of the securities loaned by the insurer in the transaction as of that date. If at any time the market value of the acceptable collateral is less than the market value of the loaned securities, the business entity counterparty shall be obligated to deliver additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals 102 percent of the market value of the loaned securities. F. In a reverse repurchase transaction, (other than a dollar roll transaction), the insurer shall receive acceptable collateral having a market value as of the transaction date at least equal to ninety-five percent (95%) of the market value of the securities transferred by the insurer in the transaction as of that date. If at any time the market value of the acceptable collateral is less than ninety-five percent (95%) of the market value of the securities so transferred, the business entity counterparty shall National Association of Insurance Commissioners

86 Attachment Sixteen Model Regulation Service April 2001 be obligated to deliver additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals ninety-five percent (95%) of the market value of the transferred securities. G. In a dollar roll transaction, the insurer shall receive cash in an amount at least equal to the market value of the securities transferred by the insurer in the transaction as of the transaction date. H. In a reverse repurchase transaction, the insurer shall receive as acceptable collateral transferred securities having a market value at least equal to 102 percent of the purchase price paid by the insurer for the securities. If at any time the market value of the acceptable collateral is less than 100 percent of the purchase price paid by the insurer, the business entity counterparty shall be obligated to provide additional acceptable collateral, the market value of which, together with the market value of all acceptable collateral then held in connection with the transaction, at least equals 102 percent of the purchase price. Securities acquired by an insurer in a reverse repurchase transaction shall not be sold in a reverse repurchase transaction, loaned in a securities lending transaction or otherwise pledged. Drafting Note 12: Subsections E, F, and H of this section contain requirements that at the time of drafting this model act were contained in the Purposes and Procedures of the Securities Valuation Office. However, concomitant with the drafting of this model act, a separate task force was considering a revised publication which did not contain these requirements inasmuch as the SVO considered these requirements as accounting-type rules which were deemed not suitable to such a publication. Moreover, another third working group was developing a draft of a revised accounting manual but had not considered proposing separate accounting guidance regarding these requirements. Instead, the accounting manual implicitly referred to the requirements stipulated in this model act. Pending the results of consideration of these requirements by the three groups, in concert, these requirements have been included in this model act. If after due consideration, these requirements are included in the revised accounting manual as representative of statutory accounting principles or, in the alternative, are inserted in the revised Purposes and Procedures of the Securities Valuation Office, then States may opt not to codify these requirements within their insurer investment code. Section 30. Foreign Investments and Foreign Currency Exposure A. Subject to the limitations of Section 23, an insurer may acquire foreign investments, or engage in investment practices with persons of or in foreign jurisdictions, of substantially the same types as those that an insurer is permitted to acquire under this Act, other than of the type permitted under Section 25, if, as a result and after giving effect to the investment: (1) The aggregate amount of foreign investments then held by the insurer under this subsection does not exceed twenty percent (20%) of its admitted assets; and (2) The aggregate amount of foreign investments then held by the insurer under this subsection in a single foreign jurisdiction does not exceed ten percent (10%) of its admitted assets as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or five percent (5%) of its admitted assets as to any other foreign jurisdiction. B. Subject to the limitations of Section 23, an insurer may acquire investments, or engage in investment practices denominated in foreign currencies, whether or not they are foreign investments acquired under Subsection A of this section, or additional foreign currency exposure as a result of the termination or expiration of a hedging transaction with respect to investments denominated in a foreign currency, if: 2017 National Association of Insurance Commissioners

87 Attachment Sixteen Investments of Insurers Model Act (1) The aggregate amount of investments then held by the insurer under this subsection denominated in foreign currencies does not exceed fifteen percent (15%) of its admitted assets; and (2) The aggregate amount of investments then held by the insurer under this subsection denominated in the foreign currency of a single foreign jurisdiction does not exceed ten percent (10%) of its admitted as to a foreign jurisdiction that has a sovereign debt rating of SVO 1 or five percent (5%) of its admitted assets as to any other foreign jurisdiction. (3) However, an investment shall not be considered denominated in a foreign currency if the acquiring insurer enters into one or more contracts in transactions permitted under Section 31 and the business entity counterparty agrees under the contract or contracts to exchange all payments made on the foreign currency denominated investment for United States currency at a rate which effectively insulates the investment cash flows against future changes in currency exchange rates during the period the contract or contracts are in effect. C. In addition to investments permitted under Subsections A and B of this section, an insurer that is authorized to do business in a foreign jurisdiction, and that has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in that foreign jurisdiction and denominated in foreign currency of that jurisdiction, may acquire foreign investments respecting that foreign jurisdiction, and may acquire investments denominated in the currency of that jurisdiction, subject to the limitations of Section 23. However, investments made under this subsection in obligations of foreign governments, their political subdivisions and government sponsored enterprises shall not be subject to the limitations of Section 23 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection shall not exceed the greater of: (1) The amount the insurer is required by law to invest in the foreign jurisdiction; or (2) One hundred twenty-five percent (125%) of the amount of its reserves, net of reinsurance, and other obligations under the contracts. D. In addition to investments permitted under Subsections A and B of this section, an insurer that is not authorized to do business in a foreign jurisdiction but which has outstanding insurance, annuity or reinsurance contracts on lives or risks resident or located in a foreign jurisdiction and denominated in foreign currency of that jurisdiction, may acquire foreign investments respecting that foreign jurisdiction, and may acquire investments denominated in the currency of that jurisdiction subject to the limitations set forth in Section 23. However, investments made under this subsection in obligations of foreign governments, their political subdivisions and government sponsored enterprises shall not be subject to the limitations of Section 23 if those investments carry an SVO rating of 1 or 2. The aggregate amount of investments acquired by the insurer under this subsection shall not exceed 105 percent of the amount of its reserves, net of reinsurance, and other obligations under the contracts on risks resident or located in the foreign jurisdiction. E. Investments acquired under this section shall be aggregated with investments of the National Association of Insurance Commissioners

88 Attachment Sixteen Model Regulation Service April 2001 same types made under all other sections of this Act, and in a similar manner, for purposes of determining compliance with the limitations, if any, contained in the other sections. Investments in obligations of foreign governments, their political subdivisions and government sponsored enterprises of these persons, except for those exempted under Subsections C and D of this section, shall be subject to the limitations of Section 23. Section 31. Derivative Transactions An insurer may, directly or indirectly through an investment subsidiary, engage in derivative transactions under this section under the following conditions : A. General Conditions (1) An insurer may use derivative instruments under this section to engage in hedging transactions and certain income generation transactions, as these terms may be further defined in regulations promulgated by the commissioner. (2) An insurer shall be able to demonstrate to the commissioner the intended hedging characteristics and the ongoing effectiveness of the derivative transaction or combination of transactions through cash flow testing or other appropriate analyses. B. Limitations on Hedging Transactions An insurer may enter into hedging transactions under this section if, as a result of and after giving effect to the transaction : (1) The aggregate statement value of options, caps, floors and warrants not attached to another financial instrument purchased and used in hedging transactions does not exceed seven and one half percent (7.5%) of its admitted assets; (2) The aggregate statement value of options, caps and floors written in hedging transactions does not exceed three percent (3%) of its admitted assets; and (3) The aggregate potential exposure of collars, swaps, forwards and futures used in hedging transactions does not exceed six and one-half percent (6.5%) of its admitted assets. C. Limitations on Income Generation Transactions An insurer may only enter into the following types of income generation transactions if as a result of and after giving effect to the transactions, the aggregate statement value of the fixed income assets that are subject to call plus the face value of fixed income securities underlying a derivative instrument subject to call, plus the amount of the purchase obligations under the puts, does not exceed ten percent (10%) of its admitted assets: (1) Sales of covered call options on non-callable fixed income securities, callable fixed income securities if the option expires by its terms prior to the end of the noncallable period or derivative instruments based on fixed income 2017 National Association of Insurance Commissioners

89 Attachment Sixteen Investments of Insurers Model Act securities; (2) Sales of covered call options on equity securities, if the insurer holds in its portfolio, or can immediately acquire through the exercise of options, warrants or conversion rights already owned, the equity securities subject to call during the complete term of the call option sold; or (3) Sales of covered puts on investments that the insurer is permitted to acquire under this Act, if the insurer has escrowed, or entered into a custodian agreement segregating, cash or cash equivalents with a market value equal to the amount of its purchase obligations under the put during the complete term of the put option sold. D. Counterparty Exposure An insurer shall include all counterparty exposure amounts in determining compliance with the limitations of Section 23. E. Additional Transactions Pursuant to regulations promulgated under Section 8, the commissioner may approve additional transactions involving the use of derivative instruments in excess of the limits of Subsection B of this section or for other risk management purposes under regulations promulgated by the commissioner, but replication transactions shall not be permitted for other than risk management purposes. Section 32. Additional Investment Authority A. An insurer may acquire under this section investments, or engage in investment practices, of any kind that are not specifically prohibited by this Act, or engage in investment practices, without regard to any limitation in Sections 23 through 30, but an insurer shall not acquire an investment or engage in an investment practice under this section if, as a result of and after giving effect to the transaction, the aggregate amount of the investments then held by the insurer under this section would exceed the greater of: (1) Its unrestricted surplus; or (2) The lesser of: (a) (b) Ten percent (10%) of its admitted assets; or Fifty percent (50%) of its surplus as regards policyholders. B. An insurer shall not acquire any investment or engage in any investment practice under Subsection A(2) of this section if, as a result of and after giving effect to the transaction the aggregate amount of all investments in any one person then held by the insurer under that subsection would exceed five percent (5%) of its admitted assets. Chronological Summary of Action (all references are to the Proceedings of the NAIC) Proc. 2 nd Quarter 11, 33, 50-86, 264 (adopted) National Association of Insurance Commissioners

