GROUP CAPITAL CALCULATION (E) WORKING GROUP Thursday, April 5, :00 p.m. ET / 12:00 p.m. CT / 11:00 a.m. MT / 10:00 a.m.

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1 Date: 3/15/18 Conference Call GROUP CAPITAL CALCULATION (E) WORKING GROUP Thursday, April 5, :00 p.m. ET / 12:00 p.m. CT / 11:00 a.m. MT / 10:00 a.m. PT ROLL CALL David Altmaier, Chair Florida Justin Schrader Nebraska Susan Bernard/Ron Dahlquist California Peter L. Hartt New Jersey Kathy Belfi Connecticut Joan Riddell New York Philip Barlow District of Columbia Jackie Obusek North Carolina Kevin Fry Illinois Dale Bruggeman Ohio Gary Anderson Massachusetts Mike Boerner/Doug Slape Texas Leslie Nehring Missouri David Smith/Doug Stolte Virginia NAIC Support Staff: Julie L. Garber AGENDA 1. Discuss Comment Letters Received Related to the Memorandum on the Treatment of Captives in the Group Capital Calculation Commissioner David Altmaier (FL) Memorandum Comment Letters Attachment 1 Attachment 2 2. Discuss Any Other Matters Brought Before the Working Group Commissioner David Altmaier (FL) 3. Adjournment W:\National Meetings\2018\Summer\Cmte\E\GCCWG\ CC (Captives)\GCCWG Agenda doc 2018 National Association of Insurance Commissioners 1

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3 -- Attachment 1 MEMORANDUM TO: Group Capital Calculation (E) Working Group FROM: Commissioner Altmaier, Chair, Group Capital Calculation (E) Working Group DATE: October 31, 2017 RE: Proposed Revised Approach to XXX/AXXX Captives During 2016 and 2017, the Group Capital Calculation Working Group has considered various aspects related to then consideration of the best approach to take with respect to incorporation of XXX/AXXX captives within the overall calculation. During today s conference call, before discussing this issue again I reminded participants that the Working Group had already determined that the purpose of this calculation was to assist lead states in analyzing the financial condition of the group. I noted that some states believe that a VM-20 valuation of such liabilities would provide states with better analytical information because it s presumed to be a more accurate representation of such liabilities. However, I highlighted that other states have expressed concerns with that approach since the states are unable to require such a valuation of all groups with XXX/AXXX captives; states can really only allow such a method. Further, requiring the VM-20 calculation could be overly burdensome for some groups. The primary issue this raises is a lack of consistency in valuation between groups, which is problematic. I also highlighted that some regulators are very opposed to any approach that allows the use of any types of assets that are not allowed for statutory accounting principles (SAP), even if that issue is only a perception issue. I stated it was my understanding that these captives report full statutory reserves but can recognize LOCs and other non-qualifying SAP assets as capital to fund the difference between economic and full statutory reserves. I noted that there seems to be no way to overcome this difference of opinion unless the NAIC can require the assets to be consistent with SAP but the liabilities to represent the economic valuation with some type of RBC adjustments or we develop a new approach for consideration. As a result, I suggested the following approach be taken 1) We use a valuation that results in essentially looking through the transaction all together (i.e. unwind the captive transaction). 2) This could include requiring the calculation for the XXX/AXXX captive to report the liabilities consistent with the valuation of the direct writer then requiring the use of SAP on the captive assets. 3) This could also include allowing the captive valuation, but requiring some type of on-top adjustment elsewhere in the calculation (and /or RBC charges related to non-qualifying SAP assets) to get to a similar net capital valuation of the XXX/AXXX as required within 2. If you have any comments, please submit them by COB December 29, 2017 to Julie Garber (jgarber@naic.org) and Dan Daveline (ddaveline@naic.org). G:\FRS\DATA\Staff\DJD\Group Capital\Non-Regulated Entities Suggestions.docx

