Private Placements Investors Association

Private Placements Investors Association Charles Therriault, CFA Director

Risk-Based Capital The Investment Risk-Based Capital (E) Working Group (IRBCWG) is charged with evaluating relevant historical data and apply defined statistical safety levels over appropriate time horizons in developing recommendations for revisions to the current asset risk structure and factors in each of the RBC formulas. The Working Group s responsibilities include reviewing asset risk factors for all RBC statement types (life, health and property/casualty). Key Issue Currently Being Considered: The Working Group should consider if there needs to be more consistency between the factors used by the different statement types Currently, certain assets may get different RBC charges based on whether it is a life, health, or property/casualty company o Some believe an asset is an asset. Therefore, the RBC charges should be consistent o Others believe that the risk in the asset could be different based on factors such as how/why it is being held. Example: Life insurers typically have longer holding periods for bonds. Therefore, the RBC charges do not need to be consistent To consider the issue of consistency, the Working Group will be addressing investment-related risks for all RBC formulas 2

Risk Based Capital The Working Group is first focusing its attention on corporate bonds and then will consider common stocks The goal was to have changes implemented for both bonds and common stocks by year-end 2017 reporting but year-end 2018 is looking more likely. Related to bonds, there are two key decisions to be made Structure of the RBC formula for bonds Should it be more granular? Factors for bonds Once the structure is finalized, consider updating the factors based on modern experience The Working Group consensus is that the structure in the life RBC formula should be more granular, and the number of RBC categories for bonds should be increased from 6 to 20. 3

Risk Based Capital Why Be More Granular? RBC charges are currently based on the six NAIC designations With the range of bond quality within an NAIC designation, there could be incentive to invest in the lower quality bonds within the same NAIC designation A lower quality bond would get the same RBC charge as a higher quality bond if it is assigned the same NAIC designation Increasing the granularity will reduce the cliffs and eliminate that incentive Example: Seven Moody s bond ratings (Aaa, Aa1, Aa2, Aa3, A1, A2, and A3) are given an NAIC 1 designation, so bonds in all of these categories get the same RBC charge. 4

Risk Based Capital Next Steps As the Working Group has reached a consensus on the life bond structure, it will now be turning its attention to the structure in the health and property/casualty formulas, as well as the factors for bonds in all statement types The August 2015 report by the American Academy of Actuaries recommended an increase in granularity, as well as updated RBC factors based on modern experience o Recommends assigning factors based on NRSRO rating o Referral by the Working Group to the Valuation of Securities (E) Task Force to consider this recommendation and impact on its operations o The Academy recently responded to the interested party comment letters related to its report What does the referral to the Valuation of Securities (E) Task Force mean? To be continued over the next several months. 5

Risk Based Capital Academy C1WG Proposed (Life) Basic C1 Bond Factors Materials are based on or extracted from the August 3, 2015 report prepared by the American Academy of Actuaries C1 Work Group, Model Construction and Development of RBC Factors for Fixed Income Securities for the NAIC s Life Risk-Based Capital Formula. 6

National Financial Presentation Standards In addition to U.S. GAAP and IFRS the NAIC has now approved the use of: Australian GAAP Belgium GAAP Canadian ASPE (Accounting Standards for Private Enterprises, non-financial institutions) Dutch GAAP French GAAP German GAAP Italian GAAP UK Financial Reporting Standard (FRS) 102 (includes Irish companies reporting under FRS 102) Additional financial presentation standards can be proposed through a national insurance associations such as the American Council of Life Insurers (ACLI). The SVO requires regular training/updates on these accounting standards and will be coordinating with the ACLI to schedule this for 2017. Japanese GAAP has been discussed as an additional NFPS request. 7

Credit Rating Providers HR Ratings de Mexico, S.A. de C.V., (HR Ratings) was added to the NAIC s credit rating provider (CRP) listing in 2016. There are currently nine CRPs 1. Moody s Investor s Service 2. Standard and Poor s 3. Fitch Ratings 4. DBRS (Dominion Bond Rating Service) 5. A.M. Best Company 6. Morningstar Credit Ratings, LLC 7. Kroll Bond Rating Agency 8. Egan Jones Rating Company 9. HR Ratings de Mexico, S.A. de C.V. All nine CRP ratings, if any, are required to be used when determining the NAIC Designation equivalent for a security to be reported under the filing exempt rule. 8

