National Meeting Update

MARKET INSIGHT PAPER NAIC FALL 2017 National Meeting Update PG. 2 PG. 3 PG. 4 PG. 5 STATUTORY ACCOUNTING PRINCIPLES WORKING GROUP (SAPWG) Dedicated to maintaining accounting principles and providing periodic updates to guidance as it develops. The SAPWG focuses on discussions that result in changes to the Accounting Practices and Procedures (AP&P) Manual and related SSAPs. INVESTMENT RISK-BASED CAPITAL WORKING GROUP (IRBCWG) Primarily dedicated to the development of new corporate bond factors for life insurance companies. VALUATION OF SECURITIES TASK FORCE (VOSTF) Dedicated to designations, valuations, and the Securities Valuations Office (SVO) filing process as outlined in the Purposes and Procedures (P&P) Manual of the NAIC Investment Analysis Office. BLANKS WORKING GROUP (BWG) Addresses changes made to the annual statement blanks and instructions, including technical changes and clarifications. Primarily dedicated to the development of new corporate bond factors for life insurance companies. clearwateranalytics.com

2 MARKET INSIGHT PAPER The NAIC held its Fall 2017 National Meeting on December 2-4 in Honolulu, Hawaii. Clearwater Analytics is dedicated to keeping insurers updated on the latest regulatory guidance changes as they pertain to investment accounting and reporting. Our insurance experts attend NAIC national meetings and pertinent calls to monitor regulatory updates and provide proactive education on adopted and proposed items. Statutory Accounting Principles Working Group The SAPWG held a conference call on November 6 in lieu of attending the NAIC Fall 2017 National Meeting to discuss credit losses, the investment classification project, and more. EXPOSED ITEMS Ref #2016-20: ASU 2016-13 Credit Losses This agenda item is in response to ASU 2016-13, which requires companies to move from a recognized credit loss where losses are recognized when incurred, to an expected credit loss model, where valuation allowances need to be established for available-for-sale and held-to-maturity securities. The SAPWG believes that statutory accounting (STAT) should incorporate an expected credit loss model similar to the GAAP model. They also acknowledge that there are many measurement differences between GAAP and STAT (most investments are held at fair value for GAAP and amortized cost for STAT) as well as complexities like RBC and AVR. These complexities would need to be addressed to transition to a model similar to GAAP so insurers can avoid doublecounting expected losses in their AVR or RBC. The SAPWG directed NAIC staff to prepare a suggested framework that would move STAT to an expected loss model, and indicated that they would evaluate that model and expose it for comment next year. Ref #2017-31: Wash Sale Disclosure This item originally clarified that money market funds are exempt to the wash sale disclosure. Interested Parties want this to expand to have Schedule D Part 2, Section 2 assets excluded from the disclosure as well. Regulators did not comment on whether they have agreed to do this on the call, but the group exposed the proposal and asked for feedback. Ref #2017-25: Wholly Owned Ultra-Short Bond Portfolio in an LLC Series This item started as a sponsored request to create a list similar to SVO-identified funds for limited partnerships. NAIC staff was averse to creating another list of certain assets allowed to be carried on a special schedule and came up with another solution they believe addresses the core issue. They proposed allowing P&C companies to report a designation on Schedule BA for fixed income-like investments, just as Life companies currently can. Since this recommendation affects more than just the SSAPs, the group sent referrals to the VOSTF and BWG to discuss the proposal further. Ref #2017-32: SSAP No. 30 Investment Classification Project The Investment classification project continues after spending three years reviewing SSAP No. 26. The SAPWG now wants to focus on common stock. NAIC staff has recommended that the SAPWG review: 1. The definition of common stock 2. The treatment of closed-ended funds and unit investment trusts 3. Reporting/RBC enhancements in response to referrals from the VOSTF, primarily regarding identification and RBC charges on fund investments Fewer substantive changes are expected from SSAP No. 30 than the changes resulting from SSAP No. 26. The anticipated changes will likely be related to funds, enabling insurers to reduce their RBC charges on those assets in certain situations. Ref #2016-48: Impact of Future Settled Premiums There are several components to this item, which concerns accounting and reporting on derivative contracts using deferred premium payments rather than up-front premiums, as is the case with most derivative contracts. This item was partially adopted to add aggregate disclosures in a narrative format for year-end 2017. These disclosures will provide data to be captured for 2018. The second part of the item concerns adding additional columns to Schedule DB and/or revising guidance within SSAP No. 86 to capture these amounts on a more granular level and clarify treatment, including AVR calculation. This item will be heavily discussed, as Interested Parties have differing opinions on what is necessary for these contracts than the SAPWG.