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5 Comment Received via December 11, 2017 Julie and Dave, New York has the following comments with respect to the October 31st Captives Memo. We support the approach outlined in the October 31 st memo from Commissioner Altmaier. New York continues to enforce a moratorium on captive reinsurance. However, captive reinsurers in other states hold reserves less than what would be required from a direct writer for the same business. This is accomplished by either directly lowering the reserves or allowing non-admitted assets to support the reserves. This inconsistency across companies should not roll-up within the group capital calculation. As such either the captive reinsurer should report the liabilities and assets consistent with the valuation requirements of the direct writer or a top-side adjustment should be applied elsewhere to get to a similar result. Joan L Riddell Deputy Chief Insurance Examiner Property Bureau Financial Division New York State Department of Financial Services 1

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7 December 29, 2017 Commissioner David Altmaier Florida Office of Insurance Regulation Chairman, NAIC Group Capital Calculation (E) Working Group Via to Re: Exposed Memo Proposed Revised Approach to XXX/AXXX Captives, October 31, 2017 ( Exposure ) Dear Commissioner Altmaier: A coalition of nine companies (Brighthouse Financial, Global Atlantic Financial Group, Lincoln Financial, National Life Group, Ohio National, Pacific Life, Principal Financial Group, Protective Life, and Transamerica) (collectively, the Coalition ) welcomes the opportunity to respond to the October 31, 2017 Exposure of the memorandum from you to the members of the NAIC s Group Capital Calculation (E) Working Group. The memorandum proposes an approach to address XXX/AXXX (term/ulsg) captives within the Group Capital Calculation ( GCC ). We appreciate the ongoing efforts of the Working Group to identify an appropriate treatment for various types of entities, including captives. The Coalition continues to urge the Working Group to reach a fundamental policy decision that the GCC directly follow domestic state legal entity rules. In other words, the GCC should employ, directly and without adjustment, the financial statements and capital calculations used by state regulators and other stakeholders to evaluate the capital adequacy of insurers at the legal entity level. In particular, the GCC should reflect the Term and Universal Life Insurance Reserve Financing Model Regulation ( Model #787 ) and Actuarial Guideline 48 ( AG 48 ). Model #787 (which has been proposed for adoption as an NAIC accreditation standard) and AG 48 provide national standards for the use of XXX/AXXX financing arrangements, including the grandfathering of captive financing arrangements established prior to Similar to the views expressed by ACLI in its comment letter, the Coalition remains deeply concerned that the proposed approach for XXX/AXXX captives is inconsistent with the existing XXX/AXXX framework, creating a calculation that contradicts established law and regulation. We respectfully submit that this approach fundamentally undermines the system of state-based insurance regulation. Regarding XXX/AXXX captives, the exposure suggests the following: 1) Use a valuation that results in essentially looking through the transaction all together (i.e. unwind the captive transaction). 2) This could include requiring the calculation for the XXX/AXXX captive to report the liabilities consistent with the valuation of the direct writer then requiring the use of 3

8 SAP on the captive assets. 3) This could also include allowing the captive valuation, but requiring some type of on-top adjustment elsewhere in the calculation (and /or RBC charges related to non-qualifying SAP assets) to get to a similar net capital valuation of the XXX/AXXX as required within 2. The Coalition interprets the three point proposal as follows: The second and third points appear intended to provide a practical implementation of the concept explained in the first point. The first point recommends unwind[ing] the captive transaction. We interpret this to mean that liabilities would be reported on a XXX/AXXX basis and the financing transaction would be assumed not to have occurred. The second point suggests that the implementation could involve requiring the calculation for the XXX/AXXX captive to report the liabilities consistent with the valuation of the direct writer then requiring the use of SAP on the captive assets. In a typical XXX/AXXX captive transaction, the direct writer reports the liability ceded to the captive at the XXX/AXXX level and receives a reinsurance credit for the same amount. Although permitted and prescribed practices are a component of statutory accounting, we interpret requiring the use of SAP on the captive assets to effectively give no credit for alternative assets used in the financing transaction at the captive level, notwithstanding their express approval by state insurance regulators. The third point references allowing the captive valuation, but requiring some type of on-top adjustment to get a similar net capital valuation of the XXX/AXXX as required within [the second point]. Thus the third point seems intended at achieving, on a somewhat more approximate basis, the unwinding explained in the first and second points. If our understanding is correct, the proposal involves reversing approved financial transactions and ignoring financing assets. This would contravene existing laws and regulations and effectively usurp the authority of state regulators to approve such transactions. It is possible that the memorandum was intended to suggest a different approach: to ignore financing assets but to restate liabilities from XXX/AXXX to a more economic basis. This concept is problematic as well, given it has no basis in existing laws and regulations. It would also undermine the NAIC s previous commissioner-level policy decisions about captives, most notably the decision to grandfather the treatment of existing XXX/AXXX captive structures. The grandfathering decision was made by commissioners after significant deliberation. We respectfully submit that is it not appropriate for the GCC to reverse previous NAIC policy decisions. Additionally, as we expect that the GCC will become public, any discrepancy between the GCC and statutory RBC could create confusion for consumers, rating agencies, reinsurance counterparties, and capital market participants with respect to insurance groups underlying financial strength. 2 4