Recommendations from the Reporting Exceptions Analysis (E) Working Group Develop a data quality assessment and data anomaly resolution processes, the latter of which should permit direct interaction between the SVO, state examiners and insurers. Integrate international security identification numbers (ISINs) in NAIC systems. In some cases, U.S. government securities are reported as filing exempt (FE) securities instead of as exempt government securities. Develop a proposal to modify the reporting instructions to ameliorate the cause of the anomaly, for eventual referral to the Blanks (E) Working Group. Pre-refunded securities are not rated and require filing with the SVO. The Working Group recommended that industry representatives be instructed to file these securities and that state examiners be asked to supervise such filings. 9

Recommendations from the Reporting Exceptions Analysis (E) Working Group The Working Group recommended that the FE-related instructions to insurers be reconciled with those of the SVO to make the production of NAIC Designation equivalents for FE securities the exclusive responsibility of the SVO. The P&P Manual should also be amended to say that while insurers can use whatever credit rating source they want for internal operations, the accuracy of their reporting will be evaluated by reference to the NAIC Designation equivalents published in the AVS+ product. The Working Group recommended that insurance companies be required to verify the credit rating assigned to any private letter securities they own by: 1. Filing private rating letters with the SVO or have them added to the CRP data feeds 2. File the security with the SVO or 3. If the insurance company does not have the necessary documentation for an SVO credit assessment, the insurer would be permitted to apply the 5*/6* procedure. This procedure closely follows what is already in place for Filing Exempt (FE) securities. 10

Private Letter Ratings The Valuation of Securities (E) Task Force will likely pick this amendment up at an interim meeting in February with the implementation date still expected to be July 1 st. Our expectation is that the letters will have sufficient information to identify the specific security. We have been working with NAIC technology staff on specifications for a new filing screen (the manual PDF versions of the Private Letter Ratings) and we will work with the CRPs to update our electronic feeds. These securities will need to be specifically identified as Private Letter Ratings through either the manual filing or electronic vendor feed. 11

Private Letter Ratings Private Letter Ratings need to meet the P&P Manual (more formally: Purposes and Procedures of the NAIC Investment Analysis Office) definition of an Eligible NAIC CRP Rating. The P&P Manual identifies the elements the credit rating must have to qualify the security as filing exempt. Part One, Section 4 (c) (ii) of the P&P Manual (B) Securities with monitored CRP ratings that: 1) Are monitored at least annually by the CRP that issued the rating, 2) Are assigned to a specific issue that must be specifically identified, 3) Apply to securities where the issuer promises to repay principal and interest or dividends; 4) (X) Convey an opinion as to the likelihood of payment of both principal and interest/dividends due from the issuer to the holders of the security, or (Y) those structured to pay only principal or only interest/dividends, if the monitored CRP rating addresses the likelihood of payment of either the principal, in the case of a security structured to pay only principal or the interest/dividends, in the case of security structured to pay only interest/dividends, (an Eligible NAIC CRP Rating ); 12

Private Letter Ratings - Confidentiality Part One: Purposes, General Policies and Instructions to the SVO Section 5. NAIC Policies Pertaining to SVO Work Product d) Statement of Practice: The SVO routinely receives financial information, legal documents and other data from reporting insurance companies so that it may assess the reported investment for the NAIC. While the NAIC is not a guarantor of the confidentiality of information submitted to the SVO, the SVO does not redistribute documents obtained in the course of its work for other than regulatory purposes or as may be required by law. The NAIC does, however, respect copyright and will not reproduce or externally distribute copyrighted documents without permission. 13