90 Attachment Sixteen Model Regulation Service April Proc. 1 st Quarter (amendments adopted later are printed here) Proc. 2 nd Quarter 11, 14, 319, 339 (amended) National Association of Insurance Commissioners

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92 Attachment Seventeen MEMORANDUM TO: FROM: Financial Condition (E) Committee NAIC Staff DATE: August 8, 2017 RE: Examiners Suggested Salary The Consumer Price Index (CPI), as defined by the U.S. Bureau of Labor Statistics (BLS) is a measure of the average change in prices of goods and services purchased by households over time. The CPI is based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors and dentists services, drugs, and other goods and services purchased for dayto-day living. All taxes directly associated with the purchase and uses of items are included in the index. Prices of fuels and a few other items are obtained every month in all 87 locations tracked by the CPI. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas. Prices of most goods and services are obtained by personal visits or telephone calls of the BLS trained representatives. In 2008, it was decided that, because the CPI takes into consideration most costs incurred by the average household, it is reasonable that an increase in salary should be within the same parameters as the increase in the cost of living. It was therefore proposed, and that proposal accepted, that the CPI be used as a basis for examiner salary increases. In years in which the CPI does not accurately reflect market conditions, additional work including surveys and salary studies may be completed to ensure proper salary suggestions. For the time period between July 2016 and June 2017, inflation showed a modest increase (driven by increases in the cost of housing, medical care, and education) and, therefore, may not completely represent the current job market warranting some consideration of additional factors. The following data table shows the average annual salary increases adopted in the previous five years as compared to the CPI, as well as the proposed increase for the following year. The information as published by BLS is for the period of August July of the previous year, as that was the most current CPI data available at the time of the suggested salary rate increase As Published in Financial Condition Examiners Handbook 1.5% 2.1% 2.25% 2.00% 2.75% *3.00% As Published by BLS 1.41% 2.14% 2.26% 0.17% 0.83% **1.96% Difference %.04% 0.01% 0.83% 1.92% 1.04% * - Suggested change ** - Estimate based on data available as of June 2017 As shown above, in recent years, the rates suggested by the NAIC were consistently comparable to those published by the BLS, regardless of the method used National Association of Insurance Commissioners 1

93 Attachment Seventeen To supplement this analysis, NAIC staff also obtained the 2017 Robert Half Salary Guide to review and compare to accounting professionals that were determined to be most comparable to insurance examiners. Both Financial auditors and IT auditors were noted to receive, on average, a 4.0% compensation increase between 2016 and Based upon the current CPI data available (July 2016 June 2017) the estimated annual change in CPI is approximately 1.96%. As noted before, the salary study obtained by NAIC staff suggests that professionals in comparable positions are receiving approximately a 4.0% increase. As such, if the Committee intends to base salary increases both on changes in the CPI and the results of the salary comparison, we would recommend a 3.0% increase in all classification categories as shown below. Classification Daily Suggested Daily Rates Increase Rates Insurance Company Examiner, AFE* $ % $ Automated Examination Specialist, AFE (no AES**) $ % $ Senior Insurance Examiner, CFE*** $ % $ Automated Examination Specialist, AES $ % $ Automated Examination Specialist, CFE (no AES) $ % $ Insurance Examiner In-Charge, CFE $ % $ Supervising or Administrative Examiner $ % $ * Accredited Financial Examiner. ** Automated Examination Specialist. *** Certified Financial Examiner. As the recommendations are not required to be finalized until the Fall National Meeting, we recommend reviewing CPI data accumulated through July (to be consistent with prior years) before reaching a final decision on salary recommendations for W:\National Meetings\2015\Fall\Cmte\E\Attachment Thirteen-Examiners Sugg Comp.docx 2017 National Association of Insurance Commissioners 2

94 Attachment Eighteen MEMORANDUM TO: FROM: Eric A. Cioppa, Chair, Financial Condition (E) Committee Dave Jones (CA), Chair, Accounting Practices and Procedures (E) Task Force DATE: May 8, 2017 RE: Referral Regarding Quarterly Reporting of Investment Schedules In June 2015, the Statutory Accounting Principles (E) Working Group began discussing the topic of more frequent reporting of the major categories of investments owned. The driving force behind engaging in such discussions was the view that such information could provide benefits to the state insurance regulatory system, which is responsible not only for the regulation of individual insurers, but also the industry as a whole. From this perspective, the NAIC Capital Markets Bureau performs macroprudential analysis of the industry s assets, and this was the context for most of these discussions. The Working Group had several exposures and discussions, which are summarized in the referral from the Working Group to the Accounting Practices and Procedures (E) Task Force (Attachment A). Discussion occurred at the Working Group in order to reach a broad representation of state insurance regulators and industry representatives involved in statutory accounting and reporting. On Dec. 10, 2016, the Working Group unanimously agreed to send a referral to the Accounting Practices and Procedures (E) Task Force, noting Working Group support for a policy change that facilitates collection of electronic-only, limited Schedule D investment information (capturing bonds (D-1), Common Stocks (D-2-2) and Preferred Stocks (D-2-1)) to be received with the second-quarter financial statements, with the following data elements for each investment owned: Committee on Uniform Security Identification Procedures (CUSIP), par value, book/adjusted carrying value and fair value. The Working Group conducted several discussions with various exposures of different options before reaching a compromise position of reporting with the second-quarter filing (due Aug. 15) limited to four data elements per Schedule D investment owned. This change will not result in a change to statutory accounting, but it will involve costs to the industry and state insurance regulators. Therefore it was referred to the Task Force as a policy issue. The referral was exposed on Feb. 28 for a 45-day comment period ending April 14. On May 2, the Task Force discussed the referral and the comment letter received from the group interested parties. The Task Force discussed the key benefits of the mid-year data collection from the referral and heard supportive comments from Ed Toy (NAIC), director of the Capital Markets Bureau. It was discussed that the current reporting of annual statement Schedule D information provides investments owned at year-end only, and the quarterly filings only include information regarding acquisitions and dispositions. It was noted that having to rollforward year-end owned assets for quarterly acquisitions and dispositions is a cumbersome, manual process as it involves aggregating and reconciling changes from the prior year-end. This process is time and resource intensive as it also requires layers of cleanup work for each quarterly reporting period. In addition, it was noted that the existing quarterly information does not include the needed data elements of book/adjusted carrying value or fair value. Therefore, even if the NAIC databases were revised to automatically aggregate the information provided in the quarterly financial statements, the information available would not provide the fair values and book/adjusted carrying values needed for reports used for solvency analysis, financial stability or macroprudential surveillance. Mr. Toy advised that mid-year reporting would assist with more timely reports and analysis National Association of Insurance Commissioners

95 Attachment Eighteen It was noted that since the financial crisis, the financial markets are more volatile, and there is an increased number of requests for reports that are event-driven. More timely mid-year investment information will allow more up-to-date assessments of changes in assets and trends on a macro basis, entity-specific basis and on asset specific exposures. It was noted that having the data is better than trying to predict the next market-driven event. It was noted that if the data is collected, the NAIC financial analysis staff will develop investment tools to assist state insurance regulators in identifying trends or thresholds to complete assessments efficiently, and to decrease any burden on state analysts of reviewing additional information. It was noted that the planned reports could actually make it easier for analysts to identify trends and changes in their year-end assessments, as information on activity that had happened earlier in the year would already be known. The following provided comments: John Bauer (Prudential) and Greg Hendler (MetLife) on behalf of interested parties, Phillip Carson (American Insurance Association AIA), Max McGee (America s Health Insurance Plans AHIP), Mike Monahan (American Council of Life Insurers ACLI) and Connie Jasper Woodroof (Stone River). Industry comments supported NAIC database changes to accumulate acquisitions and dispositions, rather than an approach that would require reporting entities to provide additional investment information (Attachment B). These speakers were opposed to the mid-year data collection of limited Schedule D information, primarily for cost factors of having each reporting entity provide an additional filing schedule once a year. It was commented that for large companies, the costs may be incremental to existing reporting. However, for small and mediumsized companies, the costs can potentially be more significant particularly if the entity outsources reporting. Interested parties noted that they appreciate the Working Group responding to the concerns of industry by reducing the proposed reporting to be mid-year with a limited number of data elements. Interested parties also noted support for providing additional financial information to state insurance regulators, provided the information increases state insurance regulator ability to monitor and identify solvency risks and if the information can be provided at a reasonable cost. Interested parties urged the NAIC to consider the usefulness of existing Schedule D data for identifying investment exposures, as the industry does not believe that the additional data would be used effectively. Interested parties also advocated for the use of additional disclosures rather the mid-year collection of limited Schedule D information. Interested parties noted that particular asset exposures cannot be accurately quantified easily using the Schedule D data elements and that more detailed analysis beyond CUSIP information is needed to fully determine asset class exposures. Interested parties commented that the only advantage from a mid-year schedule D is fair values and book values, and noted that fair value and book/adjusted carry values could be captured more easily with disclosures of aggregated information by asset class. Interested parties also noted that the more frequent data will not provide enough increased usefulness when compared to the costs and additional burden on industry. Interested parties noted that costs were considered carefully in proposing alternatives to the Working Group and that they believe that having the NAIC aggregate data, with a roll-forward from prior year-end owned investments, adjusted for acquisitions and disposals is a better alternative. While interested parties acknowledge that the roll-forward process may be cumbersome, they do not think the roll-forward costs would justify the additional industry expenses. The ACLI emphasized the interested parties comments related to the lack of any guardrails to the proposed midyear filing to prevent state insurance regulators from requesting future expansions to the reported mid-year Schedule D data elements, future expansions to other investment schedules or requests to receive the information more frequently. AHIP emphasized the interested parties comment regarding the need for a more thorough analysis of costs, noting concern if additional costs are imposed on health insurers in the current environment. Stone River noted the potential for increased costs for the annual statement software vendors to produce the software changes and that the software costs would be passed on to industry preparers. These comments noted that even companies that have little additional reporting costs could have increased filing costs National Association of Insurance Commissioners 2

