PBR for life products IABA Annual Meeting James Collingwood, ASA, MAAA August 1, 2014

Page 2 ©2014 EYGM Limited Agenda ► Overview ► Reserve calculation ► Timeline ► Key considerations

Page 3 ©2014 EYGM Limited Overview What are Principles Based Reserves? ► Quantification of key reserve cashflows, including: ► Benefits ► Expenses ► Guarantees ► Funding ► Quantification is developed using a level of conservatism for unfavorable events that have a reasonable probability of occurrence ► Calculation utilizes assumptions, financial models, risk analysis and management actions consistent with the company’s overall risk management procedures ► Margins used in the quantification are consistent with the level of uncertainty in the block of business

Page 4 ©2014 EYGM Limited Overview Rules vs. principles based approaches Rules based Principles based ► Calculation ► Formulaic calculation ► Same formula for broad categories of products ► Same formula utilized for each policy ► Assumptions ► Same assumptions used for all companies ► Same margins used for all companies ► Locked in at issue date ► Calculation ► Model based calculations for groups of similar policies ► Reflective of specific product risks ► Reflective of risk management and management actions ► Assumptions ► Assumptions and margins are reflective of company experience ► Assumptions can be unlocked to reflect changes in experience

Page 5 ©2014 EYGM Limited Overview Objectives of PBR ► Capture all the benefits/guarantee and associated quantifiable and material risks ► Determine reserves that are consistent with company risk analysis, models and risk management while maintaining a conservative valuation ► Utilize relevant and credible company experience ► Develop a process that is adaptive to changes in a company’s risk profile ► Allow for more efficient, accurate and transparent risk management through tailoring of risk models and calibrations to the risk profile of the business ► Offer incentives to implement effective risk management strategies in part by removing incentives to “game the system”

Page 6 ©2014 EYGM Limited Reserve calculation Valuation Manual details ► Valuation Manual (“VM”) applies to all business ► VM-20 applies to new life business only (i.e., prospective application) ► 3-year transition period from the operative date of the Valuation Manual is allowed for new life business ► Once VM-20 methods are applied, however, they must continue to be applied ► Exemption criteria are provided for single state companies or simple, less risky products ► Products most impacted ► Universal Life with Secondary Guarantees ► Term Life

Page 7 ©2014 EYGM Limited Reserve calculation Minimum reserve calculation ► Minimum reserve = NPR + Max(0, A – B) ► A = Max(DR, SR) ► B = NPR – DPA ► Where ► NPR = Net Premium Reserve ► DR = Deterministic Reserve ► SR = Stochastic Reserve ► DPA = Deferred Premium Assets

Page 8 ©2014 EYGM Limited Reserve calculation Net Premium, Deterministic and Stochastic Reserve ► The Net Premium Reserve is a formulaic reserve calculation – not principles based ► Serves as a floor to the PBR calculated reserve ► Net Premium Reserve calculation methodology ► Universal Life with Secondary Guarantees or Term Life products ► Maximum of NPR calculation defined in the Valuation Manual and policy cash value ► Other products (e.g., Whole Life, Universal Life w/out Secondary Guarantees, Variable Universal Life) ► Current Standard Valuation Law formulaic minimums ► Exclusion tests ► Separate exclusion tests for the Deterministic Reserve calculation and the Stochastic Reserve calculation ► Exclusion tests can be applied to certain products on an optional basis

Page 9 ©2014 EYGM Limited Timeline Recent and future anticipated activity NAIC LATF Work on VM-20 (Summer/Fall 2012) NAIC Life Insurance and Annuities Committee adoption of VM (August 17, 2012) Anticipated SVL introduction in legislatures ( ) VM adoption by NAIC Executive/Plenary (December 2012) Earliest projected effective date for VM-20 (January 1, 2016)

Page 10 ©2014 EYGM Limited Timeline Requirements for VM to become operative The VM becomes operative on the January 1 st following: SVL legislative enactment by at least 42 of the 56 jurisdictions SVL legislative enactment by states representing greater than 75% of direct premiums written as reported in 2008 annual statements NAIC adoption of VM by 42 members or 75% of members voting, whichever is greater and

Page 11 ©2014 EYGM Limited Timeline Enabling legislation process ► State legislatures will consider adoption of the Standard Valuation Law (“SVL”) that enables the VM ► The VM itself is not what state legislatures will adopt ► The NAIC PBR Implementation Task Force developed a briefing document to help state legislatures understand the enabling SVL and its relationship to the VM ► Based on the latest American Academy of Actuaries quarterly update in late June, 17 states representing 27% of US direct written premiums have adopted the revised SVL ► Many additional states have introduced the revised SVL in their legislatures in 2014

Page 12 ©2014 EYGM Limited Timeline Regulatory implementation planning ► The PBR Implementation Task Force has created a draft implementation plan framework for PBR that considers: ► Review process and staffing ► Pre-implementation and training ► Accounting and actuarial valuation needs ► RBC implications ► Captives and SPV solvency ► Accreditation standards ► Timeline/roadmap development ► LATF is continuing to work on some areas of VM-20 including: ► Developing maintenance procedures to annually update asset spreads and default costs and modifications needed to support experience data collection ► Considering small company issues including potential modifications to the stochastic exclusion test ► Constructing CSO mortality tables from the 2014 VBT tables (once completed) ► Developing an accounting smoothing mechanism to address reserve volatility

Page 13 ©2014 EYGM Limited Key considerations NAIC impact study findings ► A NAIC sponsored VM-20 impact study was performed by Towers Watson was released in February 2012 ► 35 companies participated ► A number of observations and recommendations resulted ► Key findings ► Impact of VM-20 on reserve levels ► ULSG and Term products ► Other life products ► Implementation considerations ► Setting of assumptions and margins ► Model management ► Run-time ► Understanding results

Page 14 ©2014 EYGM Limited Key considerations Impact on insurers Challenges Opportunities ► Modeling ► Explaining volatility ► Experience for assumptions ► Enhanced controls/governance ► Efficiency and uniformity in reserves ► Links pricing, ERM and reserves ► Ability to modify product designs to fit risk tolerance

Page 15 ©2014 EYGM Limited Key considerations Impact on market and consumers Challenges Opportunities ► Product offerings vary by size of insurer ► New markets potentially dominated by basic, low risk products ► Reduced reinsurance/reserve financing costs ► Reserve levels less likely to distort pricing ► Encourages various types of product designs