Initiative on Infrastructure Investments At the Summer National Meeting the Task Force held a special session to hear industry comments on issues related to infrastructure investments covering: adequacy of existing methodological approaches, adequacy of Task Force processes and elements needed for an analytical or regulatory construct. The SVO staff is preparing a report for the Task Force with its assessment of these issues. At the Fall National Meeting the Task Force indicated that it would consider targeted and specific recommendations. The SVO is willing to work with industry on initiatives in a manner similar to the joint effort to draft a methodology for wind energy. 14

Filing Modernization Now that the new filing application VISION is live the SVO plans to put forward recommendations in 2017 to modernize the rules associated with filing investment security information. The overall objective is to replace a rules system developed for a paper environment with one that leverages NAIC, SVO and insurer electronic filing platforms and other improvements in technology. The project also seeks to eliminate the negative incentive structures in current rules; most of which relate to the linkage of filing with payment of a fee and responsibility for future filings. 15

Filing Modernization Monthly Distribution of Annual Update Filings 2013-2016 by Issuer Fiscal Year-end Total annual updates received by year: 2016-7,785; 2015-5,369; 2014-6,023; and 2013-5,463.. 16

Filing Modernization Proposed Filing System General Characteristics As a regulatory compliance matter, insurers are responsible for providing filing documentation and other data to the SVO. As a matter of system design, an efficient NAIC Designation production platform would not be designed to test compliance but rather to efficiently collect the documentation necessary to analyze each security. An efficient production platform would also be designed to source required documentation and data from 3 rd parties (ex. issuers or SEC) in addition to insurers. By changing the filing system design we hope to significantly decrease the insurer s filing burden but the insurer must still file owned securities for the system characteristics to remain relevant. If the anticipated regulatory, operational and business efficiencies are to be realized, insurers must file documentation and data for owned securities either as soon after purchase as practicable; or as soon after the release of financial statements or other material disclosures as practicable. 17

Filing Modernization Proposed Filing Rules General Framework A core objective is to reduce the time frame for insurer filings with the SVO to provide the SVO with sufficient time to achieve the regulatory objective of adequately analyzing the risks of the investment. Permitted filing time frames should reflect available technologies and their relative costs and benefits. Existing filing time frames should be reduced whenever either electronic technologies or alternate sources/processes to obtain the required information can be identified that increase the efficiency or accuracy of this regulatory process at a reasonable cost. The elimination or reduction of time periods for filing by eliminating or modifying specific rules may lessen the pressure to eliminate or modify other rules. All rules and processes related to filing should be integrated into a single Part of the P&P. The filing process and compliance rules are distinctly separate and different. 18

Investment Reclassification Project & Other Accounting Issues Statutory Accounting Principles (E) Working Group is working jointly with other groups within the NAIC including the Valuation of Securities (E) Task Force on the accounting and reporting guidance under the Investment Statements of Statutory Accounting Principles. This review will consider a wide range of issues with the potential to change which the securities are reported on Schedule D and their Risk Based Capital (RBC) treatment. The intent of the project is to improve the definitions of investments, consistency of look through treatment, consistency of treatment with the Schedule D & BA, and consistency of treatment by type of insurer. 19

Investment Reclassification Project & Other Accounting Issues SSAP No. 26 Bonds Removes SVO-identified instruments (as defined in the SSAP) from the definition of a bond, and provides guidance for these instruments separately from bonds. Within this explicit section, specific guidance for SVO-identified instruments is provided, which includes a requirement for these instruments to be reported at fair value (using net asset value (NAV) as a practical expedient), unless the investment qualifies for, and the reporting entity elects, use of a documented systematic value approach (ex. SVO designated ETFs). Incorporates the definition of security within the definition of a bond, as well as definitions for non-bond, fixed-income instruments captured in the scope of SSAP No. 26. These changes include removal of the term bank participations with inclusion of guidance to reflect bank loans acquired through a participation, assignment or syndication. The proposed modifications are being re-exposed for comment including the methodology to compute systematic value on SVO designated ETFs. 20

