LIFE RISK-BASED CAPITAL (E) WORKING GROUP Monday, March 9, :00 PM ET / 12:00 PM CT / 11:00 AM MT / 10:00 AM PT ROLL CALL

Transcription

1 Date: 3/6/15 Conference Call LIFE RISK-BASED CAPITAL (E) WORKING GROUP Monday, March 9, :00 PM ET / 12:00 PM CT / 11:00 AM MT / 10:00 AM PT ROLL CALL Mark Birdsall, Chair Kerry Krantz, Vice Chair Steve Ostlund Perry Kupferman Michael Colburn Philip Barlow Fred Andersen Felix Schirripa William Carmello Frank Stone Mike Boerner Kansas Florida Alabama California Connecticut District of Columbia Minnesota New Jersey New York Oklahoma Texas AGENDA 1. Consider Adoption of the Working Group s 2015 Working Agenda Mark Birdsall (KS) Attachment 1 2. Discuss XXX/AXXX Reinsurance Framework Proposals Mark Birdsall (KS) Consolidated Cushion Calculation Paul Graham (American Council of Life Insurers) Attachment 2 3. Any Other Matters Brought Before the Working Group 4. Adjournment W:\QA\RBC\LRBC\2015\Calls and Meetings\3_9_2015 Call\LRBC Agenda.doc 2015 National Association of Insurance Commissioners 1

2 Priority 1 High priority LIFE RISK-BASED CAPITAL (E) WORKING GROUP Priority 2 Medium priority WORKING AGENDA ITEMS FOR CALENDAR YEAR 2015 Priority 3 Low priority Expected Completion # Owner Priority Date Working Agenda Item Source Comments Attachment 1 Date Added to Agenda 1 Life RBC 2 Life RBC 3 Life RBC Ongoing Items Life RBC Ongoing Ongoing Make technical corrections to Life RBC instructions, blank and /or methods to provide for consistent treatment among asset types and among the various components of the RBC calculations for a single asset type or Evaluate RBC in light of PBR. Consider changes to RBC needed because of the changes in reserve values, including right sizing of reserves, margins in the reserves, any expected increase in reserve volatility, and the overall desired level of solvency measurement and other issues. Consider a total balance sheet approach (e.g. total asset requirement (TAR) type calculation and then subtracting out the PBR reserves) and application of stress scenarios. These charges should include appropriate consideration of international core principles or Evaluate the overall effectiveness of the C3 Phase 2 and AG 43 methodologies by conducting an in-depth analysis of the models, modeling assumptions, processes, supporting documentation and results of a sample of companies writing variable annuities with guarantees and to make recommendations to the Capital Adequacy Task Force or Life Actuarial Task Force on any changes to the methodologies to improve their overall effectiveness. Referral from PBR Implementation (E) Task Force Being addressed by the Stress Testing (E) Subgroup CADTF Being addressed by the C-3 Phase II/AG43 (E/A) Subgroup 3 4 Life RBC 4 5 Life RBC 9 5 Life RBC or or or Carry-Over Items Currently being Addressed Life RBC Update the current C-3 Phase I methodology to include indexed annuities AAA L adopted instructions June 2014 for alternative calculations but did not include indexed annuities Referral from E-Committee regarding separate accounts as it relates to any RBC modifications necessary for non-unitzed products being included in separate accounts. Consider proper treatment for business ceded to unauthorized reinsurers. Currently, in most cases some type of security is required for reserves that are ceded to unauthorized reinsurers but there is no similar handling of RBC. Another option could be a factor applied to the RBC release or some other base. E Committee New York 5 Life RBC 6 Life RBC 7 Life RBC 8 Life RBC or or or or Carry-over Items Not Currently being Addressed - Life RBC Update the current C-3 Phase II methodology NAIC Part of the work being done by the C-3 Phase II/AG43 (E/A) Subgroup Expansion of modeling approach to life products (C-3 Phase III) LRBC Review the current C-3 factors without assuming an almost perfect match New York of assets and liabilities. Review the Life RBC treatment of the asset valuation reserve in relation to 9/28/2010 cash flow testing and additional actuarial reserves. Pete Storms Letter New Items Life RBC Adopted proposal limiting AVR in TAC /27/2011

