ADDITIONAL ASSET CLASSES THE AND CONSIDERATIONS CLEARWATER GUIDE TO NON-TRADITIONAL ASSET CLASSES Investment Accounting and
TABLE OF CONTENTS INTRODUCTION 2 GUIDE TO THE GUIDE 3 THE ASSET TYPES Direct Mortgage Loans 4 Syndicated Loans 5 Limited Partnerships 6 Convertible Bonds 7 Tax s 8 Interest Rate Swaps 9 Options 10 Futures 11 Default Swaps 12 Tenant Loans 13 Currency Forwards 14 Inflation-Linked Bonds 15 Private Placements 16 APPENDIX RBC Factors Matrix (AVR) 17 RBC Factors Matrix (Non-AVR) 19 The Clearwater Guide to Non-Traditional Asset Classes 1
INTRODUCTION In 2015, Clearwater Analytics, a software as a service (SaaS) provider of investment accounting, reporting, and analytics, conducted research on how US insurers were incorporating non-traditional asset classes in an everchanging investment environment. In The 2015 Insurance Investment Benchmark Survey, Clearwater asked insurance chief financial officers, chief investment officers, chief risk officers, and other investment and accounting professionals if their organizations currently invest in non-traditional asset classes. These assets are often not permitted by investment policies, are perceived as riskier investments, have more complicated accounting characteristics, or are not well known among institutional investors. Direct mortgage loans top the list of non-traditional assets that respondents invest in, with 48% indicating they invest at least some of their portfolio in them. Other popular non-traditional asset classes include limited partnerships (44%), private placements (42%), and REITs (31%). UNDER PRESSURE TO GENERATE HIGHER RETURNS IN THE LOW-YIELD ENVIRONMENT, MANY INVESTMENT TEAMS ALREADY INVEST IN NON-TRADITIONAL ASSET CLASSES Clearwater also asked insurers if they plan to increase or decrease allocations to non-traditional asset classes in the coming year. The results revealed that among insurers who already invest in non-traditional assets, the likelihood of allocation increase is relatively high (from 30% to 53% likelihood of allocation increase). In contrast, insurers who don t currently invest in non-traditional assets are significantly less likely to increase these allocations in the coming year. For example, for insurers who currently do not invest in non-traditional asset classes, the highest planned increase for any single asset class was only 13% (mortgage loans). This data suggests that, under pressure to generate higher returns in the low-yield environment, many investment teams already invest in non-traditional asset classes and plan to increase their allocations in the future. However, the data also show that others are hesitant to move beyond traditional fixed-income vehicles. While nearly half (47%) of insurers are not investing in these asset classes because they are outside investment guidelines, one in five (21%) avoid these asset classes because of regulatory concerns or lack of expertise. In a controlled environment with all other factors being equal, many of these non-traditional asset classes have the potential to provide higher-than-average returns-a sentiment that Clearwater s survey results suggest. However, also reflected in these results is the perception that in a less than perfect investment environment there is an inherent risk when investing in these assets, and this is a risk that many insurers are not willing to take. This guide provides high-level details on common non-traditional asset types, plus the associated accounting and regulatory considerations that insurance investors must evaluate when incorporating them into their investment portfolios. Note: This material is for informational purposes only. Commentary about the accounting and reporting implications of non-traditional asset types are derived from sources Clearwater Analytics considers reliable, but Clearwater Analytics provides no warranties regarding the accuracy of the information. Further, information contained within this guide should not be construed as legal, financial, investment, or tax advice, and any questions regarding the reader s individual circumstances should be addressed to that reader s lawyer, accountant, or investment advisor. The Clearwater Guide to Non-Traditional Asset Classes 2
GUIDE TO THE GUIDE This guide contains profiles of non-traditional asset classes. Each profile covers basic information to help investors evaluate the accounting and reporting implications of each asset type. A B C D E G F A. Description: A short description of the asset type, including basic transactional, structural, and contractual characteristics. B. : Accounting and data management challenges. C. : Accounting treatment for GAAP filings. D. STAT: Accounting treatment for statutory filings. E. : Accounting treatment for European/UK GAAP filings. F. Characteristics: Basic identifying characteristics of the asset type, including credit quality, coupon type, and and STAT classification. G. : Estimation of RBC charges. For a more detailed list of estimated RBC changes by insurer type, refer to the RBC Factors Matrix (pg. 17). The Clearwater Guide to Non-Traditional Asset Classes 3