Issuers by Industry Class, 2014 and 2015 (Corporate issuers fully reviewed by the SVO, excluding financial issuers) Industry Class 12/31/2015 Total Issuers % Issuers Exposure ($millions) % Exposure 12/31/2014 Total Issuers % Issuers Exposure ($millions) % Exposure Total Issuers Change Exposure Change ($ millions) Electric, Gas, Water & Waste Utility Services 1,508 23.3% $ 73,045.2 25.5% 1,312 21.6% $ 68,192.3 23.7% 196 $ 4,852.9 Business & Personal Services 710 11.0% $ 26,965.0 9.4% 710 11.7% $ 27,051.2 9.4% - $ (86.2) Transportation Services & Equipment 539 8.3% $ 20,097.6 7.0% 468 7.7% $ 19,435.4 6.7% 71 $ 662.2 Oil & Gas Equipment 447 6.9% $ 19,200.0 6.7% 374 6.1% $ 23,928.0 8.3% 73 $ (4,728.0) Chemicals & Pharmaceuticals 407 6.3% $ 20,910.4 7.3% 347 5.7% $ 19,735.0 6.9% 60 $ 1,175.4 Food, Beverage & Tobacco 380 5.9% $ 17,914.0 6.3% 314 5.2% $ 21,161.2 7.3% 66 $ (3,247.2) Financial Services 534 8.2% $ 26,010.4 9.1% 642 10.6% $ 24,802.1 8.6% (108) $ 1,208.3 Retail 363 5.6% $ 12,252.1 4.3% 380 6.2% $ 11,004.6 3.8% (17) $ 1,247.5 Electrical Equipment & Tech Instruments 318 4.9% $ 15,149.8 5.3% 337 5.5% $ 15,582.4 5.4% (19) $ (432.6) Wholesale Goods 281 4.3% $ 14,833.8 5.2% 275 4.5% $ 14,781.0 5.1% 6 $ 52.8 Manufacturing 276 4.3% $ 10,535.0 3.7% 281 4.6% $ 12,496.5 4.3% (5) $ (1,961.5) Indl/Comm Machinery & Computer Equip 136 2.1% $ 5,488.4 1.9% 134 2.2% $ 5,703.0 2.0% 2 $ (214.6) Metal Mining 106 1.6% $ 5,360.1 1.9% 84 1.4% $ 5,965.0 2.1% 22 $ (604.9) Telecommunications 106 1.6% $ 3,940.6 1.4% 83 1.4% $ 3,776.8 1.3% 23 $ 163.8 Forestry & Paper Products 90 1.4% $ 3,167.4 1.1% 110 1.8% $ 3,647.7 1.3% (20) $ (480.3) Printing & Publishing 86 1.3% $ 3,755.0 1.3% 84 1.4% $ 3,773.0 1.3% 2 $ (18.0) Entertainment & Leisure 80 1.2% $ 3,170.3 1.1% 75 1.2% $ 3,677.2 1.3% 5 $ (506.9) Construction 68 1.1% $ 3,828.9 1.3% 43 0.7% $ 2,821.9 1.0% 25 $ 1,007.0 Agriculture 41 0.6% $ 542.6 0.2% 30 0.5% $ 495.9 0.2% 11 $ 46.7 Total 6,476 100.0% $ 286,166.6 100.0% 6,083 100.0% $ 288,030.2 100.0% 393 $ (1,863.6) 21