9 Finally, the Coalition notes that the NAIC s Proposed Covered Agreement Clarifications, in the context of the U.S.-EU Covered Agreement and the associated U.S. policy statement, sends clear signals that the GCC is intended to be the basis for regulatory action. Specifically, in compliance with the terms of the Covered Agreement, the GCC is intended to be the state-based regulatory system s basis for preventive, corrective, or otherwise responsive measures for at least some entities. It is difficult to envision how state regulators could credibly or lawfully impose preventive, corrective, or otherwise responsive measures on the basis of a GCC that deviates from current legal requirements. A failure to adhere to domestic state legal entity rules therefore imperils one of the central NAIC policy objectives of the GCC. The Coalition looks forward to continuing engagement with the Working Group as the development of the Group Capital Calculation continues. Sincerely, Brighthouse Financial Global Atlantic Financial Group Lincoln Financial National Life Group Ohio National Pacific Life Principal Financial Group Protective Life Transamerica 3 5

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11 December 29, 2017 Commissioner David Altmaier Florida Office of Insurance Regulation Chair, Group Capital Calculation Working Group Via to: Re: Oct. 31, 2017 Memo on Proposed Revised Approach XXX/AXXX Captives Dear Commissioner Altmaier, The American Council of Life Insurers (ACLI) 1 appreciates the opportunity to provide feedback on the October 31, 2017 memo, Proposed Revised Approach to XXX/AXXX Captives in the group capital calculation. We appreciate your willingness to consider a compromise position to bridge strong differences of opinion within the working group. However, after careful review of the revised proposal ACLI cannot support the proposal as it s currently written, for reasons outlined below. We strongly believe that the group capital calculation should align with the Regulation XXX/AXXX Framework for Captive Reinsurers, which creates a robust regulatory framework for policyholder protection that includes enhanced disclosure, collateral, RBC, and financial examination requirements. The Framework was painstakingly established and implemented over a period of four years, and we believe any attempt to circumvent it is misguided and leads to misleading results. The XXX/AXXX Framework already addresses concerns about collateral maintained for the ceded reserves The October 31 memo notes that some regulators oppose any approach that allows the use of any types of assets that are not allowed for statutory accounting principles (SAP), even if that issue is only a perception issue. The XXX/AXXX Framework was designed to address concerns about the types of collateral maintained for the reserves ceded by the direct writer and we believe the Framework adequately addresses these concerns by setting a uniform benchmark for economic reserves that is equal to the PBR reserves prescribed in the NAIC Valuation Manual. The new benchmark is the Required Level of Primary Security and a ceding company must maintain hard asset collateral that is at least as high as the Required Level of Primary Security which is equal to the PBR reserves prescribed in the NAIC Valuation Manual. The remainder of the collateral is known as Other Security and must be composed of assets that are approved by the state commissioner. These requirements have been adopted in Actuarial Guideline 48 and are incorporated in Model Regulation # The American Council of Life Insurers is a Washington, D.C.-based trade association with approximately 290member companies operating in the United States and abroad. ACLI advocates in federal, state and international forums for public policy that supports the industry marketplace and the 75 million American families that rely on life insurers products for financial and retirement security. ACLI members offer life insurance, annuities, retirement plans, long-term care and disability income insurance, and reinsurance, representing more than 95 percent of the U.S. industry assets and premiums. 7 Page 1 of 3