DIRECT MORTGAGE LOANS Definition STAT Direct mortgage loans (DMLs), sometimes referred to as whole loans, are non-recourse whole loans that represent the direct lending of funds such that the investor (lender) owns the entire loan, or mortgage, on the collateral asset rather than a portion or fractional unit of a securitized investment. DMLs are usually backed by the physical property that the loan is supporting. In the event of a default, the investor can seize the property securing the loan. Data aggregation; pricing; getting deal specifics from servicers to comply with regulatory reporting requirements DMLs are reported at cost or market value (whichever is lower). Origination costs and fees are recognized as expenses or income when the loan is made; commitment fees are recognized as expenses or income when the loan is sold (ASC 948-310, ASC 815-10, FASB 65). Costs associated with loan purchases are charged to expense as incurred, and loans are assessed at fair value. Amortization should be recognized as an adjustment over the life of the loan to produce a constant yield (SSAP 37). DMLs are recognized when the entity becomes party to the contractual provisions of the loan. Under IAS 39, loans are measured at amortized cost using the effective interest method. If the intent is to trade the loan in the short-term, they are instead classed as Held for Trading, or designated on recognition as Fair Value Through Profit and Loss or Available for Sale. Under IFRS 9, if the entity s objective is to collect contractual cash flows, the loan is measured at amortized cost. If the objective is to sell the loan, it is measured as Fair Value Through Profit and Loss. 0.14% to 7.5%, depending on filer type and CM category for mortgages in good standing. Mortgages 90 or more days overdue or in foreclosure have an RBC charge range between 0.2% and 23.0%, depending on filer type and mortgage type. Charges are generally low with the exception of Farm Mortgages and Commercial Mortgages Other, both of which have higher RBC charges. Quality varies depending on issuer Typically fixed Long-term, depending on nature of mortgage Schedule B, Mortgage Loans S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 4
SYNDICATED LOANS Definition Syndicated loans (also referred to as bank loans ) are private placement securities that are generally senior debt secured by borrower assets. They are attractive to many investors because the U.S. Securities and Exchange Commission (SEC) does not require that they be registered. This allows issuers to borrow outside the traditional parameters of fixed-income securities. The lack of SEC registration also means less cost for the borrowing corporation at issuance. Syndicated loans are designed to provide companies with an alternative source of funding outside of traditional fixed-income securities, including access for issuers who may not be able to borrow in the traditional fixed-income markets. STAT The tiered loan structure; data availability; long settlement periods; delayed interest payments The unrealized gain/loss treatment and its impact on income depends on whether the investment is part of a portfolio classified as trading, as available for sale, or held to maturity (ASC 320, FASB 115). Syndicated loans are flat-trading securities with long, sometimes unpredictable settle dates. The loans do not accrue until the settle date (SSAP 26). Syndicated loans are recognized when the entity becomes party to the contractual provisions of the loan. Under IAS 39, loans are measured at amortized cost using the effective interest method. If the intent is to trade the loan in the short-term, they are instead classed as Held for Trading, or designated on recognition as Fair Value Through Profit and Loss or Available for Sale. Under IFRS 9, if the entity s objective is to collect contractual cash flows, the loan is measured at amortized cost. If the objective is to sell the loan, it is measured as Fair Value Through Profit and Loss. to 30%, depending on filer type and assessed risk of the investment. Despite potentially risky characteristics, syndicated loans are treated as long-term bonds with relatively low RBC charges. Quality varies depending on issuer Floating Long-term; dependent on time to maturity/conversion Schedule D, Long-Term Bonds Schedule DA, Short-Term Bonds S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 5