Designation Migrations from Filing Year 2014 to 2015 Securities Designated by the SVO Filing Year 2014 Filing Year 2015 VOS NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Total NAIC 1 $282,803,996,852 $2,659,867,254 $58,197,119 $0 $0 $0 $285,522,061,225 NAIC 2 $5,576,707,054 $126,192,415,676 $4,487,018,232 $7,282,679 $0 $0 $136,263,423,641 NAIC 3 $0 $871,786,773 $13,504,058,118 $1,949,502,756 $0 $0 $16,325,347,647 NAIC 4 $14,132,831 $3,570,542 $248,035,758 $783,993,922 $24,277,862 $1,229,852 $1,075,240,767 NAIC 5 $5,000,000 $3,593,931 $82,283,789 $101,596,105 $1,504,703,471 $144,753,202 $1,841,930,498 NAIC 6 $0 $0 $3,045,745 $0 $1,331,676 $563,133,909 $567,511,330 Total $288,399,836,737 $129,731,234,176 $18,382,638,761 $2,842,375,462 $1,530,313,009 $709,116,963 $441,595,515,108 VOS NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Total NAIC 1 98.1% 2.1% 0.3% 0.0% 0.0% 0.0% 64.7% NAIC 2 1.9% 97.3% 24.4% 0.3% 0.0% 0.0% 30.9% NAIC 3 0.0% 0.7% 73.5% 68.6% 0.0% 0.0% 3.7% NAIC 4 0.0% 0.0% 1.3% 27.6% 1.6% 0.2% 0.2% NAIC 5 0.0% 0.0% 0.4% 3.6% 98.3% 20.4% 0.4% NAIC 6 0.0% 0.0% 0.0% 0.0% 0.1% 79.4% 0.1% Total 65.3% 29.4% 4.2% 0.6% 0.3% 0.2% 100.0% (1) Green value s reflect a credit improvement and red values reflect a credit decline. 22

Designation Migrations from Filing Year 2014 to 2015 Securities that are Filing Exempt Filing Year 2014 Filing Year 2015 FE NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Total NAIC 1 $1,219,125,766,524 $57,132,313,684 $655,769,155 $2,703,335 $4,731,496 $0 $1,276,921,284,194 NAIC 2 $15,897,595,911 $642,870,488,349 $16,038,167,117 $557,975,376 $129,878,324 $3,492,561 $675,497,597,638 NAIC 3 $53,798,207 $7,269,990,969 $63,368,395,926 $4,030,748,257 $58,397,352 $308,156,124 $75,089,486,835 NAIC 4 $61,077 $101,560,057 $3,875,263,137 $19,628,684,249 $1,017,252,526 $90,548,191 $24,713,369,237 NAIC 5 $0 $872,202 $28,154,906 $421,422,592 $2,121,286,719 $73,961,126 $2,645,697,545 NAIC 6 $0 $0 $0 $1,194,999 $152,694,914 $875,517,006 $1,029,406,919 Total $1,235,077,221,719 $707,375,225,261 $83,965,750,241 $24,642,728,808 $3,484,241,331 $1,351,675,008 $2,055,896,842,368 FE NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Total NAIC 1 98.7% 8.1% 0.8% 0.0% 0.1% 0.0% 62.1% NAIC 2 1.3% 90.9% 19.1% 2.3% 3.7% 0.3% 32.9% NAIC 3 0.0% 1.0% 75.5% 16.4% 1.7% 22.8% 3.7% NAIC 4 0.0% 0.0% 4.6% 79.7% 29.2% 6.7% 1.2% NAIC 5 0.0% 0.0% 0.0% 1.7% 60.9% 5.5% 0.1% NAIC 6 0.0% 0.0% 0.0% 0.0% 4.4% 64.8% 0.1% Total 60.1% 34.4% 4.1% 1.2% 0.2% 0.1% 100.0% (1) Green value s reflect a credit improvement and red values reflect a credit decline. 23

