1. PBR Me ASAP? Kip Headley & Mark Oiler February 25, 2015

2. Disclaimer! We don’t speak for The Principal. In fact, the company would rather we didn’t say anything at all and may deny even knowing the speakers. The comments and insights are our own and don’t represent the official position of our employer, the Iowa Actuaries Club, Drake University, etc. We didn’t make this stuff up; we believe our comments to be correct. Still, you’d be a fool to rely on us explicitly without doing your own research and making your own decisions. Nothing in this presentation constitutes legal, investment or tax advice. If you think it does, you read way too much into our remarks. If you want to reproduce this presentation or copy it, knock yourself out.

3. PBR Me ASAP? Agenda PBR – History & Status Update Captive Reinsurance Concerns Actuarial Guideline 48 Future?

4. PBR - Timeline –July 2004 – LRWG formed to develop a new principle-based valuation standard for life insurance products –Early 2006 - Goal – adopt new standard in 2007 –Early 2007 - Goal – adopt new standard in 2010 –September 2009 - Revised SVL adopted (allows a PBA for reserves) –November 2010 – 34 companies participate in impact study of VM-20

5. PBR Timeline - Continued May 2011 –PBR Study completed by August 2011 NAIC meeting –Expected State Adoptions of VM-20 in 2012 and 2013 –Effective 1/1/2014 – Prospective Only ACLI Board Resolution December 2012 – NAIC Adopted Valuation Manual –Hearty objections from NY –43 votes in favor

6. Other PBR Timeline – Fun Facts Pabst Brewing Company 1844 founded in Milwaukee 1859 - Frederick Pabst married into the family 1893 got it’s name at the World’s Columbian Exposition 1906 – switched to caps instead of corks 1935 – first to put beer in cans 1977 – Peak production of 18 million barrels 1991 – PBR me ASAP 2001 – production less than 1 million barrels 2003 – resurgence begins in Portland, Oregon by bike messengers 2009 – No longer “cheap” more expensive than Keystone Light, High Life, Natural Light and Busch Light

8. Outstanding Items for PBR Treatment of Commercial Mortgages Volatility of reserves Tax Implications of PBR Net Premium Reserve Fine-tuning Treatment of Reinsurance 2014 CSO Table

9. PBR – Last Fun Fact US Market –$18.00 (Per 30 pack) –$0.60 per Bottle Chinese Market –$1,320 (Per 30 pack) –$44.00 per Bottle

10. Road to AG-48 Captives in the spotlight Captive Reinsurance Reserve Financing Transaction Scrutiny May 2011 – New York Times Article –Compared captives to the shadow banking system that contributed to the financial crisis October 2011 – NAIC Executive committee charged the E committee to study the use of captives September 2012 – AG38 8D/8E adopted November 2012 – NAIC white paper exposed June 2013 – Shining a Light on Shadow Insurance - NYDFS

11. Road to AG-48 Captives in the spotlight (cont) July 2013 – NAIC white paper on Captives finalized September 2013 – Initial report from Rector & Associates on the use of captives – subsequent reports released in February 2014 and June 2014 November 2014 – AG-48 officially adopted

12. Basics Products XXX/AXXX after 12/31/2014 Liability Valuation PBR using VM-20 Asset Valuation Primary Securities Other Securities Nonqualified Actuarial Opinion Meeting the rules Following the “intent” AG48

13. Why an Actuarial Guideline? Fast Idea -> Adoption in 5 months! Easy Don’t need specific state approvals Immediately establishes uniform, national standards Straightforward AOMR already exists AOMR has standards of actuarial analysis PBR Me ASAP!

14. Covered Policies Model 830 Policies Issued after 1/1/2015 or Not in a reinsurance agreement as of 12/31/2014 Exceptions …..many……… FAWG exceptions….risks outside intended purpose You Know It When You See It

15. Actuarial Method From PBR (VM-20) Net Premium Reserve Deterministic Reserve Stochastic Reserve Adjustments for Reinsurance Arrangements Specific %s Applied to VBT for NLP Mortality Ratios Future Updates for PBR Adoption Before - VM-20 + amendments up to 9/30 (or 12/31) After – VM-20 as published in the Valuation Manual Modified PBR

16. Asset Valuation Required Primary Level = Actuarial Method applied to the Liabilities Primary Securities > Required Primary Level Total Securities (Primary + Other) > Statutory Reserves AG48

17. Asset Valuation (picture) AG48 Assets Liabilities <- Statutory <- Required Primary Level Primary -> Other ->

18. Acceptable Securities Primary Securities Cash! SVO-listed Securities (w/o LOC-like assets) Funds-Withheld & Modified Coinsurance –Commercial Loans (CM3 or higher) –Policy Loans –Derivatives that support policy liabilities “Other” Securities Any asset but……… Acceptable to cedent’s domiciliary Commissioner Details

19. The Key What is acceptable as an “Other Security” Parental Guarantees? –Nope. LOCs? –Long term, probably…. Contingent/Credit Linked Notes? –Hmmmm, maybe……. Capital Adequacy Taskforce developing RBC charges for “Other Security” assets What are you holding?

20. Actuarial Opinion Qualified Actuary (normal definition) Unqualified Opinion Primary Security > Required Primary Security Level Assets (Primary + Other) > Statutory Reserves Certification that cedent is not engaged in an arrangement that seeks to violate the purpose or intent –Can state reliance on CFO or other officer Remediation if you fail the test…before March 1 Add more securities (Primary/Other) Set up a liability Somebody Needs to Sign-Off on This

21. Problems to Solve…quickly! It is already too late! Future….. Develop ability to do VM-20 calculations –Monitor VM-20 developments Reflect in Pricing Create New Captive? Figure out Primary Assets Get approval for Other Assets Put CFO on notice for intent reliance Build into your AOMR timeline Implementation Challenges

22. The End Questions?