Valuation of Securities (E) Task Force Conference Call July 18, 2016

Transcription

1 Attachment One Date: 8/9/16 Conference Call July 18, 2016 The met via conference call July 18, The following Task Force members participated: Anne Melissa Dowling, Chair, represented by Kevin Fry (IL); Todd E. Kiser, Vice Chair, represented by Jake Garn (UT); Dave Jones represented by Kim Hudson (CA); Katharine L. Wade represented by Adam Wilder (CT); Stephen C. Taylor represented by Philip Barlow (DC); Karen Weldin Stewart represented by Rylynn Brown (DE); David Altmaier represented by Lonnie Salimone and Taris Smalls (FL); Nick Gerhart represented by Alan Harder (IA); James J. Donelon represented by Stewart Guerin (LA); Al Redmer Jr. represented by Matt Kozak (MD); Bruce R. Ramge represented by Bruce Bornman (NE); Richard J. Badolato represented by Steve Kerner and John Sirovetz (NJ); Barbara D. Richardson represented by Omar Akel (NV); Maria T. Vullo represented by Jim Everett (NY); David Mattax represented by Jamie Walker (TX); Mike Kreidler represented by Tim Hays (WA); and Ted Nickel represented by Randy Milquet (WI). 1. Adopted Draft Interrogatory for the 5* (Insurer Certification) Population and Directed Staff to Draft Referral Back to the Blanks (E) Working Group On June 8, the Task Force discussed a response from the Statutory Accounting Principles (E) Working Group to a Task Force referral. The Task Force had originally asked if changes to statutory accounting would be necessary if the procedure by which the SVO assigns NAIC 5* to securities based on insurer certifications was moved from the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to the General Interrogatories to the annual and quarterly financial statements. The Working Group responded that the decision to create an interrogatory would not require a change in statutory accounting guidance. Julie Gann (NAIC) said the Working Group also advised that it had adopted a disclosure to help it identify the population for state insurance regulators. The certification for the new items would come along with a new code, 5* GI. During the discussion, Ms. Stock proposed that the Task Force develop the interrogatory. The SVO was asked to coordinate with the staff of the Blanks (E) Working Group to create an initial draft that could be presented to the Task Force. Mr. Garn explained that, if the Task Force adopts the proposal, the Blanks (E) Working Group will discuss the interrogatory in an upcoming call to be held Aug. 8, so that the Working Group can prepare the amendment and consider adoption at the Fall National Meeting. Ms. Belfi made a motion, seconded by Mr. Kerner, to adopt the draft interrogatory for the 5* (insurer certification) population and directed staff to draft a referral back to the Blanks (E) Working Group. The motion passed. 2. Received SVO Recommendations on a Referral from the Statutory Accounting Principles (E) Working Group on SSAP No. 41 Surplus Notes and Exposed Them for a 30-Day Public Comment Period On June 8, the Task Force discussed a referral from the Statutory Accounting Principles (E) Working Group, which advised that revisions to SSAP No. 41 Surplus Notes had been adopted that would, in turn, require revisions to the surplus notes guidance in the P&P Manual. The Task Force asked staff to review the P&P Manual guidance in question and to make recommendations and develop an appropriate amendment for consideration. Robert Carcano (NAIC) explained that the SVO maintains the List of Capital and Surplus Notes Eligible for Amortized Value Accounting that contains the name of surplus notes identified by insurers, which the SVO has verified are rated by a credit rating provider (CRP) at the equivalent of an NAIC 1. The SVO also conducts a financial assessment to determine the measurement method the insurer should use for surplus notes not rated by an NAIC CRP and those that are rated at an NAIC 2 through NAIC 6 equivalents. The revised SSAP No. 41 expands amortization treatment to include surplus notes rated at an NAIC 2 equivalent and eliminates the need for an SVO financial assessment. Surplus notes not rated by an NAIC CRP and those rated at an NAIC 2 through NAIC 6 equivalent are now valued at the lower of amortized cost or fair value. The SVO proposes an amendment to the P&P Manual that would eliminate the list and the instructions pertaining to the financial assessment. Under the existing process, insurers are instructed to identify surplus notes to the SVO, but the list is rarely updated. This may mean that there are not many surplus notes to begin with; if that is the case, staff questions the value of maintaining the list. It may be that this activity may not require a uniform national approach and can instead be left to the individual states to identify which of its companies have issued surplus notes National Association of Insurance Commissioners 1

2 2016 National Association of Insurance Commissioners 2 Attachment One Ms. Belfi made a motion, seconded by Mr. McNaughton, to receive the SVO memorandum and recommendations and expose them for a 30-day public comment period ending Aug. 19 in order to consider adopting them at the Summer National Meeting. The motion passed. 3. Heard an SSG Presentation on the Proposed Through-the-Cycle Framework for Financial Modeling of RMBS and CMBS and Exposed it for a 30-Day Public Comment Period During the year-end assumption-setting process for residential mortgage-backed securities (RMBS) and commercial mortgage-based securities (CMBS), the American Council of Life Insurers (ACLI) has consistently expressed concern that the financial modeling process makes it difficult to gauge capital efficiency because the weights used in the scenarios shift from year to year. Staff has always responded that the financial modeling process was not designed to make capital requirements predictable but to calculate a reasonable balance between possible economic future outcomes. In fact, because the methodology is concerned with identifying changing economic conditions throughout a business cycle, the capital treatment for some modeled securities will vary from year to year. Thus, concern with predictable capital requirements cannot be addressed by adjusting the calculation parameters of the pro-cyclical approach used since 2009 in the existing methodology. Were the Task Force to share the ACLI s concern, it would have to change the methodology. As a possible solution, the NAIC Structured Securities Group (SSG) has prepared a report on the through-the-cycle (TTC) framework in the financial modeling process instead. Eric Kolchinsky (NAIC) presented the report (Attachment One). He explained that changing the current framework is a policy decision. The typical financial modeling process consists of four steps; the proposed change corresponds to the first step (i.e., how staff set the macroeconomic scenarios and what they are for each year). The latter will then be input into the correct models for RMBS and CMBS in order to determine how each loan performs within those scenarios. The current, procyclical approach was first adopted in 2009 in the initial year-end modeling. Staff developed a base case scenario i.e., the current best understanding of what will happen in the future based on current conditions around which stress paths are generated, either upward or downward. Between the 2009 base case and the 2015 base case, the stress paths varied due to different economic conditions. The year 2009 marked the trough of the recession, while in 2015 circumstances changed, reflecting a base assumption of a continued increase in home price appreciation. Scenarios that change with the base case depending on where they are in the economic cycle are pro-cyclical. In order to achieve more consistency, staff propose conducting a TTC model study that will: 1) be based on historical and publically available data (e.g., Case-Schiller for RMBS and an analogous one for CMBS); 2) be able to generate several forecast paths that can statistically represent various percentiles paths; 3) qualitatively mimic historical extremes when extreme scenarios are used; and 4) be memoryless, statistically it should have the Markov property (i.e., when it generates its paths, it should only look to what is happening today). The last item is key in achieving consistency in a TTC approach. The proposed TTC approach is commonly used by rating agencies to assign ratings. One of the pros of keeping the current pro-cyclical approach is that a weak company will be identified sooner; on the other hand, the opposite holds true for a strong company. One of the cons of the TTC approach, however, is the implementation issue and the time everyone would expend in creating the model. Mr. Kolchinsky anticipated that, if directed by the Task Force to go ahead, implementation for the project would occur at year-end Because this is a technical issue, he recommended a technical exposure. Ideally, the model would be presented so the industry could reverseengineer it and run the same scenarios. Ms. Brown observed that the current method is more conservative from a regulatory perspective, and thus might prove more valuable during an economic downturn so that companies can bump up capital. Mr. Salimone expressed interest in seeing scenarios with the current macro environment with currency fluctuations, interest rates and varied anomalies. Mr. Kolchinsky clarified that there is no model at the moment. He explained that the model would exclude anything current or future views, and would be based on historical data, including the sine wave seen through the financial crisis (for example, home pricing) and would set scenarios on that. Mr. Salimone said that approach would be flawed because current events differ greatly from the financial crisis. Mr. Kolchinsky agreed that is a concern with the TTC approach and observed Mr. Salimone and Ms. Brown s comments were fair. Ms. Walker asked what staff would need from the Task Force in order to move forward and asked about the plan for this project. Mr. Fry explained that the presentation would be exposed for a public comment period. He emphasized that the current model also does not allow for as much transparency as possible, because it is owned by the vendors. Mr. Kolchinsky agreed and explained that one of the pros of the TTC framework is that it would be an NAIC intellectual property. Ms. Walker added that the current pro-cyclical model is both more and less conservative, depending on the situation, yet the TTC model may eliminate some volatility in their capital structures that carriers may see. Mr. Fry concurred that the TTC model may smooth that out. Mike Monahan (ACLI) said the TTC framework is an interesting concept because, in an up market, the rewards are not received as fast; whereas, in a down market, the needed signals are received. He said the ACLI supports staff going forward.

3 Attachment One Ms. Belfi made a motion, seconded by Mr. Garn, to receive the SSG report on the TTC framework for RMBS/CMBS financial modeling and expose it for a 30-day public comment period ending Aug. 19. The motion passed. 4. Heard an SSG Report of the Updates to the Vendor s CMBS Financial Model Mr. Kolchinsky reported that BlackRock made changes to its financial model for CMBS that will likely impact at least some insurer-owned CMBS transactions. The two main drivers for the changes are: 1) the property level inputs are being strengthened and deepened; and 2) the analytical framework is becoming a lot more probabilistic rather than single path. The SSG is now performing quality assurance (QA) for the model. It has not yet been decided whether to implement it for 2016 or 2017; that will depend on staff s ability to perform robust QA on the product, as well as robust transparency plan. Once implemented, staff will publicly update the results on a pro-forma basis. Staff will give a full report at the Summer National Meeting, when the QA process will be further along. Nancy Bennett (American Academy of Actuaries) asked whether these updates and the TTC data previously discussed will be shared and discussed with the Capital Adequacy (E) Task Force to ensure the process fits in with how the risk-based capital (RBC) charges are determined. In the past, questions have been raised about the consistency of the approach to structured securities compared to corporate bonds. Mr. Fry said that the Investment Risk-Based Capital (E) Working Group has been reviewing RBC charges and, in its A Way Forward document, discussed securities valued under SSAP No. 43R Loan-Backed and Structured Securities. The Working Group is considering increasing the granularity in designations to 20. The Working Group acknowledges it plans to look at all of SSAP No. 43R again after it finishes with the bond factors. Mr. Fry believes Ms. Bennet s point will be covered in that effort. Ms. Bennet also asked whether, in order to establish priorities and to integrate it properly with the Capital Project, it made sense to look at the framework first or how the RBC capital charges should be established for structured securities. Mr. Fry agreed they were good points and said the discussion may be expanded at the Summer National Meeting. 5. Heard an SSG Report on the Modified Filing Exempt Population Mr. Fry said this item is an extension of SSAP No. 43R, in that it touches securities that are not modeled. Mr. Kolchinsky presented a preliminary oral report on the modified filing exemption (MFE) process. Staff began with insurer filings and identified SSAP No. 43R structured securities through a number of methods including reported line codes, collateral types, CUSIP database type and AM 1 reporting. The resulting data set was pruned by removing modeled RMBS/CMBS, agency securities and Small Business Administration (SBA) securities. Approximately $294 billion book/adjusted carrying value (BACV) of securities remained. Approximately $48 billion (16%) of those securities were reported as AM, of which $12 billion were upgraded from FE; $19 billion remained the same; $6 billion were downgraded. Within those that $12 billion that were upgraded, CLOs figured prominently, representing $7 billion. In the data set, staff also found approximately $2 billion collateralized loan obligation (CLO) combo notes, which is troubling because they are typically rated by rating agencies to return on principal only. Thus, effectively what the combo does is to take all the cash coming from the tranches, principal and interest, and turns it into principal, so they do not have a stated interest. This would not qualify as a rating and yet in one case, one company had a more than $340 million single combo note, a single exposure, that had a Baa3 rating (to principal only) and the rating through MFE was uplifted into 1AM. Mr. Kolchinsky emphasized that this is not a legacy issue, because two-thirds of the pool, or $32 billion, were post Only about $15 billion are of a 2008 vintage or before. The SSG found the findings analogous to those of the Reporting Exceptions Analysis (E) Working Group. Of the AM ratings, about $10.5 billion remained unsubstantiated, meaning that staff could not find agency ratings for them. The Working Group excluded AM ratings, and only focused on FE reported. The SSG findings include six securities with a BACV of more than $100 million in a single security. The SSG envisions further work that includes: a deeper examination of these dynamics; work on vintages; consideration of the potential capital impact, pre-covariance; and consideration of what would happen if the dataset were adjusted directly to FE. Staff anticipate presenting the resulting report sometime after the Summer National Meeting, but before the Fall National Meeting. 1 AM a suffix to identify CUSIPs not modeled and not designated by the SSG but for which CRP ratings were used to derive the NAIC designation. As per Part Seven, Section 4 (a) of the P&P Manual National Association of Insurance Commissioners 3

4 Attachment One Mr. Fry asked Mr. Kolchinsky to confirm that nearly $300 billion of SSAP No. 43R securities are not modeled and to describe the MFE change rating on a certain percentage of them. Mr. Kolchinsky reiterated that, of the $294 billion of SSAP No. 43R securities, $48 billion were reported as AM designation and, within that amount, $19 billion kept the same designation, $12 billion were upgraded to a higher designation, $6 billion were downgraded to a lower designation and $10 billion remained unsubstantiated. Mr. Everett requested a written summary of Mr. Kolchinsky s report, and he agreed to draft one and distribute it to the Task Force after the call. 6. Received an SVO Recommendation to Amend the P&P Manual to Highlight the Regulatory Nature of NAIC Designations and Exposed it for a 120-Day Public Comment Period There have been discussions between the NAIC and the International Association of Insurance Supervisors (IAIS) about a project to conduct a field test of a proposed capital standard, which then led to discussions about whether the use of NAIC designations were intended to be the same as credit ratings. The nature and purpose of NAIC designations directly concerns this Task Force, so Mr. Fry asked staff to study whether the regulatory nature and purposes of NAIC designations are clearly expressed in the P&P Manual. Pursuant to that direction, the SVO has filed a proposed amendment. After conducting the review, Mr. Carcano concluded that, while it is clear that NAIC designations are used in the NAIC s state-based financial solvency process, the definition of the term itself gives the erroneous idea that NAIC designations are strictly associated with credit risk assessment methodology. This may lead to confusion as to the relationship between credit ratings and NAIC designations. When considering what the P&P Manual says on the regulatory side, it is clear that what state insurance regulators want to convey is that the NAIC is concerned with the quality of the security. He gave several examples to illustrate the point that the quality of a security is derived in a number of ways, but that quality itself is always expressed as an NAIC designation. This pattern of clearly reflects that credit risk assessment is the predominant methodology and the significant effort of the past 20 years to first develop the SVO s credit risk assessment process and then to incorporate the use of CRP credit ratings via the FE process into that framework. A person that is brand-new to the NAIC and reading the P&P Manual for the first time would quickly encounter text disclosing the quality concept linked to the designations, further linked to a regulatory function and then linking back to the definition of the NAIC Financial Conditions Framework. The definition of NAIC designation refers to the quality of the security, consistent with the beginning of the P&P Manual; however, the second sentence may be causing confusion by its reference to credit risk. If readers were to only focus on the second sentence, they might conclude that NAIC designations are concerned with credit risk. Mr. Carcano then delineated that the proposed amendment aims to correct that, with existing text discussing the quality assessment or quality determination but rearranging them for clarity. Text concerned specifically with the credit risk assessment methodology should refer to quality determination as involving credit quality and as a measure of the likelihood the security would be available to pay policyholder claims. The proposed text in the section where NAIC designations are defined explains their purpose and links NAIC designations and an updated definition of NAIC Financial Conditions Framework. Also, proposed new sections illustrate how NAIC designations trigger regulatory treatment. The text is taken from an attachment used in the Regulatory Treatment Analysis Service (RTAS) process. Additional text clarifies that NAIC designations are only issued to insurers post-purchase, which is a significant distinction with investor-oriented products intended for use in the investment decision-making process. Other subsections illustrate the many different methods used to derive NAIC designations and remove the reference to credit risk so that the definitions apply to all securities irrespective of the methodology sanctioned by the Task Force for that population. Lastly, Mr. Carcano said the NAIC is concerned with the quality of the security and emphasized that SVO staff is sensitive to the IAIS process. Ms. Belfi observed that the amendment is substantial and suggested a 120-day exposure in order to give the industry and Task Force members time to study it. Mr. Salimone added that, from a regulatory standpoint, the amendment is a good opportunity to test controls. Mr. Monahan asked if staff have reached out to either the IAIS and/or staff working with the group, and Mr. Therriault answered that there have been discussions with the staff only. Mr. Therriault explained that this proposed amendment includes text that is mostly already in the P&P Manual, which should hopefully make it easier to understand what an NAIC designation means, as well as which use a credit analysis methodology and which do not. Mr. Monahan then asked if staff have looked at how this may impact, or be impacted by, state laws. Mr. Carcano said that the definition proposed for the NAIC Financial Conditions Framework would encompass the accreditation program, noting that all 50 states and two territories have adopted the standards that utilize NAIC designations in them; therefore, on that basis, it would be included. Doug Barnert (Barnert Global, Ltd.) suggested that the memorandum and amendment be circulated to other groups beyond the Task Force because of the suggested change in the definition of NAIC Financial Conditions Framework National Association of Insurance Commissioners 4

5 Attachment One Ms. Belfi made a motion, seconded by Mr. Everett, to receive the proposed amendment and expose it for a 120-day public comment period ending Nov. 21. The motion passed. The Task Force ran out of time and deferred discussing the remaining items 7 through 10 until the Summer National Meeting. Having no further business, the adjourned. G:\DATA\Vos-tf\Meetings\2016\July\July 18\VOSTF 18 July16 Meeting Minutes.docx 2016 National Association of Insurance Commissioners 5

6 Attachment Two Date: 8/8/16 Conference Call June 8, 2016 The met via conference call June 8, The following Task Force members participated: Anne Melissa Dowling, Chair, represented by Kevin Fry (IL); Dave Jones represented by Tomoko Stock (CA); Katharine L. Wade represented by Adam Wilder (CT); Stephen C. Taylor represented by Philip Barlow (DC); Karen Weldin Stewart represented by Rylynn Brown (DE); Kevin M. McCarty represented by Joel Meyer and Taris Smalls (FL); Nick Gerhart represented by Jim Armstrong (IA); Ken Selzer represented by Tian Xiao (KS); James J. Donelon represented by Stewart Guerin (LA); Al Redmer Jr. represented by Matt Kozak (MD); Bruce R. Ramge represented by Bruce Bornman (NE); Richard J. Badolato represented by John Sirovetz (NJ); Amy L. Parks represented by Omar Akel (NV); Shirin Emami represented by Jim Everett (NY); John D. Doak represented by Joel Sander (OK); David Mattax represented by Jamie Walker (TX); Mike Kreidler represented by Tim Hays (WA); and Ted Nickel represented by Randy Milquet (WI). 1. Deferred Discussion of a Proposed P&P Manual Amendment to Describe Interaction Between the Securities Valuation Office (SVO) and the Financial Regulatory Services (FRS) Staff The Task Force deferred discussion of this item because, given the level of interaction between the SVO and the FRS staff, the text in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) and in the Accounting Practices and Procedures Manual (APPM) should be consistent. Dale Bruggeman, chair of the Statutory Accounting Principles (E) Working Group, agreed with the idea of a joint call, while Mike Monahan (American Council of Life Insurers ACLI) expressed support. The Task Force chair and Working Group chair support the transparency of the policy document. The Task Force directed NAIC staff to schedule a joint call between the Statutory Accounting Principles (E) Working Group and the Task Force sometime in July. Mr. Fry invited industry to provide specific comments regarding the language of the amendments. To that end, the Task Force and Working Group posted the memorandum on its respective Web page for a 30-day public comment period ending July Received an Update on the Reporting Exceptions Analysis (E) Working Group The Reporting Exceptions Analysis (E) Working Group met for the first time June 6 via conference call and has scheduled its next meeting for June 21 via conference call. The objective of this Working Group is to look for ways to reduce or eliminate exceptions from the Jumpstart reports so examiners are not spending time researching false positives. Mr. Guerin, the Working Group chair, said the second call will focus exclusively on the private letter rating issue due to industry and regulator interest. The Working Group will update the Task Force on any further developments. 3. Adopted a P&P Manual Amendment to Add Italian Generally Accepted Accounting Principles (GAAP) as a National Financial Presentation Standard (NFPS) Earlier in the year, the Task Force directed NAIC staff to study the possibility of adding Italian GAAP to the P&P Manual s list of national financial presentation standards (NFPS) used to produce an NAIC Designation comparable to one using U.S. GAAP or international financial reporting standards (IFRS). If Italian GAAP is added to the list, insurers will be able to submit financial statements prepared using Italian GAAP without having to reconcile them to U.S. GAAP or IFRS. On Feb. 22, the Task Force heard an NAIC staff report recommending that Italian GAAP be added. At the Spring National Meeting, the SVO presented a corresponding amendment, which the Task Force exposed for a 30-day comment period ending May 4. No comments were received. Ms. Stock made a motion, seconded by Mr. Milquet, to adopt the P&P Manual amendment to add Italian GAAP as an NFPS and to identify required documentation for those filings. The motion passed. 4. Adopted the Reinsurance (E) Task Force s Response on the s Referral of a Proposed Amendment to the P&P Manual for the NAIC Bank List Through the SVO, the Task Force maintains the NAIC Bank List (List) for the Reinsurance (E) Task Force. Insurers can obtain letters of credit (LOCs) from banks on the List for use as collateral in reinsurance transactions under the Credit for Reinsurance Model Law (#785). Both Task Forces agreed to consider whether the List should be expanded to include eligible 2016 National Association of Insurance Commissioners 1

7 2016 National Association of Insurance Commissioners 2 Attachment Two non-banks to make this activity consistent with the Model #785, which now includes the concept of allowing non-banks for such purposes. NAIC staff developed criteria for non-banks and recommendations on changes to the process of creating a list for banks and non-banks. The SVO presented a final report and recommendations at the 2015 Fall National Meeting, which the Task Force exposed for a 60-day public comment period. No written comments were received. On Feb. 22, the Task Force adopted the proposal and recommendations and referred it to the Reinsurance (E) Task Force, with a recommendation that it consider approving the proposal. The Reinsurance (E) Task Force approved it and asked the Valuation of Securities (E) Task Force to finalize outstanding technical and administrative issues for implementation. Mr. Garn made a motion, seconded by Mr. Sirovetz, to direct the SVO to adopt the Reinsurance (E) Task Force s response and to direct NAIC staff to draft a final version of the P&P Manual amendment to include eligible non-banks to the NAIC Bank List to be presented at the Summer National Meeting and to be effective Jan. 1, The motion passed. 5. Discussed the Rules and Systems Modernization Statement Over the last year or so, the SVO, ACLI, North American Securities Valuation Association (NASVA) and the Private Placement Investors Association (PPiA) have discussed how an SVO system redesign might be made to improve SVO operations, including the filing process. On April 4, NAIC staff filed a report outlining concepts to guide the redesign, including positions on issues caused by existing filing rules, and specifically suggested that the Task Force consider the lead lender rule and its impact on the filing process. At the Spring National Meeting, the Task Force voted to expose the Report on the Rules and Systems Modernization for a 60-day public comment period ending June 3. No comments were received. At the Task Force chair s request, Charles Therriault (NAIC) briefly discussed the lead lender rule, by which the insurer with the largest investment in a security must file it with the SVO. The rule creates a work backlog at year-end and unnecessary stress on staff, which leads to potential inaccuracies. This pattern has been seen over the past several years. Also, the rule places a bigger financial burden on the larger insurers, while the smaller insurers leverage off it. Mr. Therriault said he believes all of this could be prevented by implementing changes outlined in the staff report. He pointed out that changing it would entail a different fee structure than the current one, thus eliminating the incentive for companies to wait for another larger company to file. Other changes, such as updating the filing deadline rules, would also help balance the filing workload. NAIC staff recommend an allocation of the fee across insurers holding the same investment, which would entail creating processes for calculating it. Mr. Fry explained that the Task Force does not have complete purview over this rule, nor are fees within the charge of the Task Force; however, if it believes that a rule is operationally affecting SVO functions; the Task Force can then refer the recommendations to the appropriate group. Ms. Brown approved. Mr. Carcano said that, if the Task Force agrees that the staff has proved that there is a regulatory impact, staff can take it up to senior NAIC managers request their assistance to put it in front of the appropriate committee. Mr. Monahan said the ACLI also sees the initiative as a positive step that would build more efficient processes. Judi Hills (NASVA) said the NASVA also supports eliminating the lead lender rule and instituting a filing assessment instead of a filing fee per security structure. Mr. Fry explained that the staff report mentions other rules that the Task Force may take up as policy items further down the road. The Task Force agreed that the lead lender rule is negatively impacting regulation and thus supports referring staff recommendations to the appropriate NAIC regulator group so that an alternative fee process may be developed. The Task Force supports the staff report as a starting point for the SVO systems filing and modernization discussion. 6. Adopted an Amendment to the P&P Manual to Eliminate the Public Meetings Required in the Structured Security Group s Financial Modeling Process for Residential and Commercial Mortgage-Based Securities (RMBS/CMBS) On Feb. 22, the Structured Securities Group (SSG) recommended that the Task Force eliminate the existing requirement for meetings to set macro-economic assumptions, scenarios and risk weightings for the annual financial modeling of residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). The SSG thinks the requirement had a clear policy objective in 2009, which has diminished as markets stabilized and the methodology was better understood by industry and capital markets. The meetings also create an erroneous expectation that the pro-cyclicality of the methodology can be changed or modified between the time of the meetings and the implementation of financial modeling. At the Spring National Meeting, NAIC staff presented an amendment to the Task Force, which exposed it for a 30-day public comment period ending May 4. No comments were received. Mr. Fry explained that interested parties will still have a forum to raise issues. The SSG will still post macro-economic assumptions and scenarios on the Task Force s website and will still present reports on the financial modeling process to the Task Force. In the Task Force chair s view, the required meetings take up a lot of time and do not lead to productive discussions. Mr. Sirovetz pointed out an error in the amendment where micro-economic mistakenly replaced macro-economic. NAIC staff will correct the error.