LIMITED PARTNERSHIPS Definition STAT Limited partnerships (LPs) are investments in other corporations where there are two distinct types of partners: general and limited. General partners have binding authority (i.e., they can enter into contracts on behalf of the partnership) and can also be held financially liable for the actions of the partnership. Limited partners, in contrast, have limited liability. They can t enter into binding contracts on behalf of the partnership and they are only liable for the amount they originally invested in the partnership. They cannot be pursued beyond this amount financially for the actions of the partnership. Delayed pricing availability Changes in market value are taken through unrealized gain/loss; depending on percentage of ownership, investors may also utilize an equity method of accounting (ASC 323, APB 18). If carried at fair value, unrealized valuation gain/loss is the change in book-adjusted carrying value due to carrying or having carried the security at fair value; depending on percentage of ownership, investors may also utilize an equity method of accounting (SSAP 48). LPs are initially recognized when an entity becomes a party to the contractual provisions of the LP, and are classified into various categories depending upon the type of instrument and investment policy. These categories determine the subsequent measurement of the instrument, either as IAS 39 Financial Instruments or IFRS 9 Financial Instruments. 19.5% to 30%, depending on filer type and public or private placement designation; same RBC charge as unaffiliated common stock on Schedule BA. Investment-grade; depends on the investment and issuer None; periodic distributions Long-term Schedule BA, Other Long-Term Assets S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 6
CONVERTIBLE BONDS Definition STAT Convertible bonds are hybrid securities that maintain characteristics of both fixed-income and derivative securities. A typical structure may be a comparatively low-yielding bond combined with an option to convert to the issuing company s common stock over the life of the instrument. At maturity, the bond would yield the par value of the bond or provide the possibility of additional return (in the event the option is exercised). These are considered principal protected, meaning the investor will at least receive the amount of principal invested when the note matures, assuming it is held until maturity. Bifurcating the embedded derivative Embedded derivatives must be separated from the host contract and accounted for as a derivative instrument. Use FASB Statement No. 133: Accounting for Derivative Instruments and Hedging Activities, unless a fair value accounting election is made. For a fair value accounting election, FASB Statement No. 155 is applicable (ASC 815, FASB 133). SSAP 86: Accounting for Derivatives and Hedging, Income Generation, and Replication (Synthetic) Transactions. For insurers filing Asset Valuation Reserve/Interest Maintenance Reserve, realized gains/losses are allocated based on conversion value at purchase and disposal (SSAP 86, SSAP 26). Convertible bonds are treated as embedded derivatives under IAS 39. If an embedded derivative is separated, the host contract is accounted for under IAS 39. If IAS 39 requires that an embedded derivative be separated from its host contract, but the entity is unable to measure the embedded derivative separately, the entire combined contract must be designated as a financial asset at fair value through profit or loss. 0.3% to 30%, depending on filer type and security classification as a debt instrument or an equity instrument Investment-grade; depends on the investment and issuer Fixed with optionality Long-term; dependent on time to maturity/conversion Schedule D, Long-Term Bonds Schedule DA, Short-Term Bonds S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 7
TAX CREDITS Definition STAT Tax credits are indirect tax subsidies that allow investors in a flow-through limited liability partnership entity to recognize the benefits of tax credits and operating losses from qualified projects. These credits are subject to recapture over a 15-year period, starting with the first year the tax credits are earned. This includes investments in Low-Income Housing Tax s (LIHTC), New Markets Tax s, and Renewable Energy Tax s. Calculation of amortization schedules; regulatory reporting complexity GAAP: EITF 94-1 (Accounting for Tax Benefits from Investment in Affordable Housing Projects); EITF 85-16 (Leveraged Leases), (ASC 323-740, FASB 94-1,85-16). Initially recorded at cost and carried at amortized cost. Tax credits to offset applicable taxes (e.g., state tax credits to offset state taxes; federal tax credits to offset federal taxes) must be utilized in the same year they are recognized. Tax benefits other than tax credits must be accounted for pursuant to SSAP 101, with amortization reported as a component of net investment income (SSAP 93). IFRS do not provide any guidance about investment tax credits, because they are excluded from both IAS 20 and IAS 12. 0.14% to 15%, depending on filer type Recognition of tax credit at either the state or federal level Long-term Schedule BA, Other Long-Term Assets S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 8