96 Attachment Eighteen NAIC staff provided a summary of prior discussions conducted by the Working Group, including the consideration of comments previously received from industry and their request for an NAIC database rollforward. It was noted that quarterly statutory financial statements are the responsibility of the reporting entity management. For all reporting entities, information on the balance sheet lists aggregated totals of the reported book/adjusted carrying value of investments. Therefore, there is already a reporting entity obligation to reconcile quarterly investment information to certify that the quarterly balance sheet information is correct. The Working Group noted state insurance regulator concerns exist if these reporting entity reconciliations are not occurring with the quarterly financials, particularly for impairments and basic reporting changes. It was noted that the proposal began with a request for a full investment Schedule D of assets owned for each reporting period and the information requested was pared down to be mid-year, with the limited information of CUSIP, par value, book/adjusted carrying value and fair value in response to industry cost concerns. Although industry still prefers the NAIC database accumulation method, the Working Group identified that if the NAIC database approach were used, two key pieces of information would be missing: Book/adjusted carrying value reflects changes in carrying value from amortization and things such as otherthen-temporary impairments (OTTI), and changes in carrying value would not be able to be calculated by a roll-forward of acquisitions and disposals. Acquisition and disposal schedules do not include information on the current fair value for securities held. Fair value is a key element for assessing risk, particularly for investments reported at amortized cost, as it identifies the potential risk of loss as a result of market impacts and assists in determining whether an OTTI assessment is required as fair value is used to recognize OTTI. The exclusion of fair value information from updated investment information would greatly hinder the ability of the NAIC Capital Markets Bureau to identify industry-wide risk as a result of a market event and would hinder state insurance regulators and others in conducting individual company or industry assessments using the accumulated information. The Working Group considered these points in its recommendation that the mid-year reporting of limited information was a good compromise to address industry s cost concerns. As such, requesting the NAIC to accumulate quarterly acquisition and disposal information might be cost saving for reporting entities, but would result with insufficient information. Without book/adjusted carrying value and/or fair value, the investment information would not be able to be confidently used by the Capital Markets Bureau, state insurance regulators or other third parties. NAIC staff support for the Blanks (E) Working Group had provided comments to Task Force staff that in order to be consistent with quarterly data currently received, the Blanks (E) Working Group staff recommended that a portable document format (PDF) version of the new quarterly investment data accompany the electronic data submission. The Blanks (E) Working Group staff also communicated that some additional technical formatting revisions will be needed prior to the Blanks (E) Working Group exposure, but the revisions would not change content. The Task Force voted by roll call vote, with 19 jurisdictions in favor, 10 jurisdictions opposed and 6 jurisdictions voting to abstain to recommend that the mid-year data collection of Schedule D investments as recommended by the Working Group, with the inclusion of a PDF data filing should procced. The motion passed. Dale Bruggeman (OH), chair of the Statutory Accounting Principles (E) Working Group, noted that given the timing of May 2017 discussion, he recommended 2019 for the effective date (rather than 2018), to allow for adequate Financial Condition (E) Committee discussion. The ACLI noted support for a 2019 effective date. A separate vote on the proposed 2019 effective date also was held. It was noted that the effective date would have data first reported in August 2019 with the second-quarter 2019 filing. The 2019 effective date was supported, with 27 jurisdictions in favor and 8 jurisdictions abstaining. This motion also passed National Association of Insurance Commissioners 3

97 Attachment Eighteen The Task Force recommends that this policy decision be reviewed and ratified by the Financial Condition (E) Committee prior to forwarding the annual statement blanks proposal to the Blanks (E) Working Group. The blanks proposal has been updated to reflect the proposed 2019 effective date and that the data collected should also be included in the annual statement PDF (illustrated in Attachment C). cc: Kim Hudson, Dale Bruggeman, Dan Daveline, Robin Marcotte, Julie Gann, Fatima Sediqzad and Jake Stultz \\ssoclusterfs\ssovol1\shared\data\national Meetings\2017\Summer\TF\App\May 2 call\for E from May 2\APP To E final.docx 2017 National Association of Insurance Commissioners 4

98 Attachment Eighteen Attachment A TO: FROM: Dave Jones (CA), Chair, Accounting Practices and Procedures (E) Task Force Dale Bruggeman (OH), Chair, Statutory Accounting Principles (E) Working Group DATE: February 23, 2017 RE: Referral Regarding Quarterly Reporting of Investment Schedules On Dec. 10, 2016, the Statutory Accounting Principles (E) Working Group 1 (SAPWG) unanimously agreed to send a referral to the Accounting Practices and Procedures (E) Task Force, noting Working Group support for a policy change that facilitates collection of second-quarter, electronic-only, limited Schedule D 2 investment information (CUSIP, par value, book/adjusted carrying value and fair value) to be received with the second quarter financial statements, beginning in The Working Group conducted several discussions with various exposures before reaching this unanimous conclusion. Throughout these discussions, the Working Group regulators highlighted key benefits in obtaining more-timely investment information: More-timely information on insurer-held investments would be beneficial for regulators to conduct ongoing, up-to-date assessments of investment exposures and assess changes in practices and strategies. The need for this updated information has been recently highlighted by how quickly events evolved with the financial crisis and several subsequent events since. With the current approach, as information is only provided annually, it was identified that when a significant market event occurs it is often too late for regulatory action. To support this review, the NAIC Financial Analysis staff noted that mid-year investment tools will be developed to assist state regulators in identifying trends or thresholds to complete assessments efficiently without a significant burden on state analysts. More-timely investment information, allowing a macro-view of the industry, would allow the regulators to be more effective in assessing how the industry is performing as a whole. It was identified that the NAIC Capital Markets Bureau receives a wide-range of requests throughout the year, some directed to individual reporting entities, but usually on an industry-wide basis on current issues impacting the marketplace. With the current annual-reporting approach, inquiries received at the beginning of the year (e.g., February 2017) are limited to information that is over a year old (December 2015) unless a cumbersome, manual process occurs to aggregate and reconcile all acquisitions and dispositions reported on interim schedules. (To report aggregate industry information, all acquisitions and dispositions reported by all insurers would be required to be manually accumulated. For a request received in February 2017, this would involve accumulating acquisition and disposal information from three interim reporting periods, individually quarter by quarter.) As discussed by the Working Group, this process hinders the ability for the NAIC Capital Markets Bureau from providing timely information, and with volatile markets, it is necessary to have timely macro-information regarding investments. 1 Incorporating additional investment reporting requirements will not require a change in statutory accounting principles. Discussion occurred at the SAPWG in order to reach a broad representation of regulators and industry representatives involved in statutory accounting. In addition to discussions at SAPWG, notification of the topic, exposures, and explicit requests for input were routinely provided publicly at both the Accounting Practices and Procedures (E) Task Force and the Valuation of Securities (E) Task Force. As statutory accounting revisions are not required, if the Task Force supports this policy change, the Task Force would need to make a referral to the Blanks (E) Working Group to incorporate the process. 2 Schedule D investments include bonds (D-1), Common Stocks (D-2-2) and Preferred Stocks (D-2-1) National Association of Insurance Commissioners