12 The XXX/AXXX treatment of grandfathered captives should not be unwound by the NAIC group capital calculation The regulators who drafted the XXX/AXXX Framework spent a large amount of time considering the appropriate treatment of captives established before the Framework s 1/1/2015 implementation date and ultimately concluded that those existing policies should be grandfathered. There was a general recognition that it was impossible to unwind business decisions made in the past and in conformity with the existing regulatory framework. The grandfathered policies were priced, and capital was deployed based on the laws and regulations that existed when the policies were written. More practically, because a significant number of grandfathered policies are 20-year term insurance policies, there was also recognition that the block of grandfathered policies shrinks significantly every year, and within a few years the grandfathered issue would resolve itself as the last of the policies mature. Simply put, in a few years, there will be a significant decline in the number of grandfathered policies, which should assuage concerns about uniformity. In the meantime, regulators are not without insight into grandfathered or non-grandfathered XXX/AXXX captives. Regulators created the Supplemental Term and Universal Life Reinsurance Exhibit that shows the relationship between statutory reserves ceded and the hard assets being held for each captive reinsurance treaty. The exhibits show the economic reserve for grandfathered policies and the Required Level of Primary Security for non-grandfathered policies. Additionally, and maybe most importantly, there is a requirement in each individual entity s confidential RBC Report to disclose an RBC calculation that shows the impact of unwinding the financial effects of the captive reinsurance. Note, however, that such information is confidential, since the context in which such an alternative calculation is viewed is very important. Conclusion ACLI feels strongly that the group capital calculation should not circumvent or erode the existing Regulation XXX/AXXX Framework for Captive Reinsurers. The group capital calculation, and any adjustments, should align with the Regulation XXX/AXXX Framework for Captive Reinsurers. We think this issue is critical to maintain the integrity of the group-capital calculation. As always, we welcome any follow-up or discussion of our views. Please feel free to contact us directly if you have any questions or concerns, or would like to discuss our remarks in more depth. Yours very sincerely, Carolyn Cobb Vice President & Chief Counsel, Reinsurance & International Policy carolyncobb@acli.com; (202) Paul Graham Senior Vice President, Insurance Regulation & Chief Actuary paulgraham@acli.com; David Leifer Vice President & Associate General Counsel davidleifer@acli.com; (202) Mariana Gomez-Vock 8 Page 2 of 3

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15 December 29, 2017 Via Electronic Delivery Commissioner David Altmaier Florida Office of Insurance Regulation J. Edwin Larson Building 200 E. Gaines Street, Room 101A Tallahassee, Florida Attention: Julie Garber and Dan Daveline Re: Comments Regarding Memorandum Dated October 31, 2017 Commissioner Altmaier: We appreciate the opportunity to comment on your memorandum dated October 31, 2017 (the Memo ). We continue to support the NAIC s development of a robust group capital calculation. If designed appropriately, the calculation would provide a useful supervisory tool to assist lead states in analyzing the financial condition of insurance groups by complementing entity-based solvency requirements. As we have noted in our prior comment letters, it is important that any new calculation promote comparable and consistent approaches across companies and jurisdictions while recognizing that foreign jurisdictions have different underlying approaches that were developed to fit their legal and regulatory systems. To us, a lack of consistent standards or inconsistent application of standards resulting in incomparability of outcomes for similarly situated companies will erode credibility both here in the U.S. and in jurisdictions outside of the U.S. It could also affect the NAIC s ability to properly calibrate scalars. We are therefore encouraged by the Memo s recognition that a lack of consistency in valuation between groups is problematic. While the Memo raises this concern in the context of adjustments for XXX/AXXX captives, we note that there are other sources of potential inconsistency that the Working Group should address (including the use of permitted practices and the effects of intragroup transactions and statespecific accounting differences). In our prior comment letters, we advocated that the group capital calculation incorporate the adjustment for XXX/AXXX captives that was proposed in the aggregation and calibration ( A&C ) approach. That being said, we generally support the new approach set forth in the Memo which would achieve consistency and comparability by requiring (i) insurance groups with XXX/AXXX captives to report their reserves and assets without giving effect to the reinsurance transactions and (ii) insurance groups that do not engage in captive reinsurance transactions to continue reporting their statutory reserve and asset levels. Similar to the A&C proposal that would allow all companies to use PBR for in-force, pre-ag 48 business, the 11

