FASB Targeted Improvements Insurance IFRS Seminar December 2, 2016 Michael Lockerman Session 29

FASB Insurance project overview Improve and simplify financial reporting requirements Impacts FASB and IASB 2013 EDs had proposed fundamental changes to the accounting for insurance contracts In February 2014, the FASB changed course, toward making targeted improvements to insurer accounting/disclosures: Q2 2015: ASU issued requiring additional disclosure for short duration contracts, effective 2016 2014-2016 deliberations: Potential targeted accounting changes for long duration contracts; exposure draft issued September 2016 Enhanced disclosures for short duration insurance contracts and targeted improvements to the accounting for long duration insurance contracts. Talking theory Getting feedback Coming soon

FASB targeted improvements – long duration contracts Expected timeline 2014 2015 2016 2017 2019 2020 2021 Beyond February 2014 FASB decided to drop its comprehensive insurance project and focus on targeted improvements 2017 / 2018* Re-deliberations, and issuance of final standard 1st half 2016 Re-deliberations completed in March 2016; FASB votes to draft a revised document for exposure August 2014 FASB begins re-deliberations on long duration targeted improvements based on scope agreed upon in April 2014 March 2017 Public roundtable 2018 September 2016 FASB exposure draft issued with comment period ending 12/15/16 2020+* Potential adoption dates – assuming at least 2- 3 years is allowed for conversion efforts * Timing is estimated based on our current understanding of the project’s progress and not based on official timeline provided by the FASB

FASB targeted improvements – long duration contracts May/June 2015 FASB targeted improvements – long duration contracts Proposed improvements: Annual (or more frequent) updating of cash flow assumptions for liability for future policy benefits using retrospective method Quarterly update of discount rate assumptions through OCI High-quality fixed income instrument yield (proxy liability rate) vs. “expected investment yield” used today Simplified DAC amortization: Based on insurance in-force, or straight-line No interest accretion and no impairment test Variable product/separate account guarantees (GMXBs) with capital market risk at fair value; “instrument-specific credit risk” adjustment through OCI Detailed disaggregated rollforwards of liabilities and DAC; qualitative and quantitative information about estimates Retrospective transition for liabilities; prospective for DAC Responding to user requests to update assumptions, simplify, and improve consistency FASB proposed ED “targeted improvements” are pervasive

Updating cash flows Difference from current USGAAP Major difference for traditional and participating products Universal life products account value reserve does not change Remove PADs Need include expected dividends in all par models Need to update systems Need to retain historical data Need to modernize factor based systems Comparison to IFRS 17 New models apply to all products Assumptions should be similar Implicit vs explicit margin Margins will respond differently to assumption changes

DAC Difference from current USGAAP Comparison to IFRS 17 Only changes prospectively Much simpler approach No longer subject to recoverability tests Unclear what level of aggregation will be necessary Unlike reserve change, this applies to all products Comparison to IFRS 17 DAC is included in IFRS fulfillment cash flows – separate item for USGAAP Potentially very different recognition pattern between bases

Equity guarantees Difference from current USGAAP Comparison to IFRS 17 Current model includes both fair value and “SOP 03-1” amortized cost for guarantees ties to variable/unit linked products – They will all now be FV Much more I/S volatility May require more hedging than previously done Comparison to IFRS 17 Similar approach but some volatility can be absorbed by the CSM

Discount rate Difference from current USGAAP Comparison to IFRS 17 Move from expected yield basis to a market basis Current assumption is company dependent and varies greatly. New assumption should be consistent New rate expected to be much lower than current assumptions May trigger loss recognition (similar to LAT) for some contracts at issue date Comparison to IFRS 17 Similar in theory More flexibility in IFRS guidance IFRS rate expected to be higher than USGAAP rate

Expected comments from preparers May/June 2015 Expected comments from preparers Proposed improvements: Annual (or more frequent) updating of cash flow assumptions for liability for future policy benefits using retrospective method Quarterly update of discount rate assumptions through OCI High-quality fixed income instrument yield (proxy liability rate) vs. “expected investment yield” used today Simplified DAC amortization: Based on insurance in-force, or straight-line No interest accretion and no impairment test Variable product/separate account guarantees (GMXBs) with capital market risk at fair value; “instrument-specific credit risk” adjustment through OCI Detailed disaggregated rollforwards of liabilities and DAC; qualitative and quantitative information about estimates Retrospective transition for liabilities; prospective for DAC General agreement but implementation concerns? Concerns resultant rate is too low? Further clarification on methodology? Concerns regarding volatility? Significant work but useful?

Thank You