INTEREST RATE SWAPS Definition Interest rate swaps are derivative contracts where two parties agree to swap a given set of cash flows, represented as legs. There is typically one fixed leg (a fixed, agreed-upon payment amount) and a second floating leg (some basis point above an interest rate; e.g., six-month LIBOR + 5bp). Accurate interest rate accruals; duration and exposure calculations; aggregated reporting FASB Statement No. 133: Accounting for Derivative Instruments and Hedging Activities (ASC 815, FASB 133). STAT As a derivative asset, interest rate swaps are reported at fair value unless they are used in an effective hedge. Derivative instruments used in an effective hedge use the same accounting principles as the offsetting hedge asset or liability (SSAP 86). Interest rate swaps are recognized when the entity becomes party to the contractual provisions of the swap. As derivatives, interest rate swaps are classed as held for trading and reported at fair value unless they are designated as a hedging instrument, in which case the hedge accounting rules of IAS 39/IFRS 9 must be followed. 0.04% to 30%, depending on filer type and investment class Investment-grade; specific credit quality depends on counterparty/clearinghouse Varies depending on whether holder maintains the fixed leg or the floating leg Derivative instrument Schedule DB, Derivative Instruments S.08.01 Open Derivatives S.08.02 Derivative Transactions The Clearwater Guide to Non-Traditional Asset Classes 9
OPTIONS Definition STAT Options are derivative securities whose value is based on the performance of an underlying asset or basket of assets (usually financial instruments, such as a stock or commodity). These are contracts that give buyers the right (or option ) to buy or sell the option s underlying asset before a specific date, or at a specific price. These underlying assets are usually financial instruments, such as a stock or commodity. Collateral and underlying coverage tracking; net exposure calculations; over-the-counter data availability FASB Statement No. 133: Accounting for Derivative Instruments and Hedging Activities (ASC 815, FASB 133). Fair value, unless the options are used in an effective hedge, in which case the same accounting principles as the offsetting hedge asset or liability apply (SSAP 86). Options are recognized when the entity becomes party to the contractual provisions of the option. They are classed as held for trading and measured at fair value, unless designated as a hedged instrument, whereby changes in the time value of the option are recognized in Other Comprehensive Income (IFRS 9) or through Profit & Loss on a fair value basis (IAS 39). 0.04% to 30%, depending on filer type and investment class Exchange-traded are investment-grade; credit quality of OTC depends on counterparty Derivative instrument Schedule DB, Derivative Instruments S.08.01 Open Derivatives S.08.02 Derivative Transactions The Clearwater Guide to Non-Traditional Asset Classes 10
FUTURES DEFINITION GAAP STAT Futures are exchange-traded contracts that depend on the price at which an underlying asset will be delivered at a future date. Futures contracts traditionally are seen on commodities, but can also be sold on fixed-income securities, equities, and indexes. Margin variation valuation and maintenance FASB Statement No. 133: Accounting for Derivative Instruments and Hedging Activities (ASC 815, FASB 133). As a derivative asset, futures are reported at fair value unless they are used in an effective hedge. Derivative instruments used in an effective hedge use the same accounting principles as the offsetting hedge asset or liability (SSAP 86). Futures are recognized when the entity becomes party to the contractual provisions of the future contract. As derivatives, futures are classed as Held for Trading and reported at fair value unless they are designated as a hedging instrument, in which case the hedge accounting rules of IAS 39/IFRS 9 must be followed. 0.04% to 30%, depending on filer type and investment class Investment-grade; exchange-traded Derivative instrument Schedule DB, Derivative Instruments, Part B Futures S.08.01 Open Derivatives S.08.02 Derivative Transactions The Clearwater Guide to Non-Traditional Asset Classes 11