16 Memo s proposal would also ensure comparability and consistency because it would require all companies to use the same basis of valuation of both assets and liabilities, irrespective of a company s state of domicile, or its decision to use captives or contingent assets to finance reserves. While we believe that the Memo s new proposal could result in an appropriate adjustment for XXX/AXXX captives that furthers the goals of consistency and comparability, we would like to remind the Working Group of one potential consequence of simply applying the asset valuation standards set forth in statutory accounting principles ( SAP ) as contained in the NAIC Accounting Practices and Procedures Manual. The requirement that XXX/AXXX captives back their reserves with SAP assets is intended to address the regulatory arbitrage that occurs when a captive instead backs reserves with contingent assets, such as letters of credit. While such contingent assets generally would not qualify as admissible assets on the direct writer s balance sheet, there are some types of assets that operate in a similar manner to a letter of credit that might still qualify as admitted assets under SAP, such as contingent notes. We encourage the Working Group to address this source of inconsistency and regulatory arbitrage by requiring the insurer that uses a XXX/AXXX captive to not only use SAP to value its assets, but also to exclude from its asset base those contingent assets that operate in a manner similar to a letter of credit. After much careful debate and deliberation during their development at the NAIC, AG 48 and the NAIC Term and Universal Life Insurance Reserve Financing Model Regulation (Model 787) take a similar approach by excluding assets that operate in a manner similar to letters of credit from the definition of Primary Security (e.g., any synthetic letter of credit, contingent note, credit-linked note that operates in a manner similar to a letter of credit, and... any securities issued by the ceding insurer or any of its affiliates ). By taking this approach, the Working Group would align the group capital calculation with these existing NAIC standards for life insurer captives. * * * 12

17 We are grateful for your time and attention to our comments. If you would like to discuss this letter with us, please let us know. Sincerely, Joel M. Steinberg Senior Vice President, Chief Actuary & Chief Risk Officer New York Life Insurance Company David R. Remstad Senior Vice President & Chief Actuary The Northwestern Mutual Life Insurance Company D. Keith Bell Senior Vice President, Corporate Finance The Travelers Companies, Inc. 13

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19 December 29, 2017 Via Electronic Delivery Commissioner David Altmaier Florida Office of Insurance Regulation Chairman, NAIC Group Capital Calculation (E) Working Group Via to Re: Comments on the National Association of Insurance Commissioners ( NAIC s ) October Memorandums Exposed for Comment Proposed Revised Approach to XXX/AXXX Captives, Non- Regulated Entities and Related Inventory Method Suggestions, and Treatment of Senior Debt and Surplus Notes in the Group Capital Calculation ( the Memorandums ) Dear Commissioner Altmaier: Prudential Financial, Inc. and MetLife, Inc. (the Companies or we ) again thank the Group Capital Calculation Working Group ( the Working Group ) for continuing to seek stakeholder input on foundational elements of its group capital calculation (the Calculation ). We support the development of supervisory tools that enhance state regulators ability to protect policyholders and insurance markets. Further, we believe an appropriately designed Calculation would provide state regulators further insight into insurance groups including non-insurance operations within the group and serve as a strong complement to existing legal entity oriented supervisory tools. Before addressing the substance of the Memorandums, we would like to reflect on the recent agreement the NAIC and the other members of Team USA (the Federal Reserve Board ( FRB ) and Federal Insurance Office ( FIO )) were party to, regarding the development and implementation of the International Association of Insurance Supervisors ( IAIS ) risk-based global insurance capital standard ( ICS ) and the implications it may have on the efforts of the Working Group. First, we are encouraged by the extended implementation period Team USA secured as it provides greater time for Team USA and the Working Group to develop a sound aggregation based approach to group capital and promote it as an outcome equivalent approach to the ICS. Second, we believe the agreement along with the August agreement between the NAIC and FRB to align their respective approaches to a group capital framework implicitly affirms the Working Group s intention to develop a Calculation that treats activities within and across entities consistently. We believe achieving such consistency will be a minimum prerequisite for obtaining outcome equivalent status to the ICS, which aspires to produce comparable outcomes across jurisdictions. Obtaining outcome equivalent status is critically important for U.S. based internationally active insurance groups ( IAIGs ) as it will eliminate the need to report results under two distinct group capital frameworks i.e., the Market Adjusted Valuation ( MAV ) reference method ICS and the U.S. aggregation based framework. Similarly, it is also critically important that the Working Group s Calculation be the lone U.S. aggregation methodology and serve as the framework that Team USA advocates for at the IAIS. As noted in our May 26 and September 5 letters, the Companies believe enhancing consistency within and across insurance groups and obtaining further transparency into the group would be the most appropriate objectives for the Calculation. With respect to transparency, the inventory approach that serves as the foundation of the Calculation will provide state regulators insight into all entities within the group insurance and non-insurance and their respective capital position whether informed by a 15 Page 1 of 6