99 Attachment Eighteen Attachment A Although the Working Group voted unanimously to support this policy change, various industry comments were received throughout the exposures opposing any additional investment reporting. The Working Group considered these comments throughout the discussions, and contemplated various alternatives to address concerns, before reaching the final position recommending a policy change to encompass second-quarter, electronic-only, limited Schedule D investment information. Although the Working Group considered the various industry positions, and has concluded on a modified proposal after considering cost concerns, the Working Group believes that industry will not support any additional investment reporting. Despite these industry objections, the Working Group recommends the policy change for the key reasons noted above. As the Working Group had had several discussions involving this issue, and as it is anticipated that industry may raise concerns at the Task Force level, additional information has been included within this referral to detail the Working Group s discussions. Also, although industry continues to primarily support an alternative in which the NAIC would accumulate quarterly acquisition/disposal information, additional information has been provided noting the concerns with this approach, and why it was not a feasible option. As detailed, comments from industry indicated a willingness to provide additional information if such information could be provided at a reasonable cost, or as a trade-off to other investment detail. With the discussions that have occurred, the Working Group believes the mid-year, electronic-only option is a good alternative, as it assists regulators in having more-current investment information, and has factored in the industry s cost concerns, requesting information only with the second-quarter financials (rather than each quarter), with reduced detail and format requirements (non-pdf). The Task Force is encouraged to contact the chair of the Working Group, or Julie Gann (jgann@naic.org), NAIC SAPWG staff support, for any additional information. History of Discussion & Consideration of Alternatives: June 17, 2015 SAPWG initially exposed agenda item requesting comments on the prospect to collect full investment schedule information (or perhaps limited details of investments) in the quarterly financial statements. Key elements identified in exposure: Not having full investment schedules in the quarterly statutory financial statements makes it difficult for regulators to complete a review of quarterly investment holdings. Per preliminary information received from key regulators, there is support to consider full investment schedules in all interim statements for all NAIC filers. Full investments schedules were not originally required due to the printed / hard-copy filing requirements at various states and the NAIC. With electronic submission of financial statements, moving to include full investment schedules would no longer generate a printing concern / burden to reporting entities. Requiring full investment schedules would not be an overly difficult task for reporting entities. Information on investments held during the interim must already be known to comply with interim reporting requirements. Aug. 15, 2015 SAPWG considered comments submitted by interested parties regarding concerns on the proposal, and the cost considerations that should occur if quarterly investment information is requested. The SAPWG also recognized the regulatory benefits that could be obtained such as earlier identification of industry investment changes or trends if select quarterly investment information was received. As a result of the discussion, the Working Group exposed the agenda item with a request for quarterly investment proposals identifying what should be captured, and the form of such submissions, that considers both cost and regulatory benefits. Key elements of discussion: Comments received indicated that industry is not opposed to providing information, as long as the information could be efficiently and effectively used by regulators at a cost that would not be prohibitive. Industry would be interested in how the data would be utilized and the benefits to 2017 National Association of Insurance Commissioners 2

100 Attachment Eighteen Attachment A solvency regulation. Comments received indicated that this would be a major change to the filing process and would likely require significant cost to industry. NAIC Capital Markets Bureau representative (Ed Toy) noted the responsibility of the Bureau to respond to questions from state insurance regulators, and to inquiries from outside of the NAIC, on the current investment exposure of the industry, and on a company-by-company approach. He advised that the current investment (annual) reporting approach requires a labor-intensive, manual process in order to provide updated investment information, noting it requires an accumulation of the quarterly acquisition and dispositions across all reporting entities. As an initial compromise, he advised that full investment schedules are not needed, and limited data points would be sufficient. In response to comments from regulators questioning the actual need for more-current investment information, Steve Johnson (PA) - (Member of SAPWG and Chair of the Financial Analysis Working Group) - provided comments supporting the collection of additional investment information, indicating that a macro-view of industry s investments would allow regulators to be more effective. He requested that the industry and regulators achieve a middle-ground to obtain additional investment information on a quarterly basis. Nov. 19, 2015 SAPWG considered comments from industry responding to the exposure. It was identified that the industry comments did not include alternatives for the collecting of additional investment information, as requested in exposure, but rather suggested that the NAIC Capital Markets Bureau utilize data calls in the event investment information is needed. After discussion, the Working Group exposed a proposal for reporting entities to provide quarterly, electronic-only data as an NAIC supplemental filing that includes CUSIP, par value, BACV and fair value for Schedule D Investments. With this exposure, industry was requested to present alternatives to the Working Group that would be cost effective, but still provide regulators with the information needed to identify and assess macro-investment changes on a quarterly basis. Key elements of discussion: NAIC Capital Markets Bureau (Ed Toy) advised that the use of data calls is not supported because: 1) information is not received timely, therefore hindering the ability to promptly address requests and complete assessments; 2) from prior data calls, information is incomplete and/or the scope of the data call is misinterpreted, impacting the quality of the information; and 3) companies that respond to the data call are generally not the companies for which concerns exist. For example, larger companies have the ability to absorb risks, but it is the small and medium-sized companies that could have a financial solvency impact from a particular exposure. In response to SAPWG Members requesting information on how additional investment information will be utilized for regulatory purposes, the Capital Markets Bureau provided information on the wide-range of requests they receive, noting that some are directed to individual reporting entities, but that they usually focus on industry-wide information in response to current issues impacting the marketplace. It was noted that the proposal is intended to assist with providing current information in response to requests, and would allow an assessment more than once a year on macro-positions. As examples, upon market announcements involving Greek and Puerto Rico debt obligations, the Capital Markets Bureau immediately began compiling information to calculate the aggregate industry exposure, as well as the exposure for specific insurance industry sectors and individual reporting entities so that regulators could have this information as quickly as possible. Industry comments highlighted the massive amount of data that would be provided for all bonds and stocks held by the entire insurance industry. Also, industry comments noted the cost for small and medium sized insurers, indicating that even those that use investment software would require time to download and retrieve the information. Industry comments also noted the review each reporting entity would be required to conduct to ensure the additional investment information was accurate. (With the reporting of investments on the quarterly balance sheet, it was noted that industry shall already be verifying the information reported in the interim financials. Additionally, assessments on investments shall already be occurring to identify impairments.) 2017 National Association of Insurance Commissioners 3

101 Attachment Eighteen Attachment A Industry comments noted that reporting entities have 15 less days to complete interim financial statements in comparison to annual reports, therefore reporting entities will be required to utilize more resources to comply with the request and meet filing deadlines. Industry also indicated uncertainty with the regulatory concerns that would require receipt of this information, reiterating that industry is willing to provide additional information if such information could be provided at a reasonable cost. With the discussion, after identifying that full investment schedules are likely not necessary, and identifying that the reporting process has not changed over the past 20 years despite advances in providing electronic information, the Working Group unanimously agreed to expose a proposal to require additional, but limited, quarterly investment information. It was noted that the discussion should assist industry in better understanding what the regulators would like to receive, therefore allowing for alternatives to be submitted. April 3, 2016 SAPWG considered industry comments received on the exposure. These comments indicated that industry does not support any additional quarterly investment reporting, but offered three alternatives for regulator consideration. The Working Group exposed the alternatives with a request for comments and benefits of each: 1) Hire a consultant to help NAIC staff aggregate investment data. 2) Expand time to complete the electronic-only supplemental filing. 3) Replace quarterly acquisition and disposition schedules with a schedule of owned holdings. With the exposure of the third alternative, it was clarified that some quarterly schedules would be retained, such as Schedule D Part 5, which details acquisitions and dispositions that occur within the same quarter. Additionally, it was noted that the proposal would be for Schedule D investments only, the annual reporting of acquisitions/dispositions would still be required in the annual financial statements, and the Schedule D verification would be required quarterly. This exposure was explicitly communicated to the Accounting Practices and Procedures (E) Task Force and to the Valuation of Securities (E) Task Force. August 26, 2016 SAPWG considered comments received from the April 2016 exposure of three alternatives. Comments were received from industry, as well as from Connecticut and Wisconsin. In addition to the prior alternatives, a midyear alternative, to collect limited Schedule D investment information as a data-only (non-pdf) submission was offered. This proposal would require Schedule D investment information, limited to CUSIP, par value, BACV and fair value, to be received with the second-quarter financial statements. The Working Group exposed the alternatives, with the additional midyear option. Key Elements of the Discussion: Comment letters received from Connecticut and Wisconsin noted that they did not support replacing the acquisition/disposition schedules with details of owned holdings. (During the discussion both of these regulators stated support for the midyear, data-only option.) Comments received from Wisconsin noted that they would like to receive both the quarterly acquisition/disposition information and details on investments held. Wisconsin noted that from inquiries with their domestics, investment systems may routinely produce full quarterly Schedules Ds and would not be a significant burden to file. Their comment letter originally suggested an extension for the full quarterly schedule if deemed appropriate by the SAPWG. Comment letter received from industry stressed support for the NAIC to accumulate acquisition and disposition information through a programming development. The industry comments noted that they do not support the filing of any additional investment information, 2017 National Association of Insurance Commissioners 4