Designation Migrations from Filing Year 2014 to 2015 Combined - Designated by the SVO and Filing Exempt Filing Year 2014 Filing Year 2015 VOS+FE NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Total NAIC 1 $1,501,929,763,376 $59,792,180,938 $713,966,274 $2,703,335 $4,731,496 $0 $1,562,443,345,419 NAIC 2 $21,474,302,965 $769,062,904,025 $20,525,185,349 $565,258,055 $129,878,324 $3,492,561 $811,761,021,279 NAIC 3 $53,798,207 $8,141,777,742 $76,872,454,044 $5,980,251,013 $58,397,352 $308,156,124 $91,414,834,482 NAIC 4 $14,193,908 $105,130,599 $4,123,298,895 $20,412,678,171 $1,041,530,388 $91,778,043 $25,788,610,004 NAIC 5 $5,000,000 $4,466,133 $110,438,695 $523,018,697 $3,625,990,190 $218,714,328 $4,487,628,043 NAIC 6 $0 $0 $3,045,745 $1,194,999 $154,026,590 $1,438,650,915 $1,596,918,249 Total $1,523,477,058,456 $837,106,459,437 $102,348,389,002 $27,485,104,270 $5,014,554,340 $2,060,791,971 $2,497,492,357,476 VOS+FE NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 Total NAIC 1 98.6% 7.1% 0.7% 0.0% 0.1% 0.0% 62.6% NAIC 2 1.4% 91.9% 20.1% 2.1% 2.6% 0.2% 32.5% NAIC 3 0.0% 1.0% 75.1% 21.8% 1.2% 15.0% 3.7% NAIC 4 0.0% 0.0% 4.0% 74.3% 20.8% 4.5% 1.0% NAIC 5 0.0% 0.0% 0.1% 1.9% 72.3% 10.6% 0.2% NAIC 6 0.0% 0.0% 0.0% 0.0% 3.1% 69.8% 0.1% Total 61.0% 33.5% 4.1% 1.1% 0.2% 0.1% 100.0% (1) Green values reflect a credit improvement and red values reflect a credit decline. 24

Designations by Source and Type for 12/31/2015 Number of issues by designation source and security type Designation Source / Type CMBS Corporate GOVT Municipal RMBS Sovereign Structured Total FE 24,494 108,438 1,282 8,536 142,750 GOVT 62,727 62,727 SSG 4,112 16,933 21,045 SVO 6,342 1,217 55 2,940 10,554 Grand Total 4,112 30,836 62,727 109,655 16,933 1,337 11,476 237,076 Percent of issues by designation source and security type Designation Source / Type CMBS Corporate GOVT Municipal RMBS Sovereign Structured Total FE 0% 79% 0% 99% 0% 96% 74% 60% GOVT 0% 0% 100% 0% 0% 0% 0% 26% SSG 100% 0% 0% 0% 100% 0% 0% 9% SVO 0% 21% 0% 1% 0% 4% 26% 4% Grand Total 100% 100% 100% 100% 100% 100% 100% 100% Percent of issues to total by designation source and security type Designation Source / Type CMBS Corporate GOVT Municipal RMBS Sovereign Structured Total FE 0% 10% 0% 46% 0% 1% 4% 60% GOVT 0% 0% 26% 0% 0% 0% 0% 26% SSG 2% 0% 0% 0% 7% 0% 0% 9% SVO 0% 3% 0% 1% 0% 0% 1% 4% Grand Total 2% 13% 26% 46% 7% 1% 5% 100% 25

Industrial Sector - Designation Profile (Three-year average medians for the filing years 2013 through 2015) NAIC 1 Equivalent NAIC 2 Equivalent NAIC 3 Equivalent NAIC 4 Equivalent NAIC 5 Equivalent No. of companies 25 210 89 115 94 EBIT interest coverage 14.6x 7.6x 4.0x 2.0x 0.4x EBITDA interest coverage 19.7x 11.7x 6.4x 3.3x 1.7x FFO/total debt 56.9% 42.4% 25.6% 14.8% 8.6% Total debt/ebitda 1.4x 2.0x 3.2x 4.6x 6.0x Return on capital 18.1% 13.7% 9.9% 7.3% 3.2% Total debt/capital 32.3% 40.5% 51.8% 61.7% 70.3% SVO designated three-year average Median of Industrial Sector. 26