20 current entity level capital requirement or an alternative calculation. Adjusting varying entity level requirements to a consistent treatment will further enhance transparency by quantifying the impact different treatment of similar activities has on insurance groups. However, as noted in our prior comment letters, we believe adjustments recognized within the Calculation related to existing regimes should be minimal, anchored to existing practices where appropriate, and focused on ensuring similar activities are treated consistently regardless of the corporate structure and regulatory regime of an insurance group. Following adjustments deemed appropriate, aggregated entity level capital amounts would give rise to a group level view that is more comparable across the insurance groups that are subject to the Calculation. In this form, the Calculation would be well suited to serve as a basis for communication in forums such as supervisory colleges, where it is important for members to both understand developments at the entity level and their respective financial strength, and share a common language for discussing the status of the group as a whole. Further, absent such an effort to enhance comparability, the information value of the group solvency ratio produced by the Calculation could be much reduced, thereby limiting its ability to inform decision-making. For example, under an approach that does not emphasize comparability, historical differences could make an insurance group look better than it should relative to its peers, leading regulators to potentially inappropriate supervisory decisions that could be either excessive or inadequate. The converse is true as well; regulators may allocate resources to monitoring insurance groups that would have shown to be healthier relative to their peers under a more comparable metric. Regardless of the objectives the Working Group ultimately aims to achieve, we support the decision to use the Calculation as another window into insurance groups subject to it rather than a wall or binding requirement and appreciate the transparency provided on this point. This perspective serves as the foundation for our comments on the Memorandums, which are included on the pages that follow. Sincerely, Ann Kappler Senior Vice President, Deputy General Counsel and Head of External Affairs Prudential Financial Kevin Mackay Senior Vice President, Corporate Treasury MetLife 16 Page 2 of 6