8 Attachment Two Mr. Milquet made a motion, seconded by Mr. Garn, to adopt the P&P Manual amendment to delete the requirement for the series of meetings held to set macro-economic assumptions, scenarios and risk weightings for the annual financial modeling of RMBS and CMBS. The motion passed. 7. Discussed a Joint FRS/SVO Proposal on SSAP No. 43R Loan-Backed and Structured Securities and Referred it Back to the Statutory Accounting Principles (E) Working Group The Task Force first discussed this item during the Spring National Meeting. It involves a Statutory Accounting Principles (E) Working Group project to review amendments to SSAP No. 43R Loan-Backed and Structured Securities made in The SVO agreed to assess the issues and present a proposal for the Task Force to review and, if approved, to be referred to the Working Group. This reflects that the SSG has structured finance expertise and the Task Force has an issue in the P&P Manual that depends on how the SSAP issue is resolved. In April, the Task Force voted to expose the joint FRS/SVO proposal on the definition of loan-backed and structured securities (LBaSS) in SSAP No. 43R Loan-Backed and Structured Securities for a 60-day public comment period ending June 3. The ACLI submitted a letter recommending several modifications to the definition, including adding the term multiple unrelated obligors. NAIC staff included the term in a modified proposed definition. If there is to be a distinction between SSAP No. 26-Bonds and SSAP No. 43R then the most likely cause for that distinction is the differences in the cash flow characteristics attributable to the differences in the obligors. NAIC staff explained that because trusts can be used for different purposes (each of which can imply different cash-flow characteristics), the trust is not the most important element in the definition in SSAP No. 43R. Instead, it is that the trust is holding a collateral pool with multiple obligors, and it is this pool collateral pool that is the source of the cash to pay the obligation issued by the special purpose vehicle (SPV). This is very different from a trust that is holding legal documentation to verify ownership in the event of default and requires a trustee to turn over an asset to the investor who is experiencing a default. The ACLI agreed with NAIC staff analysis. Ms. Stock made a motion, seconded by Mr. Garn, to adopt the proposal and refer the revised definition back to the Statutory Accounting Principles (E) Working Group. The motion passed. 8. Deferred Adoption of a Proposed P&P Manual Amendment to Add Guidance and Instructions on Bank Loans and Referred it to Statutory Accounting Principles (E) Working Group for Guidance Although the SVO has analyzed bank loans for many decades, the P&P Manual does not provide methodology and documentation for doing so. The SVO drafted a proposed amendment to: 1) provide definitions, documentation standards, methodology and criteria for loans; 2) incorporate existing text on debtor-in-possession (DIP) financings; and 3) expand guidance for them. The Working Group is working to clarify definitions and scope issues for bank loans. The Task Force exposed the proposal for a 60-day public comment period. No comments were received. Because the Working Group has not completed its work, NAIC staff recommend that the Task Force defer adopting the amendment and refer it to the Working Group to consider as it develops its definitions and that it include a definition for assignment to ensure consistent guidance in the two areas. Ms. Stock made a motion, seconded by Mr. Milquet, to defer adoption of the proposed SVO amendment until the Statutory Accounting Principles (E) Working Group has finalized its definitions project and to refer the SVO amendment to the Working Group with a recommendation that it consider it as it develops definitions for banks loans. The motion passed. 9. Received a Referral Response from the Statutory Accounting Principles (E) Working Group Regarding Five Star Rule (5*) Insurer Certification and Referred it Back to the Working Group Early in 2015, NAIC staff expressed concern that the insurer certification component of the Five Star Rule (5*) was not being used as originally intended. The certification permits a company to ask for the assignment of a 5* regulatory designation by certifying that it is receiving and expects to continue receiving interest and principal on the security. The 5* is assigned on the basis of that certification not on a formal SVO analysis. However, the SVO is required to conduct due diligence before accepting the certification and believed it could no longer do so given the nature of some of the securities being presented to it of 5* status. The Task Force agreed to an SVO request that it be removed from this function and agreed to consider an ACLI recommendation that it move the certification process to an interrogatory. The Task Force asked the Working Group to evaluate if changes on accounting would be necessary if the certification were moved to the general interrogatories to the annual and quarterly statements. The Working Group responded that changes to accounting are not necessary if the Task Force decided to remove the SVO from the process and that the Working Group will adopt a disclosure 2016 National Association of Insurance Commissioners 3

9 Attachment Two for 5* securities to help identify the population for regulators. The next step is for the Task Force to ask the Blanks (E) Working Group to develop an interrogatory. Ms. Stock proposed that the Task Force take care of the technical aspect of the discussion before said referral. She argued that the Task Force and SVO will still be responsible until there is an interrogatory and a P&P Manual amendment is drafted. Mary Caswell (NAIC) said that the Blanks (E) Working Group will be happy to help. The Task Force directed the FRS and SVO staff to work together to create an interrogatory that will eventually be presented to the Blanks (E) Working Group. 10. Received a Referral from the Statutory Accounting Principles (E) Working Group on Revisions to SSAP No. 41 Surplus Notes and Exposed It for a 30-Day Public Comment Period The Task Force received a new referral from the Statutory Accounting Principles (E) Working Group for surplus notes. Earlier this year, the Task Force received a referral on surplus notes where it adopted an instruction for converting credit rating provider (CRP) credit ratings into NAIC Designations for surplus notes rated an NAIC 1 designation equivalent. This new referral advises that the Working Group adopt revisions to SSAP No. 41 Surplus Notes that require revisions to the surplus notes guidance in the P&P Manual. For example, amortization treatment would be expanded to surplus notes rated by a CRP at an NAIC 2 equivalent. Those rated at NAIC 3 through NAIC 6 equivalents and those not rated would be reported at the lower of amortized cost or fair value instead of at outstanding face value or outstanding face value with application of a statement factor. Mr. Carcano said there used to be a methodology that incorporated an SVO financial assessment for NAIC 3 through NAIC 6 equivalents or not rated by a CRP; that process goes away. The SVO would no longer conduct the assessment for the latter group of securities, but the Working Group wants the SVO to continue to list insurer-held surplus notes and their corresponding NAIC designation equivalents. The SVO needs to evaluate how this change from the Working Group affects its guidance in the P&P Manual. Mr. Milquet made a motion, seconded by Ms. Stock, to receive and expose the referral for a 30-day public comment period and to instruct the SVO to review the impact of the changes to SSAP No. 41 on the P&P Manual and to formulate recommendations and an appropriate amendment to the P&P Manual. The motion passed. 11. Discussed Other Matters Back in 2010, the SVO made a proposal on how many NAIC designations would be needed in order to correspond to increased granularity of risk-based capital (RBC investments. The Task Force directed the SVO and the SSG to work with the Investment Risk-Based Capital (E) Working Group staff on revising the 2010 proposal. The Task Force instructed the SSG to prepare a presentation on a through-the-cycle financial modeling process because the ACLI expressed legitimate concerns regarding the financial modeling process set in 2009, which is based on a pro-cyclical approach. The issue is that the current modeling process works on the principle of pro-cyclicality, which may make it harder for insurers to manage changes in RBC. The Task Force directed the SSG, SVO and FRS staff to work together to prepare a report that incorporates the modified filing exemption (FE) rule and carrying value under the accounting guidance. The current process creates a non-par way to look at risk, which differs from how munis, corporates and asset-backed securities (ABS) are looked at. The Task Force believes that there is a need to review these non-par processes as they apply to RMBS/CMBS. Then the Task Force can decide how to move forward regarding the guidance in the P&P Manual and for statutory accounting guidance. Having no further business, the adjourned. W:\National Meetings\2016\Summer\TF\VOS\VOSTF 08 June 16 Meeting Minutes - FINAL.docx 2016 National Association of Insurance Commissioners 4

10 Attachment Three Date: 4/18/16 New Orleans, Louisiana April 4, 2016 The met in New Orleans, LA, April 4, The following Task Force members participated: Anne Melissa Dowling, Chair, represented by Kevin Fry (IL); Todd E. Kiser, Vice Chair, represented by Jake Garn (UT); Dave Jones represented by Tomoko Stock and Kim Hudson (CA); Katharine L. Wade represented by Kathy Belfi (CT); Stephen C. Taylor represented by Philip Barlow (DC); Karen Weldin Stewart represented by Rylynn Brown (DE); Kevin M. McCarty represented by David Altmaier (FL); Nick Gerhart represented by Jim Armstrong (IA); Ken Selzer represented by Tian Xiao (KS); James J. Donelon represented by Stewart Guerin (LA); Al Redmer Jr. represented by Lynn Beckner (MD); Bruce R. Ramge represented by Justin Schrader (NE); Richard J. Badolato represented by Steve Kerner (NJ); Barbara Richardson represented by Omar Akel (NV); Maria T. Vullo represented by Stephen Wiest (NY); John D. Doak represented by Joel Sander (OK); Teresa D. Miller represented by Kimberly Rankin (PA); David Mattax represented by Jamie Walker (TX); Jacqueline K. Cunningham represented by Doug Stolte (VA); Mike Kreidler represented by Patrick McNaughton (WA); and Ted Nickel represented by Randy Milquet (WI). 1. Adopted its March 17 and Feb. 22, 2016, and 2015 Fall National Meeting Minutes Mr. Fry provided a summary of the activity that occurred during the Task Force s interim meetings: 1) exposed for public comment amendments to the Purposes & Procedures Manual of the NAIC Investment Analysis Office (P&P Manual); 2) adopted an amendment to the P&P Manual providing instructions for conversion of credit rating provider (CRP) ratings for surplus notes, which was exposed by the Task Force for a 20-day public comment period ending March 13. Mr. Armstrong made a motion, seconded by Mr. Altmaier, to adopt the Task Force s March 17, 2016 (Attachment One), Feb. 22, 2016 (Attachment Two) and Nov. 20, 2015 (see NAIC Proceedings Fall 2015, Valuation of Securities (E) Task Force) minutes. The motion passed unanimously. 2. Received and Exposed an Amendment to the P&P Manual to add Italian Generally Accepted Accounting Principles (GAAP) as a National Financial Presentation Standard (NFPS) Securities filed with the Securities Valuation Office (SVO) must be filed with an audited annual financial statement that conforms to U.S. GAAP, or to international financial reporting standards (IFRS), or to one of the foreign GAAPs listed in the P&P Manual. The Task Force instructed the SVO to study the American Council of Life Insurers (ACLI) request of June 2015 to add Italian GAAP to the list. On Feb. 22, the Task Force exposed an SVO report recommending the inclusion of Italian GAAP for a 30-day public comment period ending March 23. No comments were received and staff prepared a P&P Manual amendment for discussion at this national meeting. Mr. Hudson made a motion, seconded by Mr. Guerin, to receive the P&P Manual amendment to add Italian GAAP as an NFPS and expose it for a 30-day public comment period ending May 4. The motion passed. 3. Adopted an Amendment to the P&P Manual to Reflect Changes in the Titles of Some SSAPs and Conform SSAP References to the Style Adopted in the Accounting Practices & Procedures Manual (AP&PM) The Statutory Accounting Principles (E) Working Group requested a review of SSAP title references in the P&P Manual to ensure that they conform to the new house style in the Accounting Practices and Procedures Manual (AP&P Manual). The Task Force received the referral at the 2015 Fall National Meeting and exposed it for a 30-day public comment period, after which it instructed staff to proceed with the review and draft an amendment to the P&P Manual reflecting these changes. On Feb. 22, the Task Force received and exposed the amendment (Attachment Three) for a 30-day public comment period. No comments were received. Ms. Rankin made a motion, seconded by Mr. Kerner, to adopt the proposed amendment to modify references to the SSAP titles in the P&P Manual and to ensure they conform to the AP&P Manual style. The motion passed National Association of Insurance Commissioners 1

11 2016 National Association of Insurance Commissioners 2 Attachment Three 4. Adopted an Amendment to the P&P Manual to Remove Instructions for the Class 1 Money Market Fund (MMF) List In the late 1980s, the Task Force developed the Class 1 Money Market Fund (MMF) List to prevent certain MMFs from being eligible for bond treatment. The U.S. Securities and Exchange Commission (SEC) ruled that, effective Oct. 14, 2015, these types of funds can no longer report a stable net asset value (NAV), as required by the P&P Manual definition. In anticipation of said regulation, at the 2015 Fall National Meeting, the Task Force instructed the SVO to renew the list but also to provide for the list s expiration, effective Sept. 30, 2016, and to prepare a P&P Manual amendment to remove the Class 1 instructions on that date (Attachment Four). On Feb. 22, staff presented said amendment, which was exposed for a 30-day public comment period ending March 23. Mike Monahan (ACLI) expressed support for the Task Force s adoption of the amendment. Danielle Nefouse (BlackRock) said that many of BlackRock s insurance clients currently use prime MMFs to assist with management of claims reserves, premier receipts and other working capital, and Treasury-related functions on a daily basis. Part Two, Section 9 (e) of the P&P Manual states that mutual funds, including MMFs, are typically classified as common stock and reported in Schedule D, Part Two, Section Two of the NAIC financial statement blank. The Task Force has determined that MMFs that meet conditions in the P&P Manual section referenced by Ms. Nefouse. In addition, certain bond mutual funds that are registered with the SEC under the federal Investment Company Act of 1940, and which also meet the conditions set forth in Part Six, Section 2 of the P&P Manual, may be reported on Schedule DA, Part 1 and Schedule D, Part 1, respectively, of the financial statement blank. With the proposed removal of the Class 1 MMF List, prime MMFs would no longer receive this exception to be treated as cash or cash equivalent and receive bond treatment; instead, they would now be classified as common stock. Ms. Nefouse said this change would result in a significant difference in classification between the NAIC and the SEC, the Financial Accounting Standards Board (FASB) and the Internal Revenue Service (IRS). These entities will still consider prime institutional MMFs to be cash equivalents subsequent to the MMF reform in October. Also, and most important, even after the reform, these MMFs post-reform will continue to provide intra-day and same-day settlement for prime institutional MMF investors under normal market conditions. She added, In BlackRock s view, the changes to Rule 2a-7, while important and substantial, will not impact the quality of the investment of these funds. If anything, the changes will provide more stability to the product, greater transparency and diversification along with increased trust asset requirements and result in a more robust MMF. We would like to ask the members of the Task Force to consider the significant operational implications of such a change on insurance companies. Companies using these products for daily cash-management needs would be subject to statutory equity limitations. In many cases, insurance companies are already up against their maximum equity statutory limits and will be unable to have the large cash balances they use daily in MMFs also count toward these limits. We would like the Task Force to consider additional language to be included in the P&P Manual for a new classification of other MMFs to allow them to continue to be reported on Schedule DA as a short-term asset and refer to Statutory Accounting Principle (E) Working Group for additional guidance to be given that would allow prime MMFs to be classified under SSAP No. 2 [Cash, Drafts and Short-Term Investments], while allowing for the accounting of fair value under SSAP No. 30 [Investments in Common Stock]. Alternatively, we would propose that the Task Force consider amending the language in the P&P Manual for Class 1 requirements to be consistent with the revised requirements under SEC Rule 2a-7 for prime institutional MMFs to allow insurance companies to continue to use these funds as a cash-equivalent product. Mr. Fry responded that the Task Force s purview is to deal with the list and its place in the P&P Manual. The other aspects of MMF reporting might be located in accounting guidance or the annual financial statement instructions so that, in order to resolve the issue, the Task Force would need to figure out which group to which to refer this issue. Julie Gann (NAIC) said that, at this national meeting, the Statutory Accounting Principles (E) Working Group exposed an agenda item that removes any references to Class 1 MMFs from SSAP No. 26 Bonds, Excluding Loan-Backed and Structured Securities; however, MMFs are already specifically identified in SSAP No. 2 as an example of something that may qualify as a short-term investment. Ms. Gann clarified that she would not assume that all MMFs qualify, although those that do would be captured under Schedule DA. According to statutory accounting guidance, short-term items follow the measurement of their long-term SSAP, so they would be captured at fair value under SSAP No. 30, but be reported as short-term under Schedule DA. The Working Group also sponsored a blanks proposal to remove the reference to Class 1 MMFs on Schedule DA. Currently, there are three relevant lines: 1) the exempt MMF line; 2) the Class 1 MMF line; and, 3) the Other Short-Term Investments line. Ms. Gann

12 Attachment Three said her is presumption is that MMFs that do not fall under the first two categories are already put in the third line, but highlighted that she could be mistaken and requested clarification from the industry. If it were to be problematic that these particular MMFs do not have their own line, Ms. Gann suggested that, instead of deleting the line, it could be renamed other MMFs and have a separate line for other short-term. That discussion would likely involve the Statutory Accounting Principles (E) Working Group and/or the Blanks (E) Working Group during the exposure period that ends May 20 for the Statutory Accounting Principles (E) Working Group and ends May 16 for the Blanks (E) Working Group. The Blanks (E) Working Group will consider the issue on its June call so that, if adopted, it would be in place for year-end. Robert Carcano (NAIC) added that, three years ago, the Task Force moved a referral to the Statutory Accounting Principles (E) Working Group with a recommendation to amend SSAP No. 30 and to distinguish between funds that hold equity and other securities and those that only hold bonds, with the intent that the latter category be accorded debt-like standards. This is still an active project waiting action by the Working Group. The Task Force understands the industry s concern, but until it hears from the Statutory Accounting Principles (E) Working Group, it is not in a position to go forward. Ms. Gann explained that the issue is part of the Working Group s Investment Classification Project and it is working on SSAP No. 26 before SSAP No. 30. Mr. Garn made a motion, seconded by Mr. Akel, to adopt the amendment to delete Class 1 instructions from the P&P Manual, with the amendment to be effective as of Sept. 30, The motion passed. 5. Received and Exposed a Staff Report on Modernizing SVO Rules and Systems Mr. Fry explained that this project is a proposal to modernize SVO computer systems and the rules for how insurers file securities with the SVO. Mr. Carcano said an important element of designing a new computer platform for the SVO is to identify tasks that are now required of insurers that can be more efficiently performed by the system. Once staff achieves that, they will be able to identify existing rules that can be modified or eliminated. The goal is to shorten the time in which the SVO obtains a full document package by eliminating paper-based filing rules. With the Task Force s approval, staff held discussions with the ACLI, the Private Placement Investment Association (PPiA) and the North American Securities Valuation Association (NASVA) to discuss information and concerns about the existing filing rules and process, as well as to identify high-level principles and concepts that should guide system design and future filing rules. Staff presented the results of these discussions in a March 10 memo to the Task Force, in Section 2. The Statement, which outlines the following core principles: 1) provide a set of guidelines that can be referred to as the system design process unfolds; and 2) document SVO and industry views on how existing rules work well or could use improvement (individually and as a system). The intent behind the second point is three-fold: 1) to identify issues the system redesign should fix; 2) to have a starting point for discussion on system development; and 3) to develop recommendations for new filing rules. One existing rule that requires discussion and regulatory input before the design process can begin is the Lead Lender Rule, under which the insurer with the largest investment is required to make the initial filing of the security with the SVO and to submit annual updates thereafter. Understandably, the companies that are implicated in the rule consider it unfair. They have to pay, while all other insurers with the same security do not pay anything. As a result, all insurers wait until another company files the security. Further, it causes significant delays in security filings with the SVO, with the attendant work pressure in managing analyst workloads at year-end and thus potentially disrupts an important national regulatory process. The Lead Lender Rule was drafted to peg the fee for analysis to a specific insurance company entity. Mr. Carcano said this rule must be discussed early in the process, because the way to fix the filing problem is to change the approach to setting the fee. Mr. Carcano highlighted the fact that, as per its charges, the Task Force determines the rules for filing securities with the SVO, but that setting fees for services does not fall within its purview. The current fee approach is consistent with NAIC approaches or policies on the issue. However, the sense of the SVO and of industry representatives is that it causes an unnecessary impact on regulatory processes. While the rule has an administrative character, its more important function is to describe who bears the obligation to file. Staff recommend that the Task Force consider this perspective and, if it determines that the rule has more of a regulatory character than an administrative one, that it formulate an appropriate recommendation to senior staff and/or referral to the appropriate NAIC regulator group. The immediate objective is to put the Task Force in a position where it can consider the statement and determine comments and instructions. Approval would signify that the Task Force understands the objectives of system design and how they relate to the filing rules. Approval would also signify a determination on the Lead Lender Rule. Staff further recommend a regulator-toregulator session between the members of the Task Force and NAIC staff to permit full discussion of internal matters related to the system redesign. Public discussions of the statement and its objectives would follow in order to identify other issues or enhance the statement National Association of Insurance Commissioners 3

13 2016 National Association of Insurance Commissioners 4 Attachment Three Charles Therriault (NAIC) added that a core objective of a system redesign or process change is to get information efficiently to the SVO in as timely a manner as possible so that the analysts will have enough time to perform the work. He expects multiple approaches to solving these issues that will improve the system, the process and, likely, significantly improve the flow of information to the SVO. Each alternative should be considered in the context of regulatory goals, the efficiency gains and the cost-benefit trade-off that will result by incorporating the changes into a new platform. These improvements will eventually require changes by each of the stakeholders in the information chain that flows into the SVO, ultimately with the goal of improving the efficiency of the filing process. Mike Monahan (ACLI) said that not all insurers wait until another company pays, and clarified that the ACLI s goal is to remove the incentive to wait to file. Currently, there is a coordinated effort within the large insurers to step up to the plate. The ACLI believes it is fairer to charge all participants, not just the largest, and thus supports moving forward with the project because it agrees with many of the key issues outlined in the SVO memorandum. He also emphasized that the SVO has already made significant progress in areas where improvement was needed. Michelle Werner (AIG), representing NASVA, said NASVA has been involved in this project over the past few years. The trigger was an SVO filing backlog at year-end a few years ago. She agreed with Mr. Monahan that the process has improved tremendously since then. The discussions between NASVA, the SVO and the industry have helped in making the process much more efficient. As such, NASVA would like to continue participating in the process, and it believes that things should progress in a phased approach. In the first phase, NASVA would like to see the lead lender concept removed, because currently the lead lender handles all the responsibility and pays all the fees for all the filings of securities it holds, even though other insurers also hold the security. This is unfair and disproportionate, and another kind of fee structure should be developed. NASVA supports the VISION implementation and looks forward to it being the new platform. The second phase would entail the SVO s sourcing of public documents electronically. This would also require the SVO to either post the information in VISION or otherwise let the industry know the information is available so that each company could file. Once the first two phases are done, everyone can reevaluate the process and update deadlines if needed. Mr. Monahan said the ACLI also supports a phased-in process. He and Ms. Werner were complimentary regarding both the project and the work done so far. Mr. Garn made a motion, seconded by Ms. Stock, to receive and release the statement for a 60-day public comment period ending June 3. The motion passed. 6. Received an Update from the Statutory Accounting Principles (E) Working Group on Items Related to the Task Force Mr. Fry asked Ms. Gann for a summary of the Statutory Accounting Principles (E) Working Group s items related to the Task Force and reminded everyone that the Working Group s work and proposals are found on its Web page. In addition to the Class 1 item discussed earlier, Ms. Gann updated the Task Force on six additional items. This first item is regarding the Investment Classification Project, the Working Group is currently discussing the SVO bondapproved exchange-traded funds (ETFs) and their measurement and reporting. At this national meeting, the Working Group directed staff to draft guidance with regard to the measurement of those particular ETFs, which are still in SSAP No. 26, but moving away from SSAP No. 26 measurement guidance. The Working Group is drafting guidance that would indicate fair value with net asset value (NAV) as a practical expedient, with an allowance to what is now referred to as a documented designated amortized cost approach. At the meeting, the Working Group was tasked with finding a better terminology for the measurement method because it does not reflect amortized cost. Staff believe that they will be able to draft a memorandum for exposure shortly after the national meeting. The second item is regarding SSAP No. 41R Surplus Notes. The Working Group adopted changes to SSAP No. 41R to reflect the P&P Manual changes the Task Force adopted on its March 17 call. One key change is that the measurement method for surplus notes will change; now, both NAIC 1 and NAIC 2 designations will be allowed to be at amortized costs, with other NAIC designations being at the lower of amortized cost or fair value. The Working Group will send a follow-up referral to the Task Force to amend the P&P Manual on NAIC 1 and NAIC 2 on surplus notes. The third item is regarding the Task Force s referral on 5* securities requesting that the Working Group review those securities to see if the Working Group had any statutory accounting concerns with regard to the process to make those insurer-designations still to be filed with the SVO but not designated as 5* by the SVO. The Working Group exposed proposed disclosure revisions to capture information on 5* securities, specifically the volume, the number current and prior