3 MARKET INSIGHT PAPER Ref #2017-33: ASU 2017-12 Derivatives and Hedging This item was drafted in response to ASU 2017-12, which simplifies hedge accounting requirements, the presentation of hedged items, and the process of hedging instruments in financial statements. Industry is questioning where STAT and GAAP guidance on hedge accounting deviates, especially regarding futures. While changes to align STAT and GAAP hedge accounting can be anticipated, the motion the SAPWG made on the call was to re-open SSAP No. 86 to clarify reporting instructions and discrepancies between STAT and GAAP hedge accounting. The ASU is effective for public companies in 2019, allowing time to work on this item. ADOPTED ITEMS Ref #2016-13: Policy Statement on Coordination with Purposes & Procedures Manual This adoption adds an appendix to the AP&P Manual that details the relationship between the AP&P Manual and the P&P Manual of the NAIC Investment Analysis Office. Interested Parties had no comment on this item. Investment Risk-Based Capital Working Group The IRBCWG held a conference call on October 23 in lieu of meeting at the NAIC Fall 2017 National Meeting to discuss updating the corporate bond factors for Life companies and changes to corporate bond factors for P&C and Health companies. REVISED CORPORATE BOND BASE FACTORS FOR LIFE INSURERS The American Academy of Actuaries (AAA) exposed new C-1 factors on October 10 and discussed the reasons for the differences on the call. The new proposed factors are higher than previously proposed. The AAA also proposed a significant change to portfolio adjustment factors that will resemble what they previously exposed, providing a similar end result to the average life insurer s portfolio.the table below details the updated C-1 factors and the proposed portfolio adjustment factors. Ref #2017-04: Settlement of Variation Margin This agenda item clarifies that changes in variation margin are not settlements until the derivative contract has been sold, matured, and expired. The adoption is effective January 1, 2018, on a prospective basis so entities will not have to reclassify any activity. Ref #2017-08: Extension of SCA Filing Deadlines This adopted item extends the deadline for Sub-1 filings from 30 days to 90 days and Sub-2 filings from June 30 to August 31. It also adds a provision for companies that regularly receive their audited financial reports after August 31; those companies will have one month from the date they received their reports to file their Sub-2. The new deadlines will be in effect January 1, 2018. Ref #2017-24: Use of Net Asset Value Instead of Fair Value This agenda item mirrors GAAP updates that allow use of Net Asset Value (NAV) as a practical expedient to fair value. This guidance primarily applies to mutual funds and will be effective for year-end 2018, although companies will be permitted to use NAV for 2017 year-end reporting as well. While changes to align STAT and GAAP hedge accounting can be anticipated, the motion the SAPWG made on the call was to re-open SSAP No. 86 to clarify reporting instructions and discrepancies between STAT and GAAP hedge accounting. Updated C-1 Factors RATING CURRENT JUN-17 SEP-17 AAA 0.40% 0.22% 0.31% Aa1 0.40% 0.32% 0.43% Aa2 0.40% 0.44% 0.57% Aa3 0.40% 0.56% 0.72% A1 0.40% 0.68% 0.86% A2 0.40% 0.82% 1.06% A3 0.40% 0.98% 1.24% Baa1 1.30% 1.13% 1.42% Baa2 1.30% 1.32% 1.69% Baa3 1.30% 1.57% 2.00% Ba1 4.60% 2.88% 3.75% Ba2 4.60% 3.74% 4.76% Ba3 4.60% 4.89% 6.16% B1 10.00% 5.07% 6.35% B2 10.00% 6.89% 6.54% B3 10.00% 9.45% 11.82% Caa1 23.00% 13.87% 17.31% Caa2 23.00% 19.02% 23.22% Caa3 23.00% 29.06% 30.00%

