1. Rethinking Portfolio Management Based on New Regulation
Mark Yu, Enterprise Risk and Capital Management Professional, NEAM
Tip Tipton, Accounting Policy Manager, Thrivent Financial

2. Rethinking Portfolio Management Based on New Regulation
Impact of the 2017 Tax Cuts and Jobs Act
No impact to Fraternals !?
Items to consider:
Life PBR exemption…unintended consequences!
The RBC formula includes a ‘tax effect’ for Fraternals…and that’s a good thing!
How do you determine your fraternal expense?
How do you manage your capital and corresponding regulatory requirements (e.g. RBC; BCAR; other)?

3. Rethinking Portfolio Management Based on New Regulation
Life PBR Exemption - Conditions for Exemption (per 2018 Valuation Manual):
The company has less than $300 million of ordinary life premiums and, if the company is a member of an NAIC group of life insurers, the group has combined ordinary life premiums of less than $600 million;
The company has reported total adjusted capital of at least 450% of the authorized control level RBC as reported in the prior calendar year annual financial statement, or has less than $50 million of ordinary life premiums;
The appointed actuary has provided an unqualified opinion on the reserves for the prior calendar year;
Every ULSG policy issued or assumed by the company with an issue date on or after Jan. 1, 2020, and in force on the company’s annual financial statement for the current calendar year-end valuation date only has secondary guarantees that meet the VM-02 definition of a “non-material secondary guarantee.”

4. Rethinking Portfolio Management Based on New Regulation
Life RBC Working Group (LRBCWG)
Address the changes necessitated for the life and fraternal RBC factors and instructions by the implementation of the Tax Cuts and Jobs Act.
L-Life RBC Tax Proposal was exposed for 40 days with a comment due date of Tuesday, June 5th. (161 pages!)
The tax effect has been adjusted to reflect the current tax rate adjusted for certain effects from DTAs.
The RBC factors have been reduced to approximate the offset in the reduction of the tax rate.
Overall, the lowering of the RBC factors is not enough to completely offset the lowering of the tax rate, meaning required capital increases and RBC ratios decrease for 2018!

6. Rethinking Portfolio Management Based on New Regulation
Investment RBC Working Group (IRBCWG)
Bond factors are increasing from 6 to 20
Expected to be effective for year-end 2019
The effect will (most likely) increase your C-1 risk and decrease your overall RBC ratio.
Bond ETF impact on the Portfolio Adjustment Factor
Proposed bond factors being recalculated to accommodate the revised tax rates

7. Base C1 Factors for Corporate Bonds for the Life RBC Formula
Appendix A
Base C1 Factors for Corporate Bonds for the Life RBC Formula
Before Tax, Direct Model Output
Current August 2015 June Sept 2017
Aaa 0.40% % % %
Aa % % % %
Aa % % % %
Aa % % % %
A % % % %
A % % % %
A % % % %
Baa % % % %
Baa % % % %
Baa % % % %
Ba % % % %
Ba % % % %
Ba % % % %
B % % % %
B % % % %
B % % % %
Caa % % % %
Caa % % % %
Caa % % % %*

8. Portfolio Adjustment Factors
Appendix B
Portfolio Adjustment Factors
Current PA Formula Recommended PA Formula Recommended PA Formula
(June 2017) (September 2017)
Issuers Factor Issuers Factor Issuers Factor
Up to Up to Up to
Next Next Next
Next Next Next
Over Next Next
Over Over

9. Rethinking Portfolio Management Based on New Regulation
Statutory Accounting Principles Working Group (SAPWG)
Credit Losses ( )
Common Stock ( )
NAIC Designations?
Bank Loans ( )
Borrowing Base Loans
Debtor In Possession (DIP)
Revolving Credit Facility

10. Rethinking Portfolio Management Based on New Regulation
Valuation of Securities Task Force (VOSTF)
Updated administrative symbols for NAIC Designations
PL; PLGI; YE; IF; Z