3 Priority 1 High priority LIFE RISK-BASED CAPITAL (E) WORKING GROUP Priority 2 Medium priority WORKING AGENDA ITEMS FOR CALENDAR YEAR 2015 Priority 3 Low priority Expected Completion # Owner Priority Date Working Agenda Item Source Comments 9 Life RBC 10 Life RBC 11 Life RBC 6 Life RBC 7 Life RBC or Consider proper treatment for business ceded to unauthorized reinsurers. Currently, in most cases some type of security is required for reserves that are ceded to unauthorized reinsurers but there is no similar handling of RBC. Another option could be a factor applied to the RBC release or some other base. 1 Ongoing Consider a total balance sheet approach (e.g. total asset requirement (TAR) type calculation and then subtracting out the PBR reserves) and application of stress scenarios Identify an alternative, publicly available source of information to be used in calculating the current valuation of commercial mortgages should the NCREIF price index not become publicly available Develop an appropriate RBC cushion for an insurer ceding XXX/AXXX policies when the assuming reinsurer does not file an RBC report using the NAIC RBC formula and instructions Develop appropriate asset charges for the forms of other security used by insurers under the XXX/AXXX Reinsurance Model Regulation. These charges should then be considered for incorporation into the RBC cushion developed in accordance with the previous charge. New York 6/21/13 Moved from CADTF ongoing Referral from items PBR Implementatio n (E)Task Force CADTF Charge from PBR Implementation (E) Task Force Charge from PBR Implementation (E) Task Force Not needed as the NCREIF price index is now publicly available Attachment 1 Date Added to Agenda 6/21/ Life RBC 9 Life RBC 10 Life RBC Determine whether the current RBC C-3 treatment of qualified actuarial opinions is adequate for the purposes of the risks of XXX/AXXX reinsurance transactions that receive qualified actuarial opinions Develop guidance, for inclusion in the proposed NAIC contingent deferred annuity (CDA) guidelines, for states as to how current regulations governing risk-based capital requirements, including C-3 Phase II, should be applied to contingent deferred annuities (CDAs). Recommend a process for reviewing capital adequacy for insurers issuing CDAs and prepare clarifying guidance, if necessary, due to different nomenclature then used with regard to CDAs. The development of this guidance does not preclude the Working Group from reviewing CDAs as part of any ongoing or future charges where applicable and is made with the understanding that this guidance could change as a result of such a review or Consider changes to the life RBC formula to address longevity risk. Charge from PBR Implementation (E) Task Force 10/21/13 Referral from A Committee New Jersey

4 Attachment 2a Capital Adequacy (E) Task Force RBC Proposal Form [ ] Capital Adequacy (E) Task Force [ ] Health RBC (E) Working Group [ X ] Life RBC (E) Working Group [ ] Catastrophe Risk (E) Subgroup [ ] Investment RBC (E) Working Group [ ] SMI RBC (E) Subgroup [ ] C3 Phase II/ AG43 (E/A) Subgroup [ ] P/C RBC (E) Working Group [ ] Stress Testing (E) Subgroup DATE: 2/23/2015 CONTACT PERSON: Dave Fleming TELEPHONE: ADDRESS: dfleming@naic.org ON BEHALF OF: Life Risk-Based Capital (E) Working Group NAME: Mark Birdsall TITLE: Chair AFFILIATION: Kansas Insurance Department ADDRESS: FOR NAIC USE ONLY Agenda Item # L Year 2015 DISPOSITION [ ] ADOPTED [ ] REJECTED [ ] DEFERRED TO [ ] REFERRED TO OTHER NAIC GROUP [ ] EXPOSED [ ] OTHER (SPECIFY) IDENTIFICATION OF SOURCE AND FORM(S)/INSTRUCTIONS TO BE CHANGED [ ] Health RBC Blanks [ ] Property/Casualty RBC Blanks [ X ] Life RBC Instructions [ X ] Fraternal RBC Blanks [ ] Health RBC Instructions [ ] Property/Casualty RBC Instructions [ X ] Life RBC Blanks [ X ] Fraternal RBC Instructions [ ] OTHER DESCRIPTION OF CHANGE(S) The proposal adds a new schedule which will show the calculation of the RBC cushion in relation to the XXX/AXXX Reinsurance Framework. REASON OR JUSTIFICATION FOR CHANGE ** The schedule is needed to calculate the RBC cushion associated with XXX/AXXX reinsurance. The RBC cushion will be an adjustment to Authorized Control Level. The schedule also shows a consolidated presentation of all XXX/AXXX reinsurance. Additional Staff Comments: ** This section must be completed on all forms. Revised National Association of Insurance Commissioners