14 Attachment Three year, as well as the measurement of book/adjusted carrying value (BACV) and fair value. A referral response will be sent to the Task Force shortly after the national meeting. The fourth item is regarding SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities, A Replacement of SSAP No. 88. The Working Group received the referral from the Task Force identifying the support to remove the actual filing instruction guidance from the P&P Manual while leaving the requirement to file those securities. The Working Group re-exposed proposed revisions to include that filing guidance in the AP&P Manual. While there was a discussion on whether that would be best served as an exhibit to SSAP No. 97 or as an appendix, the Working Group supported moving the guidance to the AP&P Manual from the P&P Manual. The fifth item is regarding the quarterly investment schedules. The Working Group has discussed making a change to the investment information received in the quarterly financial statements; currently, only acquisitions and dispositions are reported. There is discussion on whether staff should receive more information on all the investments that are held on each financial statement reporting date. The Working Group exposed some industry-provided alternative options to having the full investment schedules or the quarterly acquisition schedules. The Working Group specifically seeks feedback from state insurance regulators and the industry on the matter. Lastly, the Working Group exposed a policy statement regarding coordination with the Task Force and used the Task Force s policy statement on the same matter as the basis for its own. Because they are concurrently exposed, the Working Group is hoping to receive comments on the joint process. 7. Received and Exposed the Final Jumpstart Staff Report; Appointed a New Working Group to Address Related Issues This project involves a population of securities that are reported by insurers as filing exempt (FE) but are not in the credit rating provider (CRP) data feeds. Mr. Carcano provided an update. The SVO has worked with the ACLI, NASVA and CRP representatives over a two-year period so as to discover and resolve why a population of securities that are reported by insurers as FE are not shown in the CRP data feeds the NAIC purchases. During this time period, SVO and industry representatives have identified segments of the initial population that are clearly exempt and, therefore, should not show up as exceptions. Staff has taken steps to eliminate the causes for those false positives. The staff report reflects the sense which the industry may not share that the SVO and the industry have done what they can to identify sources of the exceptions. Staff emphasizes that they have worked with the industry in good faith on this project. Staff filed the report as final (Attachment Five) to reflect their belief that to go beyond the current point requires regulatory involvement, insight and assistance. From the SVO s perspective, the main causes of the exceptions are a practical inability to apply, or a misunderstanding or misapplication of, the FE rule. To support this statement, Mr. Carcano focused on three exception populations. The first, and largest, population with an inability to apply consists of private letter ratings. The major nationally recognized statistical rating organizations (NRSROs) have told the SVO that the issuer in these transactions must agree not to disclose the rating before the NRSRO will agree to give it a private rating. If the issuer wants to give a copy of the letter to an insurer, the issuer must ask the NRSRO for permission to do so. If the NRSRO agrees, the recipient must sign a non-disclosure agreement before it can receive the letter. At that point, the recipient is allowed to disclose the rating letter to its regulators. This is a time-consuming process requiring legal involvement and, as such, largely unworkable. The SVO is sympathetic; accordingly, staff recommend that insurers file a copy of the rating letter with the SVO. If the rating letter meets the standards in the FE rule, the SVO would enter that rating into the system, which would eliminate the possibility of an exception for that CUSIP. If no insurer can send in a rating letter, then all insurers should recognize the security to be subject to filing. This is not a new obligation or new imposition; rather, it is only saying what the FE rule has always said. Another example of a misunderstanding or misapplication of the FE rule involves insurers using Bloomberg as a rating source. The stated policy and rule is that insurers must obtain the ratings of the NRSROs on the CRP List. This clearly implies companies must obtain the ratings from those CRPs on the list by buying them. A single issuer may have many ratings, such as senior secured or unsecured, preferred stock, structured securities, etc. NRSROs sell that information, the NAIC purchases it and it is very expensive; nevertheless, it is important for Task Force operations that the process work as intended because the relevant rating is the one assigned to the specific security, not the issuer s or other assigned ratings. If companies find it too expensive to obtain eight CRP feeds, staff recommend that the Task Force consider making the FE determination an administrative function of the SVO. All of the necessary components already exist in the NAIC process, and the approach is consistent with NAIC policy to lessen reliance on credit ratings of NRSROs National Association of Insurance Commissioners 5

15 2016 National Association of Insurance Commissioners 6 Attachment Three The last cause of FE exceptions involves securities shown as rated on a CRP s website but not shown in its data feed. This may be a customer service issue for insurers to pursue with the CRPs. But, more broadly, the concept of the FE rule is that the security must be rated and, if the rating cannot be identified for the security, it should be considered to be subject to filing with the SVO in the P&P Manual. In this instance, staff propose that if the security is not found on NAIC systems, regardless of what an insurer may see on Bloomberg or a CRP s website, the security should be considered to be not rated and subject to filing with the SVO. Again, this process is already specified in the P&P Manual and should be followed. There are three other exception populations, but they do not appear to involve the FE process. Mr. Therriault added that, in the review process, staff also contracted additional data feeds into the current information systems so that those securities could be cleared; however, a significant population of securities remained. Of those, at least 2,000 involved private letter ratings, which the SVO has concluded that there is not reliable means to verify their rating other than the solution recommended earlier. Another population is securities dropped from, or never included in, CRP data feeds. These securities are shown on NRSRO websites as rated but are not in CRP data feeds. The SVO recommends that the P&P Manual be amended to say that if a security is not found on NAIC systems, it is considered not rated and is, therefore, subject to filing with the SVO. There are CRP-proprietary identifiers for securities in their data feeds and staff can research connecting them to the SVO system so that they match up to the insurer statement, but that would be in a future phase of the VISION application and is not currently in the pipeline. Another population is pre-refunded securities, which are required to be filed with the SVO. The SVO suggests working with other NAIC staff to figure out mechanisms to address this issue. Government guarantees exceptions reflect problems with the policy-based filing exemption for these securities. The SVO asks the Task Force to consider returning to an analytical process in this case, so that staff can assess if a guarantee is sufficient and then log it into NAIC systems and thus clear the exception permanently. Lastly, there was a population of international securities using International Securities Identification Numbers (ISINs). The SVO is contracted to receive those, but they are not hooked into the VISION application yet. Once that data is online in a future phase, these particular exceptions will be automatically cleared. Mr. Milquet said that it is important to resolve this issue, because state insurance regulators are relying on this information in their analyses and are contacting companies to ask about the differences. Resolution will eliminate the risk of following up on false positives, freeing up regulatory resources and time. Mr. Monahan said the ACLI supports the creation of a new group to analyze the issue. He said that, over the past two years, the ACLI has worked with the SVO to tackle the low-hanging fruit on the Jumpstart Exception Report. A separate group would be able to work through the other exceptions that some may not believe are entirely accurate. Ms. Werner explained that NASVA is a group of companies involved in the NAIC calculations or the SVO filing processes. She said its members are frontline SVO filers with technical expertise in this area and they have worked with the SVO on this issue. NASVA agrees the issue has to be resolved, but, although the SVO has done a lot of work in that regard, NASVA does not support the report or the various proposals in it. NASVA analyzed the nearly 5,000 securities and believes they are in written compliance according to SVO parameters. Only 515 securities not owned by NASVA members are unknown. She then outlined the process by which the group came to that conclusion. Out of 4,889 securities, 1,600 are no longer relevant because the list is from 2014 and, in the interim, they have matured, been sold or are now rated by the SVO or included in the current FE database. Of that, 1,049 securities could be better handled by introducing enhancements to SVO systems. There are currently 1,000 securities that are not identified in the SVO system in the way the insurer identifies them, such as prerefunded securities, which have already been identified as being paid off at a future date. The funds are put in escrow; these are automatically NAIC 1 designations, and insurers carry them as such, but the SVO would like companies to file them so as to record them as such in its database. Systems such as the Electronic Municipal Market Access (EMMA) or Reuters could be used to post this information online and make the SVO systems more enhanced. A handful of theses exceptions are bank loans that, for some reason, the SVO system does not pick up. There are 694 NRSRO-rated securities that are included in the NRSRO public ratings but that, for some reason, are not included in the SVO systems. There are 36 government securities, which are automatically NAIC 1 but are not set up in the SVO systems. Ms. Werner emphasized that, while these are challenges that can be resolved, they are not compliance issues with insurers. The remaining 2,000 securities are, as previously mentioned, private placement securities. Although insurers agree at the time of those types of investments to keep them confidential, when they are examined by the states, they offer that information quickly. She said: As a matter of fact, we polled the member companies to see if there were any issues with the states under examination or if the states had been providing queries based on these false positives and the answer is no. The only queries that the companies have been receiving from the states were last year when the SVO started inquiring into this. So, from a NASVA perspective, we don t see

16 2016 National Association of Insurance Commissioners 7 Attachment Three these as compliance issues, but we look forward to an educational process going forward on both sides. I want to also touch base on a couple of things that were mentioned here, that there are processes that we are not complying with. If you look at Part One, Section 4 (c) (i) of the P&P Manual, it provides filing exempt guidance and there are several rules that each insurer has to comply with in order for a security to be filing exempt. He s right; we must comply with these rules. And we do. When the examiners come to ask questions, we provide back-up, they go on their way and we don t see any issues. We don t see any additional queries from the states. I, of course, realize that false positives need to be reduced, but I don t think the issue is private letter ratings. One more thing before I wrap up. It has been notated here that Bloomberg is not a good source of information, but yet within the P&P [Manual] itself, it s notated at least 10 times that when an insurance company submits a filing to the SVO, that that filing should include a printout screen from Bloomberg showing the ratings data. So, of course, the SVO uses the information internally, so I see no reason why we shouldn t use it externally. Mr. Fry said that a lot of the rules are complex and interactive. He said he is not sure if it is a compliance issue on the part of the industry but that, given that there are a lot of moving parts, there may be misunderstandings. He said, For instance, when [Ms. Werner] mentioned that pre-refunded securities are not required to be filed with the SVO, but they re not part of the FE process, so they are, by the [P&P] Manual in fact required to be filed. He expressed support for the appointment of a new working group as a forum for discussion and to research the problem in depth. This new working group would report its findings directly to the Task Force. He added that Mr. Guerin and Mr. Garn had already volunteered as chair and vice chair, respectively. Chris Anderson (Anderson Insights) commended the decision to appoint a new working group to focus on this issue. He expressed concern that people would leave with misunderstandings. He emphasized: The SVO has a responsibility, delegated to it by this Task Force, to come up with an FE list. The notion that insurance companies individually have to go out to the rating agencies and spend hundreds of thousands of dollars to come up with the FE list is, frankly, not correct. The SVO has that responsibility, it s in the P&P [Manual]. The notion that insurers have to go out and use the rating agencies as their primary source is not correct. There s nothing in the P&P Manual. I ve reviewed it carefully, looking at over 150 references. There is no language in the manual that I can find that says that insurers must go to each rating agency. It only says that they must use all available ratings. The SVO already has the responsibility and has already undertaken the expense, which is considerable, to build the FE list, so I would imagine, I would assume, that it s something that s reliable. And if it s not reliable, then I would think that the SVO is accountable to you as a Task Force to make sure that that list is reliable. That is not to say that an insurance company following the SVO list is immune. You are individually regulators and if there s an error on the SVO s list, and the company follows the SVO s list, my opinion and understanding is that you can and should correct that. Another statement that troubles me is that there is no brand-new requirement here ; there is a brand-new requirement here. The notion of filing exemption goes along these lines: the insurance industry owns over 330,000 discrete issues. Using BlackRock, [residential mortgage-backed securities] RMBS and [commercial mortgage-backed securities] CMBS designations are derived, and using the SVO, of the 335,000 securities, approximately 7,000 securities ratings are derived from the SVO. However, as you know, not all ratings are reported, but that doesn t mean that they re not rated. And it doesn t mean, in my opinion, that you need to go through a redundant practice of an insurer getting a rating from a rating agency and then going back to the SVO, and getting another rating from the SVO. That s completely contrary to the notion of filing exemption. Mr. Anderson said it would add a burden on the SVO of about one-third more securities of the 7,000 securities already evaluated by SVO. Also, he does not see it as an NAIC matter, but, rather, one between insurers and their state insurance regulators. While he understands that state examiners do not want to waste time if an issue arises, he repeated that NASVA and AIG do not see any indications that this particular problem (specifically, private placement letters), poses a big-time burden on regulators. He emphasized that these three key aspects of the issue would be discussed in a public call. Mr. Garn made a motion, seconded by Mr. Altmaier, to receive the SVO Jumpstart Exception Report and expose it for a 30- day public comment period; appoint a new working group and direct the SVO to work with Mr. Guerin and Mr. Garn to

17 2016 National Association of Insurance Commissioners 8 Attachment Three organize the new group; receive and refer the SVO Jumpstart Exception Report, and any comments received during the comment period, to that new working group; and to have the new working group report back to the Task Force not later than four months from the time it begins work. The motion passed. 8. Heard a Staff Report on the ACLI s Request to Study Belgian GAAP as an NFPS; Authorized Staff to Proceed with the Study The SVO received an ACLI request to study Belgium GAAP, with the goal that it be added to the NFPS List. In the opinion of the SVO, the letter meets the standard set forth in the P&P Manual. On a related if separate note, Mr. Monahan updated the Task Force on the ACLI s work on an annual update process to the NFPS standard for the SVO to ensure that the investment analysts are aware of any accounting changes. Initially, the idea was for the process to be done at year-end; however, discussions with the Big Four accounting firms in the NFPS jurisdictions, approved by the Task Force, the firms stated that the best time for the ACLI to update the SVO is after the end of the year (with it being too late for this year). The ACLI requested that the Task Force put this on its calendar and direct the SVO to put it on the agenda. Mr. Therriault said that the ACLI has been proactive in ensuring that staff receive updates on the standards on an ongoing basis and agrees that it is an important step to maintain this knowledge. Mr. Carcano added that staff believe it is an important integrity-protection on the process and thanked the ACLI for its assistance. Mr. Fry requested that staff update the Task Force once the interaction occurs. Mr. Garn made a motion, seconded by Ms. Belfi, to receive the SVO letter and to direct the SVO to proceed with the study. The motion passed. 9. Received and Exposed a P&P Manual Amendment to Revise the Definition of Loan-Backed and Structured Securities in SSAP No. 43R Mr. Carcano explained that this item is part of the Investment Classification Project, which is the Statutory Accounting Principles (E) Working Group s review of investment-related SSAPs. An aspect of the review involves concerns raised by the industry regarding amendments to SSAP No. 43R Loan-Backed and Structured Securities that were adopted in 2010, effective That Working Group project is parallel to one that came before the Task Force concurrently and involved the same amendments. At the time, the Task Force considered industry and capital market concerns with the impact the changes were having on assessing investment risks and on the pricing of some asset classes. Because the issues included a statutory accounting component and because the concerns arose late in the year, the Task Force adopted a short-term solution for the P&P Manual, exempting several populations of securities from the reach of SSAP No. 43R. The intent was to revisit the matter when the issues had been discussed in the Working Group. In discussions with the NAIC Financial Regulatory Standards (FRS) Division staff, it became clear that the Working Group s busy agenda made it desirable to identify issues that this Task Force is interested in and assist the Working Group by providing its perspective. The SVO agreed to take the initiative and work with FRS staff to study the issues presented by industry and capital market actors and to provide the perspective of both the SVO and of the NAIC Structured Securities Group (SSG). Staff from the SVO and the SSG believe that their proposed redefinition for loan-backed and structured securities (LBaSS) addresses the industry s concerns and is consistent with distinctions between structured finance securities and other securities, municipal and corporate, that govern SVO and SSG credit risk assessment processes. After the Task Force and the industry review the proposed amendment, the Task Force will determine whether it should be adopted as-is or with modifications. Afterward, the Task Force could consider making a referral to the Working Group. Mr. Fry said his recollection is that this issue arose during discussions of credit tenant loans (CTLs) and equipment trust certificates (ETCs). At the time, the industry commented that the definitional framework encompassed a few securities and, when a modified FE was applied, the economics of those securities made it difficult and caused an issue in the marketplace. The Task Force decided to depart from the framework in order to pinpoint the correct population of securities being subjected to SSAP No. 43R. Mr. Monahan said the ACLI supports the proposed definition of LBaSS, and will submit suggestions for friendly revisions during the exposure period. Ms. Belfi made a motion, seconded by Mr. Garn, to receive the SVO memorandum and expose it for a 60-day public comment period. The motion passed.

18 Attachment Three 10. Discussed Other Matters Mr. Fry said the following Task Force referrals adopted Feb. 22 have been completed: 1) to the Reinsurance (E) Task Force of the SVO s proposal to expand the Bank List to include non-banks; 2) to the Statutory Accounting Principles (E) Working Group of a response to its referral on SSAP No. 97, moving instructions related to subsidiary, controlled and affiliated entities from the P&P Manual to the statutory accounting guidance; and 3) to the Financial Condition (E) Committee responding to a request for recommendations pertaining to the Derivatives Instruments Model Regulation (#282). Having no further business, the adjourned. W:\National Meetings\2016\Spring\TF\VOS\_Final Minutes\VOSTF Spring 2016 National Meeting Minutes.docx 2016 National Association of Insurance Commissioners 9

19 Attachment Four Draft: 7/25/ PROPOSED CHARGES VALUATION OF SECURITIES (E) TASK FORCE The mission of the is to identify policy and regulatory considerations pertaining to insurer-owned obligations; provide a forum for the discussion of such policy and regulatory considerations and provide the regulatory direction to develop criteria, procedures or other assessment processes to address them; maintain the resulting assessment framework as expressed in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual); and assist in the development and maintenance of other NAIC guidance that pertains to the mission of the Task Force in accordance with the charges specified below. The meaning of obligation is the definition of that term as it appears in the P&P Manual. It is also the mission of the to produce or to direct the production of insightful and actionable research and analysis regarding insurer investments. Ongoing Support of NAIC Programs, Products or Services 1. The will: A. Review and monitor the operations of the NAIC Securities Valuation Office (SVO) and the NAIC Structured Securities Group (SSG) to ensure they continue to reflect regulatory objectives. Essential B. Maintain and revise the P&P Manual to provide solutions to investment-related regulatory issues for existing or anticipated investments. Essential C. Monitor changes in accounting and reporting requirements resulting from the continuing maintenance of the Accounting Practices and Procedures Manual, as well as financial statement blanks and instructions, to ensure that the P&P Manual continues to reflect regulatory needs and objectives. Essential D. Consider whether improvements should be suggested to the measurement, reporting and evaluation of invested assets by the NAIC as the result of: a) newly identified types of invested assets; b) newly identified investment risks within existing invested asset types; or c) elevated concerns regarding previously identified investment risks. Essential E. Identify potential improvements to the credit filing process, including formats and electronic system enhancements. Important F. Provide effective direction to the NAIC s mortgage-backed securities modeling firms and consultants. Essential G. Study the impact to the different areas of the NAIC, and to the state-based insurance regulatory structure, of modifying the existing NAIC credit assessment framework by changing the NAIC designations and NAIC designation categories, as well as the impact of adopting asset-category-specific credit assessment frameworks. The study should include identifying what changes are required in SVO and SSG credit-assessment operations, such as SVO industry and credit profiles, financial ratios, peer groups, credit committees, and related internal processes and systems. Important H. Coordinate with other NAIC working groups and task forces including, but not limited to, the Capital Adequacy (E) Task Force, the Investment Risk-Based Capital (E) Working Group, the Statutory Accounting Principles (E) Working Group and the Blanks (E) Working Group to formulate recommendations and to make referrals to such other NAIC regulator groups to ensure expertise relative to investments, or the purpose and objective of guidance in the P&P Manual, is reflected in the guidance of such other groups and that the expertise of such other NAIC regulatory groups and the objectives of their guidance is reflected in the P&P Manual and broadly secures NAIC regulatory objectives. Important NAIC Support Staff: Charles Therriault/Robert Carcano 2016 National Association of Insurance Commissioners

20 Attachment Five Date: 8/17/16 Reporting Exceptions Analysis (E) Working Group Conference Call August 8, 2016 The Reporting Exceptions Analysis (E) Working Group of the met via conference call Aug. 8, The following Working Group members participated: Stewart Guerin, Chair (LA); Tomoko Stock (CA); Jim Everett (NY); Jamie Walker (TX); Patrick McNaughton (WA); and Randy Milquet (WI). Also participating was: Kevin Fry (IL). 1. Discussed Pre-Refunded Securities Mr. Guerin explained that the National Association of Insurance Commissioners (NAIC) has initiated steps to provide expanded coverage for international securities that need international securities identification numbers (ISINs). He said regarding U.S. government securities, the current annual statement reporting requirements may be resulting in confusion among some insurers. The Working Group directed NAIC staff to prepare a proposal and recommendation to modify the current reporting requirements to eliminate any such confusion in the future. The Working Group then agreed that prerefunded securities that are no longer rated by credit rating providers (CRPs) are not filing exempt (FE) and, therefore, should be filed with the Securities Valuation Office (SVO). However, discussion of filing fees is outside the Working Group and the s purview. If there are alternative proposals regarding the instructions in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) for pre-refunded securities, they should be brought before Task Force for consideration. 2. Directed NAIC Staff to Draft a P&P Manual Amendment to Disseminate a List of Securities Dropped from or Never Included in CRP Data Feeds The Working Group then discussed securities that have been dropped or were never included in CRP data feeds and Bloomberg as a ratings source. These exceptions have arisen because other ratings sources are being used, resulting in inconsistencies with the CRP data feeds. These exceptions are not regularly communicated to insurers and, therefore, insurers are unaware of the exceptions or in a position to address them. The Working Group concluded that insurers and regulators should be informed of these security exceptions and that, in order to resolve the issue, NAIC staff should release a list of exceptions to insurers. This dialogue will undoubtedly result in enhancements to the FE process, which will then reduce the exceptions in the future. Laurie Armstrong (Principle Global Investors PGI) asked how the information would be communicated and what the time frame would be. Mr. Guerin said that the Working Group would direct NAIC staff to come up with guidance and bring it back to either the Working Group or the Task Force. Mr. Everett asked the size of the exceptions population and how material non-public information would be protected once released. Mr. Guerin said that the size was not a concern to him because the securities represent exceptions. He added insurers are already receiving some of these exceptions via examination lists today. He said this information would not be any different; it would just be more frequent. Insurers are already getting similar information from the examination reports, and he said he does not believe that the SVO will disclose any sensitive information. Ms. Stock pointed out that there is a gap in communication. Ms. Stock made a motion, seconded by Mr. Milquet, moved to direct NAIC staff to develop a recommendation on how to disseminate these investment reporting exceptions to insurers and regulators on a regular basis. The motion passed. 3. Directed Staff to Draft a P&P Manual Amendment to Reconcile Instructions and to Create a Process for Publicly Reporting Anomalies Mr. Guerin said that the SVO has recommended that the production of NAIC designations through the FE process be made an administrative function of the AVS+ system. The NAIC designations that would then be produced in the AVS+ system would be the basis from which any exceptions would be determined. Insurers would have the right to use any source that they see fit to determine the designation that they are going to report in their financial statements. However, those designations would be compared to those found in the AVS+ system. Any differences to the AVS+ system would be exceptions that would be communicated to insurers through the process just discussed. Chris Casey (Bloomberg) said Bloomberg can provide accurate ratings information and that its data feeds are more accurate than CRP feeds. He said that Bloomberg would be open to working with the SVO, the Working Group and insurers to reduce 2016 National Association of Insurance Commissioners 1

