NAIC Investment Accounting Updates You Need to Know: VOSTF, RBC, BWG Sabrina Wilson, Clearwater Analytics NAIC Investment Accounting Updates You Need to Know: VOSTF, RBC, BWG

Agenda Valuation of Securities Task Force Investment Risk-Based Capital Working Group Blanks Working Group

Valuation of Securities Task Force VOSTF Valuation of Securities Task Force

Adopted Items New Administrative Symbols for Designation YE and IF Effective December 31, 2018* *except where noted New Administrative Symbols for Designation YE and IF Securities the SVO was unable to designate by year-end will get the new administrative symbol "YE“ All initial filings SVO was unable to designate will get new administrative symbol “IF” As these two won’t be available until 2019, insurers should continue to use the existing “Z” for 2018

Adopted Items New Administrative Symbols for Designation PL/PLGI Effective December 31, 2018* *except where noted New Administrative Symbols for Designation PL/PLGI It is required to submit evidence to the NAIC that securities subject to private letter ratings have actually been assigned a credit rating “PL” securities follow the same eligibility rules as “FE” securities SVO has been actively working with CRPs to receive PL ratings electronically directly from the CRPs to lessen the filing burden on insurers New General Interrogatory process was created for PLR securities issued prior to Jan 1, 2018 where the insurer is unable to share the PLR with the NAIC

Adopted Items Effective December 31, 2018* *except where noted New Administrative Symbols for Designation PL/PLGI (cont.) Issues encountered by SVO: Outdated Private Letter Issuer Rating – PLR must be for a specific security and not the issuer. PLRs are a subset of the filing exempt policy. If the securities are not eligible to use CRP ratings for conversion to NAIC designations under the FE policy, e.g. Credit Tenant Loans “CTL,” they are not eligible for PLR. Private Ratings – PLR are only for privately issued securities. Publicly issued securities must continue to go through the FE process. Missing letter – Insurers must attach this to support each reported PL. Different Securities – PLR filing was for one security identifier but the private letter itself is for another security identifier.

Effective immediately* Adopted Items Effective immediately* *except where noted Add Swiss GAAP as an accepted NFPS SVO is authorized to accept Audited Financial Statements prepared in accordance with National Financial Presentation Standards, e.g. Canadian, UK, Australian, German, French, Dutch, Italian, Belgium, and Swiss Amended P&P Manual to redefine the term CRP The amendment clarifies the CRP includes those of its affiliates identified to the SEC by the CRP as a separate legal entity or a separately identifiable department or division of the credit rating provider The SEC treats the credit ratings by those affiliates as ratings issued by the CRP for purposes of Section 15E of the Securities and Exchange Act of 1934

Adopted Items Delete market indicator Instruction Effective December 31, 2019* *except where noted Delete market indicator Instruction Eliminate administrative symbols “A,” “J,” “K,” “L,” “U,” and “V” Delete Administrative Symbols for Preferred Stocks Eliminate administrative symbols “P” and “RP” Add New Credit Rating Agency Japan Credit Rating Agency Ltd – effective after 2019 Delete Modified Filing Exemption “MFE” Process SAPWG would like to eliminate SSAP No. 43R, paragraph 26(b)

Adopted Items Delete Valuation Instruction Clarifies: Recognizes: Effective December 31, 2019* *except where noted Delete Valuation Instruction Clarifies: SVO publishes values in the AVS+ for any security reported without a value under the compilation instructions The insurers are not required to use this valuation, which is provided solely to give regulators a measure of value for the security if they need one Recognizes: The adoption of SSAP No. 100R – Fair Value in 2010 provided a valuation framework that eliminates the need for an SVO valuation function

Adopted Items Add NAIC Designation Category Target Date: 2020 Add NAIC Designation Category IRBCWG adopted a proposal to increase the number of RBC categories for bond from 6 to 20

Proposed Items P&P Manual Make-Over: separate policy from administrative tasks and methodology Current Proposed Part One Purposes, General Policies, and Instructions to the SVO Policies of the NAIC Valuation of Securities Task Force Part Two Filing with the SVO Operational and Administrative Instructions Applicable to the SVO Operations SVO Administrative Procedures Part Three Credit Assessment SVO Procedures and Methodology for Production of NAIC Designations Part Four Special Regulatory Procedures Applicable to Investment Activity of Insurers The NAIC Structured Securities Group Part Five Valuation of Securities Part Six SVO Verification Activities in Support of Certain Regulatory Processes Part Seven Mapping https://www.naic.org/documents/cmte_e_vos_ exposure_e_task_force_transition_table.pdf