5 CALCULATION OF RBC CUSHION (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Pro Rata Pro Rata Pro Rata Pro Rata Pro Rata Pro Rata Pro Rata Other Ceding Captive Captive Captive Captive Captive Captive Captive Captives Company #1 #2 #3 #4 #5 #6 #7 As necessary* Total Attachment 2b (1) C-0 (2) C-1 (2.1) C-1 Concentration Factor (3) Net C-1 Line (2) minus Line (2.1) $0 (4) C-2 (5) C-3 (6) C-4 (7) Total Adjusted Capital (8) Authorized Control Level (9) Benchmark RBC XXX XXX (10) RBC Shortfall XXX XXX (11) Final Total Adjusted Capital Including RBC Cushion XXX XXX XXX XXX XXX XXX XXX XXX (12) Total Adjusted Capital Adjusted for Assets Backing Other Security (13) Authorized Control Level Adjusted for Assets Backing Other Security (14) RBC Ratio Adjusted for Assets Backing Other Security XXX XXX XXX XXX XXX XXX XXX XXX XXX * If there are more than 8 captives subject to consolidation, provide the totals for the captives not repored in columns (1) through (8). Instructions: For the purposes of this Page, the term "Captives" refers to the assuming insurer of non-exempt transactions as defined in AG-48. Column 1: Ceding Company Lines (1), (2), (4), (5), and (6): Take the values from the RBC forms for C-0, C-1, C-2, C-3, and C-4. Line (2.1) and Line (3) are used to eliminate double counting of the concentration factor within the captives. Line (2.1) is to be zero for the ceding company. Line (3) equals Line (2) minus Line (2.1). Line (7): Take the value from the RBC form for Total Adjusted Capital. Line (8): Take the value from the RBC form for Authorized Control Level. Line (9) and Line (10) are not applicable to the ceding company (N/A). Line (11) is the Final Total Adjusted Capital of the Ceding Company, and includes the RBC Cushion. It is Line (7) of Column (1) minus Line (10) of Column (10). Line (12) is Total Adjusted Capital less Assets Backing Other Security. For the ceding company, there are no Assets Backing Other Security and Line (12) is equal to Line (7). Line (13) is the recalculated Authorized Control Level, eliminating the additional C-1 charges for Assets Backing Other Security. For the ceding company, there are no Assets Backing Other Security and Line (13) is equal to Line (8). Line (14) is the Adjusted RBC Ratio eliminating the impact of Other Security for the Consolidated Total. It is not applicable to the entity specific calculations. Columns 2 through 9: Pro Rata Portion of Captive Reinsurer RBC Cushion only needs to be calculated for entities reinsuring Covered Policies (as defined in AG-48, excluding entities assuming only risks exempted per Section 3 of AG-48 ). Entities not meeting this definition should not be reported on this Page. See the guidance in Appendix I for determining C-0, C-1, C-2, C-3, C-4, and TAC in the event that the captive does not file a RBC Report. Lines (1), (2), (4), (5), (6) and (7): Take the values from the RBC forms for C-0, C-1, C-2, C-3, C-4, and Total Adjusted Capital Line (2.1) is the C-1 concentration factor (or pro rata portion, if approprate) for the captive. Line (3) is equal to Line (2) minus Line (2.1), and eliminates the double counting of the concentration factor within the captives. Line (9) is the Benchmark RBC level for setting RBC Shortfall. It is set equal to X% of Authorized Control Level for each captive. Line (10) is the RBC Shortfall of the captive. It is the difference between the Total Adjusted Capital and the Benchmark RBC level. It is Line (9) minus Line (7), floored at zero, for each captive. Line (11) is the Final Total Adjusted Capital of the Ceding Company. It is not applicable to the captive. Line (12) is Total Adjusted Capital less Assets Backing Other Security. For the captive, Assets Backing other Security is equal to the Other Security, as defined by AG-48, that is associated with the reinsurance treaty between the ceding company and the captive. Line (12) is Line (7) minus Assets Backing Other Security. Line (13) is the recalculated Authorized Control Level, eliminating the additional C-1 charges for Assets Backing