21 Proposed Revised Approach to XXX/AXXX Captives As noted above, we believe activities in this case term and universal life business reinsured by XXX/AXXX captives should be treated consistently within and across insurance groups for purposes of the Calculation. In consideration of this, we support allowing the utilization of a VM-20 valuation when calculating reserves for new and in-force business in the Calculation. Adjusting reserves to a consistent basis is essential for enhancing comparability and obtaining further transparency into the group. With respect to enhancing comparability, utilization of VM-20 would ensure similar activities are treated consistently regardless of the corporate structure, utilizing an approach that is anchored to the NAIC s current approach to valuing insurance liabilities. With respect to transparency, the insight provided by the inventory of all entities within the group would be further enhanced through quantifying the impact varying entity level reserve requirements for similar activities has on the group. To maximize the degree of comparability, VM-20 would be utilized for all similar business activities, including business assumed by the captive and the portion retained by the direct writer irrespective of whether the business is grandfathered under the NAIC XXX/AXXX Framework or if the business on the books of a direct writer is not ceded to a XXX/AXXX captive. Application of an on-top adjustment to convert statutory reserves on XXX/AXXX business to the VM-20 level would serve as an appropriate and practical way to achieve consistent treatment within and across insurance groups. Further, such an approach offers a solution that could both address the challenges noted in the Memorandum (e.g., the inability of states to require a VM-20 valuation, potential burden it may present for insurers, etc.) and provide a robust and credible foundation for Team USA s future efforts to promote the Calculation as an outcome equivalent approach to the ICS. Through the iterative field testing to occur over the coming years, the design and calibration of the adjustment can be refined to ensure it circumvents the concerns noted in the Memorandum and achieves sufficient consistent treatment of XXX/AXXX business. Regarding treatment of captive assets, it is important to recognize that the assets insurers hold to support non-economic XXX/AXXX reserves are directly informed by the regulatory requirements applicable to the underlying policies, including what assets its state insurance commissioner provides credit for. For purposes of the Calculation, we support only allowing insurance groups to take credit for assets backing XXX/AXXX reserves when they are admissible under NAIC statutory accounting principles, provided reserves are restated to a reasonable economic level via the on-top adjustment as outlined above. Provided such an adjustment is made, disparity in the recognition of assets eligible to support non-economic reserves would no longer be of relevance as the assets backing non-economic reserves in the captive, which may have limited economic value and loss absorption capabilities outside of the captive structure, would no longer be necessary. Should the approach to calculating reserves for purposes of the Calculation retain substantial conservatism, the treatment of assets would need to provide credit for assets insurers currently hold to back such conservatism, irrespective of whether they are admissible under NAIC statutory accounting principles or not. Non-Regulated Entities and Related Inventory Method Suggestions For purposes of the Calculation, the Companies believe the approach to non-regulated entities should be risk sensitive and ensure that the entities position within the corporate structure does not affect the results. With respect to the proposals in the Memorandum, we are encouraged by the Working Group s 17 Page 3 of 6

22 decision to explore methods for non-regulated entities other than the application of a flat charge on the book/adjusted carrying value ( BACV ) of the entity, which we agree is not sufficiently risk-sensitive and could create incentives for arbitrage. However, our perspective on the remainder of the observations and proposals outlined in the Memorandum is mixed. Regarding the Revised NAIC Approach-Grouping and Scope section, we generally agree with the proposal for identifying entities within the capital calculation inventory with the following exception: Companies should be permitted to inventory asset management entities and report them in total for the calculation, similar to the approach proposed for the all other entities not specifically included above category. The additional quantitative and qualitative information required for the other entities should also be required for the grouped asset management entities. From a risk perspective, operational risk poses the biggest threat to the equity of asset management entities. The approach we have proposed would provide supervisors equal transparency into the group while avoiding the complexity that would accompany the reporting of hundreds of entities, many of which are likely to be immaterial from a risk perspective to the overall group. Regarding the Revised NAIC Approach-Factors section, we note the following perspectives and concerns: We agree the minimum capital level required by the insurance regulator, subject to appropriate modifications (e.g., treatment of captives, application of scalars, etc.) should be reported. We agree that the minimum required by the regulator of banks and other depository institutions within the group should be reported. However, we believe these entities should be subject to scalar adjustments to achieve a comparable level of conservatism to RBC, thereby increasing the informational value of the group level ratio produced by the Calculation. We support application of an operational risk framework to asset managers. We believe the international Basel III approach provides a reasonable starting point. However, the 12% factor applied to revenue should be scaled to achieve a comparable level of conservatism to RBC. We believe it is important to add further granularity to the all other financially regulated entities category. Further, it would be appropriate to apply alternative regimes (e.g., U.S. Basel III, the international Basel III operational risk charge, scaled as appropriate) to material entities that fall within this category to ensure similar entities/activities are treated consistently within and across groups and potential risks are appropriately measured. For example, we believe Basel III should be applied to holding companies with a scalar adjustment applied to required capital (note that because holding companies do not have insurance liabilities it would not be necessary to scale available capital). We believe the other entities material to the group from a risk perspective and all other entities categories should be distinguished by both materiality which we will address when further discussed by the Working Group in the future and the nature of the risks to which the entity is exposed (e.g., the international Basel III operational risk charge for entities that are predominantly exposed to operational risk) with results scaled as appropriate. As noted above, we do not support the application of a flat charge on the BACV as it is not sufficiently risksensitive and could create incentives for arbitrage. Given the potential for the approach to non-regulated entities to give rise to changes to legal entity RBC, it is critically important that the approach ultimately employed be thoroughly field tested (as envisioned 18 Page 4 of 6

