1. NASVA Executive Committee VOSTF, SAPWG & Investment Project Update Kevin Fry, Chair of the Valuation of Securities Task Force Julie Gann, NAIC Senior Manager II – Accounting & Reporting 1

2. Illinois Deputy Director of Financial and Corporate Regulatory * Serves as Chair of the Following NAIC Groups: Valuation of Securities Task Force, Risk-Limiting Contracts (E) Working Group and the Investment Risk-Based Capital (E) Working Group * Serves as a Member / Rep for the Following NAIC Groups: Statutory Accounting Principles (E) Working Group, Reinsurance (E) Task Force, Surplus Lines (E) Task Force, Accounting Practices & Procedures (E) Task Force, Risk Retention Group (E) Task Force, Creditor-Placed Insurance Model Act Review (C) Working Group, Surplus Lines (C) Working Group, Financial Analysis (E) Working Group, Group Capital Calculation (E) Working Group, Group Solvency Issues (E) Working Group, ORSA Implementation (E) Subgroup, and Investment Reporting (E) Subgroup 2

3. NAIC Senior Manager II – Accounting & Reporting * Supports SAPWG * Supports Restricted Asset (E) Subgroup * Provides technical & advisory services in the areas of SAP, GAAP & IFRS * Joined NAIC in February 2001. Prior Positions Include: * NAIC Financial Examination Manager * NAIC International Insurance Accountant * Public accountant and insurance examiner consultant * CPA, FLMI, ARA and AIRC; Member of AICPA & MSCPA 3

4. Related Projects – SAPWG and VOSTF 1. Investment Classification Project * SSAP No. 26 – Equity Investments * SSAP No. 26 – Security / Bank Loan Definitions * SSAP No. 43R – Definition of LB&SS 2. Surplus Notes – Referral to VOSTF 3. SAPWG & VOSTF Policy Statements 4. 5* Securities – SAPWG Referral Response 5. SSAP No. 97 – TF Referral Response & SAP Revisions 6. Short Sales 4

5. Originated in 2013 after receiving questions on definitions and scope of bond and equity SSAPs. * Definitions vary from market definitions * Inconsistent interpretations of definitions * “Look-through” allowed for some investments * Reporting inconsistencies (measurement / schedules) * Different treatment for similar investments 5

6. Reporting Preference for Bond Classification: * Ability for Amortized Cost (Reduce Volatility) * Lower RBC * Ability to Use FE * Possible “Bond” Classification under Investment Laws (SSAP No. 26 classification does not necessarily mean that the investment is a bond under state investment laws.) 6

7. Explicit Guidance for SVO-Identified Equity Items: * Exchange-Traded Funds * Bond Mutual Funds * Exempt Money Market Mutual Funds (Class 1 List eliminated – effective Sept. 30, 2016) Proposed guidance clarifies these items are not “bonds” but in scope of SSAP No. 26. Also clarifies that inclusion in SSAP No. 26 is not intended to contradict state law. Only “bonds” under state law if investment law allows. PROPOSAL UNDER DISCUSSION 7

8. Key Elements on Proposed Guidance * Initially reported at cost, including brokerage and other related fees. (Consistent with other investments.) * Subsequently, required at fair value (NAV as a practical expedient) unless entity elects use of a documented approach to determine “systematic value” * “Systematic Value” – ONLY permitted for the specific SVO-designated equity investments in SSAP No. 26. Systematic Value Systematic amortization of underlying bond holdings 8

9. Systematic Value Proposed to be Limited As Follows: * Only Permitted for NAIC 1-5 (AVR) and 1-2 (Non-AVR) * Irrevocable Election by Equity Investment (CUSIP) * If Owned Prior to SVO-Designation = SSAP No. 3 * SV Designation Must Remain until:  Investment is no longer SVO-Identified  Investment is not at an allowable NAIC designation  Investment is FULLY sold by reporting entity 9