102 Attachment Eighteen Attachment A therefore would only support the alternative allowing for extended time if additional investment information is mandated. Also, the industry comments noted that the elimination of quarterly acquisition/disposition schedules does not appear to be a feasible option as regulators conduct analyses based on these schedules. Comments provided during the meeting noted concerns from the small-company perspective, noting additional vendor and software costs. These comments noted that the midyear option is a good compromise, but there would still be concern on the costs and possible future expansion of the midyear collection to encompass all quarterly reporting periods, or if other investment schedules were to be required. (Regulator response to these comments again noted the current requirement to reconcile investment systems data quarterly to the submitted statutory financial statements. These comments noted regulator concern if small companies do not have the resources to complete these reconciliations, or if they are not completing verifications on the investment information already reported in the quarterly financial statements.) In response to discussion on whether state analysts would have a potential burden to review the additional investment information, the Working Group was informed that the NAIC Financial Analysis staff has been consulted on developing tools that would assist in identifying trends or thresholds in the additional information, thereby allowing state analysts to complete assessments efficiently. The development of these financial analysis tools are intended to allow state analysts to review the midyear detail of owned holdings without causing a significant burden. After this discussion, Michigan indicated a preference to receive the midyear investment information with the second quarter financial statements (rather than providing an extension for this additional investment information), as the analysis work may already be completed before the detail of owned holdings is received. This exposure was explicitly communicated to the Accounting Practices and Procedures (E) Task Force and to the Valuation of Securities (E) Task Force. Dec. 10, 2016 SAPWG considered comments received from the exposure of the alternatives, including the midyear (second-quarter) data-only option, and unanimously agreed to send a referral to the Task Force, noting Working Group support for a policy change that facilitates collection of second-quarter, electronic-only, limited Schedule D investment information, capturing CUSIP, par value, BACV and fair value, to be received with the second quarter statutory financial statements. Key elements in the discussion: Comment letter received from industry continued to support the NAIC accumulating quarterly acquisition and disposition information through a programming development. These comments continued to question the cost/benefit of providing additional investment information, and indicated that programming the NAIC database would be the best possible option. The Working Group identified that this topic has been discussed at several meetings, and the discussion at the SAPWG was intended to capture a larger audience involved with the financial statements. As a result of the discussion that has occurred, the Working Group agreed that recommending a policy change that facilitates collection of second-quarter, electronic-only, limited Schedule D investment information, capturing CUSIP, par value, BACV and fair value, to be received with the second quarter statutory financial statements would be appropriate. As statutory accounting revisions would not be required, if the Task Force supports the policy change, the Task Force would need to make a referral to the Blanks (E) Working Group to incorporate the change. As noted in prior discussions, more-timely insurer investment information would be beneficial for the ongoing assessments of individual company investment exposures. Furthermore, moretimely investment information, allowing a macro-view of the industry, would allow the regulators to be more effective in assessing how the industry is performing as a whole National Association of Insurance Commissioners 5

103 Attachment Eighteen Consideration of NAIC Database Accumulation of Quarterly Acquisition / Disposal Information Attachment A As detailed in the timeline, industry comments supported NAIC database changes to accumulate acquisitions and dispositions, rather than an approach that would require reporting entities to provide additional investment information. These industry comments continued throughout the discussions, even when an alternative was offered to only require limited, midyear information in an electronic-only (non-pdf) format. With regards to the industry preference for NAIC accumulation through a database function, the following information is provided: Quarterly Statutory Financial Statements are the Responsibility of Reporting Entity Management: Requesting the NAIC to accumulate quarterly acquisition and disposal information, although possibly saving costs for reporting entities would require the NAIC to incur costs to program the database accordingly and would still result with insufficient information that would prevent the investment information from being confidently used by both the Capital Markets Bureau and by state regulators. As identified throughout the discussions, it is anticipated that reporting entities that utilize investment vendor software will be able to comply with the additional investment information request through a datadownload with limited additional costs. For all reporting entities, as information on the balance sheet details the reported value of investments, there is already a reporting entity obligation to reconcile quarterly investment information to certify that the quarterly balance sheet information is correct. As noted by the Working Group, regulator concerns exist if these reconciliations are not occurring with the quarterly financials. Acquisition and Disposal Schedules Do Not Include Recognized OTTI for Securities Held: Accumulating acquisitions and disposal schedules only provides information on the securities sold or acquired by a reporting entity. These schedules do not detail other key valuation impacts such as otherthen-temporary impairments (OTTI) - which would be a critical element in assessing whether held investments have been adjusted as a result of market impacts. Although not specifically requested in the data-points for the midyear investment details, by comparing the most-recent annual investment information, with the proposed midyear investment details, the NAIC Capital Markets Bureau, and state regulators, would be able to isolate BACV changes, and assess whether market factors have impacted the reported value (such as the recognition of OTTI). This information would be unable to be identified if the NAIC database was only accumulating acquisitions and dispositions. Acquisition and Disposal Schedules Do Not Include Current Fair Value for Securities Held: Similar to the discussion on OTTI, the acquisition and disposal schedules do not include information regarding the current fair value of held investments. As such, if the NAIC was to accumulate the information on holdings from the prior year annual investment detail, all information regarding fair value would either be limited to the last reported fair value (potentially over a year old), or would have to be eliminated from updated assessments of investment holdings. Fair value is an important metric for conducting assessments, particularly for investments reported at amortized cost, as it identifies the potential risk of loss as a result of market impacts, and assists in determining whether an OTTI assessment is required. The exclusion of fair value information from updated investment information would greatly hinder the ability of the NAIC Capital Markets Bureau to identify overall industry-wide risk as a result of a market impact and would hinder state insurance regulators in conducting individual company assessments using the accumulated information. W:\National Meetings\2017\Summer\TF\App\May 2 call\for E from May 2\A - sapwg_ref_mid_yr_rep_discussion.docx 2017 National Association of Insurance Commissioners 6

104 Attachment Eighteen D. Keith Bell, CPA Senior Vice President Accounting Policy Corporate Finance The Travelers Companies, Inc ; FAX Rose Albrizio, CPA Vice President Accounting Practices AXA Equitable Attachment B April 18, 2017 Mr. Kim Hudson, Chairman Accounting Practices and Procedures Task Force National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO RE: Interested Parties Comments on Items Exposed Regarding a Policy Change to Facilitate Collection of Mid-Year, Electronic Only, Investment Information Dear Mr. Hudson: Interested Parties ( IPs ) appreciate the opportunity to provide comments on the item exposed for comment by the Accounting Practices and Procedures Task Force (the Task Force ) which would result in a policy change to mandate the collection of mid-year, electronic only, investment information capturing CUSIP, par value, book adjusted carrying value and fair value for Schedule D investments. In 2015, the Statutory Accounting Principles Working Group ( SAPWG ) exposed an agenda item requesting comments on a future blanks proposal to incorporate full investment schedules into all quarterly financial statement filings. Subsequently, there have been additional exposures encompassing potential alternatives and the broad exposure has been narrowed to Schedule D reporting. IPs have consistently maintained throughout the SAPWG discussions on this topic that the NAIC should utilize the existing acquisition and disposition schedules provided each quarter to aggregate investment holdings for industry as the most effective option for all concerned. Throughout the processes to vet the various exposures, IPs have continually urged the NAIC to thoroughly analyze whether it has the capability to aggregate this data and, if not, that the NAIC should utilize internal or external (i.e. IT consultants) to program the data from the NAIC database. Support for this approach is as follows: All of the data by company currently resides electronically with the NAIC. Companies can submit what they currently submit, with no additional cost or resource burden.

105 Attachment Eighteen Comments to Accounting Practices and Procedures Task Force April 18, 2017 Page 2 Attachment B The programming required would be a once and done effort. Current NAIC IT staff could handle future changes, which would primarily be the companies added to or deleted from the reports. To date, we have not received any detailed cost/benefit analysis as to the viability of this recommendation. IPs have struggled to understand the specific reason as to why this additional investment data is necessary. Small and medium sized companies have limited resources (i.e. staff) currently devoted to producing investment data. In addition, for those that outsource the production of currently required investment data, any additional requirements will significantly increase their cost. Given the additional cost and burden on industry, additional investment data should not be required without specifically detailing the regulatory reason for the request. IPs recall previous requests to provide additional investment data (i.e. postal codes) which do not appear to have resulted in any technical analysis being created since this additional data has been provided by industry. A mid-year, electronic only, data filing requiring an electronic filing of four Schedule D columns (CUSIP, book adjusted carrying value, par value and fair value) also raises significant concerns related to the lack of any guardrails to prevent the arbitrary addition of additional Schedule D columns to this filing ( column creep ). We strongly believe that the potential exists for this, or for a future gradual addition of columns from other Schedules, eventually expanding into full quarterly investment schedules. Summary As discussed above, IPs continue to question the cost/benefit of providing any additional investment data on a quarterly basis. If Task Force members feel otherwise, we believe programming any additional information they may require via the NAIC database is the most efficient possible option. We also believe the specific regulatory reason for requesting additional investment data should be communicated and discussed prior to implementing any change in policy. * * * * Thank you for considering IPs comments. We look forward to working with you and the Task Force on this topic. If you have any questions in the interim, please do not hesitate to contact either one of us. Sincerely, D. Keith Bell Rose Albrizio cc: Robin Marcotte, NAIC