23 by the Working Group), sufficiently risk sensitive, and not inclined to provide inappropriate incentives for sound risk and capital management. Treatment of Senior Debt and Surplus Notes in the Group Capital Calculation The Companies generally support the recommendations included in the Memorandum but note the following: In Closing It is important that the Working Group determine the treatment of captives before finalizing the treatment of surplus notes. We support the inclusion of a limit on the amount of senior debt recognized. However, we believe the limit should be higher than the proposed 20% level. While the S&P approach provides a useful reference point for the Working Group, the different objectives of the Calculation versus rating agency frameworks must also be considered. For example, S&P s capital model is calibrated to much higher confidence levels (e.g., 97.2% for BBB ) and has a different tolerance level for debt. Additionally, S&P s leverage metrics framework views 20% to 40% financial leverage as neutral. Also, the Working Group must recognize the potential incentives the approach settled on may create, including the potential to inhibit insurers from responding to stress events in a manner that that is in the best interest of policyholders and other stakeholders. For these reasons, we believe it would be appropriate for the Calculation to provide greater flexibility than the S&P capital approach when it comes to the amount of senior debt recognized. The Companies support the development of supervisory tools that enhance state regulators ability to protect policyholders and insurance markets. We believe that an appropriately designed Calculation would provide further insight into insurance groups including non-insurance operations within the group and serve as a strong complement to existing legal entity oriented supervisory tools. Further, we continue to believe that a Calculation aimed at enhancing comparability within and across insurance groups and obtaining further transparency into the group would: Provide the most appropriate and complementary tool for state regulators and be well suited to serve as a basis for communication in forums such as supervisory colleges, where it is important for members to both understand developments at the entity level and their financial strength, and share a common language for discussing the status of the group; Produce a group solvency ratio that offers regulators greater information value when comparing insurance groups; and Serve as a credible framework to advance at the global level as an outcome equivalent approach to the ICS, which aspires to produce comparable outcomes across jurisdictions. Obtaining outcome equivalent status is critically important for U.S. based IAIGs as it will eliminate the potential need to report results under two distinct group capital frameworks i.e., the MAV reference method ICS and the U.S. aggregation based framework. We again thank the Working Group for seeking stakeholder input on foundational elements of the Calculation and look forward responding to future Memorandums exposed for comment and engaging in the multiple rounds of field testing the Working Group intends to conduct, both of which will serve as 19 Page 5 of 6

24 critically important steps for ensuring that the various elements of the Calculation are, and the Calculation as a whole is, fit for purpose. We would welcome the opportunity to discuss the information included in this response should the Working Group or NAIC staff engaged in the project wish to do so. 20 Page 6 of 6

25 TRINIDAD NAVARRO INSURANCE COMMISSIONER January 26, 2018 MEMORANDUM FOR Commissioner Altmaier, Chair of the Group Capital Calculation (E) Working Group MEMORANDUM FROM Steve Kinion, Director, Bureau of Captive and Financial Insurance Products COPY TO Commissioner Trinidad Navarro and Deputy Commissioner Mitch Crane Re: Delaware Comment for the NAIC Group Capital Calculation (E) Working Group The purpose of this memorandum is to submit the Delaware Insurance Department s comments regarding the proposed revised approach for XXX/AXXX captives set forth in the chair s October 31, 2017 memorandum. Delaware believes that any group capital calculation should apply the existing state rules and regulations for XXX/AXXX captives. This means the Group Capital Calculation Working Group should adopt, without any adjustments, the financial statements and capital calculations used by the captive domicile s state regulators. This approach is consistent with the Regulation XXX/AXXX Framework adopted by the NAIC Executive Committee and Plenary. For this comment memorandum, the Delaware Insurance Department incorporates the comments I made on October 25, 2017 during an appearance on A.M. BestTV. Please see the video link at Thank you for considering this memorandum. Bureau of Captive and Financial Insurance Products 1007 N. Orange St., 10 th Floor, Suite 1010 Wilmington, Delaware Telephone Facsimile Delaware is the 3 rd Largest U.S. and the World s 5 th Largest Captive Domicile 21

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