10. If No Longer Qualifying as Systematic Value: * Reported at Lower of S ystematic Value or Fair Value Unrealized gains are prohibited if investment was previously reported at “systematic value” * Documented approach:  Must be reviewable, with regulator ability to disallow  In ALL situations, an approach that continuously reflects “historical cost” or “original cost” is not acceptable. PROPOSAL UNDER DISCUSSION 10

11. Additional Component for the Equity Instruments: * Impairment Guidance  No “Contractual Terms of Debt Security”  Impairment guidance proposed based on SSAP No. 30  After OTTI Recognition: Subsequently at lower of Systematic Value or Fair Value Unrealized gains are prohibited if investment was previously reported at “systematic value” PROPOSAL UNDER DISCUSSION 11

12. Specific Disclosures for Equity Instruments: * If electing use of the systematic value:  Whether the reporting entity consistently uses SV, or whether some equity investments are at SV and others are at FV and why different methods are used.  Whether securities sold, and subsequently reacquired, are held at a different method than prior to the sale.  Securities no longer qualifying for systematic value. PROPOSAL UNDER DISCUSSION 12

13. Discussion of Proposed “Systematic Value” * Application – Will companies just use Fair Value (NAV)? * Effective Date – How much time to implement? * Errors – Why are so many ETFs reported incorrectly?  ETFs are not being filed with SVO.  Filed ETFs are being reported with wrong NAIC designation.  ETFs required to be at FV are reported at amortized cost. 2015 Data: 46% of reported SVO-Identified ETFs Incorrect (A 10% increase in errors from prior year) 13

14. Reporting Worsened between 2014 and 2015: 2014 - 36% - 148 ETFs Incorrectly Reported 2015 - 46% - 214 ETFs Incorrectly Reported Reported with NAIC Designation when NO Designation Exists: 2014 - 27% - 110 ETFs Reported with NAIC Designation 2015 - 35% - 161 ETFs Reported with NAIC Designation Reported with Incorrect NAIC Designation (Designation Exists): 2014 - 9% - 38 ETFs With Incorrect NAIC Designation 2015 - 16% - 53 ETFs With Incorrect NAIC Designation In 2015, Only 54% Reported Correctly 14

15. Inclusion of “Security” Definition: Bonds shall be defined as any securities representing a creditor relationship, whereby there is a fixed schedule for one or more future payments. Application of GAAP “Security” definition: * Already included in SSAP No. 37. * No comments objecting to inclusion. 15

16. Security: A share, participation, or other interest in property or in an entity of the issuer or an obligation of the issuer that has all of the following characteristics: * It is either represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer. * It is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment. * It either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations. 16

17. Discussion of “Security” Definition: * Will inclusion of “security” definition impact inclusion of items within SSAP No. 26? (Not yet adopted for inclusion – detailed in Issue Paper.) * Concerns if included / effective for year-end 2016? * Could inclusion result in unintended consequences? 17

18. Remove Reference to “Bank Loans” and Consider: * Loan Participation – Fixed income transaction in which a single lender makes a large loan to a borrower and subsequently transfers (sells) undivided interests in the loans to other entities.  Generally Non-Recourse  Originating Lender Services Loan  Participant May Not Have Right to Sell or Transfer  Participation can be Senior / Subordinated 18

19. Remove Reference to “Bank Loans” and Consider: * Loan Syndication – Fixed income transaction in which several lenders share in lending to a single borrower. Each lender loans an amount to the borrower and has right of repayment from borrower.  Separate Debt Instruments Exist  Each Lender Accounts for Amounts Owed  Lead Lender May Function as Servicer, but Does Not Report Aggregate Loan as Asset 19

20. Discussion of Loan Participation & Loan Syndication: * Impact from Removal of “Bank Loans” reference? * Should Participations and Syndications be treated similarly? * What differences (if any) should be considered?  Impact of Non-Recourse Provisions (Participations)  Ability to Sell / Transfer Loan (Participations)  Filing Requirements (Assessing Credit Risk)  Subordinated / Senior Status (Participations)  Determination of NAIC Designation 20