4 MARKET INSIGHT PAPER Proposed Portfolio Adjustment Factors CURRENT PA FORMULA # OF ISSUERS FACTOR Up to 50 2.5 Next 50 1.3 Next 300 1.0 Over 400 0.9 RECOMMENDED PA FORMULA # OF ISSUERS FACTOR Up to 10 7.8 Next 90 1.75 Next 100 1.0 Next 300 0.8 Over 500 0.75 CHANGES TO CORPORATE BOND FACTORS FOR P&C COMPANIES The AAA exposed a possible starting point for P&C and Health factors. The factors were developed by applying several adjustments to the AAA s Life model that do not include any adjustment for the shorter duration of an average P&C portfolio, nor for the carrying value difference in NAIC 3-5 bonds. Because of the imprecise nature of these factors, adjustments are expected. The current Health RBC formula does not include a portfolio adjustment factor, and the IRBCWG also discussed whether one should apply. The updated academy report was exposed for a comment period ending January 22, 2018. RBC CHARGE FOR SVO-IDENTIFIED FUNDS The IRBCWG proposed three ideas for how RBC charges on SVO-identified funds should be calculated: 1. Each fund would count as one issuer. This is how the investments are currently treated, but this method undersells the diversification benefit of investing in a bond fund and may provide a disincentive for companies to invest in these assets. If the AAA s current proposal of increased-based factors and lower portfolio adjustments are adopted, this will be especially true. 2. SVO-identified funds would have separate factors reflective of the risk that each designation class proposes. These would likely be significantly lower than the base factor for a single bond with the same rating. 3. The fund would receive credit on the number of issuers based on the size of the insurer s investment in the fund. For example, if an insurer had 2% of their portfolio in a particular fund and that fund had 1,000 issuers, the insurer could count 20 issuers in their portfolio adjustment calculation. Regulators did not express a strong preference for which method they prefer, but Industry will most likely advocate for the second or third options. PROPOSAL TO MODIFY FACTOR FOR REAL ESTATE ASSETS A proposal by the American Council on Life Insurance (ACLI) to modify the factor for real estate assets for Life and Fraternal companies was also discussed. There are four parts to the ACLI s proposal: 1. Revise the factor on Schedule A to be 10% 2. Revise the factor for encumbrances to be consistent with the commercial mortgage loan framework adopted in 2013 3. Add an adjustment to reflect unrealized gain/loss in real estate assets 4. Revise the factor on Schedule BA Real Estate to be 10% on a look-through basis, equivalent to the factor on Schedule A The AAA has reviewed the ACLI s proposal and raised some concerns around some of the data and conclusions in the proposal. Regulators also had questions about certain aspects of the proposal but noted they might consider lowering the factor on either schedule and adding additional adjustments. The IRBCWG agreed to have additional calls on this topic so the AAA can have an in-depth discussion on the ACLI s proposal. Valuation of Securities Task Force The VOSTF held a conference call on November 13 in lieu of meeting at the NAIC Fall 2017 National Meeting. During the call updates on the Z designation rule, FE enhancements, full faith credit lists, and more were discussed. UPDATE ON PROPOSAL TO MODERNIZE THE Z DESIGNATION RULE The NAIC presented a proposal to refine the Z designation process. The proposal retains the use of the Z designation for new purchases, but introduces new processes for securities that are transitioning filing statuses or are still under review by the SVO. The SVO is in the process of compiling a list of all properly filed securities it will not be able to rate before year-end. According to their proposal, a YE symbol would be assigned to these securities and the previous designation in the Automated Valuation Service+ (AVS+) system could be used for year-end reporting. For all properly filed initial filings that