CREDIT DEFAULT SWAPS DEFINITION STAT default swaps (CDSs) are derivative contracts that transfer the credit exposure of fixed-income products from one party to another. They are typically traded OTC and are commonly referred to as either buying or selling protection (depending on the investor s position). When the CDS is written on a fixedincome product that experiences a credit event (i.e. downgrade, bankruptcy, etc.), the buyer of protection will receive either a payment from the seller of protection, or will sell the fixed-income product to the seller of protection. In return, the buyer of protection pays interest to the seller. OTC data availability FASB Statement No. 133: Accounting for Derivative Instruments and Hedging Activities (ASC 815, FASB 133). As a derivative asset, CDSs are reported at fair value unless they are used in an effective hedge. Derivative instruments used in an effective hedge use the same accounting principles as the offsetting hedge asset or liability (SSAP 86). CDSs are recognized when the entity becomes party to the contractual provisions of the swap. As derivatives, CDSs are classed as Held for Trading and reported at fair value unless they are designated as a hedging instrument, in which case the hedge accounting rules of IAS 39/IFRS 9 must be followed. 0.04% to 30%, depending on filter type and investment class Dependent on the credit quality of the fixed-income product the CDS is written on, as well as the inherent risk associated with an OTC agreement due to counterparty risk. Investment-grade; exchange-traded Derivative instrument Schedule DB, Derivative Instruments S.08.01 Open Derivatives S.08.02 Derivative Transactions The Clearwater Guide to Non-Traditional Asset Classes 12
CREDIT TENANT LOANS Definition STAT tenant loans (CTLs) are real estate loans (typically on commercial property) by a single obligor who makes debt-service payments in the form of lease or rental payments. The real estate serves as the underlying collateral. CTLs have historically low default rates and high interest rates, with lessees long-term debt rated investment-grade by many ratings organizations. Because they are long-term debt, they are reported by U.S. insurers as long-term bonds. Cash flow assumptions; FAS 91/ ASC 310 adjustments; collateral tracking CTLs are reported in line with other structured products for GAAP purposes. If security is privately placed, ownership is not recorded until settlement of the initial purchase (ASC 320, FASB 115). CTLs are reported at cost. However, if the CTL is low credit quality, or can t be contractually prepaid or otherwise settled in such a way that the reporting entity would not substantially recover all of its recorded amount, CTLs are recorded at fair value and are subject to constant yield amortization (SSAP 43R). CTLs are recognized when the entity becomes party to the contractual provisions of the loan. Under IAS 39, loans are measured at amortized cost using the effective interest method. If the intent is to trade the loan in the short-term, they are instead classed as Held for Trading, or designated on recognition as Fair Value Through Profit and Loss or Available for Sale. Under IFRS 9, if the entity s objective is to collect contractual cash flows, the loan is measured at amortized cost. If the objective is to sell the loan, it is measured as Fair Value Through Profit and Loss. 0.3% to 30%, depending on filer type and whether the security is classified as a debt instrument or an equity instrument Investment-grade; specific credit quality depends on the investment and issuer Fixed, predictable monthly cash flows Long-term; dependent on time to maturity/conversion Schedule D, Long-Term Bonds Schedule DA, Short-Term Bonds S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 13
CURRENCY FORWARDS Definition Currency forwards (sometimes referred to as FX contracts or Forward Outright Contracts ) are used by investors to lock in a specific exchange rate for a specific date in the future. This transaction occurs between two parties that agree to exchange the two currencies at a predetermined rate on a date in the future. Currency forwards contracts consist of a trade date, a settle date, the two currencies being exchanged, and the amounts of each currency (the rate). There is no cost to enter the contract upfront. STAT OTC data availability FASB Statement No. 133: Accounting for Derivative Instruments and Hedging Activities (ASC 815, FASB 133). As a derivative asset, currency forwards are reported at fair value unless they are used in an effective hedge. Fair value is determined by using forward rates. Derivative instruments used in an effective hedge use the same accounting principles as the offsetting hedge asset or liability (SSAP 86). Currency forwards are recognized when the entity becomes party to the contractual provisions of the currency forward contract. As derivatives, currency forwards are classed as Held for Trading and reported at fair value unless they are designated as a hedging instrument, in which case the hedge accounting rules of IAS 39/IFRS 9 must be followed. The charge for derivatives for a P&C company is usually 0.05% and is shown on PR009 Miscellaneous Assets Reports. The RBC for derivatives for a Life company is 0.004% for exchange-traded derivatives. OTC derivatives vary based on class and can be found in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual). Exchange-traded are investment-grade; credit quality of OTC depends on counterparty. Derivative instrument Schedule DB, Derivative Instruments Part A S.08.01 Open Derivatives S.08.02 Derivative Transactions The Clearwater Guide to Non-Traditional Asset Classes 14