Other Security. For the captive, Authorized Control Level is to be recalculated removing all C-1 charges associated with Assets Backing Other Security and Line (13) is equal to this recalculated amount. Line (14) is the Adjusted RBC Ratio eliminating the impact of Other Security for the Consolidated Total. It is not applicable to the entity specific calculations. Fill a separate column for each captive. In the event that the captive assumes business from more than one ceding company, or in the event that only a portion of the business at the captive is subject to the scope of AG-48, use a pro rata portion of the total C-0, C-1, C-2, C-3, and C-4 risks, as well as Total Adjusted Capital for Lines (1), (2), (4), (5), (6), and (7). Re-calculate the Authorized Control Level (Line 8) for the pro rata portion. Use reserves ceded by the ceding company and total reserves of the captive to determine pro rata amounts. Column (10:) Consolidated amounts Lines (1) through (7): Calculate the sum of columns (1) through (9). Line (8): Calculate a consolidated Authorized Control Level using the normal RBC formula, using Line (3) as the C-1 risk in the formula. Line (9) and Line (10) are not applicable to the consolidated RBC Total. Line (11) is the Consolidated Authorized Control Level. It is equal to Line (8). Line (12) is the Consolidated Total Adjusted Capital removing the impact of the Assets Backing Other Security. It is the sum of columns (1) through (9). Line (13) is the Consolidated Authorized Control Level removing the impact of the C-1 charges for Assets Backing Other Security. It is the sum of columns (1) through (9). Line (14) is the Adjusted RBC Ratio eliminating the impact of Other Security for the Consolidated Total Denotes items that must be manually entered on the filing software.

6 Attachment 2c Rules for RBC Cushion for Captive Transactions RBC Cushion only needs to be calculated for entities reinsuring Covered Policies (as defined in AG-48, excluding entities assuming only risks exempted per Section 3 of AG-48 ). For the purposes of the descriptions below, the term captives is to mean the assuming insurer of non-exempt transactions as defined in AG-48. The primary objective of this calculation is to determine if there is a capital shortfall at the captive. In certain instances, captives do not report financial results according to U.S. Statutory Accounting rules. In those instances, a pro forma view of the transaction will be necessary (see #2.d. below). For the purposes of the rules described below, TAC means Total Adjusted Capital and CAL means Company Action Level RBC (200% of Authorized Control Level). The following situations may exist: 1. For instances where the ceding company is already calculating and holding a C-0 charge because the captive is an admitted subsidiary: No need for additional RBC cushion, as the C-0 calculation will automatically adjust for any capital shortfall. If the captive has TAC < 100% CAL RBC, the TAC shortfall will already be reflected in the numerator of the parent, so no further TAC adjustment is needed. The denominator will continue to be the sum of the ceding company and captive company CAL RBC amounts. 2. For instances where the ceding company is not already calculating and holding a C-0 charge for the captive: a. If the captive files an RBC report and has TAC>= CAL: RBC Cushion at ceding company = 0. There is no capital shortfall at the captive. b. If the captive files RBC report and has TAC <CAL: RBC Cushion at ceding company = CAL RBC[captive] TAC[captive]. TAC at ceding company is reduced by this amount. This calculates capital shortfall of captive. c. If the captive does not file RBC, but reports its financial condition to its regulator using U.S. Statutory Accounting: RBC Cushion at ceding company = Max (0, (CAL RBC[captive] TAC[captive]). TAC at ceding company is reduced by this amount. This calculates capital shortfall of captive, using NAIC RBC instructions to determine CAL and TAC at the captive, even though no RBC report is filed. If the captive does not file an NAIC Annual Statement Blank, the company will have to rely on company records rather than line items from the Statement Blank.