Proposed Items Look-through analysis Look-through analysis will be applied to the fund’s portfolio This item would expand fixed-income treatment to qualifying funds issued by any investment company type registered with and regulated by the SEC, e.g. open end fund, closed end fund and unit investment trusts The use of NAIC CRP credit ratings would be excluded in this activity

Investment Risk-Based Capital Working Group IRBCWG Investment Risk-Based Capital Working Group

Effective 2018 Annual Reporting Adopted Item #2017-14-P Effective 2018 Annual Reporting P&C Move Affiliated Bond RBC Charge from PR003-5 to PR006 Include both Affiliated and Unaffiliated Bond RBC Charge in PR006

Effective 2018 Annual Reporting Adopted Item #2017-14-P Effective 2018 Annual Reporting

Effective 2018 Annual Reporting Adopted Item #2018-13-L Effective 2018 Annual Reporting Life and Fraternal RBC factor change Factors Table As determined by the NAIC

BWG Blanks Working Group

Adopted Item #2017-24BWG Modified Effective December 31, 2018* *except where noted New Category Lines for Bank Loans Add additional lines for bank loans on the Schedules D Part 1, 3-5, Part 1A Section 1 & 2, Part 1B and Summary, DA Part 1, DL Part 1 & 2, and E Part 2 Adjusts resulting category line number references

Adopted Item #2018-01BWG Effective December 31, 2018* *except where noted Update Language on Schedule DB Part D Section 1 for Exchange-Traded Funds and Centrally Cleared Derivatives Add subheading, “Over-The-Counter,” and an updated total row, “Aggregate Sum of Central Clearinghouses (Excluding Exchange Traded),” on the quarterly and annual schedules

Adopted Item #2018 06BWG Increase Number of Lines for Schedule DB Effective December 31, 2018* *except where noted Increase Number of Lines for Schedule DB Add “-999” to the end of each available line number Allow up to 9,999,996 lines on the quarterly and annual schedules Eliminate the need to accumulate data within certain categories

Context: Adopted Schedule DB Items Net investment income increased 3.9% ($6.7 billion) to $176.9 billion in 2017, compared to $170.2 billion in 2016 Derivatives increased $3.9 billion to $7.6 billion Other invested assets increased $2.3 billion to $14.7 billion Unaffiliated other bonds increased $1.5 billion to $123.2 billion Net Investment Income Allocation The table to right is from the Center for Insurance Policy and Research “CIPR” – 2017 Life, A&H and Fraternal Insurance Industry Analysis Report As you can see, the net investment income from derivatives increased more than a double in 2017. There is a need for increasing number of lines for full disclosure. Source: The Center for Insurance Policy and Research “CIPR” – 2017 Life, A&H and Fraternal Insurance Industry Analysis Report

Adopted Item #2018-07BWG Modify Reporting Designations Effective December 31, 2018* *except where noted Modify Reporting Designations Add new “PL” and “PLGI” symbols to the reporting instructions Modify definitions of the symbol “Z” Rename the “NAIC Designation” and “NAIC Designation/Market Indicator” columns to “NAIC Designation and Administrative Symbol” for Schedules BA, D, and DL Develop a new General Interrogatory for PL securities issued prior to January 1, 2018 Add two new symbols: “YE” and “IF” Remove designation matrices from instructions and replace with list of administrative symbols

Context: PL and PLGI symbols If you haven’t filed PL ratings with SVO, you may want to do it sooner rather than later Cost is $175 to file a PL rating According to CIPR – 2017 Life, A&H and Fraternal Insurance Industry Analysis Report, the bond portfolio was 68.7% publicly traded securities and 31.3% private placements Private placements are one-third of the bond portfolio owned by insurers Source: The Center for Insurance Policy and Research “CIPR” – 2017 Life, A&H and Fraternal Insurance Industry Analysis Report

Adopted Item #2018-09BWG Modify and Add Notes Effective December 31, 2018* *except where noted Modify and Add Notes Modify instructions for Notes 20A, 20C, and 20D to reflect changes to SSAP No. 100R — Fair Value Modify the illustrations for Notes 20A and 20C to move the NAV column and data-capture it New disclosure, Note 20E SSAP No. 100R updates language around use of NAV as a practical expedient to fair value Discloses when the investment may be sold below NAV, e.g. description of the investment, estimate of the period of time over which the underlying assets are expected to be liquidated by the investees, etc. Call to update the language to match the guidance change

Adopted Item #2018-09BWG (Note 20A) Effective December 31, 2018* *except where noted 20 A. and 20 C. NAV is the new one that Sabrina will emphasize.