21 Attachment Five the number of exceptions that are caused by data discrepancies. Mr. Everett asked what could be more accurate than data feeds. Mr. Casey said that downgrades are effective immediately, but CRP data feeds may not reflect them for weeks. Mr. Everett alluded to a CRP changing its methodology a few years ago and its effect on rating feeds. Mr. Casey explained that in March 2015, Moody s methodology change affected more than 1000 banking entities, and the mass downgrade took more than two weeks to be reflected in CRP feeds. However, Bloomberg feeds were updated within 12 hours. The lag depends on the rating agencies and the methods they use for disseminating data. Mr. Everett asked if the introduction of ISINs would change that, and Mr. Casey said that identifiers do not cause delays. Mike Monahan (American Council of Life Insurers ACLI) said he believes that Mr. Casey has responded to the assertion made in prior calls that Bloomberg ratings have been inaccurate or incomplete. He asked that NAIC staff respond to the charge that Bloomberg data is incomplete. Mr. Guerin withheld his opinion of the accuracy of CRP or Bloomberg feeds, but he clarified that the larger issue is one of inconsistency. He underlined that issue can be resolved via the reporting process previously discussed whereby insurers are informed of discrepancies and have a chance to respond, because it would establish a dialogue between all parties involved. Mr. Guerin said the designations in the AVS+ would be used as the starting point for regulatory purposes to determine what a designation should be. Ms. Stock requested a clarification that the AVS+ system would be the system that would tell insurers if a security is FE, what the designation is and that the designation is derived from the information that the SVO receives from the CRP data feeds. Mr. Carcano referred to the P&P Manual on page 52, Compilation and Publication of the SVO List of Securities. He said that this is something that the SVO performs quarterly and includes the FE process, along with designations assigned through other processes. He said all of this is published, per the P& P Manual, into AVS+. He said that instructions on page 55 of the P& P Manual, NAIC Policy on the Use of Credit Ratings of NRSROs, (c)(i) Regulatory Significance Filing Exempt Rule, would also be affected as this section seems to imply a separate set of instructions to insurers on how to file FE securities. The SVO recommends eliminating these separate instructions to insurers filing FE securities as a process already exists for the SVO, which it has been performing since FE was adopted in It recommends finding and publishing NAIC designations for FE securities. Currently, there is no mechanism for NAIC staff to address the Task Force or industry with discrepancies and resolve them. Mr. Milquet asked how this motion would be different from the prior one. Mr. Guerin said that the prior motion was specific to communication between the SVO and insurers, whereas this motion would make the FE process an administrative function of the SVO. Mr. Everett asked who was responsible for determining what was FE, and Mr. Guerin answered regulators, ultimately. Mr. Everett asked how regulators would know that a company had been contacted, and Mr. Guerin said the NAIC currently sends out the cross check letters to all the insurance companies after they have looked at various parts for the annual statements. He said those letters get sent out from Kansas City, but for the exceptions in question here, the letters would come from the SVO. Mr. Everett asked if the motion entailed the SVO taking over the Jumpstart report from state regulators and making the SVO the sole source of ratings. Mr. Carcano clarified that they discovered the discrepancies by analyzing what was reported and compared it to our various data feeds rather than using the Jumpstart reports. The process being discussed would be an extension of that analysis to look at these exceptions. Mr. Guerin added that regulators would be working hand-in-hand with NAIC staff in the process and that at no point would they be removed from it. This would dispel the confusion that the SVO is driving the process. Mr. Guerin agreed and said this proposal could be added to the agenda for the Chief Financial Regulators Forum at the Summer National Meeting. Mr. Everett asked who would ultimately be responsible for determining if a security is FE. Mr. Guerin answered that the regulators would, but the communication process and the process of working through the exceptions is yet to be determined. Mr. Everett asked how regulators would get notice that there is a discrepancy. Mr. Guerin said that too was yet to be determined, but he said it would probably be a similar process to the NAIC currently sending out cross-check letters whereby they look at parts of the insurer s annual statement. Mr. Guerin added that the NAIC copies state regulators on cross-check letters to insurers and insurers in turn copy regulators when answering the NAIC. The proposed new process would be run similarly so that nothing would be lost from a regulatory perspective. Mr. Everett requested that the P&P Manual instructions reflect that. Mr. Garn pointed out the new process would end the current black box status. Mr. Milquet made a motion, seconded by Mr. Garn, moved to direct NAIC staff to draft a P&P Manual amendment to reconcile the compilation instructions to the instructions in the FE policy and to make recommendations to the Task Force on a process for sharing information about reporting anomalies with insurers and regulators. The motion passed. 4. Directed SVO Staff to Work with FRS Staff to Develop A P&P Manual Amendment and a Referral to the Blanks (E) Working Group Whereby a Proposed Suffix Change Would Identify Private Letter Ratings 2016 National Association of Insurance Commissioners 2

22 2016 National Association of Insurance Commissioners 3 Attachment Five Mr. Guerin addressed the most contested part of the discussion, private letter ratings due to the many grey areas involved. He said this issue has been discussed many times of the years, and the goal is to develop some definitive guidance to remove this grey area. To that end, he said the first issue is to develop a way to identify which securities are being issued private letter ratings. On a prior call, it was suggested that an interrogatory be developed to capture this information. Mr. Milquet suggested instead creating a special section in Schedule D or creating a symbol to identify private placements. Pamela DelCiampo (Conning Asset Management) suggested changing the suffix designation to indicate private placement letters would be easier than segregating the securities and changing Schedule D. Mr. Guerin asked Mr. Garn, who is also a member of the Blanks (E) Working Group, about it being an easy fix. Mr. Garn answered that he is not sure what adding the suffix would entail but agreed that it did seem simpler than the other two proposed solutions. Ms. Stock asked if the Working Group would review the proposed revision. Mr. Guerin said that it would depend on how soon the amendment is drafted since the Working Group must complete its charges by October. If the Working Group has already disbanded by the time the amendment is drafted, the would review it instead. Mr. Carcano said that it would take time to draft the various proposed amendments. It would be best for the Working Group to report back recommendations to the Task Force for the latter to decide; if necessary, the Working Group would be extended in order to assist the Task Force. Mr. Fry, the Task Force chair, opined that it might be better to present all the amendments in one shot to the Task Force. Connie Woodroof (StoneRiver) said that revisions brought to the Blanks (E) Working Group regarding suffixes would also entail a P&P Manual amendment. Mr. Garn made a motion, seconded by Mr. Milquet, to direct SVO staff to work with Financial Regulatory (FRS) staff to develop a P&P Manual amendment and a referral to the Blanks (E) Working Group whereby a proposed suffix change would identify private letter ratings. The motion passed. 5. Discussed the Private Letter Ratings Confidentiality Issue Mr. Guerin spoke about the larger issue with private letter ratings, verification. He said there has been a lot of discussion regarding the extent that regulators are reviewing private letter ratings. The industry contends that they are being reviewed as part of financial examinations. He said that currently, public CRP ratings are verified annually or more frequently, so there is no reason that regulators should not verify private letter ratings as frequently. Mr. Guerin said that he does not believe that private letter ratings are being reviewed as thoroughly or regularly during examinations, but even if they were, he does not think it is adequate to review a potentially risky population once every five years. Mr. Milquet agreed and added that it is impossible to determine what the private letter rating population will do in the future and that it might become more significant with time. Mr. Guerin agreed that they will become more popular in today s investment environment; thus, there is no reason not to verify them at least as often as public ratings. Mr. Milquet pointed out that there might be a problem of time, resources and staff. Mr. Guerin said that would have to be discussed after the frequency issue is addressed. Ms. Del Ciampo said the rules entail an annual updated rating letter, so she does not see any issues with the proposed review. Mr. Guerin agreed that the bigger question is likely how the review would occur. Mr. Everett brought up the risk level posed by private letters because some states have greater exposure, which is unknown. Mr. Guerin answered that public ratings are not considered in terms of materiality, so this population should not be treated differently. He pointed out that regulators want to review and do anything they can to prevent future problems, within reason. The Working Group members agreed, and he then outlined three options for insurers for verification: 1) provide a private letter rating to the SVO; 2) file the security with the SVO; or 3) not file and take 5*/6*. Another alternative might be a punitive risk-based capital (RBC) penalty, yet to be determined, if the private letter ratings are not filed. Citing states lack of manpower and resources, Mr. Guerin dismissed the option of filing with regulators, adding that the SVO is a good resource that could be a great benefit in that regard. He added two further considerations: 1) how to deal with private letter ratings going forward; and 2) how to deal with the ones that were already issued. Mr. Everett added that confidentiality must also be considered. Mr. Guerin agreed that confidentially is important and said that insurers could pick any of the three options outlined that would suit them best in that regard. He said he believes that taking a stand on the issue that they need to be verified annually may encourage insurers to work with issuers and rating agencies to come up with suitable solutions regarding any confidentially concerns. Mr. Garn asked if once confidentiality is resolved, it would be more difficult to provide private letter ratings than other kinds of ratings through CRP feeds or the current FE process. Mr. Monahan requested a 30-day time period to consult with others regarding confidentiality and to come up with options because of the drastic policy change. In order to meet the Working Group s deadline of October, Mr. Guerin suggested meeting again in two weeks instead and discussing the matter shortly after the Summer National Meeting. Ms. Stock said that there might be a way that nationally recognized statistical rating organizations (NRSROs) can share that data with NAIC staff. Mr. Carcano said that NAIC staff have tried to address the

23 Attachment Five confidentiality issue with NRSROs for at least a decade and the latter cannot, due to their contractual relationships with issuers, share that information with the NAIC directly; they take the position that they can share the private letter ratings with investors once the issuer identifies the investors and with the regulators of the recipient. NRSROs have no objection to the NAIC receiving those letters in that capacity on behalf of state regulators. Chris Anderson (Anderson Insights) suggested that the problem would be solved if CRPs included the rating of a private placement on its data feed, instead of providing ratings letters. Mr. Guerin alluded to Mr. Carcano s earlier point and suggested that industry and the insurers involved discuss the point with rating agencies. Until CRPs agree to do that, however, the Working Group must develop alternate plans. Mr. Carcano restated the Working Group s timeline of October and said there was some leeway to the two-week proposed deadline. Nevertheless, he expressed concern that a call in 30 days time might mean running out of time to resolve the issue and that the Working Group will need to prepare a final report to the Task Force by the end of September. Mr. Guerin suggested trying to schedule the meeting by the end of August. Michelle Werner (AIG) said that if the proposed verification options are adopted, then there would be no need to create the previously discussed suffix. Mr. Guerin said that the suffix would merely identify the population and did not conflict with the current proposal. Mr. Guerin said it was a good point but until the issue is discussed on the next call, it is a good idea to keep it as an option. Ms. Armstrong opined that the suffix is a good idea in order to identify the population, but until it is determined, it is hasty to come up with solutions. Mr. Guerin said that between the two issues, the verification one is more important and industry is invited to suggest other options on the next call. Further, he reminded everyone that the Working Group s recommendations have no real impact unless the Task Force adopts and validates them. Ms. Werner said the AIG fully supports being totally transparent. Rick Kahn (Fitch Ratings) asked for clarification about Standard & Poor s stance regarding confidentiality because the call faded at that point. Mr. Kahn said Fitch is cognizant of the confidentiality issues but also wants to help provide a solution. Mr. Carcano said that he did not identify any particular NRSRO but did say that the major NRSROs have said on numerous occasions that they cannot share directly with the SVO because they are under a contractual obligation with the issuer; however, they have set up processes so that they can submit letters to the issuer s investors, who can then share them with their regulators. NRSROs have said that they would not object to considering the SVO as regulators for these purposes. Mr. Kahn said Fitch s stance is similar and would not have a problem sharing them with the SVO and will present the idea to Fitch Solutions about providing it in a different type of data feed. Ira Powell (Kroll Bond Rating Agency) said that Kroll also does not have a problem sharing those ratings with the SVO and looking into some sort of private feed for regulatory purposes, but it would have to work out how to do so for ratings already issued. Mr. Guerin expressed appreciation to both Fitch and Kroll. Mr. Anderson said the proposed CRP feed would streamline the process and may eliminate the confidentiality problem. Mr. Garn said that until the major NRSROs are involved, the only option is for insurers to provide the letters to the SVO annually instead of having the 50 states do so. Having no further business, the Reporting Exceptions Analysis (E) Working Group adjourned. W:\National Meetings\2016\Summer\TF\VOS\REAWG Meeting Minutes.docx 2016 National Association of Insurance Commissioners 4

24 Attachment Six Date: 8/9/16 Reporting Exceptions Analysis (E) Working Group Conference Call June 21, 2016 The Reporting Exceptions Analysis (E) Working Group of the met via conference call June 21, The following Working Group members participated: Stewart Guerin, Chair (LA); Tomoko Stock (CA); Jim Everett (NY); Jamie Walker (TX); Patrick McNaughton (WA); and Randy Milquet (WI). Also participating were: Carolyn Morgan (FL); and Debbie Doggett (MO). 1. Discussed Private Letter Ratings Exception and Next Steps On June 6, the Working Group had its first call and received a staff update on the 2015 Examination Jumpstart exceptions, of which more than 1,000 were private placement securities totaling $68 billion the largest group of identified exceptions that could not be matched to the credit rating provider (CRP) data feeds. The Working Group voted to devote a single call to the topic because of regulator and industry interest. Mr. Guerin said everyone agrees that in order for a security with a private letter rating to be eligible for filing exemption (FE), it must be: 1) monitored at least annually; 2) assigned to a specific issue, not issuer; and 3) address the likelihood of principal interest or dividend payment. Chris Anderson (Anderson Insights) suggested guidelines for determining if a private letter security is monitored annually. Mr. Guerin said it is too early to determine wording yet. The most pressing issue is verification for FE purposes, which has been discussed over the past 13 years without any definitive resolution in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) on whether it should be verified by state insurance regulators through examinations, by the Securities Valuation Office (SVO) or through a third process yet to be developed to meet regulatory objectives. All the comment letters received on this issue stated that private letter ratings are reviewed by examiners during their periodic examinations and that no problems have arisen. As a former examiner, Mr. Guerin said he still has questions about the extent to which state examiners are really reviewing private letters under the risk-focused examination approach, and, if they do, whether they merely look at the rating or if they also verify the three points outlined above. In an informal poll with regulators and examiners, the consensus is that private letter ratings are not examined to a great extent. Mr. Milquet said examining them is not a state-specific requirement in Wisconsin, so Wisconsin examiners would not review them thoroughly, if at all, unless investments at risk were identified that would have a lot of FEs. He questioned whether examiners would identify that it is for the correct issue as opposed to being for the issuer. Mr. Everett said that New York examiners do, but it depends on the size of the issue. Ms. Stock said California does not have significant issues or holdings in this category for its domestics; unless an issue pops up with significant risk, California examiners follow the risk assessment process. This may not get to the level of reviewing the private letter rating and checking for FE eligibility. She presented the possibility of conducting a survey of state examiners addressing these specific questions. In the meantime, it might be worthwhile to look at where those exceptions are, specifically; i.e., whether they occur in a handful of companies or throughout the industry. She asked if the Working Group wants to move forward with having the SVO charged with monitoring insurers of all sizes, from large international insurers to much smaller local ones, through regular filings. The comment letters assert that it is a mechanical process. The Working Group should also look at cost versus benefits. Lastly, she asked how the disclosure aspect should be handled. Mr. Guerin said that notwithstanding the universal comment that these are reviewed during examination, he questioned if they really are. He said his concern is that there is a large population of securities that, at best, may only be reviewed every three to five years during examination and, at worst, not be reviewed at all, depending on the state, and asked whether that really serves the regulatory process. Laurie Armstrong (North American Securities Valuation Association NASVA) said this category represents less than 1% of all industry holdings in the 2014 and 2015 lists, which may account for the lack of uniform regulatory review as it is a small part of insurance company holdings. Ms. Stock repeated that the Working Group should see specifics and examine the data in more detail. Mr. Fry asked how much examiners in all the states are covering this, adding that regulators do not want to blindly rely on ratings for FEs. He asked about the size of the exposure and how many CRPs rate this category, as well as what the motivation is for not getting a public rating or filing with the SVO, and which is cheaper. Currently, it is impossible to determine what specific securities this applies to other than through an exception report. He said it is clear that something needs to change, whether it is centralizing the process or creating a way to identify these types of securities so that regulators can readily see what they are dealing with National Association of Insurance Commissioners 1

25 2016 National Association of Insurance Commissioners 2 Attachment Six Ms. Armstrong suggested that the Working Group invite the CRPs to explain their process and the difference between private and public ratings. She also suggested that insurers list private placement letters on an interrogatory and thus flag them for regulators. Michelle Werner (American International Group Inc. AIG) said that AIG s experience with the CRPs is that they do not distinguish between private and public analysis in their methodologies. She said AIG spoke with the CRPs when the issue first arose regarding that point. She endorsed Ms. Armstrong s suggestions. Mr. Guerin asked if any CRPs were on the call who could answer those questions. Ms. Armstrong said the Working Group would have to invite the CRPs to present. Ms. Werner explained that an insurer would go to a CRP instead of the SVO on private placements because issuers often tell insurers that they have already obtained the CRP letter and, therefore, do not need to submit to the SVO in order to obtain an NAIC designation. Hence, it is not the insurers call. Mr. Fry asked whether, if a regulator requests a private letter rating for a security in question, the letter would be submitted by itself or would it be accompanied by the analysis behind the rating. Brian Keating (Guardian Life), representing the Private Placement Investors Association (PPIA) answered that sometimes an insurer will receive the analysis with the letter rating and sometimes not; lenders have no control over this. He emphasized that Guardian Life never invests on the basis of a letter only; separate underwriting is always conducted. Mr. Fry clarified that, in contrast, with a public rating, it is possible to go online and see the rating, which is transparent; there is always a rationale for the rating and Mr. Keating confirmed this. Mr. Fry said that is a major distinction; when FE was adopted years ago, regulators identified this population of securities but never followed up on how to address this gap. Mr. Guerin reiterated that, regardless, whether private letter ratings represent a small or a large percentage of investments, there is a verification gap that must be addressed, particularly given the large amount of money invested in them in total that is potentially not being looked at. This is a possible concern for regulators. Mr. Keating said there was a difference between requiring that a rating exists and verifying that it is merited. Mr. Guerin clarified that the question is not whether the NAIC rating is correct, but, rather, whether it fulfills the three key requirements outlined at the beginning of the call. Ms. Armstrong said a one-page document would show those three requirements for a specific CUSIP, but it would not reflect a deeper analysis on the company. Mr. Guerin clarified that this call focuses on two issues: 1) to discuss exceptions that cannot be identified because they cannot be matched up to the ratings feeds; and 2) to determine how regulators can verify that these ratings meet the requirements. The documentation issues can be addressed in later calls. Mr. Fry agreed and asked if the states want examiners to do this analytical work. Ms. Stock outlined three steps the Working Group should take in order to move forward: 1) to understand the SVO exceptions report; 2) to understand the private letter ratings process; and 3) to reach out to the states in order to narrow down a list of potential solutions. However, before conducting a survey, the Working Group needs a better grasp of the issue. Ms. Doggett said Missouri examiners have moved the Jumpstart exceptions from examinations to be part of the annual analysis review, so exceptions are looked at annually, and she suggested this might be a good course for other states to follow. She asked why the SVO is not getting fed this information from the nationally recognized statistical rating organizations (NRSROs) if the latter already have it. Mr. Guerin explained that the NRSROs nondisclosure agreements allow them to provide information to regulators but not the NAIC. He added that, in other states, examiners limited resources are already overwhelmed with analysis, Own Risk and Solvency Assessment (ORSA) reports, corporate governance and enterprise risk. There might also be timing issues from an accreditation perspective, where an analyst is trying to complete a review and might not have time to look at the Jumpstart exceptions. Ms. Doggett said Missouri is not verifying every Jumpstart exception; examiners might only look at the top five or 10 based on materiality. Mr. Guerin asked if Missouri has encountered private letter ratings during its exceptions examinations. Ms. Doggett said that if the security is private, the private letter rating will be requested. Missouri examiners often use the Bloomberg report for anything else. Charles Therriault (NAIC) said that staff spoke with several rating agencies; they agreed that insurers could submit their private letter ratings to the SVO. The challenge is that rating agencies cannot directly deliver that information to the SVO. Ms. Werner reiterated the issue that, in terms of materiality and solvency, there is no need to spend so much time on an issue that does not need further inspection. Mr. Guerin repeated that there are an arguably large number of securities, by book value, that are not being looked at annually or maybe ever. There is a gap in coverage for these investments, whereas every other type of security is reviewed at least annually to some extent by either the SVO or the CRPs through the data feeds. Tracey Lindsey (Nationwide) explained that, while she understands the need to submit to the SVO for transparency s sake and to be centralized, the concern as a filer is whether there will be a need to pay an initial filing fee to the SVO, if all a filer receives is a letter. The concern is that there might be a need to pay for something that should really be FE. Mr. Guerin answered that there is a need to verify if the security is truly FE. Mr. Therriault said staff would need to see the letter in order to answer that, but they will likely need enough information to be able to identify the security, the rating assigned and that the rating methodology applied by the NRSRO is consistent to the one applied to a public security. He clarified that insurers would be the conduit for the private rating letters to be submitted to the SVO, noting that they would not come directly from the rating agencies.

26 Attachment Six Mr. Everett referred back to Ms. Stock s suggestion that the Working Group first needs to determine the magnitude of the filing mismatches, specifically, whether it is nationwide, or confined to some states or companies. Mr. Guerin suggested directing staff to schedule a regulator-to-regulator call to address these issues if specific insurer holdings will be discussed. Ms. Armstrong suggested that each company place private rating letter holdings on an interrogatory so that the Working Group can identify the populations and study them further. Mr. Guerin said identification is a good idea, but nevertheless this Working Group would not have time to review them because it will be disbanded after four months. Regardless, there should be an identification process. Ms. Armstrong said NASVA ran an extensive analysis on the 2014 exceptions list and will share the NASVA-identified CUSIPs with the Working Group. Analysis is still being conducted on the 2015 exceptions list. Mr. Guerin said the NASVA report of the 2015 exceptions list would be ideal for the Working Group s purposes, but conceptually the 2014 list would work, as well. Mr. Therriault said the SVO submitted the 2014 detailed lists to the state examiners. Mr. Guerin asked him to resend the lists. Ms. Werner requested that the list be resent after NASVA has identified the exceptions on it. On the 2014 list, for instance, NASVA narrowed it down to 500 securities that remained problematic. Her concern is that the original list will be sent to the states, giving the wrong impression about the extent of the problem. Karla Streeter (MetLife) agreed and said MetLife staff found Code 99s and rated securities for 2016 that should not have been on the list. Mr. Guerin asked for clarification about whether the 2014 list was the one staff sent, because Ms. Werner and Ms. Streeter seemed to be referring to the 2015 list. Mr. Therriault verified it was the 2014 list. Ms. Armstrong gave a rundown of securities on the 2014 list that should no longer be up for discussion, and detailed the extensive work NASVA did to scrub the list. From the 2014 list, 694 securities were rated by NRSROs but they did not match SVO feeds, something the industry cannot explain. A total of 515 securities do not belong to NASVA members, so it cannot be determined if they are private letter ratings, which Ms. Armstrong categorized as the true exceptions in the 2014 list. She closed by saying that NASVA has as much of a vested interest as regulators in correcting these exceptions. Mr. Guerin said he appreciates the time and hard work, and pointed out that NASVA will not want to expend the same time and energy every year narrowing down the data to the true exceptions. Chris Casey (Bloomberg) said Bloomberg is aware that its viability as a ratings data provider for insurers came up. He said Bloomberg is willing to provide data to the SVO and to help identify any discrepancies. Mike Olander (Bloomberg) said Bloomberg understands there are quality issues. Many NRSROs publish multiple sources of data (feeds, newsletters, etc.) and Bloomberg staff see a fair amount of discrepancy in those. Lastly, some agencies use different identifiers, while Bloomberg uses around 30 different identifiers and maps them against each other. Mr. Guerin thanked them and said that the Working Group will discuss the role of Bloomberg in future calls. Mr. Guerin noted that the SVO s position, vis-à-vis private letter ratings, that, in order to be FE, a security must be rated and filed with the NAIC and then subsequently added to the NAIC FE data file per the P&P Manual. The NAIC cannot add these securities to the FE data file because the SVO cannot verify that they are rated and that the designation is appropriate. The definition of the FE master file in the P&P Manual states toward the end of the definition that an NAIC CRP rating has been confirmed by the NAIC; the P&P Manual does impart some sort of verification responsibility onto the NAIC that it is unable to perform under this current situation. Robert Carcano (NAIC) answered that staff agree with that characterization of the issue. Mr. Keating repeated that the ideal solution would be for NRSROs to provide the SVO with the information directly, but this is not possible. The proposed approach of have insurers file the letters is also going to be extremely difficult without a blanket waiver from the rating agencies. Mr. Guerin asked for other potential solutions that have not been discussed. Mr. Anderson proposed that state insurance regulators receive the information and supported Missouri s approach in using normal regulatory rules in examining companies that it regulates. He described the NAIC as a standard-setting body, as opposed to a regulatory one, and emphasized that insurers have a responsibility and an incentive to self-report and to help the NAIC obtain the correct information and rectify its own records. He added that, if an insurer disagrees with the NAIC, it is obliged to use its own best judgment regardless of what the NAIC says. That will be flagged and a state insurance regulator will have the opportunity to examine the issue to determine who is right. He strongly disagreed with the prospect of having a new process with new requirements and additional filings and expenses National Association of Insurance Commissioners 3