7 Attachment 2c d. If captive does not file RBC and does not report its financial condition to its regulator using U.S. Statutory Accounting: Ceding company is to develop pro forma statutory statement for the captive, assuming colal security for the reserve credit are all admitted assets (determines Adjusted Assets), liabilities are based on reserves ceded (determines Adjusted Liabilities), and TAC is based on Adjusted Assets minus Adjusted Liabilities. RBC Cushion at ceding company = Max (0, (CAL RBC[captive] TAC[captive]). TAC at ceding company is reduced by this amount. This calculation calculates the RBC as if the captive does file financial statements using U.S. Statutory Accounting. These values should be readily available from work performed to comply with AG-48. This would eliminate any potential arbitrage opportunities of forming a captive that does not use U.S. Statutory Accounting. 3. For instances where the captive assumes business from more than one ceding company: e. If the captive reports its financial condition to its regulator using U.S. Statutory Accounting and there is a RBC shortfall: Follow #2.b. and #2.c above, as appropriate, to determine the amount of the shortfall. The shortfall should be allocated to ceding companies on a pro rata basis, using reserves ceded by the ceding companies for the pro ration. For the purposes of this calculation, this is a reasonable way to allocate the RBC shortfall. f. If the captive does not report its financial condition to its regulator using U.S. Statutory Accounting: Follow #2.d. above using actual liabilities ceded, pro rata assets (by reserves ceded), and pro rata TAC (by reserves ceded) to determine allocation for each ceding company. For the purposes of this calculation, this is a reasonable way to allocate the assets, liabilities, and surplus of the captive. Once allocated, the RBC shortfall can be directly calculated according to #2.d.

8 Attachment 2d Appendix I Rules for Calculating RBC Amounts for Captives that do not file RBC Reports RBC Amounts for Captives that do not file RBC Reports only need to be calculated for entities reinsuring Covered Policies (as defined in AG-48, excluding entities assuming only risks exempted per Section 3 of AG-48). For the purposes of the descriptions below, the term captives is to mean the assuming insurer of non-exempt transactions as defined in AG-48. The following situations may exist: 1. For instances where the ceding company is already calculating and holding a C-0 charge because the captive is an admitted subsidiary: No need for additional RBC cushion, as the C-0 calculation will automatically adjust for any capital shortfall. In this instance, do not fill out a separate column for the captive, as the RBC amount is already included in Column 1 2. For instances where the ceding company is not already calculating and holding a C-0 charge for the captive: a. If the captive does not file RBC, but reports its financial condition to its regulator using U.S. Statutory Accounting: Calculate RBC using NAIC RBC instructions to determine ACL and TAC at the captive, even though no RBC report is filed. If the captive does not file an NAIC Annual Statement Blank, the company will have to rely on company records rather than line items from the Statement Blank. b. If captive does not file RBC and does not report its financial condition to its regulator using U.S. Statutory Accounting: Ceding company is to develop pro forma statutory statement for the captive, assuming colal security for the reserve credit are all admitted assets (determines Adjusted Assets), liabilities are based on reserves ceded (determines Adjusted Liabilities), and TAC is based on Adjusted Assets minus Adjusted Liabilities. This calculation calculates the RBC as if the captive does file financial statements using U.S. Statutory Accounting. These values should be readily available from work performed to comply with AG-48.