21. Discussion of Additional Terms for SSAP No. 26: * Loan Assignment – Sale and transfer of the rights and obligations of a lender under an existing loan agreement to an insurer as a new lender. Insurer becomes the direct creditor of the borrower having the sole right to enforce rights under the loan agreement. * DIP Loans – Post-petition loan to a company that has filed for protection under Chapter 11 Bankruptcy. Court order must approve the financing. (Reflects a first preferred interest – often with collateral.) DIP = Debtor-In-Possession 21

22. Valuation of Securities (E) Task Force Exposure: * Reconsider the 2010 LB&SS Definition in SSAP No. 43R Discussion: 2010 SSAP No. 43R Definition Amendments: Incorporated “trust” concept for SSAP No. 43R Securities.  Did the 2010 revisions result in classification changes in investments between SSAP No. 26 or SSAP No. 43R?  What classes of investments were most impacted?  Is there a preference for SSAP No. 26 or SSAP No. 43R based on type of investment? 22

23. Similarities between SSAP No. 26 & SSAP No. 43R * Schedule D-Part 1 / RBC Charges * General Measurement Method (AC / Lower of AC or FV) Differences between SSAP No. 26 & SSAP No. 43R 43R – Assessment of Cash Flows 43R – Accretable Yield 43R – Bifurcated Impairment 43R – Financial Modeling 43R – AVR / IMR Bifurcation Which, if any, should be eliminated from SSAP No. 43R, or included in SSAP No. 26? 23

24. Valuation of Securities (E) Task Force Exposure: * Proposed concept for 43R - dynamic cash flow pattern: Legal Isolation and pooling of a finite number of cash generating assets from different obligors, in a trust, in which the cash flows from the collateral assets is used to pay the holders of the securities. Proposed New Name for LB&SS: Structured Finance Securities 24

25. Valuation of Securities (E) Task Force Exposure: * Structured Finance Security: An issuer, typically an SPE, 1) Sells LB or SS and uses the proceeds to purchase a pool of assets, including derivatives, from one or more originators. 2) Places the assets within a trust that serves as trustee for the benefit of the holders of the LB&SS with instructions that use the cash flow generated by the assets to pay the holders of the SPE’s LB&SS. Closed asset pool contains multiple unrelated obligors. The default of an asset pool obligor permanently impairs the cash flow generating ability of the asset pool. 25

26. Valuation of Securities (E) Task Force Exposure: * Structured Finance Security: An issuer, typically an SPE, 1) Loan-backed Securities: Servicing intermediary collects payments from the asset pool obligors and remits or passes them through to holders of the securities so that payment of interest and/or principal to each SPE noteholder is directly proportional to the payments received by the issuer from the underlying assets. 2) Structured Securities: Divided into two or more classes in which payments from the asset pool obligors are distributed under specified contractual instruments. Allocated payments are not proportional to payments received from the assets. 26

27. Discussion: VOSTF Exposed Definition:  Elements of definition specifically supported?  Elements of definition that initially cause concern?  Will the proposed definition result in classification changes between SSAP No. 26 / SSAP No. 43R?  Are that other elements that should be included within the proposed definition? Current Exposure at VOSTF until June 3, 2016. Discussion will occur at that Task Force, with subsequent referral to the SAPWG. Possible interim VOSTF discussion. 27

28. SSAP No. 21—Other Admitted Assets - (collateral loans) SSAP No. 30—Investments in Common Stock SSAP No. 32—Investments in Preferred Stock SSAP No. 37—Mortgage Loans (participations) SSAP No. 48—Joint Ventures, Partnerships and LLCs 28

29. Collateral Loans (Not captured in “Bond” definition) * Unconditional obligations for the payment of money secured by the pledge of an investment. * Outstanding principal balance and related accrued interest are recorded as admitted assets if:  Loan is not deemed impaired.  Loan is secured by assets that qualify to be investments. (Only portion of loan secured is allowed to be admitted.) * On Schedule BA – NAIC designation does not impact reporting. Discussion: Is further consideration needed on collateral loans? 29