27 Attachment Six Mr. Everett asked about the size of risk-based capital (RBC) involved in these exceptions. Mr. Guerin said that some have suggested having a different RBC charge for private letter rating securities. Mr. Fry answered that there are about 2,000 securities from 2014 so far, but there may be more that regulators do not know about. He said this is another incentive to study the gaps and try to determine the number of rating agencies involved. Mr. Guerin asked Ms. Armstrong if NASVA has any indication of that in the 2014 list, and she said they would try to pull the data together. She added that when an insurer enters into a deal, the private letter rating already exists. The suggested filing fee structure might close down this investment avenue for some insurers. Mr. Guerin said that is not the goal, because regulators understand that private placement is a good source of investment. Mr. Fry asked if it would be possible for an insurer to buy the securities and then file them with the SVO, or does the SVO not have the authority to rate these securities. Ms. Armstrong answered that the SVO may be able to rate some, but may not have the three years of documentation required for analysis because the document is private. Sometimes, companies themselves do not have three years of documentation at the time of the deals, or might not be willing to share it with staff. Ms. Werner said the discussion seemed to be leading to a punitive charge for private placement investments as if they carry an additional type of risk. AIG has seen more covenants and, hence, more protection in these investments. She asked if the SVO has a nondisclosure requirement, and Mr. Carcano answered that, as per a P&P Manual policy statement, staff cannot share data with anyone other than regulators, except under subpoena. Ms. Werner asked for the specific places that Mr. Guerin had referred to earlier in the P&P Manual that states the FE requirements. Mr. Carcano said staff would post a PDF file of those P&P Manual sections on the Working Group s page on the NAIC website. Ms. Werner reminded the Working Group that insurers work hard to meet the NAIC requirements. NASVA also worked with staff to ensure that the definition scoped in private placement securities so there would be no question about controls and management of these investments. Mr. Guerin reminded the Working Group that the purpose is to verify that the private letter rating meets those definitions and requirements. The Working Group directed staff to: 1) resubmit the 2014 NASVA analysis; 2) coordinate CRP presentations on the private letter ratings process; and 3) schedule a regulator-to-regulator call. Ms. Stock added that the next two steps are to do a survey of state examiners and propose various solutions. Having no further business, the Reporting Exceptions Analysis (E) Working Group adjourned. G:\DATA\Vos-tf\REA WG\June\June 21\REAWG Meeting Minutes-Final.docx 2016 National Association of Insurance Commissioners 4

28 Attachment Seven Valuation of Securities E) Task Force Date: 7/21/16 Reporting Exceptions Analysis (E) Working Group Conference Call June 6, 2016 The Reporting Exceptions Analysis (E) Working Group of the met via conference call June 6, The following Working Group members participated: Stewart Guerin, Chair (LA); Jake Garn, Vice Chair, (UT); Tomoko Stock (CA); Jim Everett (NY); Jamie Walker (TX); Patrick McNaughton (WA); and Randy Milquet (WI). 1. Received the SVO s Jumpstart Report and Industry Comment Letters This is the inaugural call of the Reporting Exceptions Analysis (E) Working Group, which was formed at the request of the at the Spring National Meeting. The Task Force directed the Working Group to receive a report from the Securities Valuation Office (SVO) and industry comments with regard to investment exceptions identified on the NAIC Jumpstart Report. The Working Group s objectives are to: 1) explore the issue and consider recommendations from the SVO, regulators and industry; 2) consider the best course of action as per regulators, and; 3) provide recommendations to the Task Force. The project must be completed in four months; however, many of the issues have already been discussed in prior Task Force meetings; thus, it may be possible to achieve its goals faster. Mr. Guerin thanked the Working Group member states for their participation. 2. Received an NAIC Staff Report from the Financial Regulatory Services (FRS) on the Jumpstart Process Mary Caswell (NAIC) explained that currently quality assurance (QA) staff do not review the Jumpstart reports to address exceptions, but will do so, if directed. NAIC staff are looking into doing additional contextual validation failures. She said that the SVO provided a table listing CUSIPs expected to be filed in the U.S. government category. The Financial Regulatory Services (FRS) will look into matching what is reported on Schedule D with that table and review anything that sticks out. Ms. Caswell said that was originally going to be reported on a separate Jumpstart report, but if it is better to do it via a quality assurance (QA) session, that can be done as well. NAIC staff are also looking at repeating the process for the other reports. It is up to the chief financial regulators to determine if QA staff should review exceptions. Mr. Guerin asked about the investment designation exception for the residential mortgage-backed securities (RMBS)/commercial mortgage-backed securities (CMBS) report, on which the FRS memorandum states that NAIC staff do not believe that the report works any longer because Pacific Investment Management Company (PIMCO) is no longer a vendor. He asked if steps were being taken to change it over to BlackRock Solutions. Rodney J. Cornish (NAIC) said that NAIC staff are looking at specific designation symbols FMR/FMC 1 that will identify the model structured securities population. The logic from the Jumpstart reports will read off that and identify exceptions, so it will not matter who the sponsor is BlackRock or PIMCO as long as those populations are identified using those symbols. Mr. Guerin asked Ms. Caswell to let the Working Group know if she thinks anything said during the Working Group s calls can lend itself to validation so that the SVO can eliminate as many exceptions as possible upfront. Ms. Caswell agreed. 3. Received and Exposed an SVO Report on the Process Used to Formulate the Exception Population Mr. Cornish reviewed the 2015 population of reported securities that possibly should have been filed with the SVO. He looked at NAIC designations reported using a filing exemption (FE) designation from the Dec. 31, 2015, Schedule D universe that do not have matching credit rating providers (CRP) ratings in the NAIC system as of Dec. 31, This population was then crosschecked against the following third-party vendor feeds: 1) CUSIP Global Services (CGS) data feeds to exclude invalid security identifiers, including dummy values; 2) Bloomberg IDs; and 3) government filing exceptions that are not included within the CGS data file. Mr. Cornish also looked to see if any of these securities were found on any of the eight CRP data feeds. That approach identified 17,959 FE securities without CRP ratings worth $176.7 billion book adjusted value (BAV). With additional filtering, the SVO pinpointed segments of this population that should not be filed with the SVO: 1) certificates of deposits (CDs); 2) government agencies reported with FE designations; and 3) nonmodeled structured securities RMBS/CMBS, asset-backed securities (ABS) and collateralized mortgage obligation 1 FMR denotes a residential mortgage-based security that is subject to the financial modeling methodology. FMC denotes a commercial mortgage-based security that is subject to the financial modeling methodology. As per the P&P Manual, Part Seven, Section 4(a) National Association of Insurance Commissioners 1

29 Attachment Seven Valuation of Securities E) Task Force (CMO)/collaterized loan obligation (CLO). After removing those securities, a total of 5,161 securities worth $131.4 billion still remained that may have to be filed with the SVO. The remaining securities consist of private placements, foreign governments, corporate bonds, syndicated loans, lotteries, municipal revenue/general obligation bonds, municipal prerefunded and other security types. Mr. Guerin clarified that the report was compiled using the same process used in prior years, and the same types of exceptions cropped up. Mr. Milquet asked if some of the populations were specific to one company or group. Mr. Cornish said that there were a variety of companies, and some were captured more than others. Mr. Milquet asked if a dozen might have been a large number for one company. Mr. Cornish said that was possible, but he said he did not have the precise information at hand. The detail does exist, and research can be done. Mr. Milquet suggested that the research might eliminate a large number of exceptions. Mike Monahan (American Council of Life Insurers ACLI) said that he appreciates the consistency of applying the same process every year. He added, however, that it became obvious to him that one step is missing and that maybe with the new VISION system, there can be a feedback loop. He said if the new VISION system is designed so that regulators, upon examination, can check a box saying that they have reviewed the exceptions and the company is in compliance and, one by one, they can eliminate all of these exceptions so that they do not continually appear on a report where they are not exemptions, they are valid. He said this idea came from regulators he spoke to who said that they should be in control and not the SVO. Judi Hills (North American Securities Valuation Association NASVA) asked if the 2015 data will be released to industry, like in the past. Charles A. Therriault (NAIC) said yes and explained that NAIC staff had only recently completed the 2015 review because the filing year does not end until March, so it takes Mr. Cornish time to go through the data. Kathy Cohoon (MassMutual) asked if the dollar amount of the securities is the total value for an asset on the Jumpstart report or if it represents just the amount that one company may have on it. For instance, if 20 companies are holding one asset and 19 of them are holding it with a valid designation and only one has designated it differently, is the entire asset s worth on the report, or is it just the one company s share? Mr. Therriault said it is only the companies with exceptions that are appearing on the SVO s reviews. Mr. Carcano clarified that the SVO is not involved in the Jumpstart process because it was developed to assist state regulators in preparing for examinations and audits; however, NAIC staff are often pulled in to provide expertise on the rule because exceptions involve securities or SVO processes. In this particular series, beginning a few years ago, in order to get a sense of whether companies are filing with the SVO, NAIC staff began performing an internal process, unrelated to Jumpstart. However, both efforts became intertwined early on. Mr. Guerin referred back to Mr. Monahan s comment and said that they would be considered. He added that the Louisiana commissioner might hesitate to go in through the NAIC system to determine what is an exception because the risk of this examination approach is that there may be a lot of instances where exceptions are not caught, due to materiality issues or other reasons. Mr. Therriault added that VISION is a filing application, a means by which the SVO can communicate back and forth with insurance companies, and not an examination support system. It would require a major change in scope to change that application. Michelle Werner (American International Group AIG) referred back to Mr. Guerin s comments about regulators fully looking into these investments, saying that it led with the private placement letter ratings issue. Ms. Werner said that the current system offers complete transparency. Insurers provide the private letter ratings and submit complete documentation so that examiners can review it and make an informed decision. Mr. Guerin agreed with her point, adding, however, that it is one thing to approve things during an examination and another to go into a system where the state may be certifying that there is not an exception. Some commissioners and departments may not be comfortable with the latter approach because it could get complicated. Mr. Garn pointed out that regulators look at Jumpstart exceptions only during examination, which is typically every three to five years, and suggested that the SVO could look at exceptions on an annual basis. Mr. Guerin responded that Louisiana analysts run the jumpstart report every year, but they do not go through the same steps that examiners do. Ms. Hills explained that industry does not see the Jumpstart report, which makes it hard for companies to comment on it and help state regulators. Ms. Stock said that one of the problems is that not all discussion participants have a complete view; for example, industry does not see the report, while regulators do not see all the information that the SVO has access to. The question is whether this function belongs to the SVO or whether it should remain part of the states examination process. A third option would be a process through which discrepancies could be resolved. Ms. Stock said that she would like to delve more deeply into the issue of private letter ratings, particularly if there is a legal way to share confidential information to parties other than the issuer and the investor. She also suggested reaching out to the states, possibly through a survey, to get state analysts and examiners views regarding possible solutions. Mr. Guerin suggested that the Working Group direct FRS and SVO staff to research if there would be any issues connected to sharing this data from the Jumpstart reports with companies. The Task Force received the report and exposed it for a two-week public comment period National Association of Insurance Commissioners 2

30 Attachment Seven Valuation of Securities E) Task Force 4. Heard Brief Presentations and Comments on Specific Jumpstart Issues Mr. Guerin said that with some specific Jumpstart issues, there is consensus on how they should be addressed, while other issues will warrant more discussion. Due to industry and regulator interest, the Working Group directed NAIC staff to set up a separate call in order to discuss the private rating letter exception exclusively. a. International Securities That Need International Securities Identification Numbers (ISINs) Mr. Therriault reported that this particular exception is caused because NAIC systems do not currently recognize ISINs. NAIC systems use CUSIPs, CUSIP International Numbering System (CINS), private placement numbers (PPNs) and syndicated bank loan identifiers. If insurers use ISINs, NAIC systems will not match them to any of the rating feeds NAIC staff use. The SVO has contracted with CUSIP Global Services to incorporate its global identifier cross-reference service (GICRS), which includes ISIN, with the new VISION platform. That is expected to occur in 2017, and the SVO is including that development expense into its 2017 budget request. Until that is approved, there is no definitive time frame for incorporating ISINs, although NAIC staff recognize it is a deficiency and are looking to address it. Ms. Walker asked if it would be possible, once GICRS is live in VISION, to apply the data to the 2016 report and thus rectify some of the Jumpstart errors that were incorrectly included. Mr. Therriault said that the data would have to be applied to the AVS+ system and so there is other work beyond VISION, but NAIC staff will scope all that in. Ms. Stock asked if the GICRS would only be used for ISINs. Mr. Therriault said that ISIN is currently the only problem within the main identifiers that NAIC staff use, but GICRS has a broader scope, so it will provide additional data. A question was asked about whether the service would rectify the source of other Jumpstart exceptions. Mr. Cornish clarified that it was a separate matter because the other exceptions already have CUSIP numbers or other identifiers that the current data feeds already provide to NAIC staff. He said ISINs relate to securities that are not domiciled in the U.S. and do not receive CUSIP identifiers, so there is no way today to crossreference to them without a product like GICRS. The Working Group directed NAIC staff to report back to the Task Force regarding the integration of these ISINs into the VISION and AVS systems through the GICRS data and, once implemented, should resolve these particular exceptions so no further action is necessary. b. Government Guarantees Exceptions SVO staff acknowledge they have limited insight on this issue and enlisted FRS staff for help in determining the cause of these exceptions. This memorandum reflects additional work done by FRS staff. Mr. Carcano explained that the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) has a filing exemption for U.S. government securities separate from CRP-rated securities. There are two populations: 1) securities backed by the U.S. government full faith in credit or that are direct claims on U.S. government agencies; and 2) collateralized by securities issued or guaranteed by government agencies identified in the P&P Manual, page 86. This particular exception seems to be caused by insurers reporting them as if they were CRP-based; in other words, sometimes insurers use the wrong filing exempt (FE) process. Securities guaranteed or insured as to the timely payment of principal and interest by the agencies or enterprises identified on page 88 of the P&P Manual are not backed by the full faith and credit of the U.S. government, but are also FE based on an assumption that the combined credit worth of the entity and the U.S. government support provide an NAIC 1 equivalent quality. The exceptions in this group seem to be caused because exempt and non-exempt securities are required to be reported on the same line, which may confuse regulators and insurers. Fixing this exception may require that a new subcategory be created for reported or that a different symbol be adopted. Mr. Monahan said the ACLI and NASVA also believe that this category is due to an identification problem instead of a compliance one that can be resolved through dialogue. Mr. Guerin echoed the ACLI/NASVA comment that the ongoing system redesign may provide some additional processes that will eliminate these types of exceptions. The Working Group directed the SVO and the FRS to prepare a proposal and recommendations to identify the necessary modifications to the reporting requirement that might address these types of exceptions and use that memorandum as the basis for a recommendation to the Task Force. c. Pre-Refunded Securities 2016 National Association of Insurance Commissioners 3

31 2016 National Association of Insurance Commissioners 4 Attachment Seven Valuation of Securities E) Task Force This category refers to a batch of securities where the issuer is sold a new security and new proceeds to purchase a portfolio of securities, which are then deposited in a trust that will be used as a cash-flow to make payments on previously issued bonds. Mr. Carcano explained that when an FE security is defeased, 2 it becomes an unrated security. These exceptions occur because securities are reported in a way that does not correspond to either FE or the SVO designation pattern for them. The ACLI/NASVA response acknowledges that pre-refunded securities are required to be filed with the SVO because they are not rated, but does not mention that the P&P Manual requires the SVO to apply a unique credit assessment methodology to them. This involves analyzing the cash-flow to be produced by the portfolio of securities deposited with the trustee to verify that they will at all times produce the debt service that is necessary to provide required payments to the holders for the life of the security. Some of these defeasements present legal or structural issues highlighted in the footnotes to the memorandum filed for this issue. The ACLI/NASVA response indicates that insurers are not filing pre-refunded securities because they think the SVO fee is too high. NAIC staff believe it is not appropriate for a regulated entity to ignore a rule because it does not like the fee. SVO fees are set by regulators as part of the NAIC budget process. In this particular case, the discussion is only about one filing of a pre-refunded security by one insurance company. For this population of securities, there are no annual updates; the filing is done once, and there are no further reporting requirements for this population of securities. The ACLI and NASVA also say that Bloomberg is a good alternative to understanding the quality of a security. NAIC staff responded that the P&P Manual specifies that the only processes the NAIC accepts are either: 1) a nationally recognized statistical rating organization (NRSRO) credit rating; or 2) an independent credit quality assessment by the SVO. NAIC staff thus believe that the only way to eliminate this exception is for insurers to follow the rules prescribed in the P&P Manual. Mr. Monahan said that the ACLI and NASVA do not believe, nor encourage, that companies should not comply. He noted that perhaps the fee for service is large was a misplaced comment. The ACLI and NASVA believe that the Bloomberg data accepted by the SVO in other areas should be scrubbed more. This data is not accepted here. Mr. Carcano clarified that the SVO does not identify when any vendor s products are used in regulatory processes; those rules are created by the Task Force. He reiterated the only two processes accepted by the NAIC are the ones mentioned in the report. Mr. Monahan said that the ACLI and NASVA look forward to more discussion about EMMA and Reuters as outside sources of direct feeds working within the improved VISION system that shows the securities as pre-refunded, which would automatically designate them as an NAIC 1. Mr. Guerin said the P&P Manual is clear that once the rating is removed from these particular securities, they are no longer FE and, therefore, must be filed with the SVO. It is not within the s purview to set fees, and any issue of the kind must be presented to the appropriate NAIC group. Mr. Guerin expressed hope that industry will continue to work with staff on the VISION system redesign. The Working Group will recommend to the Task Force that: 1) the ACLI and NASVA be directed to inform its members that pre-refunded securities are subject to filing unless there is an NRSRO rating that can justify the FE; and 2) the Task Force draft a letter to chief examiners asking them to supervise their insurers to file these securities. Insurers who may have an issue with the current guidance may present a proposal with alternate procedures. Chris Anderson (Anderson Insights) said that previously, those optimization programs and the cash-flow numbers were available, and he requested that the SVO publicly release them so industry may review and verify. Mr. Therriault said NAIC staff will consider any suggestions to improve the process. There was a question about the reason this exception occurs. Mr. Carcano repeated the explanation he gave earlier. Mr. Anderson asked if there was a legal opinion as to the sufficiency of the defeasance and if it would streamline the process to file a legal opinion. If yes, he suggested that a P&P Manual amendment be drafted to require the opinion of counsel instead of a credit analysis. A question was asked about referring the issue back to the. Mr. Guerin said the Task Force had already referred the issue to the Working Group, but that the topic can be expanded on in a future call. Karla Streeter (MetLife) wondered if there was confusion between government securities and these types of securities because, ultimately, the latter are backed by the U.S. government. If so, then it is all a matter of adding text to the pertinent section of the P&P Manual clarifying that point. Mr. Guerin agreed it is worth considering whether to amend the P&P Manual on this matter. d. Securities Dropped from or Never Included in CRP Data Feeds Mr. Carcano said NAIC staff do not know why data that was previously in a data feed would be dropped, but this particular category is not caused by NAIC systems, nor do they believe that additional security identifiers are needed. An FE security owned by an insurer and reported to the NAIC would be in the NAIC s FE data file. An FE security not previously owned by 2 Defeasance A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient enough to service the borrower's debt. Also referred to as defease. Source: Investopedia.com

32 2016 National Association of Insurance Commissioners 5 Attachment Seven Valuation of Securities E) Task Force any insurer would not be in the FE data file, but it should be in the NRSRO data feeds purchased by the NAIC. That security is converted into an NAIC designation when the NAIC runs the conversion process and the SVO runs a compilation at the end of each quarter. The exceptions, therefore, would almost have to be the result of the NAIC conversion process not finding the CRP rating in the NRSRO data feeds. NAIC staff believe that having insurers rely on the AVS+ product should reduce this population for the reason discussed above. The NAIC staff proposal would probably not reach securities added in the fourth quarter because new acquisitions would not be known until the conclusion of the reporting process in late March or April of the following year. However, if insurers were relying on AVS+, the NAIC would have an incentive to identify and address limitations in its processes when insurer needs are better understood. The only way for exceptions to be totally avoided is for the insurer to purchase the ratings from the NRSROs. If the NAIC knew that insurers were relying on that, they may find a way to respond to any sub-population of security that is not listed. Mr. Monahan said that this issue should be discussed further because it seems that the report may point to a quality assurance issue within the NAIC. Mr. Anderson said that while insurers should be able to rely on the NAIC, they are ultimately accountable to their state regulators. He said that the present system is fine and that it is not the NAIC s task to ensure compliance. Mr. Carcano clarified that NAIC staff believe these securities are not reported because there is no uniform standard where the NRSRO s credit ratings should be sourced. NAIC staff recommend that the NAIC s AVS+ serve as that standard. He reiterated that there would be an incentive to improve the service if AVS+ use were expanded as recommended to include securities sold or purchased at year-end. Mr. Anderson agreed that the NAIC is a standard-setting organization; however, he said his point is that insurers should not answer to the NAIC, but to state regulators. He asked if a new standard is set, will it be compulsory or voluntary. Mr. Carcano said that there is a fundamental difference in how Mr. Anderson understands the NAIC and how NAIC staff do. Mr. Carcano said that the NAIC is not the SVO; it is an association of state insurance regulators. He said the working groups, task forces, committees, and Executive (EX) Committee and Plenary are all staffed by state insurance regulators. They are the ones who make the decisions. Mr. Carcano said this happens to be a process that was entrusted to the NAIC or delegated to the NAIC by states to conduct more efficiently at that level. Mr. Anderson asked if the NAIC will decide whether the process will be mandatory. Ms. Stock said she agrees with Mr. Monahan s earlier point that it might be worthwhile to study further what the 260 securities in this category consist of in order to be gain more transparency. Mr. Therriault said that the SVO is happy to continue the conversation with industry. He explained that so far, NAIC staff have seen a number of scenarios. One recurring problem with the NRSRO feed is that a security identifier that staff rely upon does not exist anymore. It is critical for all NAIC staff processes to work efficiently for all states so that NAIC staff have a means by which to connect the data feeds to the insurers filings the SVO receives. Ms. Stock agreed and repeated that it warranted additional discussions. Mr. Therriault added as a central coordinator of these functions, the NAIC is trying to get the answer right for everyone. If NAIC staff do not have that information or feedback, it means one company may report correctly, but 20 others may not. Mr. Guerin agreed about the need for more discussions. He referred back to Mr. Anderson: If one company reports something differently than can be found on the NRSRO s data feeds, it is a true exception. The state regulator will ask the company to justify its reporting it differently. It is up to the state regulator to determine whether the data feeds are the correct source or whether the additional data makes sense. Mr. Guerin s said it is a hybrid between what Mr. Carcano and Mr. Anderson discussed. Mr. Carcano deferred to his authority. Mr. Guerin continued that if the SVO were to add data feed information and provide designation information to insurers, presumably at no cost, it would promote consistency. It is impossible to eliminate all exceptions; the idea is to reduce them and narrow them down to the true exceptions. Mr. Anderson persisted that this is the current system, but that making it compulsory for insurers to use the NAIC s metric would put them in a bind. Mr. Guerin said that NAIC staff are not saying that; they are saying that the CRP data feeds indicate that the data is different. The bigger insurers have access to CRP data feeds, but the smaller insurers are getting their data from other sources, which may or may not be accurate. If there were to be one source, it would reduce erroneous exceptions. Mr. Anderson said he agrees and reiterated his point that this not be made compulsory. Mr. Guerin reiterated Ms. Stock s request for studying this further. Mr. Therriault said that has been NAIC staff s objective, but since the reported exceptions have been consistent, NAIC staff have yet to find permanent solutions and must work with industry and the Working Group. e. Bloomberg as a Rating Source Mr. Carcano said that the ACLI/NASVA letter seems to say that industry can use Bloomberg because the SVO can use Bloomberg as a rating source in very narrow circumstances as defined in the P&P Manual. The Valuation of Securities (E) Task Force decides the manual s content, and nowhere does the manual mention the use of any other information vendor in this context. It would be costly to buy the use of eight or nine NRSRO data feeds. When NAIC staff researched this, they found that on behalf of industry, a prior Task Force chair introduced a concern about the cost of an FE. He noted that the

33 Attachment Seven Valuation of Securities E) Task Force NAIC already has a conversion process and creates an FE securities list that companies could purchase. The Task Force could make this an SVO administrative function. Mr. Therriault added that many P&P Manual references may be outdated and may need to be deleted. When this text was originally adopted, the SVO did not receive the NRSRO feeds it now contracts. These NRSRO feeds may replace said obsolete references. Mr. Anderson brought up his earlier points regarding insurers accountability to state regulators and not to an educational or charity entity like the NAIC (as per its 501(c)(3) status). Insurers should only follow procedures outlined in the P&P Manual; they should not be required to bear the expense of eight or nine NRSRO feeds. He said he does not agree that insurers should go in lockstep with the NAIC data if there are errors in it. They already have an incentive to help the NAIC correct its mistakes. Insurers should follow their own judgement and not what the NAIC happens to report. Pamela DelCiampo (Conning) said that another issue with insurers using the NAIC data is that it is proprietary information. If there is a discrepancy in the database, insurers will not be able to access it. Companies have internal and external audits in addition to state audits and thus still need access to true ratings in some other format, not just calculated designations. Ms. Werner said that AIG does receive every NRSRO feed along with Bloomberg. She said that Bloomberg does tie in all the information reliably and includes all the identifiers (stock exchange daily official list [SEDOL], CUSIP, etc.), which are not always available in some NRSRO data feeds or databases. Ms. Werner disagrees that the Bloomberg references in the P&P Manual are outdated. Mr. Anderson referred back to Ms. DelCiampo s comment about NAIC proprietary information and asked if it was correct that the NAIC cannot divulge the ratings underlying its composite if an insurer asks NAIC staff to justify a rating. Ms. DelCiampo said that was correct, based on their experiences. Mr. Therriault clarified that limitation on providing this information was due to restrictions from the data providers like the NRSRO s and the re-distribution of their data and not anything proprietary to the NAIC. NAIC staff have seen discrepancies in Bloomberg, sometimes due to drops in coverage, which is why the SVO contracted with the NRSROs. He also corrected Mr. Anderson s characterization of the NAIC as an educational entity and said that the NAIC is an instrumentality of the states and that it works for the regulators. Mr. Anderson asked Mr. Therriault to clarify the earlier contention that NAIC staff cannot release the underlying work for its designation to insurers. Mr. Therriault reiterated that to do so, the NAIC would have to renegotiate all of its NRSRO licensing agreements to include redistribution to insurers that would want that information. He emphasized that all NRSROs have this requirement as do other providers, including Bloomberg. Mr. Anderson said that this fact supports his argument that insurers should do the work themselves and that state regulators, therefore, should not be cut out of the process. Eric Kolchinsky (NAIC) observed that the discussion was going around in circles. He said that it sounded as if Mr. Anderson were proposing that insurers self-rate. Mr. Kolchinsky worked for a large NRSRO in the past and is aware that it is a huge business. He clarified that NRSROs rating information is proprietary because it belongs to the NRSROs, not the NAIC. He said the NAIC provides insurers a great service by contracting all the data feeds and compiling them. Mr. Therriault said that the NAIC can set up a fee arrangement with NRSROs for redistribution rights. Mr. Guerin said the Working Group will continue its discussion on this topic during subsequent conference calls. Having no further business, the Reporting Exceptions Analysis (E) Working Group adjourned. W:\National Meetings\2016\Summer\TF\VOS\REAWG Meeting Minutes - FINAL.docx 2016 National Association of Insurance Commissioners 6