9 Attachment 2e CALCULATION OF TOTAL ADJUSTED CAPITAL (Including Total Adjusted Capital Tax Sensitivity Test) LR033 Basis of Factors In determining the C 1 risk factors, availability of the AVR and voluntary investment reserves to absorb specific losses was not assumed. Therefore, the AVR is counted as capital for the purposes of the formula although it represents a liability and is not usable against general contingencies. The portion of the AVR that can be counted as capital is limited to the amount not utilized in asset adequacy testing in support of the Actuarial Opinion for reserves. Voluntary investment reserves were eliminated from Total Adjusted Capital for the 1997 risk-based capital formula. The annual statement provision for future dividends can provide a general cushion against potentially adverse future experience. As a reflection of this possible cushion, 50 percent of the annual statement dividend liability is included. However, when a block is reinsured, such credit to Total Adjusted Capital will not be allowed to either company unless the company has total control over the dividend decision and the full benefit of a change in the dividend scale flows to the company. A factor of 25 percent of the dividend liability is used in sensitivity testing. Subsidiary amounts other than the carrying value of Alien Insurance Subsidiaries Other, are included as appropriate recognizing that this surplus is included within the surplus of the parent. The carrying value of Alien Insurance Subsidiaries Other should be excluded from the surplus of the parent for purposes of computing Total Adjusted Capital. Property and casualty subsidiaries should subtract all non-tabular discounts from surplus to arrive at the adjusted surplus figure. This adjustment to surplus was phased in over a five-year period by subtracting 20 percent of the non-tabular discount the first year and an additional 20 percent each year thereafter. Beginning with the 1998 risk-based capital formula, the adjustment to surplus is 100 percent. The same adjustment is made to the surplus of a life company having ownership of a property and casualty subsidiary. The laws of certain states allow insurers to issue a form of capital instrument called a capital note. A credit is allowed to Total Adjusted Capital for a capital note that satisfies all of the following conditions: 1. In a liquidation, the capital note ranks with surplus notes and is subordinate to the claims of policyholders, claimants and general creditors. 2. The form and content of the capital note was approved by the commissioner of the insurer s state of domicile. 3. At the time of issuance of the capital note, the aggregate principal amount did not exceed 25 percent of the Total Adjusted Capital (including the aggregate principal amount of outstanding capital and surplus notes) as of the end of the immediately preceding calendar year less the aggregate principal amount of outstanding capital and surplus notes. 4. The term of the capital note is not less than five years. 5. At the time of issuance of the capital note: a) The total principal amount of capital notes maturing in any one year did not exceed 5 percent of Total Adjusted Capital (measured at the time of issuance); and b) The total principal amount of capital notes maturing in any three-year period did not exceed 12 percent of Total Adjusted Capital (measured at the time of issuance). 6. Payment of interest, dividend or principal of the capital note is deferred if it would have caused: a) The insurer s Total Adjusted Capital to drop below its Company Action Level Risk-Based Capital; or b) The insurer s Total Adjusted Capital to drop below 125 percent of its Company Action Level Risk-Based Capital, and there is a negative trend on the Trend Test. However, upon request by the insurer, the commissioner of the insurer s state of domicile may approve such payment if, in the commissioner s judgment, the financial condition of the insurer warrants it. 7. The commissioner of the insurer s state of domicile may halt all payments on the capital note if the insurer s Total Adjusted Capital drops below three times the principal amount of the capital and surplus notes the insurer has outstanding. 8. The capital note is treated as a liability in the computation of statutory surplus National Association of Insurance Commissioners 1