Sector Comparisons (Three-year average median for the filing years 2013 through 2015) Sector EBITDA Coverage EBITDA Leverage NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 Business & Personal Services 27.2x 11.1x 9.9x 3.6x 1.9x 2.1x 1.9x 2.3x 4.3x 7.9x Transportation Services & Equipment 36.0x 8.1x 6.6x 3.4x 2.3x 1.2x 2.2x 3.8x 4.8x 5.1x Wholesale Goods 18.6x 11.8x 8.3x 2.8x 2.2x 1.0x 2.3x 3.0x 5.2x 6.2x Real Estate 4.5x 3.9x 3.3x 3.8x 2.9x 5.7x 6.1x 6.3x 17.8x 7.6x Food, Beverage & Tobacco 8.1x 12.0x 5.5x 2.7x 1.2x 2.1x 2.1x 3.9x 4.8x 4.6x Electric, Gas, Water & Waste Utility Services 6.0x 5.2x 2.5x - - 3.1x 4.0x 8.9x - - Oil & Gas Equipment - 15.7x 4.3x 7.4x 2.5x - 1.7x 4.5x 2.4x 4.1x Electrical Equipment & Tech Instruments 15.1x 14.3x 7.9x 2.1x 0.8x 1.9x 1.8x 3.1x 5.0x 6.8x Manufacturing 15.7x 12.6x 6.0x 2.4x 3.0x 1.3x 1.7x 3.1x 5.2x 5.1x Chemicals & Pharmaceuticals 23.5x 10.3x 5.9x 4.9x (2.1x) 0.8x 2.5x 3.4x 1.4x 0.6x Retail - 9.8x 6.2x 3.1x 1.2x - 1.3x 3.5x 5.1x 9.5x Metal Mining 9.7x 10.9x 6.5x 2.4x 3.7x 1.8x 2.6x 3.2x 5.0x 6.8x Printing & Publishing 13.9x 10.4x 14.5x 3.9x 1.7x 1.8x 2.6x 2.6x 4.4x 8.6x Telecommunications 22.2x 11.3x 7.3x 3.3x 3.1x 1.4x 1.7x 3.0x 3.3x 5.2x Indl/Comm Machinery & Computer Equip 34.7x 11.7x - 4.7x 1.1x 0.9x 1.6x - 4.0x 10.6x Construction - 10.9x 12.5x 1.7x 0.9x - 1.8x 0.7x 178.9x 9.5x Forestry & Paper Products 27.2x - 5.5x 11.4x 2.3x 0.9x - 4.9x 1.8x 7.7x Agriculture - 16.9x 0.8x 3.4x 2.1x - 1.6x 21.2x 5.9x 5.4x Financial Services - 6.8x - 3.0x 1.0x - 2.9x - 4.0x 282.8x Entertainment & Leisure - 4.9x 5.5x 3.0x - - 2.3x 3.6x 7.5x - All Industrials* 19.7x 11.7x 6.4x 3.3x 1.7x 1.4x 2.0x 3.2x 4.6x 6.0x *includes only those repored as Industrial (excludes Financials, Utilities, and REIT) 27

Regulator Treatment Analysis Service (RTAS) The RTAS process permits insurance companies and other entities to ascertain the analytical position the SVO would take (or the recommendations it would make to NAIC regulators) with respect to credit and other investment risks embedded in a security and the regulatory treatment that corresponds to those analytical conclusions under the existing NAIC regulatory framework. The opinion given by the SVO at the completion of the RTAS assignment in the RTAS Letter addresses key areas of regulatory treatment including: statutory accounting; risk-based capital; valuation and reporting along with a preliminary NAIC Designation (NAIC Designations can only be assigned to investments owned by an insurer for the benefit of NAIC members, state insurance regulators). It is possible that the SVO will conclude that existing rules do not permit the SVO to assign a preliminary NAIC Designation to the security or that applicable NAIC regulatory guidance would not permit insurers to purchase and report the security in accordance with existing NAIC rules. 28

Q&A 29

Additional Information Contact Information Charles A. Therriault, CFA Director, Securities Valuation Office Office: 212.386.1920 CTherriault@NAIC.org National Association of Insurance Commissioners Capital Markets and Investment Analysis Office One New York Plaza, Suite 4210 New York, New York 10004 30

Useful Links NAIC: www.naic.org NAIC - SVO: http://www.naic.org/svo.htm VISION - The on-line system used by insurance companies and their third part administrators to file securities with the NAIC's SVO. Application: https://vision.naic.org Information: http://www.naic.org/svo_vision.htm Regulatory Treatment Assessment Service (RTAS) application: http://www.naic.org/documents/svo_rtas_app.pdf NAIC Publications: http://www.naic.org/store_publications.htm NAIC Automated Valuation Service: http://www.naic.org/store_avs.htm 31