34 Attachment Eight Presentation on a through-the-cycle macroeconomic scenario study July 18, 2016 Structured Securities Group Structured Securities Group (SSG) 2015 National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC National Association of Insurance Commissioners

35 Attachment Eight Rationale Interested parties would like the NAIC to use economic scenarios for the year-end modeling process which are consistent year to year and can be modelled internally. This is an issue that has been consistently raised since the NAIC adopted financial modeling methodology. This is a policy question for the TF because it involves an adjustment in how the financial modeling methodology is conducted. Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC National Association of Insurance Commissioners

36 Attachment Eight Use of Economic Scenarios In the context of the Year-end project, the macro-economic scenarios are the initial step and are used by the mortgage credit model to calculate performance metrics. Macroecon. Model Credit Model Waterfall Valuation Projects macroeconomic variables Projects the performance of each loan based on macroeconomic scenario and loan characteristics Allocates cash sh- flows ws/ losses to each tranche in the deal Calculates some aspect of risk (e.g. rating, price) Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC National Association of Insurance Commissioners

37 Attachment Eight Current Approach 2% decline over 3yrs. Since 2009, the NAIC has followed the same approach for determining macro-economic scenarios. 1. Use a base case scenario, from a third party, which constitutes their best estimate of future events given current conditions. 2. Generate stress paths around the base. This approach generates inherent pro-cyclicality i.e. the base prediction is negative in bad times and positive in good times Jan-06 Aug-06 Mar Base Case Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr Base Case Nov-11 Jun-12 Structured Securities Group (SSG) Jan-09 Nov-09 Sep-10 Jul-11 May-12 Mar-13 Jan-14 Nov-14 Sep-15 Jul-16 May-17 Mar National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC. 11% increase over 3yrs National Association of Insurance Commissioners

38 Attachment Eight Proposed Study SSG will study and propose a framework to be used for year end modelling. The proposal will meet the following criteria: 1. Be based on historical and publically available data: e.g Case-Shiller for RMBS. 2. The model must be able to generate several forecast paths which can statistically represent various percentiles (e.g. 5th, 50th, 75th and 95th). 3. Qualitatively, we would expect that the extreme scenarios approximately mimic historical extremes (e.g. the RMBS Most Conservative scenarios should approximate the recent financial crisis). 4. Be memoryless (i.e. possess the Markov property). This is the key criteria that ensures consistency and a-cyclicality. The resulting paths / scenarios would be converted into periodic percentage changes to be applied annually to then current value (e.g. HPI). Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC National Association of Insurance Commissioners

39 Attachment Eight Through the Cycle An approach which depends only on the current conditions ( memory-less ) is analogous to through the cycle (TTC) approaches nominally used by rating agencies to assign ratings. This practice is justified by invoking accuracy and stability: Accuracy: [T]he combination of Moody s through-the-cycle rating approach and the long-term stability of the economy implies that future long-horizon expected loss rates are likely to be similar to historical loss rates for specific rating categories. [Emphasis in the original] Stability: A through-the-cycle approach places low weight on shortterm credit shocks and thereby reduces rating volatility in general and the likelihood of rating reversals (upgrades followed by downgrades or vice versa) in particular. Structured Securities Group (SSG) Cantor R. and Mann C., Measuring The Performance Of Corporate Bond Ratings, Special Comment, Moody s Investor Services, April National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC National Association of Insurance Commissioners

40 Attachment Eight Pros and Cons The table below summarizes the benefits and detriments of moving to a TTC approach. Staying with Current Approach Moving to TTC Pros Cons No implementation issues. Pro-cyclicality will have a more adverse effects on capital as we head into a downturn. Pro-cyclicality will have a more adverse effects on capital as we head into a downturn. Stable and predictable framework for economic scenarios. A-cyclical better alignment for companies for long term liabilities. Implementation issues. A-cyclical lose some ability to value assets in the current economic environment. Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC National Association of Insurance Commissioners

41 Attachment Eight Proposed Next Steps SSG will propose a set of scenarios meeting the above criteria. After soliciting directions from VOSTF, the model would be exposed for comments from industry participants. Because the issue is highly technical, we will be able to be highly transparent with respect to this framework. The exposure would be highly technical, including 1. a description of the historical data used, 2. the model used to generate the scenarios (potentially including the relevant R code) and 3. the scenarios themselves. This is not a 2016 project. Anticipate year-end 2017 implementation. Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC National Association of Insurance Commissioners

42 Attachment Nine August 27, 2016 BlackRock Solutions Enhancements to Commercial Mortgage Backed Securities (CMBS) Model Presentation to the Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

43 Attachment Nine Executive Summary Blackrock Solutions (BRS) has been the NAIC s vendor for analyzing the risk of CMBS since BRS has recently made enhancements to its CMBS credit model for use by all its clients. NAIC - SSG is currently in the process of evaluating this enhanced model. NAIC - SSG will undertake a transparency process for the new model during We expect will be rolled out for year-end Preliminary results indicate that the enhanced model is somewhat more conservative than the one currently used. August 27, 2016 Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

44 Attachment Nine NAIC Structured Securities Initiative BlackRock Solutions (BRS) has modeled CMBS credit risk for the NAIC since 2010, using their proprietary property and loan level credit model and Trepp cash flow waterfalls. The BRS framework is consistent with the best current commercial mortgage modeling and research. The BRS CMBS model framework used for the NAIC has been largely static since the NAIC-SSG program s inception. Recent enhancements to the CMBS credit model focus on better capturing the potential effect of specific events at the property level on credit risk through tenant level lease simulation. August 27, 2016 Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

45 Attachment Nine Role of CMBS Credit Model In the context of the Year-end project, the credit model projects loan losses for a given economic scenario. Macroecon. Model Credit Model Waterfall Valuation Projects macroeconomic variables Projects the performance of each loan based on macroeconomic scenario and loan characteristics Allocates cashflows/ losses to each tranche in the deal Calculates some aspect of risk (e.g. rating, price) Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

46 Attachment Nine Modeling CMBS Credit Risk CMBS are bonds backed by pools of commercial mortgages; mortgage collateral cash flows are pooled and passed through the CMBS deal waterfall Principal and interest payments are allocated to the bonds, typically sequentially from the most senior to most subordinate Losses are allocated from the bottom-up, most subordinate to most senior CMBS credit analysis consists of four steps: Macroeconomic Assumptions: Real Estate Values, Employment, Income Growth, Inflation, Interest Rates Property Cash Flow Modeling: Vacancy, Rents, Property Value Mortgage Cash Flow Modeling: Loan outcomes (payoffs, term defaults, maturity defaults) and resulting principal, interest, and losses CMBS Cash Flow Waterfall Modeling: Bond-level principal, interest, and losses Projected bond losses across scenarios are inputs to the NAIC Breakpoint calculation, which subsequently determines RBC requirements August 27, 2016 Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

47 Attachment Nine BRS CMBS Model Enhancements Monte Carlo Simulation Framework Property cash flows are now projected using a Monte Carlo simulation of tenant lease renewal and lease-up of vacant space in order to allow for the divergence of property and market level performance. The probability of lease renewals is a function of projected market level vacancy. Property values are determined using a discounted cash flow approach. Property Cash Flow Construction The enhanced model uses actual reported property level financials and tenancy as the starting point of cash flow forecasting. Forecast property performance is a function of market specific rent and vacancy projections, effectuated via the lease simulation. Expenses are classified as fixed or variable and modeled accordingly. August 27, 2016 Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

48 Attachment Nine Expected Impact on CMBS Transactions As the enhanced model better captures idiosyncratic property risk, losses are expected to be somewhat higher across vintages, with larger differences in the peak vintages (e.g. 06/07) and more recent issuance (e.g. 14/15). Single Asset (Legacy and 2.0) No major impact expected. Legacy Conduits Bond level designation impact is expected to be concentrated in AJ and AM bonds from peak vintages. Impact will be somewhat muted given the high levels of current and expected paydowns. CMBS 2.0 Conduits Later vintage losses are expected to be moderately higher as the model better captures asset-specific risks in newly originated loans. August 27, 2016 Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

49 Attachment Nine Next Steps The conceptual framework of the enhanced BRS CMBS model has been reviewed and vetted by NAIC-SSG. NAIC-SSG is currently conducting loan and bond level QA and will continue to review model output through Q NAIC-SSG will undertake a broad transparency initiative in Q We expect that this initiative will be as broad as the one related to the 2015 RFP. NAIC-SSG will confer with VOS (E) TF on its findings in Implementation of the CMBS model enhancements is expected to take place for the year-end 2017 analysis. August 27, 2016 Structured Securities Group (SSG) National Association of Insurance Commissioners Permission to reprint or distribute any content from this presentation requires prior written approval from the NAIC.

50 Attachment Ten MEMORANDUM TO: Kevin Fry, Chair, Members of the FROM: Bob Carcano, Senior Counsel, NAIC Investment Analysis Office CC: Charles Therriault, Director, NAIC Securities Valuation Office; Dan Daveline, Director, NAIC Financial Regulatory Services; Julie Gann, Senior Manager, NAIC Financial Regulatory Services DATE: June 2, 2016 RE: Referral from the Statutory Accounting Principles (E) Working Group Pertaining to Surplus Notes 1. Introduction In this referral, the Statutory Accounting Principles (E) Working Group advises that it has adopted revisions to SSAP No. 41 Surplus Notes that require corresponding revisions to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual). As most relevant here, SSAP No. 41 links the valuation method to the quality of the capital or surplus debenture, expressed as an NAIC Designation equivalent of an NAIC CRP credit rating. Prior to the revisions, the SVO performed the financial assessment for NAIC 2 through NAIC 6 surplus and capital debentures and those not rated by an NAIC CRP. The SVO also maintains a List of Capital and Surplus Notes Eligible for Amortized Value Accounting (the List ) for those capital and surplus debentures reported by insurers and rated by an NAIC CRP at the NAIC 1 equivalent (both processes are fully discussed below). The revisions made by the Working Group extend amortization to NAIC 2 equivalents and adopts a lower of amortization or fair value standard for NAIC 3 through NAIC 6 equivalents and those not rated by an NAIC CRP, thereby eliminating the need for an SVO financial assessment. The Working Group requests that the SVO continue to maintain the List, which would now encompass NAIC 1 and NAIC 2 equivalents, and recommend or indicate that it does not intend for capital and surplus debentures to be eligible for filing exemption. 2. Recommendation The SVO recommends that capital and surplus debentures rated by an NAIC CRP be reported under the CRP-based filing exemption in Part Two, Section 4 (d) of the P&P Manual and that the List be eliminated. Both recommendations reflect that SVO analysis is not required. The recommendation pertaining to filing exemption reflects that the adopted valuation process is, in fact, based on CRP credit ratings according the same treatment to capital and surplus debentures that are not rated by an NAIC CRP to those that are rated by an NAIC CRP at NAIC 3 through NAIC 6. 1 The recommendation pertaining to the List reflects a concern that the process is not enforced in any way, the List is an 1 The following text is from Statutory Accounting Principles (E) Working Group Maintenance Agenda Submission Form Form A Ref# Capital or surplus notes shall be valued in accordance with paragraph 11. Pursuant to that paragraph, the value is determined by CRP ratings. If the notes are rated and monitored by two NAIC CRPs, the lowest of the ratings shall be assigned. In case of notes rated and monitored by three or more NAIC CRPs, the NAIC CRP ratings will be ordered according to their NAIC equivalents and the rating falling second lowest will be selected, even if that rating is equal to that of the first lowest. 11. If the capital or surplus note has been rated by an NAIC credit rating provider (CRP) and has a designation equivalent of NAIC 1, then amortized cost shall be used. If the capital or surplus note is not CRP rated or has an NAIC designation equivalent of NAIC 2 through 6, then the balance sheet amount shall be reported at the lesser of amortized cost or fair value, with fluctuations in value reflected as unrealized valuation changes National Association of Insurance Commissioners 1

51 Attachment Ten antiquated communication device and the List is obsolete, given the NAIC s use of nationally recognized statistical rating organization (NRSRO) data feeds to identify rated populations of securities. It would be more efficient assuming the regulatory community needs to identify capital and surplus debentures for the NAIC to create an electronic process. In that case, new symbols might need to be adopted for all rated and unrated capital and surplus debentures. Because the valuation process refers to NAIC Designations for which the Task Force is responsible, the P&P Manual would continue to refer to (and thereby authorize) their use for the purposes of SSAP No. 41. Section 3 of this memorandum provides detail on the Working Group revisions, and Section 4 shows the amendments that would be required if the Task Force agrees with the SVO s recommendation. 3. Impact of SSAP No. 41 Revisions Part Three, Section 5 (c) (ii) (D) (1) indicates that SSAP No. 41 requires insurers to report the lesser of amortized cost; or either the outstanding face value or the outstanding face value times a statement factor (subject to further specified conditions). In this context, insurers are instructed to file with the SVO those capital and surplus debentures not rated by an NAIC CRP and those rated by an NAIC CRP at NAIC 2 through NAIC 6 equivalents (Section 5 (c) (ii) (D) (2)). The SVO is then required to determine whether the insurer should use the outstanding face value or the product of face value and statement factor measurement method (Section 5 (c) (ii) (D) (3)). Under the revision adopted by the Working Group, capital and surplus debentures rated at an equivalent of NAIC 2 would be subject to amortization (as NAIC 1 equivalents have been prior to the revision). Capital and surplus debentures rated at the NAIC 3 through NAIC 6 equivalents and those not rated by an NAIC CRP are reported at the lower of amortized cost or fair value. These changes require the deletion of much of Section 5 (c) (ii) (D) (1) through Section 5 (c) (ii) (D) (3). Part Six, Section 4 requires insurers to file with the SVO those capital and surplus debentures rated at an NAIC 1 Designation equivalent. The SVO is required to verify the CRP credit rating and, if rated, to place the capital or surplus debenture on the List. The List (and another list for other capital and surplus debentures) is published as part of the Other Information component of the quarterly compilation published by the SVO in AVS Plus per Part One, Section 3 (k). The decision of the Working Group to extend amortization to capital and surplus debentures rated an NAIC 2 Designation equivalent requires the revision of certain component definitions associated with the compilation instruction assuming that an electronic process is created to identify capital and surplus debentures spate from other filing exempt securities. Under the SVO proposal, there would be no need for the List, although there might be a need to modify NAIC computer process under the process of filing exemption to identify this population of securities. 4. Proposed Amendments Part Two - Filing with the SVO Section 1. General Definitions Used in This Manual Surplus Notes (NAIC1) Process refers to the component of NAIC electronic systems used to store the names of Surplus Notes rated by CRPs at the NAIC equivalent used in connection with the publication of the AVS+ products. Surplus Notes (NAIC 2 NAIC 6) Process refers to the component of NAIC electronic systems used to store the names of Surplus Notes rated by CRPs at the NAIC equivalent used in connection with the publication of the AVS+ products. Part Three - Credit Assessment Section 5. Reporting Certain Schedule BA Assets with Underlying Characteristics of Bonds or Preferred Stock Comment [RC1]: Unless an electronic process was created to identify capital and surplus debentures and populate these lists, these definitions and the mechanisms used for this process would be deleted. If a new electronic process was created these definitions would be retained. c) Schedule BA Assets to be filed with the SVO 2016 National Association of Insurance Commissioners 2

52 Attachment Ten (ii) Special Instruction Capital and Surplus Debentures Capital and surplus debentures, whether or not rated by an NAIC CRP, are subject to valuation as specified in paragraphs 10 and 11 of SSAP No. 41. Capital and surplus debentures that are rated by an NAIC CRP are filing exempt pursuant to Part Two, Section 4 (d) of this Manual and reported in the same way as other filing exempt securities. (A) Capital and surplus debentures that are not rated by an NAIC CRP are reported to the NAIC (?) All capital and surplus debentures are reported on the surplus notes line of Schedule BA, not on Schedule D. Application Comment [RC2]: It would be necessary to consider whether an additional symbol would be needed to identify the rated population. It would also be necessary to consider how insurers identify unrated capital and surplus debentures. Otherwise this NEW text would seem to be sufficient to permit the use of NAIC Designations for the purposes of SSAP No. 41 and to identify information about that process. This special instruction applies only to capital and surplus debentures that are rated by an NAIC CRP at an NAIC Designation equivalent of NAIC 2 through 6 and those not rated by an NAIC CRP which are subject to paragraph 10 b. of SSAP No. 41. For reporting guidance applicable to capital and surplus debenture rated by an NAIC CRP at the equivalent of an NAIC 1 Designation, which may be amortized pursuant to paragraph 10 a. i. and ii. of SSAP No. 41. See Section 5(a) and (b) of this Part above. (B) Where to Report Capital and Surplus Debentures Capital and surplus debentures rated by an NAIC CRP at the equivalent of an NAIC 2 All capital and surplus debentures are through 6 and those not rated by an NAIC CRP are reported on the surplus notes line of Schedule BA, not on Schedule D. (C) Clarification on Filing Exemption Capital and surplus debentures rated by an NAIC CRP at the equivalent of an NAIC 2 through 6 and those not rated by an NAIC CRP are not eligible for the filing exemption discussed in Part Two, Section 4(d) of this Manual and NAIC CRP are filed?should not be reported with an FE administrative symbol as permitted in Section (h)(iv) of this Part below. Capital and surplus debentures rated by an NAIC CRP at the equivalent of an NAIC 1 are also not eligible for the filing exemption discussed in Part Two, Section 4(d) of this Manual, but are filed with the SVO in accordance with the procedure specified in Section 4 (a) and (b) of this Part above. (D) Valuation of Capital and Surplus Debentures (1) Valuation Methodology Capital or surplus debentures that are rated by an NAIC CRP at the equivalent of an NAIC 2 through 6 Designation and capital or surplus debentures not rated by an NAIC CRP are valued in accordance with the procedure specified in SSAP No. 41. For the population of capital and surplus debentures identified in the preceding sentence, SSAP No. 41 requires the reporting entity to report the lesser of amortized cost (a value that may be unique to the specific reporting entity) or, either: outstanding face value or outstanding face value times a statement factor, provided that any negative amount generated using the statement factor will result in a zero balance (not a negative asset balance) and subject to the other considerations that may apply to the reporting entity as specified in SSAP No. 41. (2) Requirement for Filing Information with the SVO A reporting entity that owns a capital or surplus debenture rated by an NAIC CRP at the equivalent of an NAIC 2 through 6 Designation and/or a capital or surplus debentures not rated by an NAIC CRP, shall report to the SVO the name of the issuer of the debenture, the NAIC company number of the issuer, the description of the debenture (for example, the 7% Surplus Note of the ABC Company ) and its CUSIP number on the appropriate ATF Form National Association of Insurance Commissioners 3

53 Attachment Ten (3) Directive to the SVO Upon receipt of the information provided by the reporting entity pursuant to paragraph 2 above, the SVO shall obtain the most recently filed statutory financial statement of the issuer of the capital or surplus debenture and determine whether an insurance company holder of the surplus note should use the outstanding face value valuation method or the product of face value and statement factor method. If the SVO determines that the latter method should be used, it shall also calculate the applicable statement factor. The SVO shall then publish its determinations in the VOS Database and subsequently in the VOS Products under a heading that combines the NAIC issuer and the CUSIP number for the debenture. Any insurance company that does not see an SVO determination of the valuation method to be used for a capital or surplus debenture it owns should follow the procedure described in this Section to request that determination from the SVO. (4) Credit Ratings Inapplicable Because capital and surplus debentures rated by an NAIC CRP at the equivalent of an NAIC 2 through 6 Designation and/or a capital or surplus debentures not rated by an NAIC CRP do not rely on credit ratings for valuation calculations, information for capital and surplus debentures is reported to the SVO solely for purposes of the valuation calculations indicated in this paragraph (4) and not for a request for classification as an asset with underlying characteristics of a fixed income investment or with a request for a credit quality designation. Part Five - Valuation of Securities Section 1. Pricing of Unaffiliated Investments c) SVO Valuation Methodologies (iii) Analytical Determinations of Fair Value Where a fair value cannot be obtained from a public source, the SVO shall attempt to determine a fair value analytically in accordance with the procedures discussed below Comment [RC3]: A global search for the term surplus note identified several instances of its use as part of the SCA instructions which require the value of such notes to be subtracted in the SCA calculation. It does not appear that these provisions are impacted by the Working Group s revisions. And in any event the task Force has agreed to move the SCA process to the Working Group. (G) Common Stock of Insurance Companies The fair value of a private common stock issued by an insurance company is its book value. Book value shall be calculated by (i) ascertaining capital of the insurance company as reported on the company's latest NAIC Financial Statement Blank or report of examination, (ii) ascertaining the company's surplus (excluding from surplus any reserves required by statute and any portion of surplus properly allocable to policyholders), (iii) subtracting the greater of par or redemption value of the company's preferred stock and the face value of surplus notes (other than 144A note offerings) from the total amount of such capital and surplus and (iv) dividing the remaining amount by the number of shares of the company's common stock outstanding. Part Five - Valuation of Securities Section 2. Valuation of Subsidiary Controlled and Affiliated Investments (c) Valuation Methods Statutory accounting guidance for investments in SCA entities is contained in: SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities, A Replacement of SSAP No. 88, SSAP No. 68 Business Combinations and Goodwill, SSAP No. 41 Surplus Notes, and SSAP No. 32 Investments in Preferred Stock, (including investments in preferred stock of subsidiary, controlled and affiliated entities). The reader should refer to the NAIC Accounting Practices and Procedures Manual for detailed accounting guidance National Association of Insurance Commissioners 4

54 Attachment Ten (i) Market and Equity Valuation Methods (B) Equity Methods If a SCA investment does not meet the requirements for the market valuation approach in Section 2(c)(i)(A) of this Part above, or if the requirements are met, but a reporting entity elects not to use the market valuation approach, the reporting entity s proportionate share of its investments in SCAs shall be recorded as follows: (1) Investments in U.S. Insurance SCA Entities Investments in U.S. insurance SCA entities shall be recorded based on the underlying audited statutory equity (where equity is defined as net of preferred stock and surplus notes of the investee) of the respective entity s financial statements, adjusted for any unamortized goodwill as provided for in SSAP No. 68. (2) Investments in Non-Insurance SCA Entities Statutory Basis Investments in non-insurance SCA entities engaged in the activities described in SSAP No. 97, paragraph 8b.ii. shall be adjusted to an audited statutory basis of accounting, if 20% or more of the SCA s revenue is generated from the reporting entities and its affiliates. For purposes of this section, revenue means GAAP revenue reported in the audited GAAP financial statements, excluding realized and unrealized capital gains and losses. Statutory basis of accounting shall be based on the underlying audited U.S. GAAP equity of the respective entity with the adjustments required by paragraph 9 of SSAP No. 97. If the reporting entity also holds an investment in preferred stock and or surplus notes refer to paragraphs 23 through 27 of SSAP No. 97. For guidance on investments in downstream holding companies refer to paragraphs of SSAP No. 97 (6) Investments in the Preferred Stock of an SCA Investments in the preferred stock of an SCA shall be accounted for in accordance with the provisions of SSAP No. 32. If in addition to preferred stock the reporting entity also holds an investment in common stock and/or surplus notes refer to paragraphs 23 through 27 of SSAP No. 97 and paragraph 10 of SSAP No. 41 f) Make Adjustments to Reported Value (iii) Reciprocal Ownership (C) Investments in Surplus Notes of a Subsidiary, Controlled and Affiliated Entity Investments in the surplus notes of an SCA shall be accounted for in accordance with the provisions of SSAP No. 41. If the reporting entity also holds an investment in preferred stock or surplus notes refer to paragraphs 23 through 27 of SSAP No. 97. Part Six SVO Verification Activities in Support of Certain Regulatory Practices Section 4. - Capital And Surplus Debentures a) Reporting To SVO All capital and surplus debentures must be filed with the SVO. A reporting insurance company that owns a capital or surplus debenture rated by an NAIC CRP at the equivalent of an NAIC 1 Designation, may amortize that debenture pursuant to paragraph 10 a. i. and ii. of SSAP No. 41 provided that the procedure specified in this Part has been followed and the name of the capital or surplus debenture appears on the List in Part Six, Section 4. A reporting insurance company that owns a capital or surplus debenture eligible for amortization treatment because it has been rated by an NAIC CRP at an NAIC 1 equivalent must file a copy of the most recent rating letter issued by the NAIC CRP with the SVO on or before June 1 and December 1 of each year. If there is a change in the NAIC CRP rating, the reporting insurance company must notify the SVO immediately. b) Conversion of CRP Credit Ratings to NAIC Designation 2016 National Association of Insurance Commissioners 5