10 9. The insurer issuing the capital note is obligated to supply to the commissioner of the insurer s state of domicile an informational filing in a manner approved by the commissioner at the same time the insurer files its annual statement, and at such other times as the commissioner determines necessary. The filing shall include and be based on the following guidelines: a) The filing shall display the financial results of the criteria used to determine whether payments on the insurer s capital notes need be approved by the commissioner or may be halted by the commissioner. Further, it shall specifically identify those results that either necessitate commissioner approval of the payment or give the commissioner the option to halt payment. b) The insurer shall notify the Commissioner for informational purposes of each forthcoming payment under a capital note not less than ten business days prior to the date of payment, nor more than 30 business days prior to the date of payment. c) Whenever an insurer declares its intention to exercise the option to call or redeem a capital note prior to the scheduled maturity, the Commissioner shall be notified within five business days following the declaration, and not less than 10 business days prior to the declared redemption date. The 10-day period should be measured from the date of the commissioner s receipt of the notice. The credit for a capital note is reduced as the note approaches maturity (as calculated on LR032 Capital Notes before Limitation). The aggregate credit for capital notes is limited so that the total amount of capital and surplus notes included in Total Adjusted Capital is not more than one-third of Total Adjusted Capital. Total Adjusted Capital is to be reduced by the amount of all XXX/AXXX reinsurance RBC shortfalls. Attachment 2e National Association of Insurance Commissioners 2

11 Attachment 2e Specific Instructions for Application of the Formula Lines (3) and (4) When reinsurance is involved (coinsurance, modified coinsurance, coinsurance with funds withheld, or any similar arrangement) the dividend liability credit included in Total Adjusted Capital by the ceding company should not be allowed in the event the ceding company cannot realize the financial benefits associated with a reduction in the dividend liability. At the same time, the reinsurer should not be allowed a credit to Total Adjusted Capital for any of the dividend liability, even if the direct writer cannot take the Total Adjusted Capital credit, unless the reinsurer can demonstrate control over the dividend decision of the direct writer. A no answer to either of the following two questions eliminates the company's ability to take the dividend liability credit related to such reinsurance: 1. Does the company have "total control" over the dividend decision? 2. Does the full benefit of any future ability to change the dividend scale flow to the company? (In considering the answer to this question, the company should consider the retained and reinsured portions separately.) Line (5) Fair Value TAC Adjustment - In order to mitigate the effects of derivative accounting mismatches an adjustment to total adjusted capital is required when all of the following conditions exist: the bond is not carried at fair value, the bond is hedged with a credit derivative and RBC is being reduced for the hedge, the credit derivative is carried at fair value, and the bond has never been written-down pursuant to the recording of an other-than-temporary impairment. When these conditions exist, the adjustment shall never be less than zero and shall be based on any unrealized gain of the credit derivative, determined as the lesser of 1 or 2 below: 1. Book/Adjusted Carrying Value of the credit derivative from Schedule DB minus the sum of the Prior Year and Current Year Initial Cost of the credit derivative from Schedule DB, 2. The reduction in RBC arising from the hedge. This Fair Value TAC Adjustment shall be applied to basic and intermediate hedging relationships as described in the instructions to the Spreadsheet Computation of Risk Reduction. In the case of an intermediate hedging relationship any unrealized gain attributable to the index-based credit derivative shall be determined as required in 1. above then allocated to the individual bonds named in the index-based credit derivative on the basis of their par values