Adopted Item #2018-09BWG (Note 20C) Effective December 31, 2018* *except where noted 20 A. and 20 C. NAV is the new one that Sabrina will emphasize.

Adopted Item #2018-10BWG Effective December 31, 2018* *except where noted Modify Instructions for Bifurcation of OTTI Investments Modify AVR/IMR instructions for bifurcation of OTTI investments subject to SSAP No. 26R — Bonds Clarify investments with other-than-temporary impairments be included either on: Asset Valuation Reserve, or Interest Maintenance Reserve reports

Adopted Item #2018-11BWG Added Instructions for Categories Effective December 31, 2018* *except where noted Added Instructions for Categories Clarified investments should not be reported in those categories when there is a specific category available for the investment, e.g. Collateral Loans and Surplus Notes Provide clarifying language and additional instructions to: Fixed or variable interest rate investments with underlying characteristics of a bond, mortgage loan, or other fixed-income instrument Joint ventures or partnership interests for which the primary underlying investments are considered fixed-income instruments Intended to avoid double-counting of assets within Schedule BA

Adopted Item # 2018-12BWG Modify Instructions for Financing Premiums Effective December 31, 2018* *except where noted Modify Instructions for Financing Premiums Define financing premiums within the Schedule DB general instructions Modify the instructions to reflect changes to SSAP No. 86 – Derivatives being adopted by the SAPWG Add new note to Financial Statement No. 8H, which shows the total future settled premiums Add four new electronic columns on the Schedule DB Part A/B Section 1 Total Premium Cost Unpaid Premium Cost Fair Value of Derivative, Excluding Impact of Financing Premiums Unrealized valuation Increase/Decrease, Excluding Impact of Financing Premiums

Adopted Item #2018-15BWG Effective December 31, 2018* *except where noted Add Disclosure Changes and a new Note 10O to reflect changes to SSAP No. 97 – Investments in SCA being considered by SAPWG Add a new disclosure to Note 10 Required the disclosure of: The name of the SCA investment The reporting entity’s current period share of SCA net income or loss The reporting entity’s accumulated share of SCA losses not recognized during the period equity method was suspended The reporting entity’s share of the SCA equity Any guaranteed obligation or commitment for financial support The SCA’s reported value Graph: Everything is brand new. Not emphasizing a specific coliumn

Adopted Item #2018-15BWG (cont.) Effective December 31, 2018* *except where noted

Adopted Item #2018-17BWG Modify Instructions for Wash Sales Effective December 31, 2018* *except where noted Modify Instructions for Wash Sales Modify the instructions for Note 17C to reflect SAPWG adoptions Excludes cash equivalents, derivative instruments, and short-term investments with NAIC 1-2 designations

Adopted Item #2018-18BWG Effective March 31, 2019 Combine Reporting Guidance for Life and Fraternal Reduces redundant reporting publications and the burden on both insurers and regulators for maintenance

Exposed Item #2018-02BWG Target Date: December 31, 2019 Update the rows on the Summary Investment Schedule to tie to the different investment schedules on the Annual Statement  Adopted the modifications August 4, 2018 and re-exposed one proposal previously deferred with a comment deadline September 19, 2018

Miscellaneous Item For ordering the AP&P Manual, be sure to order sufficient copies on time because the NAIC decided not to print very many The NAIC thought they would keep 100 copies only after receiving the pre-orders Once all are sold, they will not reprint Consider getting the digital copies: It is more economical ($465/user vs. $500/book), and the more you buy the lower the price ($465/user for less than five users vs. $420/user for 5/10/50 users AP&P Manual is the only digital item offered by the NAIC

Product Owner, Clearwater Analytics Questions? Sabrina Wilson Product Owner, Clearwater Analytics sabrinawilson@clearwateranalytics.com