5 MARKET INSIGHT PAPER the SVO cannot rate before year-end, insurers would selfdesignate the security for year-end and append an IF suffix. Both suffixes would be removed when the SVO assigns the designation and publishes in the AVS+ product. A referral was sent regarding this proposal to the BWG, and the proposal was released for a 30-day comment period. The VOSTF would like this change in place for 2018 reporting. UPDATE ON FE ENHANCEMENT PROJECT The VOSTF continues to develop a process for times when an insurer disagrees with the AVS+ designation for privatelyrated securities. The current proposal for privately-rated securities is as follows: 1. Private letter (PL) ratings are now specifically included in the filing exempt rule, and the process for PL securities is included with the filing exempt (FE) instructions 2. The proposal transfers responsibility for assignment of FE designations to the SVO through the AVS+ product 3. The proposal creates a new 5* interrogatory for PL securities issued on or after January 1, 2018; a proposal will be brought forth for securities issued prior to that datewhere an insurer cannot disclose the rating to the NAIC A few clarifications were added regarding the scope of the PL process: 43R securities will be excluded from the scope of the PL process, and the VOSTF doesn t anticipate PL securities to go through the YE / IF process since they are rated by a nationally recognized statistical rating organization (NRSRO) and not required to be filed with the SVO. A flowchart is available on the VOSTF s website to help insurers visualize and understand this process. Other adopted changes that relate to the PL process include the removal of the IAO s authority to ignore a credit rating of a Credit Rating Provider (CRP), and the authority of the SVO to require an insurer to file a security rated by a CRP. Regarding discrepancies between what is in the AVS+ product and what insurers believe is the correct designation for a security, Industry and the VOSTF believe an informal process is best, and the SVO is currently working on an informal process for discussion. Insurers have been opposed to the idea of an RE designation suffix, as they are worried it would carry a negative connotation with their regulators and auditors. Industry worries that they will be required to spend extra time verifying that what they filed is correct. FULL FAITH AND CREDIT LIST Earlier this year, the SVO added approximately 40 funds to the U.S. Direct Obligations/Full Faith and Credit Exempt list that do not qualify for the list. After reviewing these funds, the SVO is recommending a change in guidance that would allow these funds to be added to the list, and change the name of the list to the U.S. Obligations Exempt List. This would allow funds that invest in government-sponsored enterprises to be added to the list. The revisions were exposed for a 30-day comment period. SCHEDULE BA PRIVATE FUNDS This agenda item clarifies that fund investments may have the underlying characteristics of fixed income investments if they meet the following criteria: 1. Predominantly holds debt 2. Either receives a public rating from a CRP or is given a designation by the NAIC Under this new clarification, companies can receive designations on Schedule BA investments that function like fixed income and receive a more favorable RBC charge and AVR treatment. Several members of Industry would like the allowed treatment for Life companies to be extended to P&C and Health companies so that they too may benefit from an RBC charge that accurately reflects the risk of the investment; however, this will require input from other working groups. Blanks Working Group The BWG held a conference call on November 9 in lieu of meeting at the NAIC Fall 2017 National Meeting to discuss private letter and reporting exception designations for bonds and preferred stocks, categories for bank loans, and more. WITHDRAWN PROPOSAL New PL/RE Designation for Bonds and Preferred Stocks Item #2017-07BWG proposed that designations be added to the Designation Column of Schedules D and BA. The designations would be effective during the first quarter of 2018 and would reflect PL and RE suffixes for bonds and preferred stocks. However, due to changing requirements and implementation dates, both Industry and the VOSTF requested that the current proposal to the BWG be withdrawn. The VOSTF will make final revisions to the P&P Manual and submit a new proposal to the BWG. The VOSTF continues to develop a process for times when an insurer disagrees with the AVS+ designation for privately-rated securities.

6 MARKET INSIGHT PAPER ADOPTED EDITORIAL REVISIONS Added Code to Preferred Stock Designation Matrices The BWG updated the preferred stock designation matrices of the investment schedule instructions to include acceptable designations using the General Interrogatory suffix: P5*GI P5*AGI P5*LGI P5*UGI P5*VGI RP5*GI RP5*AGI RP5*LGI RP5*UGI RP5*VGI For the holdings report (Schedule D Part 2, Section 1), these additional designations are effective for annual 2017 reporting. For the Activities reports (Schedule D Parts 3 and 4), these additional designations are effective for quarterly 2018 reporting. EXPOSED FOR COMMENT Update on Combined Life/Fraternal Annual Blanks The BWG previously received a request from Industry during the NAIC Spring 2017 National Meeting to combine the Life and Fraternal blanks. The BWG heard an update on the combining of the annual financial statement blanks, which included responses to memorandums sent to applicable NAIC working groups and task forces. After reviewing these responses, NAIC staff will develop a draft proposal of the combined blanks and consult with Industry for initial comments. The BWG has proposed adding new category lines to distinguish bank loans on the Schedule D Parts 1, 3, 4, and 5, Schedule DA, Schedule DL Parts 1 and 2, and Schedule E Part 2, as well as adjust resulting category line number references. Item #2017-24BWG: Added Category Lines for Bank Loans Due to changes made to SSAP No. 26R by the SAPWG, the BWG has proposed adding new category lines to distinguish bank loans on the Schedule D Parts 1, 3, 4, and 5, Schedule DA, Schedule DL Parts 1 and 2, and Schedule E Part 2, as well as adjust resulting category line number references. The proposed changes would be effective for annual 2018 reporting, and applicable to all insurers that hold bank loan securities. The comment deadline for this change is February 26, 2018. Item #2017-25BWG: Added Language for Restricted Cash The BWG also exposed changes made to the cash flow statement as a result of changes made by the SAPWG to SSAP No. 69 Statement of Cash Flows. The proposed changes would modify the annual statement instructions for all insurers to clarify inclusion of restricted cash or restricted cash equivalents in beginning and ending balances in the cash flow statement. These changes would be effective for annual 2019 reporting, and commentary on this item ends February 26, 2018.

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