30. * Revisit and Update Definitions: Redeemable / Perpetual / Mandatory-Sinking / PIK * Classification and Reporting of “Funds” Currently ONLY Mutual Funds Included in SSAP No. 30 * Consider Measurement Changes Preferred Stock – Clarify Measurement Method Differs by Type of Reporting Entity / NAIC Designation * Reporting Revisions Include NAIC designation - Funds 30

31. 2015 Initial Data Review: * 7,945 individual records reported on the Schedule D-2-1 reflecting 1,379 securities. * Of the 1,379 records, 563 (40.8%) were reported with multiple NAIC Designations. (Some with as many as 10 different NAIC designations.) * If only looking at the 775 CUSIPS that are reported by more than one insurance companies, then 455 out of 775 CUSIPS (58.7%) reported multiple NAIC Designations Variations include actual NAIC designation and whether the preferred stock is perpetual or redeemable 31

32. SSAP No. 37 – Accounting for Participating Mortgages Excludes “securities” from mortgage loan definition. Definition of “Securities” includes “participation” Discussion: What other elements needed for SSAP No. 37? Thoughts on the request to address participating mortgages? SSAP No. 48 – Joint Ventures, LLC and Partnerships Intended for equity investments Impact of RBC based on Reporting Entity Discussion: What other elements needed for SSAP No. 48? 32

33. 2016 Reporting Impact: * Schedule D-1: Subcategories for SSAP No. 26 Equity items * Elimination of Class 1 Mutual Funds Current Discussions: * SSAP No. 26 – Expected SAPWG Exposures (“Equity” items) * SSAP No. 43R – Current VOSTF Exposure * SSAP No. 32 – NAIC Evaluating 2015 Filing Results 33

34. SSAP No. 41R – Adopted 2016 Spring NM * Revised Measurement Method for Surplus Notes * Effective Date: January 1, 2017 Referral to VOSTF: * Revise P&P Manual for updated measurement method * Retain filing requirements Surplus notes receive NAIC designation based on CRP equivalent, but are filed to verify NAIC designations. 34

35. Key Change: Measurement Method Revisions * NAIC 1 and NAIC 2 = Amortized Cost * All Other and Non-Rated = Lower of Amortized Cost or Fair Value Change from “Outstanding Face Value / Statement Factor Other Changes: * Clarification of Nonadmittance / Unrealized Losses * Addition of Impairment Guidance * Reference to SVO Guidance for NAIC Designations 35

36. Clarification of Nonadmittance / Unrealized Losses * Valuation changes are unrealized changes * Limits or regulatory actions result with nonadmittance Other-Than-Temporary Impairment Guidance * Similar to other guidance, but identifies that extended delays of payment shall trigger an OTTI evaluation Reference to SVO Guidance * Guidance on use of the “second-lowest” designation has been incorporated into the P&P Manual and removed from the SSAP. 36

37. NAIC Designation “Second Lowest” * ALL available CRP ratings are required to be obtained. * After obtaining all available CRP ratings, the ratings will be ordered, according to their equivalents, and the rating falling second lowest will be selected, even if that rating is equivalent to that of the first lowest. (If there are only two CRP ratings, the lowest is used.) NAIC 1 NAIC 2 NAIC 3 NAIC 2 NAIC 1 NAIC 2 NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 3 NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 NAIC 5 37

38. New Policy Statements – Exposure Period Ended (SAPWG – May 20 / VOSTF – May 22) Coordination and Communication of SVO & SAPWG: * NAIC designations do not communicate SAP status * SAPWG is source for statutory accounting guidance * SVO can assign designation to any filed asset or obligation * SAPWG and SVO staff should maintain ongoing dialogue Identify issues and new instruments and bring to TF / WG 38

39. Definition / Elements:  NAIC 5* Assigned by the SVO when an insurer certifies that: 1. Documentation for a full credit analysis does not exist. 2. Issuer or obligor is current on all contractual interest and principal payments. 3. Insurer has actual expectation of ultimate payment of all contractual interest and principal.  NAIC 5* receives same treatment as NAIC 5. NAIC 5 – SSAP No. 26 / 43R: AVR Filer = Amortized Cost Non-AVR Filer = Lower of Cost or FV 39