106 Attachment Eighteen NAIC BLANKS (E) WORKING GROUP Blanks Agenda Item Submission Form CONTACT PERSON: TELEPHONE: ADDRESS: ON BEHALF OF: NAME: Dale Bruggeman DATE: FOR NAIC USE ONLY Agenda Item # Year 2019 Changes to Existing Reporting [ X ] New Reporting Requirement [ ] REVIEWED FOR ACCOUNTING PRACTICES AND PROCEDURES IMPACT No Impact [ X ] Modifies Required Disclosure [ ] DISPOSITION TITLE: Chair SAPWG AFFILIATION: Ohio Department of Insurance ADDRESS: 50W. Town St., 3 rd Fl., Ste. 300 Columbus, OH [ ] Rejected For Public Comment [ ] Referred To Another NAIC Group [ ] Received For Public Comment [ ] Adopted Date [ ] Rejected Date [ ] Deferred Date [ ] Other (Specify) BLANK(S) TO WHICH PROPOSAL APPLIES [ ] ANNUAL STATEMENT [ X ] QUARTERLY STATEMENT [ X ] INSTRUCTIONS [ X ] CROSSCHECKS [ ] BLANK [ X ] Life and Accident & Health [ X ] Property/Casualty [ X ] Health [ ] Separate Accounts [ X ] Fraternal [ X ] Title [ ] Other Specify Anticipated Effective Date: 2 nd Quarter 2019 These revisions will be 2 nd quarter only. IDENTIFICATION OF ITEM(S) TO CHANGE Add Quarterly Schedule D Part 1, Schedule D Part 2, Section 1 and Schedule D Part 2, Section 2 to the Second Quarterly Statement filing for bonds, preferred stocks and common stocks. These schedules will be a condensed version of the Annual Statement schedules. REASON, JUSTIFICATION FOR AND/OR BENEFIT OF CHANGE** The purpose of this proposal is to provide a Quarterly Schedule D Part 1, Schedule D Part 2, Section 1 and Schedule D Part 2, Section 2 to the Second Quarterly Statement filing to provide regulators with limited information on bonds, preferred stocks and common stocks owned with Second Quarterly Statement filing. The information captured in this second-quarter filing is limited to CUSIP/ISIN, Par Value (excluding common stock), Book/Adjusted Carrying Value, Fair Value and Number of Shares (preferred and common stock only). Comment on Effective Reporting Date: Other Comments: NAIC STAFF COMMENTS ** This section must be completed on all forms. Revised 6/13/ National Association of Insurance Commissioners 1

107 Attachment Eighteen QUARTERLY INSTRUCTIONS LIFE, HEALTH, PROPERTY, FRATERNAL AND TITLE SCHEDULE D PART 1 Attachment C LONG-TERM BONDS OWNED DURING THE CURRENT QUARTER Schedule D, Part 1 for the Second Quarter Statement filing only. Bonds are to be grouped as listed below and each category arranged alphabetically. Refer to SSAP No. 23 Foreign Currency Transactions and Translations for accounting guidance related to foreign currency transactions and translations. Short Sales: Selling a security short is an action by a reporting entity, which results with the reporting entity recognizing proceeds from the sale and an obligation to deliver the sold security. For statutory accounting purposes, obligations to deliver securities resulting from short sales shall be reported as contra-assets (negative assets) in the investment schedule, with an investment code in the code column detailing the item as a short sale. The obligation (negative asset) shall be initially reflected at fair value, with changes in fair value recognized as unrealized gains and losses. These unrealized gains and losses shall be realized upon settlement of the short sale obligation. Interest on short sale positions shall be accrued periodically and reported as interest expense. If a reporting entity has any detail lines reported for any of the following required categories or subcategories described in the Investment Schedules General Instructions, it shall report the subtotal amount of the corresponding category or subcategory, with the specified subtotal line number appearing in the same manner and location as the pre-printed total or grand total line and number: Category Line Number Bonds: U.S. Governments Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals U.S. Governments All Other Governments Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals All Other Governments U.S. States, Territories and Possessions (Direct and Guaranteed) Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals U.S. States, Territories and Possessions (Direct and Guaranteed) U.S. Political Subdivisions of States, Territories and Possessions (Direct and Guaranteed) Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals U.S. Political Subdivisions of States, Territories and Possessions (Direct and Guaranteed) National Association of Insurance Commissioners 2

108 Attachment Eighteen U.S. Special Revenue and Special Assessment Obligations and all Non-Guaranteed Obligations of Agencies and Authorities of Governments and Their Political Subdivisions Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals U.S. Special Revenue and Special Assessment Obligations and all Non-Guaranteed Obligations of Agencies and Authorities of Governments and Their Political Subdivisions Industrial and Miscellaneous (Unaffiliated) Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals Industrial and Miscellaneous (Unaffiliated) Hybrid Securities Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals Hybrid Securities Parent, Subsidiaries and Affiliates Issuer Obligations Residential Mortgage-Backed Securities Commercial Mortgage-Backed Securities Other Loan-Backed and Structured Securities Subtotals Parent, Subsidiaries and Affiliates SVO Identified Funds Exchange Traded Funds as Identified by the SVO Bond Mutual Funds as Identified by the SVO Subtotals SVO Identified Funds Total Bonds Subtotals Issuer Obligations Subtotals Residential Mortgage-Backed Securities Subtotals Commercial Mortgage-Backed Securities Subtotals Other Loan-Backed and Structured Securities Subtotal SVO Identified Funds Subtotals Total Bonds List all bonds and certificates of deposit owned as of current quarter-end, except bonds and certificates of deposit in banks or other similar financial institutions with maturity dates or repurchase dates under repurchase agreements of one year or less from the acquisition date. Exclude cash equivalents as described in SSAP No. 2 Cash, Drafts, and Short-Term Investments with original maturities of three months or less. The security identifier reported (Column 1 for CUSIP, CINS, PPN or Column 2 for ISIN) must be the same as the identifier used when filing securities with the NAIC pursuant to the Purposes and Procedures Manual of the NAIC Investment Analysis Office instructions National Association of Insurance Commissioners 3

109 Attachment Eighteen Column 1 CUSIP Identification Column 2 ISIN Identification Column 3 Par Value CUSIP numbers for all purchased publicly issued securities are available from the broker s confirmation or the certificate. For private placement securities, the NAIC has created a special number called a PPN to be assigned by the Standard and Poor s CUSIP Bureau. For foreign securities, use a CINS that is assigned by the Standard and Poor s CUSIP Bureau: If no valid CUSIP, CINS or PPN number exists then report a valid ISIN (Column 2) security number. The CUSIP field should be zero-filled. The International Securities Identification Numbering (ISIN) system is an international standard set up by the International Organization for Standardization (ISO). It is used for numbering specific securities, such as stocks, bonds, options and futures. ISIN numbers are administered by a National Numbering Agency (NNA) in each of their respective countries, and they work just like serial numbers for those securities. Record the ISIN number only if no valid CUSIP, CINS or PPN exists to report in Column 1. Enter the par value of the bonds owned adjusted for repayment of principal. For mortgage-backed/loan-backed and structured securities, enter the par amount of principal to which the reporting entity has a claim. For interest only bonds without a principal amount on which the reporting entity has a claim, use a zero value. Enter the statement date par value for bonds with adjustable principal. An interest only bond with a small par amount of principal would use that amount. For SVO Identified Funds in scope of SSAP No. 26 Bonds, enter Zero (0). Column 4 Book/Adjusted Carrying Value This should be the amortized value or the lower of amortized value or fair value, depending upon the guidance in SSAP No. 26 Bonds, adjusted for any other-than-temporary impairment. Include: The original cost of acquiring the bond, including brokerage and other related fees. Amortization of premium or accrual of discount, but not including any accrued interest paid thereon. Amortization of deferred origination and commitment fees. Deduct: Exclude: A direct write-down for a decline in the fair value of a bond that is other-than-temporary. All other costs, including internal costs or costs paid to an affiliated reporting entity related to origination, purchase or commitment to purchase bonds, are charged to expense when incurred. Cost should also be reduced by payments attributed to the recovery of cost. Accrued interest National Association of Insurance Commissioners 4

110 Attachment Eighteen The amount reported in this column should equal: Book/Adjusted Carrying Value reported in the Prior Year statement (or Actual Cost for newly acquired securities) plus Unrealized Valuation Increase/(Decrease)Total in Book/Adjusted Carrying Value plus Current Year s (Amortization)/Accretion minus Current Year s Other-Than-Temporary Impairment Recognized plus Total Foreign Exchange Change in Book/Adjusted Carrying Value plus Changes due to amounts reported in Schedule D, Parts 3 and 4 Total of Column 4 should equal Asset Page, Line 1, Column 1. Column 5 Fair Value Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. (Refer to SSAP No. 100 Fair Value.) 2017 National Association of Insurance Commissioners 5