INFLATION-LINKED BONDS Definition STAT The most common form of inflation-linked bonds are U.S. Treasury Inflation-Protected Securities (TIPS). TIPS are long-term bonds issued by the U.S. Treasury that pay investors a fixed, inflation-adjusted coupon. The principal, or par value, of the bonds is tied to the consumer price index (CPI), which means that as the CPI rises, the nominal coupon payment increases or decreases. However, when the TIPS matures, if deflation has occurred, investors are paid the adjusted principal or the original principal, whichever is greater. That means that even if the coupon payments decrease, the principal will never dip below the original par value. Inflation data points; odd day count methods; accounting requirements GAAP requires factor changes through income (accretion/amortization); if the value of the security increases/decreases in book value, the original cost will adjust accordingly (ASC 320, FASB 115). Reported at par. Changes in inflation flow through unrealized valuation gain/loss, and when sold, realized gain/loss. This is an instance where book-adjusted carrying value is not equal to book value or market value. The current factor for unrealized valuation gain/loss calculations should never go below one (SSAP 26). Inflation-linked bonds are initially recognized when an entity becomes a party to the contractual provisions of the bond, and are classified into various categories depending upon the type of instrument and investment policy. These categories determine the subsequent measurement of the instrument, as either IAS 39 Financial Instruments or IFRS 9 Financial Instruments. Varies by government sponsorship; 0% for U.S.-backed bonds Investment-grade; specific credit quality depends on the investment and issuer Fixed, but has variable payments when applied principal adjusts due to underlying inflation/reference rate Long-term; dependent on time to maturity/conversion Schedule D, Long-Term Bonds Schedule DA, Short-Term Bonds S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 15
PRIVATE PLACEMENTS Definition STAT Private placements are securities (for the purposes of this guide, defined as privately placed corporate debt) that are exempt from SEC disclosure and registration requirements, per Regulation D of the 1982 amendment to the Securities Act of 1933. They are only available to qualified private investors with the financial and accounting capabilities and resources to administer them. Because private placements are typically less liquid than publicly traded bonds and require robust issuer credit assessment, accounting, and performance monitoring tools, private placements are typically limited to sophisticated institutional investors such as banks, pension funds, or insurance companies. Data aggregation; interest accruals; combined cash flows Private placements are reported in line with other corporate debt instruments. However, ownership is not recorded until settlement of initial purchase/funding (ASC 320, FASB 115). If carried at fair value, unrealized gain/loss is the change in book-adjusted carrying value due to carrying or having carried the security at fair value. Investors may also utilize the equity method of accounting (SSAP 26). Private placements are initially recognized when an entity becomes a party to the contractual provisions of the placement, and are classified into various categories depending upon the type of instrument and investment policy. These categories determine the subsequent measurement of the instrument, as either IAS 39 Financial Instruments or IFRS 9 Financial Instruments. to 30%, depending on filer type and assessed risk of the investment. Despite potentially risky characteristics, private placements are treated as long-term bonds with relatively low RBC charges. Investment-grade; specific credit quality depends on the investment and issuer None; periodic distributions Fixed or floating Schedule D, Long-Term Bonds Schedule DA, Short-Term Bonds S.06.02 List of Assets The Clearwater Guide to Non-Traditional Asset Classes 16