40. Definition / Elements:  NAIC 6* SVO or Self-Assigned when: 1. Documentation for a full credit analysis does not exist. 2. Does not have certification for an NAIC 5* a) Cannot certify obligor is current on interest and principal payments b) Cannot certify expectation of ultimate payment 3. Received 5* in prior year but did not file Subsequent Report. NAIC 6 – SSAP No. 26 / 43R: AVR Filer = Lower of Cost or FV Non-AVR Filer = Lower of Cost or FV 40

41. Referral to SAPWG:  Highlights concerns on population growth of 5* securities. 435% increase from 2011 to 2014  Highlights concerns with admitted asset standards. Is asset available for policyholder claims? VOSTF Referral Request: SAPWG to evaluate accounting and reporting impact of removing the SVO from the application of the 5*/6* Rule by allowing insurer’s to provide similar certification in the general interrogatories within the statutory statements. 41

42. SAPWG Referral Response – Directed to VOSTF 2016 Spring NM  SAPWG will consider new disclosure for 5* securities o Comparative disclosure (current and prior year) to provide info on the number of, with BACV and FV of these securities. o Disclosure exposed at SAPWG and Blanks WG.  Further statutory accounting revisions not considered necessary at this time if the Task Force proceeds with the proposed SVO 5* designation process change. Next Steps: * VOSTF to consider adoption of 5* process change. * If adopted, separate blanks proposal to add GI certification. 42

43. Four Agenda Items Adopted in 2015 * Revisions intend to clarify and improve application: * Ref #2015-08 – Improve consistency in guidance Nonadmitted assets and valuation of SCAs * Ref #2015-32 – Clarification of paragraphs 10-12 Application of “equity” method * Ref #2015-25 – New SCA Disclosure for 2015 Inclusion of filing guidance * Ref #2015-26 – Rejection of GAAP guidance (Not Detailed in Slides – Pertains to Consolidation) 43

44. Overview of SSAP No. 97 Accounting: 8.a: Market Value – Must Qualify and Be Elected Traded on NYSE, ASE, NASDAQ, or Tokyo Stock Exchange 8.b: Equity Methods: * 8.b.i – Statutory Equity U.S. Insurance SCA – Statutory Financial Statements * 8.b.ii – Adjusted GAAP Equity – Limited SAP Adjustments Noninsurance SCAs Meeting Revenue and Activity Tests * 8.b.iii – GAAP Equity Noninsurance SCAs NOT Meeting Revenue and Activity Tests * 8.b.iv – GAAP Equity / Foreign Basis – Limited Adjustments Foreign insurance SCAs 8.a. - Exchanges to be Updated 44

45. Nonadmitted Assets and Valuation of SCAs * Revisions reference SSAP No. 25, paragraph 16d directly in SSAP No. 97. This inclusion clarifies that “audited GAAP equity” shall be adjusted per SSAP No. 25. Addresses situations in which companies are uncertain whether they should adjust “audited GAAP equity” as that measurement is explicitly used in SSAP No. 97. SSAP No. 25, paragraph 16d: Transactions which are designed to avoid statutory accounting practices shall be reported as if the reporting entity continued to own the assets or to be obligated for a liability directly instead of through a subsidiary. 45

46. Nonadmitted Assets and Valuation of SCAs * Revisions require disclosure of permitted or prescribed practices in the value of insurance reported SCAs (8.b.i). Addresses questions on whether the “statutory financials” can be adjusted to remove permitted or prescribed practices in the value reported by the parent insurer. Revisions Allow EITHER: * Audited statutory equity per statutory financials with disclosure of any permitted or prescribed practices, or * Audited statutory equity adjusted to remove permitted or prescribed practices that depart from the NAIC AP&P Manual. 46