111 Attachment Eighteen SCHEDULE D PART 2 SECTION 1 PREFERRED STOCKS OWNED DURING THE CURRENT QUARTER Schedule D, Part 2, Section 1 for the Second Quarter Statement filing only. Stocks are to be grouped as listed below and arranged alphabetically, showing a subtotal for each category. Short Sales: Selling a security short is an action by a reporting entity, which results with the reporting entity recognizing proceeds from the sale and an obligation to deliver the sold security. For statutory accounting purposes, obligations to deliver securities resulting from short sales shall be reported as contra-assets (negative assets) in the investment schedule, with an investment code in the code column detailing the item as a short sale. The obligation (negative asset) shall be initially reflected at fair value, with changes in fair value recognized as unrealized gains and losses. These unrealized gains and losses shall be realized upon settlement of the short sale obligation. Interest on short sale positions shall be accrued periodically and reported as interest expense. If a reporting entity has any detail lines reported for any of the following required categories or subcategories, it shall report the subtotal amount of the corresponding category or subcategory, with the specified subtotal line number appearing in the same manner and location as the pre-printed total or grand total line and number: Category Line Number Industrial and Miscellaneous (Unaffiliated) Parent, Subsidiaries and Affiliates Total Preferred Stocks Only transferable shares (i.e., can be bought and sold) of savings and loan or building and loan associations are to be reported in this schedule. Column 1 CUSIP Identification Column 2 ISIN Identification CUSIP numbers for all purchased publicly issued securities are available from the broker s confirmation or the certificate. For private placement securities, the NAIC has created a special number called a PPN to be assigned by the Standard and Poor s CUSIP Bureau. For foreign securities, use a CINS that is assigned by the Standard and Poor s CUSIP Bureau: If no valid CUSIP, CINS or PPN number exists then report a valid ISIN (Column 2) security number. The CUSIP field should be zero-filled. The International Securities Identification Numbering (ISIN) system is an international standard set up by the International Organization for Standardization (ISO). It is used for numbering specific securities, such as stocks, bonds, options and futures. ISIN numbers are administered by a National Numbering Agency (NNA) in each of their respective countries, and they work just like serial numbers for those securities. Record the ISIN number only if no valid CUSIP, CINS or PPN exists to report in Column National Association of Insurance Commissioners 6

112 Attachment Eighteen Column 3 Number of Shares Provide the number of shares owned. Column 4 Par Value Per Share Provide the par value for a share of the security. Column 5 Book/Adjusted Carrying Value Report cost, amortized cost, or the lower of cost, amortized cost or fair value pursuant to SSAP No. 32 Preferred Stock. SSAP No. 97 Subsidiary, Controlled and Affiliated Entities provides guidance for preferred stock investments in Subsidiary, Controlled or Affiliated (SCA) companies. Deduct: Cash dividends paid on Payment In Kind stock during the stock dividend period. Column 6 Fair Value A direct write-down for a decline in the fair value of a stock that is other-than-temporary. The amount reported in this column should equal: Book/Adjusted Carrying Value reported in the Prior Year statement (or Actual Cost for newly acquired securities) plus Total Change in Book/Adjusted Carrying Value plus Total Foreign Exchange Change in Book/Adjusted Carrying Value plus Changes due to amounts reported in Schedule D, Parts 3 and 4 Total of Column 4 should equal Asset Page, Line 2.1, Column 1. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. (Refer to SSAP No. 100 Fair Value.) 2017 National Association of Insurance Commissioners 7

113 Attachment Eighteen SCHEDULE D PART 2 SECTION 2 COMMON STOCKS OWNED DURING THE CURRENT QUARTER Schedule D, Part 1 for the Second Quarter Statement filing only. Stocks are to be grouped as listed below and arranged alphabetically, showing a subtotal for each category. Short Sales: Selling a security short is an action by a reporting entity, which results with the reporting entity recognizing proceeds from the sale and an obligation to deliver the sold security. For statutory accounting purposes, obligations to deliver securities resulting from short sales shall be reported as contra-assets (negative assets) in the investment schedule, with an investment code in the code column detailing the item as a short sale. The obligation (negative asset) shall be initially reflected at fair value, with changes in fair value recognized as unrealized gains and losses. These unrealized gains and losses shall be realized upon settlement of the short sale obligation. Interest on short sale positions shall be accrued periodically and reported as interest expense. If a reporting entity has any detail lines reported for any of the following required categories or subcategories, it shall report the subtotal amount of the corresponding category or subcategory, with the specified subtotal line number appearing in the same manner and location as the pre-printed total or grand total line and number: Category Line Number Industrial and Miscellaneous (Unaffiliated) Parent, Subsidiaries and Affiliates Mutual Funds Money Market Mutual Funds Total Common Stocks Total Preferred and Common Stocks Shares of all mutual funds, regardless of the underlying security, whether specialized or a mixture of bonds, stock, money market instruments or other type of investments, except those mutual funds as defined in the Purposes and Procedures Manual of the NAIC Investment Analysis Office that are reported in Schedule D, Part 1 or Schedule DA, Part 1, are considered to be shares of common stock and should be listed in the appropriate category of Mutual Funds or Money Market Mutual Funds. Only transferable shares (i.e., can be bought and sold) of savings and loan or building and loan associations are to be reported in this schedule. Column 1 CUSIP Identification CUSIP numbers for all purchased publicly issued securities are available from the broker s confirmation or the certificate. For private placement securities, the NAIC has created a special number called a PPN to be assigned by the Standard and Poor s CUSIP Bureau. For foreign securities, use a CINS that is assigned by the Standard and Poor s CUSIP Bureau: If no valid CUSIP, CINS or PPN number exists then report a valid ISIN (Column 2) security number. The CUSIP field should be zero-filled National Association of Insurance Commissioners 8

114 Attachment Eighteen Column 2 ISIN Identification Column 3 Number of Shares The International Securities Identification Numbering (ISIN) system is an international standard set up by the International Organization for Standardization (ISO). It is used for numbering specific securities, such as stocks, bonds, options and futures. ISIN numbers are administered by a National Numbering Agency (NNA) in each of their respective countries, and they work just like serial numbers for those securities. Record the ISIN number only if no valid CUSIP, CINS or PPN exists to report in Column 1. Provide the number of shares owned. Column 4 Book/Adjusted Carrying Value Column 5 Fair Value Fair Value (adjusted for any other-than-temporary impairment) as of the end of the current reporting period, except for common stock in Subsidiary, Controlled or Affiliated (SCA) companies accounted for under another valuation method pursuant to SSAP No. 97 (e.g., equity method) and capital stock in a Federal Home Loan Bank reported at par value pursuant to SSAP No. 30. The amount reported in this column should equal: Book/Adjusted Carrying Value reported in the Prior Year statement (or Actual Cost for newly acquired securities) plus Total Change in Book/Adjusted Carrying Value plus Total Foreign Exchange Change in Book/Adjusted Carrying Value plus Changes due to amounts reported in Schedule D, Parts 3 and 4 Total of Column 3 should equal Asset Page, Line 2.2, Column 1. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. (Refer to SSAP No. 100 Fair Value.) 2017 National Association of Insurance Commissioners 9

115 2017 National Association of Insurance Commissioners 10 SCHEDULE D PART 1 Showing All Long-Term BONDS Owned the Current Quarter CUSIP Identification ISIN Identification Par Value Book/Adjusted Carrying Value Fair Value Total Bonds Attachment Eighteen

116 Attachment Eighteen SCHEDULE D PART 2 SECTION 1 Showing All PREFERRED STOCKS Owned the Current Quarter CUSIP Identification ISIN Identification Number of Shares Number of Shares Book/Adjusted Carrying Value Fair Value Total Preferred Stocks 2017 National Association of Insurance Commissioners 11

117 Attachment Eighteen SCHEDULE D PART 2 SECTION 2 Showing all COMMON STOCKS Owned the Current Quarter CUSIP Identification ISIN Identification Number of Shares Book/Adjusted Carrying Value... Fair Value Total Common Stocks Total Preferred and Common Stocks 2017 National Association of Insurance Commissioners 12

118 Attachment Eighteen QUARTERLY STATEMENT BLANK LIFE SUPPLEMENTAL EXHIBITS AND SCHEDULES INTERROGATORIES The following supplemental reports are required to be filed as part of your statement filing. However, in the event that your company does not transact the type of business for which the special report must be filed, your response of NO to the specific interrogatory will be accepted in lieu of filing a NONE report and a bar code will be printed below. If the supplement is required of your company but is not being filed for whatever reason enter SEE EXPLANATION and provide an explanation following the interrogatory questions. Response 1. Will the Trusteed Surplus Statement be filed with the state of domicile and the NAIC with this statement? 2. Will the Medicare Part D Coverage Supplement be filed with the state of domicile and the NAIC with this statement? 3. Will the Reasonableness of Assumptions Certification required by Actuarial Guideline XXXV be filed with the state of domicile and electronically with the NAIC? Will the Reasonableness and Consistency of Assumptions Certification required by Actuarial Guideline XXXV be filed with the state of domicile and electronically with the NAIC? Will the Reasonableness of Assumptions Certification for Implied Guaranteed Rate Method required by Actuarial Guideline XXXVI be filed with the state of domicile and electronically with the NAIC? Will the Reasonableness and Consistency of Assumptions Certification required by Actuarial Guideline XXXVI (Updated Average Market Value) be filed with the state of domicile and electronically with the NAIC? 7. Will the Reasonableness and Consistency of Assumptions Certification required by Actuarial Guideline XXXVI (Updated Market Value) be filed with the state of domicile and electronically with the NAIC? 8. Will the 2 ND Quarter Schedule D, Part 1 be filed with the 2 nd Quarter Statement? 9. Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement? 10. Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement? Explanation: Bar Code: 2017 National Association of Insurance Commissioners 13