55 Attachment Ten Capital or surplus debentures assigned an Eligible NAIC CRP Rating will be assigned the equivalent NAIC Designation. Capital or surplus debentures assigned two Eligible NAIC CRP Ratings, will be assigned the NAIC Designation equivalent to the lowest rating. In case of a capital of surplus debenture assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for the capital or surplus debenture will be ordered according to their NAIC equivalents and the rating falling second lowest will be selected, even if that rating is equal to that of the first lowest. The equivalency of an Eligible NAIC CRP Rating to an NAIC Designation is determined using the conversion process indicated in Part One, Section 7 (d) of this Manual. c) Where Published Capital and surplus debentures rated by an NAIC CRP at the NAIC 1 Designation equivalent will not be listed in the VOS Database but the list that appears in Part Six, Section 4 will also be published in the VOS Products this reflects that these capital and surplus debentures are reported in the NAIC Financial Statement Blank in Schedule BA. d) Capital and Surplus Debentures Rated at the Equivalent of an NAIC 2 through 6 Capital and surplus debentures that are rated by an NAIC CRP at an NAIC Designation equivalent of NAIC 2 through 6 and those not rated by an NAIC CRP are subject to the valuation method specified in paragraph 10 b. of SSAP No. 41. Please refer to Part Three, Section 5(c)(ii) of this Manual for instructions relating to SVO valuation of capital and surplus debentures rated by an NAIC CRP at an NAIC Designation equivalent of NAIC 2 through 6 and those not rated by an NAIC CRP. W:\National Meetings\2016\Summer\TF\VOS\Task Force 2016 Referral on Surplus Notes Two.docx 2016 National Association of Insurance Commissioners 6

56 Attachment Ten-A To: Director, Anne Melissa Dowling, Chair of the From: Dale Bruggeman, Chair of the Statutory Accounting Principles (E) Working Group Re: Surplus Notes Substantive Revisions Adopted to SSAP No. 41R Date: April 21, 2016 On April 3, 2016, the Statutory Accounting Principles (E) Working Group adopted a substantively revised SSAP No. 41R Surplus Notes (SSAP No. 41R) to change the measurement method, clarify the guidance for nonadmittance, and to incorporate impairment guidance for surplus note investments. In adopting the substantively revised SSAP No. 41R, the Working Group agreed to send a referral to the Valuation of Securities (E) Task Force with a request that the Task Force update the guidance for surplus notes in Part Three, Section 5 of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to reflect the revised guidance in SSAP No. 41R. In particular, the following elements are identified for updating the P&P Manual: 1. Surplus Notes with an NAIC 1 or NAIC 2 designation, based on CRP equivalent, shall be reported at amortized cost. Prior to the revisions, only surplus notes with an NAIC 1 designation were reported at amortized cost. 2. Surplus Notes with an NAIC 3 through NAIC 6 designation, and non-rated surplus notes shall be reported at the lower of amortized cost or fair value. Prior to the revisions, surplus notes that did not qualify for amortized cost were reported at either outstanding face value or outstanding face value with application of a statement factor. Determining which approach to use depended on the issuer s capital and surplus, excluding surplus notes, in comparison to their admitted assets. As such, the holder of the surplus note was required to obtain an assessment, or conduct their own assessment, on the issuer s financials in order to determine the appropriate measurement method. 3. The Working Group does not recommend any changes to the surplus notes filing requirements, and recommends that surplus notes continue to be ineligible for a filing exemption and not allowed as FE. The guidance in the P&P Manual identifies that surplus notes are not eligible for a filing exemption and should not be reported with an FE. Furthermore, the P&P Manual identifies that the SVO shall obtain the most recent filed statutory financial statement of the issuer to determine whether the holder of the surplus note shall use the outstanding face value, or the product of the face value and the statement factor. Although assessing the measurement method will no longer be required, the Working Group noted that the SVO listing of surplus notes held by insurers, and their corresponding NAIC designation equivalent, has been beneficial in reviewing surplus notes. As such, the Working Group supports the continuation of filings with the SVO for assessment and publication of CRP equivalence to NAIC designations National Association of Insurance Commissioners

57 Attachment Ten-A 4. In addition to change in measurement method, the revisions clarified / incorporated the following: a. Admitted value of surplus notes cannot exceed the amount that would be admitted if the surplus note was considered an equity instrument, and added to other equity items held from the issuer. b. Surplus note shall be nonadmitted if the issuer is subject to any order of liquidation, conservation, rehabilitation or any company action level event based on the issuer s risk-based capital. Subsequent to this nonadmittance, if any of the conditions cease to exist, the holder may admit the surplus note at the value determined by NAIC designation, adjusted for any recognized other-than-temporary impairments. c. An other-than-temporary impairment shall be considered to have occurred if it is probable that the reporting entity will be unable to collect all amounts due according to the contractual terms of the surplus note. Pursuant to the terms of the surplus note, payments of principal and interest may be delayed if the issuer s domiciliary commissioner does not approve payment. Extended delays of either principal or interest shall trigger an evaluation for an other-than-temporary impairment. Thank you for considering this referral. Please contact SAPWG staff, Julie Gann, if you have any questions. Attachments: o Adopted SSAP No. 41R Surplus Notes o Adopted Issue Paper No. 151 Valuation for Holders of Surplus Notes Cc: Julie Gann, Robin Marcotte, Josh Arpin, Charles A. Therriault, Robert Carcano W:\National Meetings\2016\Summer\TF\VOS\10 SAPWG to VOSTF - Adopted Surplus Notes.docx 2016 National Association of Insurance Commissioners 2

58 Attachment Eleven MEMORANDUM TO: Kevin Fry, Chair, Members, FROM: Bob Carcano, Senior Counsel, NAIC Investment Analysis Office CC: Charles Therriault, Director, NAIC Securities Valuation Office; Dan Daveline, Director, NAIC Financial Regulatory Services; Julie Gann, Senior Manager, NAIC Financial Regulatory Services DATE: May 31, 2016 RE: Recommended Referral to the Statutory Accounting Principles (E) Working Group Pertaining to Debtor-in- Possession (DIP) Financings 1. Issue Debtor-in-possession financings (DIPs) are a type of bank loan and as such are within the definition of an Obligation 1 that can be assessed for quality and assigned an NAIC Designation. 2 A DIP is a loan facility extended to a debtor to finance a corporate reorganization under the U.S. Bankruptcy Code (Code). Because they are bank loans, the SVO has considered DIPs to be in scope of SSAP No. 26 Bonds. Consultation with Financial Regulatory Services (FRS) staff on a recent Regulatory Treatment Analysis Service (RTAS) assignment indicates that DIPs are not specified in the Accounting Practices and Procedures Manual; that their characteristics may suggest characterization as collateral loans in scope of SSAP No. 21 Other Admitted Assets; and that reporting may be on Schedule BA Part 1, Other Long-Term Invested Assets, subject to the admitted asset restrictions in SSAP No. 21. The SVO requests that the Task Force consider a referral to the Statutory Accounting Principles (E) Working Group recommending that it consider clarifying the treatment of DIPs under the Accounting Practices and Procedures Manual and a referral to the Blanks (E) Working Group recommending that it consider clarifying reporting depending on the determination of the Statutory Accounting Principles (E) Working Group. This memorandum provides information on DIPs that should be helpful in determining the identified issues. 2. Summary Analysis Analysis of credit risk under probability of default methodology excludes collateral packages because it is only concerned with the likelihood of default, and collateral is concerned with mitigating the severity of loss given default. The structure of a DIP eliminates this distinction because it is concerned both with the likelihood the debtor can successfully complete its reorganization, emerge from bankruptcy and repay the loan at emergence and/or that the reorganization fails and the loan can be repaid from proceeds of the sale of company assets based on a superior claim to the debtor s property granted by court order. Accordingly, assuming the monetary value of the court-granted liens have been conservatively derived, the likelihood of repayment is extremely high, despite the fact that the quality of the obligation itself is typically low. Only a debtor with a viable business model has any hope of obtaining DIP financing. The likelihood of the debtor successfully implementing its reorganization plan depends on the causes that led to the filing and the challenges that have to be met for the reorganization plan to succeed. The structural elements of a DIP loan can be expected to fit this 1 Obligation means bonds, notes, debentures, certificates, including equipment trust certificates, production payments, bank certificates of deposit, bankers acceptances, credit tenant loans, loans secured by financing, net leases and other evidences of indebtedness for the payment of money (or a participation, certificates or other evidences of an interest in any of the foregoing), whether constituting general obligations of the issuer or payable only out of certain revenues or certain funds pledged or otherwise dedicated for payment. P&P Manual Part Two, Section 1 2 See Part Three, Section 2 (b) for the procedure governing DIP financings National Association of Insurance Commissioners 1

59 Attachment Eleven situation closely. For example, typical loan structures include those that tie loan advances to availability of assets or those where loan amounts are advanced against attained milestones like closing loss-making operations or achieving cost reductions. These structures permit the lender to control and limit its loan exposure. Court-approved liens in debtor assets have priority over all administrative expenses Bankruptcy Code and priority over claims of pre-petition creditors. The court may approve: 1) a priority claim over all administrative expenses (called a super-priority claim); and or 2) a lien in the debtor s unencumbered property; and or 3) a junior lien on already encumbered property; and/or 4) a senior lien on already encumbered property (called a super-priority lien). The enumerated liens entitle the DIP lender to be paid from the specified property of the estate prior to payment of the claims by the debtor of any prepetition unsecured creditor or any administrative claimant. The nature and quality of debtor assets and their proximity to cash are an important consideration in determining how well the lender is protected. DIPs are documented in credit and other documents that address required monthly or more frequent reporting of financial information and covenants whose violation may trigger an event of default, required repayment of the DIP and/or force a liquidation of company assets to be applied to prepay the DIP. 3. Information on Loans and DIPs a. Credit Facilities Loans (as distinguished from DIPs) are typically made as part of a larger credit facility that may include any combination of multiple terms loans, revolving loans, letters of credit (LOCs) and bond issuances. Loans are either term loans (lending an agreed upon sum to be repaid/amortized over the life of the loan) 1 or revolving loans (lending a maximum sum over an agreed availability period that may be drawn at any time throughout the term of the loan repaid, and re-borrowed with payment due in one payment at the end of the term of the loan). 2 DIPs are term loans. b. DIPs (i) Negotiated Before the Bankruptcy Filing Before it files a petition to reorganize, the debtor and its adviser develop a working capital budget for the reorganization or the DIP maturity. The debtor s agent creates a steering committee of prepetition lenders and negotiates the DIP. Terms for the financing are settled in a commitment letter included in a term sheet that is an exhibit to the commitment letter. A credit agreement based on the terms and conditions in the term sheet is negotiated. The bankruptcy (reorganization) petition is filed, and a DIP financing motion is filed soon after. On the first or second day after filing, an interim hearing is held on the DIP financing and other first-day motions. At this interim hearing, the debtor would try to borrow an amount under the DIP sufficient to avoid immediate and irreparable harm to the estate pending a final hearing. Twenty-five to 30 days later, and at least 15 days later, there is a final hearing on notice to all the parties. At the final hearing, the borrower seeks authority to borrow the entire committed amount of the DIP facility. The DIP financing usually closes after approval at the interim hearing. 3 (ii) The Order of Relief The Order identifies the DIP lender s priority interest in the debtor property. The Order creates a perfected security interest in the lender, although the DIP lender will want to file a separate security agreement. Uniform Commercial Code filings are also not necessary to perfect the security interest since perfection is established by the DIP order. However, the DIP agent may file financing statements to ensure it has taken all steps necessary to maintain a perfected priority position. The DIP order will, in such event, modify the automatic stay to permit the Uniform Commercial Code (UCC) filings. The DIP order also modifies the automatic stay to permit the DIP lenders to exercise remedies in respect of the collateral backing the DIP facility upon the occurrence of an event of default under the DIP credit agreement, which requires notice to the debtor, the U.S. trustee and the bankruptcy court. (iii) The Statutory Basis for Obtaining Credit A. Unsecured Credit A debtor authorized by the court to operate the debtor s business under Code sections 721, 1108, 1203, 1204 or has authority to incur unsecured credit or debt as long as the credit/debt incurred is an administrative expense permitted by Section 503(b) (1) 5 and was incurred in the ordinary course of its business, unless the court has ordered otherwise. 6 A new (post-petition) creditor, however, would be concerned that Section 364 (a) offers no 2016 National Association of Insurance Commissioners 2

60 Attachment Eleven protection if the credit/debt is not considered an administrative expense under section 503 (b). Confidence that one has acquired an administrative claim requires a legal analysis that the credit/debt was an actual, necessary cost or expense of preserving the estate extended in the ordinary course of business typically understood to mean trade credit. 7 This may cause the debtor to ask the court to authorize unsecured credit/debt under Section 364 (b) as a section 503(b) (1) administrative expense instead because Section 364 (b) does not contain an ordinary course of business requirement. However, this requires a hearing. 8 While a lender under Section 364 (b) is entitled to repayment as an unsecured administrative expense claim, debtors are frequently unable to pay all of their administrative expense claims in full, so many lenders would not agree to lend money on this basis. 9 B. Secured Credit Section 364 (c) and Section 364 (d) authorize a debtor to offer a creditor positions or interests with priority over administrative expenses in exchange for credit. 1. Section 364 (c) (1) provides a priority over any or all administrative expenses specified in section 503(b) or 507(b) and is called a super-priority lien. A lender with a super priority claim is entitled to be paid from the proceeds of all unencumbered property of the estate prior to payment of the claims of any prepetition unsecured creditor or any administrative claimant. However, 364 (c) (1) does not provide the lender with a lien on specific property, so the lender cannot enforce its right to payment directly against specific assets. A lender may, therefore, try to combine the super-priority claim with a first priority lien on the debtor s assets Section 364 (c) (2) provides a lien on property of the estate not otherwise subject to a lien (a lien on unencumbered property). This is generally sought where the debtor has substantial unencumbered assets such as an accounts receivable generated post-petition Section 364 (c) (3) provides a junior lien on property of the estate that is subject to a lien. If a significant portion of the debtor s assets are subject to pre-existing (usually prepetition liens), the DIP lender may try to get a junior lien on the DIP s encumbered assets and combine it with a subordination agreement from the senior lienholder to get a senior lien on previously encumbered property of the debtor Section 364 (d) (1) provides a senior or equal lien on property of the estate subject to a lien (a priming lien). 13 To obtain a priming lien, the debtor must demonstrate that the creditor to be primed is adequately protected. 14 This is extremely difficult to prove, so priming liens are rare and always contested, expensive and time-consuming. 15 (iv) Assessing DIPs The debtor s business risk before the filing must be well understood: i.e., the viability of the debtor s business model its competitive position; competitive advantage; scale; diversity; operating efficiency; operating history; current cash flow; and ability to operate profitably once it has a manageable capital structure. The evaluation is influenced by the complexity, contentiousness and magnitude of required restructuring activity and the impact the bankruptcy has on the debtor s business relationships with its customers, vendors and employees. A credit agreement identifies borrowing mechanics, interest rates, repayment and prepayment terms, representations and warranties, covenants, and events of default. Covenants are examined to identify event of defaults that trigger repayment of the DIP loan and force a liquidation of assets. Covenants typically require monthly or more frequent delivery of financial information and financial statements, as well as cash flow forecasts and reconciliations to actual results of operations. DIP credit agreements also contain events of default provisions specific to the bankruptcy context, including dismissal of the bankruptcy case or the conversion of the bankruptcy case to a Chapter 7 case. Financial covenants would differ from those required with a non-debtor borrower. The mix of rights given the lender by the court and the type of assets to which they apply helps to determine the degree of protection afforded the DIP lender. For example, liens on receivables and inventory provide greater protection because a priority claim on these types of assets are more readily converted to cash. The value of liens on debtor assets must be sufficiently conservative to allow for exigencies associated with a reorganization, such as the loss of value of assets when not used in an ongoing business enterprise National Association of Insurance Commissioners 3

61 Attachment Eleven W:\National Meetings\2016\Summer\TF\VOS\Task Force Refer DIP Issue to WG.docx 1 Practical Law, Practice Note - Lending: Overview Amortization for term loans are typically between five to eight years, with payment due at or by the end of the term. Amounts borrowed and repaid under a term loan cannot be re-borrowed. Term loans can be designed so that the amount is to be drawn in full on an execution date or drawn at any point in a specified time period and in a specified number of draws after the execution date, called the availability or commitment period. If monies are not drawn during the availability or commitment period, the facility expires, and the monies are no longer available. It is possible for a credit facility to permit multiple term loans. When this is the case, the term loans are identified by the letters A, B and C. Term A loans usually mature within five to six years and are structured so the borrower repays a low percentage of the principal balance in year one and an increasing percentage in each subsequent year until the maturity date (for example, between 5% and 20%). Term B loans usually mature within six to seven years and are made by investors (usually specialized investment funds) looking for a long-term total return and, therefore, willing to hold until the maturity date. Many Term B lenders buy part of the loan from the lead bank and come in by assignment after the closing date. Term B loans typically require repayment of 1% of the principal amount per year, payable quarterly until the final year, with the remainder due on the maturity date. Term C loans are generally made by the same type of investors as Term B loans but are less common, typically maturing within seven to eight years, with a bullet repayment due on the maturity date. 2 Practical Law, Practice Note - Lending: Overview 3 Debtor in Possession and Exit Financing Leading Lawyers on Securing Funding and Analyzing Recent Trends in Bankruptcy Financing: An Overview of Debtor in Possession Financing, Paul H. Zumbro, Partner, Cravath, Swaine and Moore, LLP U.S. Code 721 Authorization to operate business The court may authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate. 11 U.S. Code 1108 Authorization to operate business Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor s business. 11 U.S. Code 1203 Rights and powers of debtor Subject to such limitations as the court may prescribe, a debtor in possession shall have all the rights, other than the right to compensation under section 330, and powers, and shall perform all the functions and duties, except the duties specified in paragraphs (3) and (4) of section 1106(a), of a trustee serving in a case under chapter 11, including operating the debtor s farm or commercial fishing operation. 11 U.S. Code 1204 Removal of debtor as debtor in possession (a) On request of a party in interest, and after notice and a hearing, the court shall order that the debtor shall not be a debtor in possession for cause, including fraud, dishonesty, incompetence or gross mismanagement of the affairs of the debtor, either before or after the commencement of the case. (b) On request of a party in interest, and after notice and a hearing, the court may reinstate the debtor in possession. 11 U.S. Code 1304 Debtor engaged in business (a) A debtor that is self-employed and incurs trade credit in the production of income from such employment is engaged in business. (b) Unless the court orders otherwise, a debtor engaged in business may operate the business of the debtor and, subject to any limitations on a trustee under sections 363(c) and 364 of this title and to such limitations or conditions as the court prescribes, shall have, exclusive of the trustee, the rights and powers of the trustee under such sections. (c) A debtor engaged in business shall perform the duties of the trustee specified in section 704(a)(8) of this title Allowance of administrative expenses (b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including (1) (A) the actual, necessary costs and expenses of preserving the estate including (i) wages, salaries, and commissions for services rendered after the commencement of the case; and (ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title, as a result of a violation of federal or state law by the debtor, without regard to the time of the occurrence of unlawful conduct on which such award is based or to whether any services were rendered, if the court determines that payment of wages and benefits by reason of the operation of this clause will not substantially increase the probability of layoff or termination of current employees, or of nonpayment of domestic support obligations, during the case under this title; (B) any tax (i) incurred by the estate, whether secured or unsecured, including property taxes for which liability is in rem, in personam, or both, except a tax of a kind specified in section 507(a)(8) of this title; or (ii) attributable to an excessive allowance of a tentative carryback adjustment that the estate received, whether the taxable year to which such adjustment relates ended before or after the commencement of the case; (C) any fine, penalty or reduction in credit relating to a tax of a kind specified in subparagraph (B) of this paragraph; and (D) notwithstanding the requirements of subsection (a), a governmental unit shall not be required to file a request for the payment of an expense described in subparagraph (B) or (C), as a condition of its being an allowed administrative expense; 6 11 U.S. Code 364 Obtaining credit (a) If the trustee is authorized to operate the business of the debtor under section 721, 1108, 1203, 1204 or 1304 of this title, unless the court orders otherwise, the trustee may obtain unsecured credit and incur unsecured debt in the ordinary course of business allowable under section 503(b)(1) of this title as an administrative expense. 7 POSTPETITION LENDING UNDER SECTION 364: ISSUES REGARDING THE GAP PERIOD AND FINANCING FOR PREPACKAGED PLANS Paul M. Baisier and David G. Epstein, Richmond School of Law 1992 at 27 Wake Forest Law Review, U.S. Code 364 Obtaining credit (b) The court, after notice and a hearing, may authorize the trustee to obtain unsecured credit or to incur unsecured debt other than under subsection (a) of this section, allowable under section 503(b)(1) of this title as an administrative expense. 9 PURE DEBTOR-IN-POSSESSION FINANCING by Richard M. Kohn, Alan P. Solow and Douglas P. Taber, The Secured Lender 10 PURE DEBTOR-IN-POSSESSION FINANCING by Richard M. Kohn, Alan P. Solow and Douglas P. Taber, The Secured Lender 11 PURE DEBTOR-IN-POSSESSION FINANCING by Richard M. Kohn, Alan P. Solow and Douglas P. Taber, The Secured Lender 12 PURE DEBTOR-IN-POSSESSION FINANCING by Richard M. Kohn, Alan P. Solow and Douglas P. Taber, The Secured Lender 13 Code Section 364 (c) If the trustee is unable to obtain unsecured credit allowable under section 503(b)(1) of this title as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt (1) with priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title; (2) secured by a lien on property of the estate that is not otherwise subject to a lien; or (3) secured by a junior lien on property of the estate that is subject to a lien. (d) (1) The court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if (A) the trustee is unable to obtain such credit otherwise; and (B) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted. (2) In any hearing under this subsection, the trustee has the burden of proof on the issue of adequate protection U.S. Code 361 Adequate protection When adequate protection is required under section 362, 363 or 364 of this title of an interest of an entity in property, such adequate protection may be provided by (1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title, use, sale or lease under section 363 of this title, or any grant of a lien under section 364 of this title results in a decrease in the value of such entity s interest in such property; (2) providing to such entity an additional or replacement lien to the extent that such stay, 2016 National Association of Insurance Commissioners 4

62 Attachment Eleven use, sale, lease or grant results in a decrease in the value of such entity s interest in such property; or (3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity s interest in such property. 15 PURE DEBTOR-IN-POSSESSION FINANCING by Richard M. Kohn, Alan P. Solow and Douglas P. Taber, The Secured Lender 16 Debtor in Possession and Exit Financing Leading Lawyers on Securing Funding and Analyzing Recent Trends in Bankruptcy Financing: An Overview of Debtor in Possession Financing, Paul H. Zumbro, Partner, Cravath, Swaine and Moore, LLP; Moody s Global Corporate Finance, Rating Methodology, Debtor in Possession Financing, March 2009; Standard and Poor s Ratings Direct, Criteria, Corporates, General: Debtor-In-Possession Financing, 2016 National Association of Insurance Commissioners 5