47. Nonadmitted Assets and Valuation of SCAs * Clarifies “limited” statutory revisions if meeting the revenue and activity test, and adds statutory adjustments. Addresses questions on whether adjustments are intended to reflect “full statutory financial statements” for qualifying 8.b.ii entities as well when adjustments are needed Revisions Require Nonadmittance Adjustments in SCA: * SSAP No. 21 (e.g., collateral loans), SSAP No. 105 (WCFI), and for surplus notes held by SCA issued by reporting entity. * Also, depreciation adjustments for assets under SSAP No. 68 47

48. Application of Equity Method * Overlap of paragraphs based on type of “equity method” caused confusion on differences in the paragraphs. Also, guidance for dividends seemed contradictory. Addresses questions mostly by reorganizing guidance * Paragraph 10 – Applies to all equity filers and provides guidance for recording the investment at initial acquisition. * Paragraph 11 – Equity guidance for subsequent reporting. * 11a: Specific guidance for 8.b.i – U.S. Insurance SCAs (SAP Equity) * 11b: Specific guidance for non-8.b.i entities (GAAP Equity) * Paragraph 12 – Guidance for market-value (8.a) entities 48

49. New SCA Disclosure * Disclosure details the reported value of the SCA as well as information received after filing the SCA with the NAIC. Disclosure Initially Required Dec. 31, 2015 New Agenda item Exposed Spring 2016 NM: * Data-captures disclosure * Incorporates revisions to include ownership percentage of SCA * Includes instructions to assist with completing disclosure and identifying materials difference since the SCA was filed. NAIC Filing: Submitted in June, with prior year audited F/S of SCA Insurer Reported Value: Based on current year investment info of SCA 49

50. Key Information for Filing SCAs: * Equity SCAs within scope of SSAP No. 97, except 8.b.i entities, shall be filed. 8.b.i = U.S. Insurance SCA already file statutory financials with NAIC Equity = Common or Preferred Stock meeting “control” threshold * Joint Ventures, Partnerships and LLCs are within scope of SSAP No. 48 and are not filed. * No current exclusions for nonadmitted / immaterial SCAs Completeness = NAIC is tasked with providing info on non-filed SCAs * New Database “VISION” will greatly improve SCA Filings!! 50

51. February 2016 – Task Force Referral Response: * Agrees that the SCA filing instructions should be moved into SSAP No. 97 or other statutory accounting guidance. * Will amend the P&P Manual to delete filing instructions. Will retain explicit filing requirement, but add reference to location for instructions. * Despite initial opposition, ACLI agrees that the SCA instructions should be transferred pending identification of a suitable location. SAPWG 2016 Spring Exposure – Incorporate in SSAP No. 97 appendix 51

52. Proposes explicit statutory accounting guidance for short sales - substantively revising SSAP No. 103. Short Sale: * Sale of security that the selling entity does not own. * Normally settled by delivering borrowed security. * Seller purchases security to return to lender. * Risk of loss when market price of security increases. Short Sale = ACTION (Does not create new financial instrument) 52

53. Proposed Statutory Accounting * Obligation reported as contra-asset (negative asset) * Shown in investment schedule for type of asset sold. * Reported at fair value, with unrealized gains/losses * Gains/losses recognized at settlement. * “Secured Borrowing” guidance for borrowing securities. Adopts GAAP guidance except for contra-asset reporting 53

54. SAPWG Discussion / Exposure * Issue Paper Exposed 2015 Fall NM * Concurrent IP and SSAP No. 103R Exposed Spring 2016 o Reflects comments from initial exposure * Discussion expected Interim or at 2016 Summer NM * Expected Effective Date: January 1, 2017 54

55. 1. Investment Classification Project * SSAP No. 26 – Equity Investments * SSAP No. 26 – Security / Bank Loan Definitions * SSAP No. 43R – Definition of LB&SS 2. Surplus Notes – Referral to VOSTF 3. SAPWG & VOSTF Policy Statements 4. 5* Securities – SAPWG Referral Response 5. SSAP No. 97 – TF Referral Response & SAP Revisions 6. Short Sales Additional Discussion Points? 55

56. VOSTF, SAPWG & Investment Project Update Kevin Fry, Chair of the Valuation of Securities Task Force Julie Gann, NAIC Senior Manager II– Accounting & Reporting 56