119 Attachment Eighteen QUARTERLY STATEMENT BLANK HEALTH SUPPLEMENTAL EXHIBITS AND SCHEDULES INTERROGATORIES The following supplemental reports are required to be filed as part of your statement filing. However, in the event that your company does not transact the type of business for which the special report must be filed, your response of NO to the specific interrogatory will be accepted in lieu of filing a NONE report and a bar code will be printed below. If the supplement is required of your company but is not being filed for whatever reason enter SEE EXPLANATION and provide an explanation following the interrogatory questions. Response 1. Will the Medicare Part D Coverage Supplement be filed with the state of domicile and the NAIC with this statement? Will the 2 ND Quarter Schedule D, Part 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement?... Explanation: Bar Code: 2017 National Association of Insurance Commissioners 14

120 Attachment Eighteen QUARTERLY STATEMENT BLANK PROPERTY Attachment C SUPPLEMENTAL EXHIBITS AND SCHEDULES INTERROGATORIES The following supplemental reports are required to be filed as part of your statement filing. However, in the event that your company does not transact the type of business for which the special report must be filed, your response of NO to the specific interrogatory will be accepted in lieu of filing a NONE report and a bar code will be printed below. If the supplement is required of your company but is not being filed for whatever reason enter SEE EXPLANATION and provide an explanation following the interrogatory questions. Response 1. Will the Trusteed Surplus Statement be filed with the state of domicile and the NAIC with this statement? Will Supplement A to Schedule T (Medical Professional Liability Supplement) be filed with this statement? Will the Medicare Part D Coverage Supplement be filed with the state of domicile and the NAIC with this statement? Will the Director and Officer Insurance Coverage Supplement be filed with the state of domicile and the NAIC with this statement? Will the 2 ND Quarter Schedule D, Part 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement?... Explanation: Bar Code: 2017 National Association of Insurance Commissioners 15

121 Attachment Eighteen QUARTERLY STATEMENT BLANK FRATERNAL SUPPLEMENTAL EXHIBITS AND SCHEDULES INTERROGATORIES The following supplemental reports are required to be filed as part of your statement filing. However, in the event that your company does not transact the type of business for which the special report must be filed, your response of NO to the specific interrogatory will be accepted in lieu of filing a NONE report and a bar code will be printed below. If the supplement is required of your company but is not being filed for whatever reason enter SEE EXPLANATION and provide an explanation following the interrogatory questions. Response 1. Will the Trusteed Surplus Statement be filed with the state of domicile and the NAIC with this statement? Will the Medicare Part D Coverage Supplement be filed with the state of domicile and the NAIC with this statement? Will the Reasonableness of Assumptions Certification required by Actuarial Guideline XXXV be filed with the state of domicile and electronically with the NAIC? Will the Reasonableness and Consistency of Assumptions Certification required by Actuarial Guideline XXXV be filed with the state of domicile and electronically with the NAIC? Will the Reasonableness of Assumptions Certification for Implied Guaranteed Rate Method required by Actuarial Guideline XXXVI be filed with the state of domicile and electronically with the NAIC? Will the Reasonableness and Consistency of Assumptions Certification required by Actuarial Guideline XXXVI (Updated Average Market Value) be filed with the state of domicile and electronically with the NAIC? Will the Reasonableness and Consistency of Assumptions Certification required by Actuarial Guideline XXXVI (Updated Market Value) be filed with the state of domicile and electronically with the NAIC? Will the 2 ND Quarter Schedule D, Part 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement?... Explanation: Bar Code: 2017 National Association of Insurance Commissioners 16

122 Attachment Eighteen QUARTERLY STATEMENT BLANK TITLE SUPPLEMENTAL EXHIBITS AND SCHEDULES INTERROGATORIES The following supplemental reports are required to be filed as part of your statement filing. However, in the event that your company does not transact the type of business for which the special report must be filed, your response of NO to the specific interrogatory will be accepted in lieu of filing a NONE report and a bar code will be printed below. If the supplement is required of your company but is not being filed for whatever reason enter SEE EXPLANATION and provide an explanation following the interrogatory questions. Response 1. Will the 2 ND Quarter Schedule D, Part 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement? Will the 2 ND Quarter Schedule D, Part 2, Section 1 be filed with the 2 nd Quarter Statement?... Explanation: Bar Code: W:\QA\BlanksProposals\Proposals In Progress\SAPWG Proposals\Schedule D Quarterly Reporting\Schedule_D_Quarterly_Reporting_Proposal_Ver_8.doc W:\National Meetings\2017\Summer\TF\App\May 2 call\for E from May 2\C- Schedule_D_Quarterly_Reporting_Proposal_Ver_8.doc 2017 National Association of Insurance Commissioners 17

123 Attachment Eighteen This page intentionally left blank National Association of Insurance Commissioners 18

124 Attachment Nineteen D. Keith Bell, CPA Senior Vice President Accounting Policy Corporate Finance The Travelers Companies, Inc ; FAX Rose Albrizio, CPA Vice President Accounting Practices AXA Equitable June 12, 2017 Mr. Eric Cioppa, Chairman Financial Condition (E) Committee National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO RE: Interested Parties Comments Regarding a Policy Change to Facilitate Collection of Mid- Year, Electronic Only, Investment Information Dear Mr. Cioppa: Interested parties ( IPs ) appreciate the opportunity to provide comments on a potential policy change regarding the collection of mid-year, electronic only, investment information that would capture CUSIP, par value, book adjusted carrying value and fair value for Schedule D investments. As noted in our past letters, we continue to believe that the best approach to gathering additional quarterly data is to utilize the existing acquisition and disposition schedules currently provided each quarter. We have consistently advocated this and do not believe that it has been demonstrated how any additional quarterly data would be utilized effectively, or what the specific cost/benefit considerations of having the data programmed from the NAIC database entails. We recently learned of the work A.M. Best is doing, and has done for many years, regarding the quarterly roll-forward of investment portfolios utilizing the annual Schedule D and quarterly acquisition and disposition schedules filed by insurers. We understand this data can be made available for the NAIC and state regulatory departments through existing channels. We also understand that A.M Best is willing to provide further details on their portfolio roll forward process or provide copies of the work product to regulators and that they can utilize a pricing service to provide current fair values for securities having readily determinable fair values.

125 Comments to Financial Condition Committee June 12, 2017 P a g e 2 Attachment Nineteen We strongly urge the Committee to recommend that the process utilized by A.M. Best be studied and to reject any policy change at this time. However, if the Committee declines to go down this path, IPs would request a formal cost/benefit analysis be completed by the NAIC before consideration of any policy change. * * * * Thank you for considering IPs comments. We look forward to discussing this topic with you. If you have any questions in the interim, please do not hesitate to contact either one of us. Sincerely, D. Keith Bell Rose Albrizio cc: Dan Daveline, NAIC

126 Attachment Twenty

127 Attachment Twenty

128 Attachment Twenty-one June 12, 2017 Superintendent Eric A. Cioppa, Chairman Financial Condition (E) Committee National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500 Kansas City, MO RE: Collection of Mid-Year Investment Information Dear Superintendent Cioppa: Thank you for the opportunity to comment regarding the current proposal to collect expanded mid-year investment information. Our three organizations are providing comments together as we are all in agreement regarding the adoption of this proposal. The Vermont Captive Insurance Association ( VCIA ), with over 450 members, is the largest trade association for captive insurance in the world, and represents the captive insurance industry in Vermont. The Captive Insurance Companies Association ( CICA ) is the leading domicile-neutral trade association representing the global captive insurance industry. And the National Risk Retention Association ( NRRA ) is a 501(c)(6) non-profit and non-partisan trade association that is dedicated to the advancement of the risk retention and purchasing group industry. We strongly oppose this proposal for several reasons. Adoption of the proposal would adversely affect small insurance companies and Risk Retention Groups (RRGs). Such small insurance companies generally have very conservative portfolios and are often not representative of the insurance industry generally. The cost of providing this information by RRGs and other small companies will far outweigh the benefits that might be obtained for analysis by the NAIC. Further, we do not believe that the information provided by expanded mid-year reporting would be useful for regulatory analysis of small companies. Quarterly statements are filed 45 days after the statement date, and any analysis results would be weeks in gestation. There are daily financial press reports, and if the news warrants additional data, insurance departments can call for it; otherwise insurance departments are likely to be collecting information for which they have no immediate need. 180 Battery Street 4248 Park Glen Road Ventura Blvd., Suite 1055 Burlington, Vermont Minneapolis, MN Encino, CA phone: phone: phone: x102 smith@vcia.com dtowle@cicaworld.com joe@riskretention.org