compared to the total par value represented by the index. Each allocated unrealized gain will then be used as 1. above for purposes of determining the Fair Value TAC Adjustment for that bond and hedge within the intermediate hedging relationship. Lines (6) through (8) The source for subsidiary amounts should be reported from the subsidiaries annual statements. These amounts should be adjusted by percentage of ownership before entering. All U.S. life, property and casualty and investment subsidiaries should be included. An adjustment to reduce the Total Adjusted Capital for the carrying value of Alien Insurance Subsidiaries Other should be made for the parent company on Line (8). Lines (10.1) through (10.4) These lines calculate the credit to Total Adjusted Capital for the insurer s qualifying capital notes. The calculation on Line (10.2) limits the credit for capital notes so the total amount of capital and surplus notes included in Total Adjusted Capital is not more than one-half of Total Adjusted Capital from other sources. This is equivalent to a limit of one-third of Total Adjusted Capital from all sources, including the capital and surplus notes themselves National Association of Insurance Commissioners 3

12 Attachment 2e Line 11 Line (11) should include the entire amount of any shortfall in Primary Securities as outlined in Actuarial Guideline XLVIII National Association of Insurance Commissioners 4

13 CALCULATION OF TOTAL ADJUSTED CAPITAL (Including Total Adjusted Capital Tax Sensitivity Test) (1) (2) Attachment 2f Annual Statement Source Statement Value Factor Adjusted Capital Company Amounts (1) Capital and Surplus Page 3 Column 1 Line 38 X = (2) Asset Valuation Reserve Page 3 Column 1 Line X = (3) Dividends Apportioned for Payment Page 3 Column 1 Line 6.1, in part X = (4) Dividends Not Yet Apportioned Page 3 Column 1 Line 6.2, in part X = (5) Hedging Fair Value Adjustment Company Records X = Life Subsidiary Company Amounts (6) Asset Valuation Reserve Subsidiaries' Annual Statement Page 3 Column 1 Line X = (7) Dividend Liability Subsidiaries' Annual Statement Page 3 Column 1 Line Line 6.2 X = Property and Casualty and Other Non-U.S. Affiliated Amounts (8) Non-Tabular discount and/or Alien Insurance Subsidiaries: Other Included in Subsidiaries' Annual Statement Page 3 Column 1 Line X = and/or Schedule D Part 6, Section 1 Column 8 Line and Line , in part (9) Total Adjusted Capital Before Capital Notes Sum of Lines (1) through (7) less Line (8) Credit for Capital Notes (10.1) Surplus Notes Page 3 Column 1 Line 32 (10.2) Limitation on Capital Notes 0.5 x [Line (9) - Line (10.1)] - Line (10.1), but not less than 0 (10.3) Capital Notes Before Limitation LR032 Capital Notes Before Limitation Column (4) Line (18) (10.4) Credit for Capital Notes Lesser of Column (1) Line (10.2) or Line (10.3) (11) XXX/AXXX Reinsurance RBC Shortfall LRXXX XXX/AXXX Reinsurance RBC Shortfall Columns (2) through (9) Line (10) (12) Total Adjusted Capital Line (9) + Line (10.4) - Line (11) Tax Sensitivity Test Company Amounts (13) Deferred Tax Asset (DTA) Value Page 2 Column 3 Line 18.2 X = (14) Deferred Tax Liability (DTL) Value Page 3 Column 1 Line 15.2 X = Subsidiary Amounts (15) Deferred Tax Asset (DTA) Value Company Records X = (16) Deferred Tax Liability (DTL) Value Company Records X = (17) Tax Sensitivity Test: Total Adjusted Capital Line (12)+(13)+(14)+(15)+(16) Ex DTA ACL RBC Ratio Sensitivity Test (18) Deferred Tax Asset-Company Amounts Page 2 Column 3 Line 18.2 X = (19) Total Adjusted Capital Less Deferred Tax Asset Amounts Line (12) less Line (18) (20) Authorized Control Level RBC LR034 Risk-Based Capital Level of Action Line (4) X = (21) Ex DTA ACL RBC Ratio Line (19) / Line (20) 0.000% ACA Fee RBC Ratio Sensitivity Test (22) ACA Fee (Data Year Amount to be Paid in the Fee Year) Note 22A X = (23) Total Adjusted Capital Less ACA Fee Line (12) less Line (22) (24) Authorized Control Level RBC LR034 Risk-Based Capital Level of Action Line (4) (25) ACA Fee RBC Ratio Line (23) / Line (24) 0.000% Including subsidiaries owned by holding companies. Multiply statement value by percent of ownership. The portion of the AVR that can be counted as capital is Iimited to the amount not utilized in asset adequacy testing in support of the Actuarial Opinion for reserves. Denotes items that must be manually entered on the filing software.