63 Attachment Twelve MEMORANDUM TO: Kevin Fry, Chair, Members, FROM: Bob Carcano, Senior Counsel, Investment Analysis Office DATE: July 21, 2016 RE: Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office to Add HR Ratings de Mexico, S.A. de C.V., (HR Ratings) to the NAIC Credit Rating Provider List 1. Introduction The NAIC Policy on the Use of Credit Ratings of NRSROs (the Policy ) 1 permits an NRSRO 2 that wishes to provide Credit Rating Services 3 to the NAIC, and that meets requirements specified in the Policy, to request that its name be added to the NAIC Credit Rating Provider List. HR Ratings made application to the Task Force on Aug. 16, The Task Force asked that NAIC staff negotiate the agreement specified in the Policy and that it advise the Task Force when the agreement has been concluded. The SVO hereby advises the Task Force that NAIC staff has concluded the required contractual and operational arrangements with HR Ratings. Pursuant to the specified procedure 4 the SVO therefore recommends that the Task Force instruct the SVO to add HR Ratings to the NAIC Credit Rating Provider List, effective immediately, by adopting the amendment to Part One, Section 7 (d) of the Purposes and Procedures Manual shown below. 2. The Proposed Amendment (d) List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations (i) CRPs on the NAIC Credit Rating Provider List The CRPs that provide Credit Rating Services to the NAIC, either pursuant to the terms of Section 4 of this Part or otherwise, are: Moody's Investor's Service, 1 The Policy is expressed in Part One, Section 4 of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (Purposes and Procedures Manual). 2 The U.S. Securities and Exchange Commission granted an Order Granting Registration of HR Ratings de Mexico, S.A. de C. V. as a nationally recognized statistical rating organization under the Securities Exchange Act of 1934 in Release No /November 5, 2012 for the class of credit ratings described in clause (v) of Section 3(a)(62)(A) of the Exchange Act. For your convenience I have reprinted the applicable text: SECURITIES EXCHANGE ACT OF SEC. 3. (a) When used in this title, unless the context otherwise requires (62) NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION. The term nationally recognized statistical rating organization means a credit rating agency that (A) issues credit ratings certified by qualified institutional buyers, in accordance with section 15E(a)(1)(B)(ix), with respect to (v) issuers of government securities, municipal securities, or securities issued by a foreign government; and (B) is registered under section 15E. (Bold Text Added) 3 The term is defined Part Two, Section 1 of the Purposes and Procedures Manual; reproduced here: Credit Rating Services is used in connection with the NAIC Credit Rating Provider List discussed in Part One, Section 4 and Part One, Section 7 (d) (i) of this Manual and means: Electronic data feed transmissions of credit ratings assigned by the NRSRO with their corresponding CUSIP number and other pertinent security specific information in English, updated as frequently as provided to other customers; Other analytical services or products, in English, provided to other customers; and Access to the NRSRO s rating analysts by SVO staff. 4 Part One, Section 4 (c) of the Purposes and Procedures Manual reads as follows:... (c) Adding the NRSRO to the NAIC Credit Rating Provider List When directed to do so by the VOS/TF, the SVO shall add the name of the NRSRO (hereafter described as a Credit Rating Provider (CRP)) to the NAIC credit rating provider in the publication of this Manual that follows the execution of an agreement between the NAIC and the NRSRO National Association of Insurance Commissioners 1

64 Attachment Twelve (ii) Standard and Poor's, Fitch Ratings, Dominion Bond Rating Service (DBRS), A.M. Best Company (A.M. Best) Morningstar Credit Ratings, LLC (for All Structured Finance Securities) Kroll Bond Rating Agency and Egan Jones Rating Company. (for issuers of government securities, municipal securities, or securities issued by a foreign government). CRP Credit Rating Equivalent to SVO Designations (I) Please note that the existence of a rating does not eliminate the requirement to file on SAR on any insurer owned security not currently listed in the VOS manual unless exempted from filing as detailed in Part Two, Section 4 (d) of this Manual. Government Counterparty and Municipal Ratings SVO HR AAA (G), HR AA+ (G), HR AA (G), HR AA- (G), HR A+ (G), HR 1 A (G), HR A- (G) HR BBB+ (G), HR BBB (G), HR BBB- (G) 2 HR BB+ (G), HR BB (G), HR BB- (G) 3 HR B+ (G), HR B (G), HR B- (G) 4 HR C+ (G), HR C (G), HR C- (G) 5 HR D (G) 6 W:\National Meetings\2016\Summer\TF\VOS\Task Force 2016 PP Amend To Add HR Ratings.docx 2016 National Association of Insurance Commissioners 2

65 Attachment Thirteen MEMORANDUM TO: Kevin Fry, Chair, Members of the FROM: Bob Carcano, Senior Counsel, NAIC Investment Analysis Office John Yazzo, SVO, Senior Analyst, Credit Assessment & Valuation Group CC: Charles Therriault, Director, NAIC Securities Valuation Office DATE: June 17, 2016 RE: Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office to Delete Outdated Instructions 1. Introduction During discussions about certain administrative instructions in the Purposes and Procedures Manual of the NAIC Investment Analysis Office on a Task Force project, the SVO recognized that the instructions have long since been superseded by changes in NAIC systems and administrative infrastructure. This proposed amendment would delete these instructions as no longer relevant to the SVO operations they were initially designed to address. The proposed deletions are shown below. The nature of the instructions does not suggest a need to offer substitute text. The SVO therefore recommends a 30-day public comment period. 2. Proposed Amendments Section 10. Reporting Conventions and Required Documents c) Reporting Conventions and Required Documents Specific reporting conventions for initial reports that all reporting insurance companies should follow are described below. (i) (A) Corporate Issues Rated In the case of a corporate issue that is rated by an NAIC CRP that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part, above, the reporting insurance company shall submit a completed SAR with evidence of the NAIC CRP rating. The evidence can be in the form of a copy (or copies) of the rating letter from the NAIC CRP or a copy of the page from each NAIC CRPs rating publication showing the date of the publication. If the issue is rated below A or is rated differently by two or more NAIC CRPs, a prospectus and a rating rationale memorandum from each NAIC CRP that rated the transaction must accompany the submission. Insurance companies reporting bonds of not-for-profit entities shall follow the same filing conventions applicable to bonds of profit-making entities National Association of Insurers Commissioners 1

66 Attachment Thirteen (AB) Unrated (C) Rated Medium Term Notes In the case of Obligations defined as medium term notes in the offering prospectus or private placement memorandum, where the issuer is rated by an NAIC CRP, that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part, above, the reporting insurance company must file a completed SAR and evidence of proof of rating or ratings. The evidence can be in the form of a copy of the rating letter from the NAIC CRP or a copy of the page from each NAIC CRP rating publication showing the date of the publication.. (DB) Foreign Issuers (CE) Investments in Certified Capital Companies (4) Required Documentation (a) Rated In the case of a CAPCO issue that is eligible for filing exemption by virtue of its rating by an NAIC CRP but filed with the SVO despite the availability of the filing exemption provided for in Section 4 (d) of this Part above the reporting insurance company shall submit a completed SAR with evidence of the NAIC CRP rating. The evidence can be in the form of a copy (or copies) of the rating letter from the NAIC CRP or a copy of the page from each NAIC CRP s rating publication showing the date of publication. If the issue is rated below A or is rated differently by two or more NAIC CRP's, a prospectus and a rating rationale memorandum from each NAIC CRP that rated the transaction must accompany the submission. (ab) Unrated In the case of a CAPCO issue that is not rated by an NAIC CRP, the reporting insurance company shall complete an SAR and shall attach the issuer s public offering statement or private placement memorandum, as the case may be, the insurance company's internal credit committee memorandum and the Audited Financial Statement of the issuer for the last three consecutive years. If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such rating. If none of these documents are available, the reporting insurance company must obtain and complete the SVO's VIM form and submit it with the required documents and attachments. (ii) (A) (AB) Municipal Issues Rated In the case of an NAIC CRP- rated municipal issue that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the reporting insurance company shall file a completed SAR with evidence of each NAIC CRP. Such evidence can be in the form of a printed copy of a computer screen display showing the rating as reported by Bloomberg Financial Services, Interactive Data Corporation, JJ Kenny Co, Inc. or Muller Data Corporation or may be evidenced by submission of a copy of the official statement if the issue is within one year of the date given for interest payments to begin. Unrated (iii) (A) Structured Issues Rated In the case of transactions that meet the criteria for Credit Tenant Loan-Variants Requiring an NAIC CRP Rating, as defined in Part Four, Section 1(a)(vii) of this Manual, debt, common or preferred stock issued by a real estate 2016 National Association of Insurers Commissioners 2

67 Attachment Thirteen investment trust, commercial mortgage-backed securities, residential mortgage-backed securities, collateralized mortgage obligations, asset backed securities, collateralized bond obligations and collateralized loan obligations, and that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurance company shall submit a completed SAR, evidence of a current rating from each NAIC CRP and a prospectus or private placement memorandum for the transaction. For purposes of this subsection, a current rating is defined as one issued or reviewed within the past 12 calendar months. Evidence of a current rating may also be submitted in the form of a Bloomberg RCHG screen or other similar screen acceptable to the NAIC from another information vendor. Evidence of a current rating may also take the form of a final prospectus or complete private placement memorandum that contains "condition to issuance language." For purposes of this paragraph, "condition to issuance language" means text within the prospectus or private placement memorandum which unequivocally states that it is a condition to the issuance of the securities named in the prospectus or private placement memorandum that the securities shall have been assigned specific ratings by one or more named NAIC CRPs. (AB) Unrated (1) Credit Tenant Loan (CTL) For Bond Lease Based CTLs and Credit Lease Based CTLs, the reporting insurance company shall submit a completed SAR form, a completed Bond Lease Based or Credit Lease Based CTL Evaluation Form, as appropriate (in either case together with the documentation described in the Evaluation Form), and evidence of the lessee's rating or Audited Financial Statement. (ix) (A) Public Common Stock, Private Common Stock, Warrants, Foreign Common Stock or Preferred Stock Part Five, Section 1 of this Manual permits insurance companies to self-value common stock, preferred stock or warrants. Public common stock not restricted is exempt from filing with the SVO pursuant to Part Two, Section 4 (d) (i) (C) of this Manual. The following documentation requirements therefore apply only when these securities must be reported to the SVO for whatever reason despite the primary instructions contained in because the insurer has elected to have the SVO provide a valuation identified as methodology e under Part Five, Section 1 (b) (iii) Valuation Methodologies and Corresponding Reporting Codes of this Manual. Such a filing with the SVO may be required, for example, if the insurer wants to obtain a value for the security that the SVO has not previously valued for another insurer or if the state insurance department has directed the insurer to file the security with the SVO for valuation. Public Common Stock If the common stock is listed on any exchange, the reporting insurance company must submit the most recent Bloomberg Description Screen or other acceptable screen, if available, together with the issuer's Audited Financial Statement. If the public common stock is restricted as to transferability, the issuer's most recent annual report, a copy of the common stock certificate showing the limitations on transferability (or any other document that details such limitations), the issuer's Audited Financial Statement for the last three years and a written description of the daily price trading range for the past six months must be submitted National Association of Insurers Commissioners 3

68 Attachment Thirteen (B) (C) (D) (E) Private Common Stock and Private Warrants For either restricted or non-restricted private common stock, and for private warrants the reporting insurance company shall submit the issuer's annual report for the most current three years (together with Audited Financial Statements for those years, if these are not a part of the annual report), the stock or warrant purchase agreement and the common stock or warrant certificate (front and back) or other evidence of restrictions. Warrants If the warrant is traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market System, the reporting insurance company shall submit the issuer's Bloomberg Description Screen. For a warrant listed on any other domestic or Canadian exchange, the reporting insurance company shall submit the issuer's Bloomberg Description Screen, together with the issuer's Audited Financial Statement. Foreign Common Stock The reporting insurance company shall submit the issuer's most recent annual report (together with the issuer's Audited Financial Statement if it is not a part of the annual report) and/or the most recent equity/credit research reports by NAIC CRPs or other rating organizations, if available. Preferred Stock Unrated (1) Rated In the case of an NAIC CRP- rated preferred stock that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the reporting insurance company shall submit any stock purchase agreement and the issuer's Certificate or Articles of Incorporation setting forth the terms and characteristics and the rights and preferences of the preferred stock and evidence of each NAIC CRP rating which may be in the form of a copy of the rating letter from the NAIC CRP or a copy of the page from the NAIC CRPs rating publication showing the date of the publication. If the issue is rated below "A" or is rated differently by two or more NAIC CRPs, a prospectus or private placement memorandum, the most recent issuer's annual report and a rating rationale memorandum from each NAIC CRP which rated the transaction must accompany the submission (2) Unrated In the case of a preferred stock not rated by an NAIC CRP, the reporting insurance company shall submit any stock purchase agreement and the issuer's Certificate or Articles of Incorporation setting forth the terms and characteristics and the rights and preferences of the preferred stock, the issue's prospectus or private placement memorandum and the Audited Financial Statement of the issuer for the last three consecutive years. Section 11. Subsequent Reporting e) Reporting Conventions and Required Documents Specific reporting conventions that all reporting insurance companies should follow are described below. (i) (A) Corporate Issues not Filing Exempt Rated (1) General Rule A Subsequent Report is required on corporate securities National Association of Insurers Commissioners 4

69 Attachment Thirteen (2) Specific Filing Conventions (i) In the case of a corporate issue rated A-/A3 or better by an NAIC CRP, that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurer requesting that the SVO update the NAIC Designation shall file evidence of an NAIC CRP rating. Evidence of a rating may take the form of a printed copy of the complete Bloomberg Description Screen ( DES ) display, showing the rating(s) assigned by an NAIC CRP. (ii) In the case of a corporate issue rated less than A-/A3 by an NAIC CRP, or rated differently by two or more NAIC CRPs, the reporting insurance company shall file the issuer's Audited Financial Statement and evidence of rating(s) from all NAIC CRPs that have rated the security. (AB) Unrated (ii) (A) Municipal Issues not Filing Exempt Rated (1) General Rule A Subsequent Report is required on all rated municipal issues. (2) Specific Filing Conventions (i) In the case of a municipal issue rated A-/A3 or better by an NAIC CRP, that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurer requesting that the SVO update the NAIC designation shall file evidence of an NAIC CRP rating which may take the form of a printed copy of the complete Bloomberg Description Screen ( DES ) display, showing the rating(s) assigned by an NAIC CRP or a copy of the rating in an NAIC CRP publication that shows the rating. (ii) In the case of a municipal issuer rated less than A-/A3 by an NAIC CRP, or rated differently by two or more NAIC CRPs that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the reporting insurance company shall file the issuer's Audited Financial Statement and evidence of a rating from all NAIC CRPs that have rated the security. Evidence of a rating may take the form of a printed copy of the complete Bloomberg Description Screen ( DES ) display, showing the rating(s) assigned by an NAIC CRP or a copy of the rating in an NAIC CRP publication that shows the rating. (13) Subsequent Reports Subsequent Reports are not required for any municipal security that has been escrowed to maturity or pre-refunded if the supporting documentation, as required by the last sentence of Section 10 (c)(ii)(b) of this Part above, has been filed with the SVO and a designation based on such escrow or pre-refunding has been issued by the SVO. (iii) (A) Structured Issues Structured Securities Requiring a Subsequent Report Please refer to Part Seven, Section 5 of this Manual for instructions applicable to RMBS, CMBS and asset backed (ABS) securitizations. (i) Structured Securities Fully Guaranteed by an NAIC CRP Rated Entity The informational requirements described in this sub-paragraph should be read together with Part Three, Section 3(a)(i) of this Manual National Association of Insurers Commissioners 5

70 Attachment Thirteen A structured security filed under this subsection must be filed together with evidence of the current NAIC CRP rating for the guarantor. (ii) Structured Securities Backed by NAIC CRP Rated Financial Assets The informational requirements described in this sub-paragraph should be read together with Part Three, Section 3(a)(ii) of this Manual. A structured security filed under this subsection must be filed together with evidence of the current NAIC CRP rating assigned to each pool obligor. (iii) Structured Securities Fully Backed by Financial Assets Insured by NAIC CRP Rated Insurers The informational requirements described in this sub-paragraph should be read together with Part Three, Section 3(a)(iii) of this Manual. A structured security filed under this subsection must be filed together with evidence of the current NAIC CRP rating assigned to the pool insurer. (iv) Commercial Mortgage-Backed Securities Please refer to Part Seven, Section 5 of this Manual for instructions applicable to CMBS. (v) Real Estate Investment Trusts In the case of debt or preferred stock of a real estate investment trust not currently rated by an NAIC CRP, the reporting insurance company shall provide the documentation specified in Section 10 (c)(i)(b) of this Part above. (vi) Credit Tenant Loans For Bond Lease Based CTLs, Credit Lease based CTLs, Multiple Property Transactions (MPTs) and Acceptable CTL Variants, the reporting insurance company shall submit evidence of a current NAIC CRP rating for the lessee or the lessee's guarantor. For purposes of this subsection, a current rating is defined as one issued or reviewed within the past 12 calendar months. Evidence of a current rating may be submitted in the form of a Bloomberg screen or other similar screens acceptable to the NAIC from another information vendor. In the event the lessee, or lessee's guarantor, is not rated by an NAIC CRP, the reporting insurance company shall file the Audited Financial Statement of the lessee or the lessee's guarantor, as the case may require. (v) Mutual Funds Subsequent reporting for money market funds on the U.S. Direct Obligations/Full Faith and Credit Exempt List or the Class 1 List, or for bond mutual funds on the Bond List, consists of an annual submission of the following information due prior to April 30 of each year: (A) (B) (C) (D) The appropriate money market or bond mutual fund application form; Prospectus and Statement of Additional Information of the fund; Most recent annual report of the fund and, if more recent, the latest semi-annual report; and Rating letter from an NAIC CRP dated in the year of the filing. Failure to provide the information required may result in removal of the money market fund or bond mutual fund from the list and reclassification of the fund as a common stock reported on Schedule D - Part 2 - Section 2. Part Six SVO Verification Activities in Support of Certain Regulatory Processes Section 1. Creation and Maintenance of Bank List 2016 National Association of Insurers Commissioners 6

71 Attachment Thirteen Administration (i) (A) (B) (C) Reporting A party interested in having a bank listed on the Bank List should first determine whether the bank meets the minimum qualifications discussed above. If the bank meets the minimum qualifications discussed above, it should submit to the SVO: An ATF Initial Filing Form. A copy of its most recent Audited Financial Statement or call report. Proof of current long and/or short-term rating from all NAIC CRPs that have rated the bank, which may consist of: (1) A copy of the rating letter from the NAIC CRP. (2) A copy of the page from the NAIC CRP s rating publication showing the rating and the date of the publication. (3) A copy of the Bloomberg display screen W:\National Meetings\2016\Summer\TF\VOS\06 Task Force 2016 PP Amend Delete Archaic Instructions.docx 2016 National Association of Insurers Commissioners 7

72 Attachment Fourteen TO: FROM: Anne Melissa Dowling, Chair Dale Bruggeman, Chair Statutory Accounting Principles Working Group Jill Youtsey, NAIC DATE: July 13, 2016 RE: Collateral Type Revision Feedback On behalf of the Investment Reporting Subgroup, we request the Valuation of Securities (E) Task Force and the Statutory Accounting Principles Working Group s feedback on the following proposal. Interested parties and NAIC staff proposed revising the collateral type categories. The revisions would reduce the number of categories from 21 to 10 and also add more detailed explanations and examples to the categories. Interested parties also proposed further reducing the codes to 8 by removing the categories for Residential Mortgage Backed/RMBS and Commercial Mortgage Backed/CMBS. Please see the attached revisions to collateral type categories and the interested parties comment letter. W:\National Meetings\2016\Summer\TF\VOS\IRSG Memo_Collateral Types.doc 2016 National Association of Insurance Commissioners 1

73 Changes to blanks and instructions adopted during 2015 Attachment Fourteen 1. Change the reference for line 11 of the General Interrogatories, Part 2 from minimum net worth to statutory minimum capital and surplus. Modify the description for line 3 of the Five Year Historical Data page to match the reference in line 11 of the General Interrogatories, Part 2 ( BWG) effective 12/31/ Modify the instructions and illustrations for Note 32 and Note 34 to correct inconsistencies in the use of market value and fair value ( BWG) effective 12/31/ Remove form lists from the barcode instructions in the appendix. The form list will be maintained on the Blanks (E) Working Group Web page. Modify references to the form list in the instructions to reflect the removal ( BWG) effective 12/31/ Modify the Supplemental Health Care Exhibit instructions and blank to eliminate the Aggregate 2% Rule Column for Parts 1 and 2 and replace it with a column to capture Medicare Advantage Part C Plans and Medicare Part D Stand Alone Plans, which are no longer excluded by statute for medical loss ratio (MLR) reporting ( BWG) effective 12/31/ Move definitions for all lines of business to the appendix for the property instructions and make those definitions available to health companies filing the property supplement. Add additional definitions for lines of business found in the Property Product Matrix not found in the property instructions ( BWG) effective 12/31/ Add one-year and two-year loss development in the Title Insurance Five-Year Historical Data Exhibit ( BWG) effective 12/31/ Add additional instructions to Underwriting and Investment Expense Exhibit, Part 2B, line 10 to clarify the reporting of healthcare receivables ( BWG) effective 12/31/ Add crosschecks to the illustrations data captured for Note 11B for Federal Home Loan Bank agreements. Modify the instructions for 11B(2)b to clarify inclusion of Class A and B membership stock not eligible for redemption ( BWG) effective 12/31/ Modify the instructions for Schedule A, Part 1 to reflect the reporting of real estate owned by an LLC on Schedule A if it meets the requirements set forth in SSAP No. 40R Real Estate Investments Revised ( BWG) effective 12/31/ Modify the appropriate instructions to reflect the inclusion of only cash transactions on the Cash Flow page ( BWG) effective 12/31/ Add instructions and illustration for a new disclosure in Note 5A for Mortgage Loans Derecognized as a Result of Foreclosure ( BWG) effective 12/31/ Modify the instructions and illustration for Note 12, Retirement Plans, Deferred Compensation, Postemployment Benefits and Compensated Absences and Other Postretirement Benefit Plans, to reflect changes adopted by the Statutory Accounting Principles (E) Working Group for SSAP No.11 Postemployment Benefits and Compensated Absences ( BWG) effective 12/31/ Add the instructions for Note 1, Summary of Significant Accounting Policies, to reflect changes adopted by the Statutory Accounting Principles (E) Working Group for SSAP No.1 Disclosures of Accounting Policies, Risks & Uncertainties, and Other Disclosures ( BWG) effective 12/31/ Modify the instructions for Note 5G and add additional disclosures adopted by the Statutory Accounting Principles (E) Working Group for investments in low-income housing tax credits (LIHTC) ( BWG) effective 12/31/ Add a new supplement to collect data on cybersecurity insurance. Add this supplement to the list of supplements to be filed on the Supplemental Exhibits and Schedules Interrogatories ( BWG) effective 12/31/ Modify the Schedule D, Part 1 instructions for CUSIP Identification column and Description column. Add new electronic columns for Issuer, Issue, ISIN Identification and Capital Structure Code ( BWG) effective 12/31/ Modify the instruction and illustration in Note 22, Events Subsequent to reflect changes to the disclosures related to the federal Affordable Care Act (ACA) assessment and add crosschecks to the Five-Year Historical page ( BWG) effective 12/31/ Modify the blank line description for Line 15.3 of the Asset page to reference contracts subject to redetermination, and make the appropriate reference changes in the instructions. Add the reference to include contracts subject to 2016 National Association of Insurance Commissioners 2

74 Attachment Fourteen redetermination in the instructions for the Liabilities page, Summary of Operations page, and appropriate supporting schedules and exhibits ( BWG) effective 12/31/ Split the Supplemental XXX/AXXX Reinsurance Exhibit, Part 2 into to two new parts: 1) Part 2A (Grandfathered or Special Exemption; and 2) Part 2B, (Non-Grandfathered). Modify Part 3 and 4 to better reflect being a fixed line schedule and additional lines to those schedules. The instructions for Parts 1 through 4 will reflect the appropriate changes ( BWG) effective 12/31/ Add a reference to the Supplemental Health Care Exhibit (SHCE) Cautionary Statement to be posted to the Blanks (E) Working Group web page in the header of the SHCE, Part 1 blanks page; the first paragraph of the General Instructions for Parts 1, 2 and 3; and the header of the instructions for Part 1 ( BWG) effective 12/31/ Add instructions to the Supplemental Health Care Exhibit, Part 2 to clarify the reporting for retrospectively rated contracts ( BWG) effective 12/31/ Add new table to the Supplemental Health Care Exhibit, Part 1 to capture the Affordable Care Act 3R s (risk adjustment, risk corridor and transitional reinsurance) receivables, payables and receipts by state for individual and small group plans ( BWG) effective 12/31/ Modify the question in the Supplemental Exhibits and Schedules Interrogatories on filing the Communication of Internal Control Related Matters Noted in Audit filing to reference being regulator only, non-public and to be filed electronically with the NAIC ( BWG) effective 12/31/ Add instruction to include the Affordable Care Act Section 9010 fee as a write-in for special surplus in accordance with SSAP No. 106 Affordable Care Act Section 9010 Assessment ( BWG) effective 1/1/ National Association of Insurance Commissioners 3

75 Attachment Fourteen Attachment 1 Collateral Type Current categories included in the instructions for Schedule D Part 1 (Column 26): Proposed category revisions: The following proposal reduces the number of collateral type categories from 21 to 10. It includes eliminating the Single Asset category (#20) as it is not a collateral type. The proposed revision also combines several existing categories into a lesser number of categories, grouped by common collateral types. For example, the RMBS Prime, RMBS Non-Prime and Other Residential Mortgage categories currently in the instructions have been combined into one collateral type category (i.e., Residential Mortgage Loans/RMBS) since they have the same or similar underlying risks, the definition can be a matter of judgement, and the market does not distinguish between them. Lastly, since the Loan category currently included in the instructions has consisted primarily of collateralized loan obligations (CLOs), we expanded that category to also include collateralized bond obligations (CBOs) and collateralized debt obligations (CDOs) and renamed it as such National Association of Insurance Commissioners1