RBC FACTORS MATRIX (AVR) Instrument AVR (pre-tax) Life AVR (post-tax) Life Bonds - Unaffiliated NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 Preferred Stocks - Unaffiliated NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 Hybrid Securities - Unaffiliated NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 Bonds - Affiliated Direct and Indirect-Owned Insurance Affiliates and Investment Direct and Indirect-Owned Alien Insurance Affiliates Holding Company in Excess of Indirect Subs, Investment in Parent and Other Affiliates 1.30% 4.60% 23.00% 1.30% 4.60% 23.00% 1.30% 4.60% 23.00% 0.96% 3.39% 7.38% 16.96% 19.50% 0.96% 3.39% 7.38% 16.96% 19.50% 0.96% 3.39% 7.38% 16.96% 19.50% Mortgages in Good Standing Residential Mortgages - Insured or Guaranteed Residential Mortgages - All Other Commercial and Farm Mortgages - Insured or Guaranteed Commercial and Farm Mortgages - All Other-Class CM1 Commercial and Farm Mortgages - All Other-Class CM2 Commercial and Farm Mortgages - All Other-Class CM3 Commercial and Farm Mortgages - All Other-Class CM4 Commercial and Farm Mortgages - All Other-Class CM5 Mortgage - 90 Days Overdue, Not in Process of Foreclosure Farm Mortgages Residential Mortgages - Insured or Guaranteed Residential Mortgages - All Other Commercial Mortgages - Insured or Guaranteed Commercial Mortgages - All Other Mortgage - In Process of Foreclosure Farm Mortgages Residential Mortgages - Insured or Guaranteed Residential Mortgages - All Other Commercial Mortgages - Insured or Guaranteed Commercial Mortgages - All Other Real Estate Company Occupied Real Estate Company Occupied Encumbrances Foreclosed Real Estate Foreclosed Encumbrances Investment Real Estate Investment Encumbrances Federal Guaranteed Low Income Housing Tax s Federal Non-Guaranteed Low Income Housing Tax s State Guaranteed Low Income Housing Tax s State Non-Guaranteed Low Income Housing Tax s All Other Low Income Housing Tax s 0.14% 0.68% 0.14% 0.90% 1.75% 3.00% 7.50% 18.00% 0.27% 1.40% 0.27% 18.00% 23.00% 0.54% 2.70% 0.54% 23.00% 1 12.00% 23.00% 1 12.00% 0.14% 0.14% 1.40% 2.60% 1 0.10% 0.50% 0.10% 0.66% 1.29% 2.21% 3.69% 5.53% 13.28% 0.20% 1.03% 0.20% 13.28% 16.96% 1.99% 16.96% 9.75% 7.80% 14.95% 13.00% 9.75% 7.80% 0.14% 0.14% 1.40% 2.60% 1 The Clearwater Guide to Non-Traditional Asset Classes 17
Instrument AVR (pre-tax) Life AVR (post-tax) Life Derivatives Exchange Traded Over the Counter Class 1 Over the Counter Class 2 Over the Counter Class 3 Over the Counter Class 4 Over the Counter Class 5 Over the Counter Class 6 Schedule BA Assets BA -Real Estate Real Estate Real Estate Encumbrances BA - Working Capital Finance Notes NAIC 01 NAIC 02 BA - Collateral Loans 1.30% 4.60% 23.00% 23.00% 0.50% 1.63% 0.96% 3.39% 7.38% 16.96% 19.50% 14.95% 13.00% 0.33% 0.33% Collateral Loans 6.80% 5.02% BA - Bonds, Preferred Stock, Surplus Notes, Capital Notes NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 BA - Common Stock and All Other Unaffiliated Common Stock - Public Unaffiliated Common Stock - Private and All Other Miscellaneous Assets Cash Cash Equivalents Short-Term Investment Premium Notes Receivable for Securities Aggregate Write-Ins for Invested Assets Common Stocks - Unaffiliated Common Stock excluding Federal Home Loan Bank Stock Non-Government Money Market Mutual Funds Federal Home Loan Bank Stock Preferred and Common Stocks - Affiliated (Summary) U.S. Insurance or Investment Subsidiaries subject to RBC Alien Insurance Affiliates Holding Company in Excess of Indirect Subs, Investment in Parent and Other Affiliates Fair Value Excess Affiliate Common Stock Preferred and Common Stocks - Affiliated (Complete List) Directly Owned U.S. P&C Subsidiaries Indirectly Owned U.S. P&C Subsidiaries Directly Owned U.S. Life Subsidiaries Indirectly Owned U.S. Life Subsidiaries Directly Owned U.S. Health Subsidiaries Indirectly Owned U.S. Health Subsidiaries Directly Owned MCO Subject to RBC Indirectly Owned MCO Not Subject to RBC Investment Subsidiaries Directly Owned Alien Insurance Affiliates Indirectly Owned Alien Insurance Subsidiaries Alien Insurance Subsidiaries - Canadian Life Alien Insurance Subsidiaries - Other Investment in Parent Holding Company in Excess of Indirect Subsidiaries Other Affiliate - P&C Insurers not subject to RBC Other Affiliate - Life Insurers not subject to RBC Other Affiliate - Health Insurers not subject to RBC Other Affiliate - All Other Fair Value Excess Affiliate Common Stock 1.30% 4.60% 23.00% 30% +/- beta 6.80% 6.80% 6.80% +/- beta (22.5% - 4) 1.10% Sub s RBC After Covar/0.65 MCCSR(0.65 or 10 Sub s RBC After Covar/0.65 Sub s RBC After Covar/0.65 Sub s RBC After Covar/0.65 Sub s RBC After Covar/0.65 Sub s RBC After Covar/0.65 Sub s RBC After Covar/0.65 Sub s RBC After Covar/0.65 Sub MCCSR/0.65 10 x B.A.C.V. x B.A.C.V. x B.A.C.V. x B.A.C.V. x B.A.C.V. 0.96% 3.39% 7.38% 16.96% 19.50% 19.50% +/- beta 19.50% 5.02% 5.02% 5.02% 19.50% +/- beta (14.625%-29.25%) 0.26% 0.72% 19.50% The Clearwater Guide to Non-Traditional Asset Classes 18
RBC FACTORS MATRIX (NON-AVR) Bonds - Unaffiliated Instrument Non-AVR (No Tax Adjustment) P&C Non-AVR (No Tax Adjustment) Health NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 Preferred Stocks - Unaffiliated NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 Hybrid Securities - Unaffiliated NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 Bonds - Affiliated Direct and Indirect-Owned Insurance Affiliates and Investment Direct and Indirect-Owned Alien Insurance Affiliates Holding Company in Excess of Indirect Subs, Investment in Parent and Other Affiliates Mortgages in Good Standing Residential Mortgages - Insured or Guaranteed Residential Mortgages - All Other Commercial and Farm Mortgages - Insured or Guaranteed Commercial and Farm Mortgages - All Other-Class CM1 Commercial and Farm Mortgages - All Other-Class CM2 Commercial and Farm Mortgages - All Other-Class CM3 Commercial and Farm Mortgages - All Other-Class CM4 Commercial and Farm Mortgages - All Other-Class CM5 Mortgage - 90 Days Overdue, Not in Process of Foreclosure Farm Mortgages Residential Mortgages - Insured or Guaranteed Residential Mortgages - All Other Commercial Mortgages - Insured or Guaranteed Commercial Mortgages - All Other Mortgage - In Process of Foreclosure Farm Mortgages Residential Mortgages - Insured or Guaranteed Residential Mortgages - All Other Commercial Mortgages - Insured or Guaranteed Commercial Mortgages - All Other Real Estate Company-Occupied Real Estate Company-Occupied Encumbrances Foreclosed Real Estate Foreclosed Encumbrances Investment Real Estate Investment Encumbrances Federal Guaranteed Low Income Housing Tax s Federal Non-Guaranteed Low Income Housing Tax s State Guaranteed Low Income Housing Tax s State Non-Guaranteed Low Income Housing Tax s All Other Low Income Housing Tax s 1.00% 2.00% 4.50% 1.00% 2.00% 4.50% 1.00% 2.00% 4.50% Sub s RBC After Covar 5 22.50% 0.14% 2.60% 1.40% 2.60% 1 1.00% 2.00% 4.50% 1.00% 2.00% 4.50% 1.00% 2.00% 4.50% 0.14% 2.60% 1.40% 2.60% 1 The Clearwater Guide to Non-Traditional Asset Classes 19
Derivatives Exchange Traded Over the Counter - Class 1 Over the Counter - Class 2 Over the Counter - Class 3 Over the Counter - Class 4 Over the Counter - Class 5 Over the Counter - Class 6 Schedule BA Assets BA -Real Estate Real Estate Real Estate Encumbrances BA - Working Capital Finance Notes NAIC 01 NAIC 02 BA - Collateral Loans Instrument Non-AVR (no Tax Adjustment) P&C 0.38% 1.25% 0.38% 1.25% Non-AVR (no Tax Adjustment) Health Collateral Loans BA - Bonds, Preferred Stock, Surplus Notes, Capital Notes NAIC 01 - U.S. Government Bonds - Direct and Gtd NAIC 01 - Other NAIC 02 NAIC 03 NAIC 04 NAIC 05 NAIC 06 BA - Common Stock and All Other Unaffiliated Common Stock - Public Unaffiliated Common Stock - Private and All Other Miscellaneous Assets Cash Cash Equivalents Short-Term Investment Premium Notes Receivable for Securities Aggregate Write-ins for Invested Assets Common Stocks - Unaffiliated Common Stock excluding Federal Home Loan Bank Stock Non-Government Money Market Mutual Funds Federal Home Loan Bank Stock Preferred and Common Stocks - Affiliated (Summary) U.S. Insurance or Investment Subsidiaries subject to RBC Alien Insurance Affiliates Holding Company in Excess of Indirect Subs, Investment in Parent and Other Affiliates Fair Value Excess Affiliate Common Stock Preferred and Common Stocks - Affiliated (Complete List) Directly Owned U.S. P&C Subsidiaries Indirectly Owned U.S. P&C Subsidiaries Directly Owned U.S. Life Subsidiaries Indirectly Owned U.S. Life Subsidiaries Directly Owned U.S. Health Subsidiaries Indirectly Owned U.S. Health Subsidiaries Directly Owned MCO Subject to RBC Indirectly Owned MCO Not Subject to RBC Investment Subsidiaries Directly Owned Alien Insurance Affiliates Indirectly Owned Alien Insurance Subsidiaries Alien Insurance Subsidiaries - Canadian Life Alien Insurance Subsidiaries - Other Investment in Parent Holding Company in Excess of Indirect Subsidiaries Other Affiliate - P&C Insurers not subject to RBC Other Affiliate - Life Insurers not subject to RBC Other Affiliate - Health Insurers not subject to RBC Other Affiliate - All Other Fair Value Excess Affiliate Common Stock 1 1 1 Sub s RBC After Covar 5 22.50% Sub s RBC After Covar Sub s RBC After Covar Sub s RBC After Covar Sub s RBC After Covar Sub s RBC After Covar Sub s RBC After Covar Sub s RBC After Covar 5 5 22.50% 22.50% 22.50% 22.50% 22.50% 1 1 2.30% Affiliate s RBC 10 22.50% Affiliate s RBC* Affiliate s RBC* Affiliate s RBC* Affiliate s RBC* Affiliate s RBC* Affiliate s RBC* Affiliate s RBC* Affiliate s RBC* Affiliate s RBC* 10 10 Total Type Codes 1-5 of XR002, Col 13 Source: IRBC Status Matrix. Investment Risk-Based Capital Working Group. www.naic.com/committees_e_capad_investment_rbc_wg.htm *Capped at book/adjusted carrying value for health companies The Clearwater Guide to Non-Traditional Asset Classes 20
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