MODERATORCHARLES D. FRIEDSTAT FRIEDSTAT ACTUARIAL CONSULTING SPEAKERSRICHARD N. BUSH AMERIPRISE FINANCIAL PETER A. MARION SUN LIFE OF CANADA CONCURRENT SESSION D-1 LIFE RESERVES

Application of CARVM Section 807(d)(3)(B)(ii) defines CARVM: The term “CARVM” means the Commissioners’ Annuities Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is in effect on the date of the issuance of the contract.

NAIC Definition of CARVM The Standard Valuation Law provides that CARVM applies to all annuity and pure endowment contracts with the exception that reserves for group annuity contracts purchased under a retirement plan or plan of deferred compensation, established or maintained by an employer or by an employee organization, or by both, other than a plan providing individual retirement accounts or individual retirement annuities under Section 408 of the Internal Revenue Code, are calculated under CRVM and not under CARVM using a method that is consistent with the principles of CRVM that apply to life insurance and endowment contracts providing for a uniform amount of insurance and requiring the payment of uniform premiums. The Standard Valuation Law is adopted as part of the NAIC Accounting Practices and Procedures Manual in Appendix A CARVM also applies to annuity riders or annuity benefits provided by a contract.

Application of CARVM to tax rules The NAIC prescribed method must be used for tax purposes whether or not any state has actually adopted the method prescribed by the NAIC. No requirement that the method is the prevailing view of the States. If there is no NAIC prescribed method, the prevailing state method should be used. If there is no prevailing state method, follow the annual statement.

Actuarial Guideline 39 Reserves for Variable Annuities with Guaranteed Living Benefits Effective 12/31/2002; sunset 12/31/2005 Revised sunset date of 12/31/2009 VAGLB reserve is accumulation (without interest) of VAGLB charges (explicit or imputed) Subject to asset adequacy analysis requirement

AG 39 – Tax Reserve Issues Is sunset date given effect? –If so, is revised sunset date given effect, and, if so, how? Code says reserves must be “computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest.” –Does a reserve that is merely an accumulation of charges qualify, and, if not, what is used to determine tax reserves

Guideline 39 The Model Variable Annuity Regulation provides that the reserve liability for variable annuities must be established pursuant to the requirements of the Standard Valuation Law in accordance with actuarial procedures that recognize the variable nature of the benefits provided and for any mortality guarantees. The language in the Model Regulation is essentially repeated in the NAIC Accounting Practices and Procedures Manual. Background to Guideline 39 makes it clear that the guideline is intended to be an interpretation of CARVM. The Background states: “The purpose of this Actuarial Guideline (Guideline) is to interpret the standards for the valuation of reserves for guaranteed living benefits included in variable and immediate annuity contracts (VAGLBs). This Guideline provides an interpretation of the [NAIC] Model Standard Valuation Law for VAGLBs.”

CARVM and Section 807(d) CARVM does not define whether a reserve is a life insurance reserve Does Guideline 39 meet the definition of a life insurance reserve under Section 816 If Guideline 39 is not a life insurance reserve, is any deduction allowed

Guidelines Do Guidelines apply retroactively –American Financial Case broadly says yes Does this apply to mortality and interest rates –What to apply if there is no prevailing view prior to the adoption of the Guideline and the company adopts the guideline –What if there is a prior Guideline or prevailing view

Actuarial Guideline 43 Guaranteed Minimum Benefits on Variable Annuities Stochastic aggregate reserve using Conditional Tail Expectation (CTE) with floor of deterministic seriatim standard scenario amount Tax questions –Basis of Federally prescribed reserve –Statutory cap –General Account/Separate Account Aggregation

AG 43, cont. Tax questions and IRS Notice –Basis of Federally prescribed reserve is standard scenario only, not stochastic –Statutory cap includes standard scenario, silent regarding stochastic, with no inference –General Account/Separate Account Aggregation Code says do 3-prong comparison on a contract- by-contract basis, but Sec. 817 requires separate accounting of variable contracts

Life PBR Proposal: Stochastic aggregate, seriatim gross premium, and seriatim net premium Tax questions similar to AG 43 –Basis of Federally prescribed reserve likely to be net premium reserve only, using prevailing mortality tables and prevailing interest rates –Statutory cap should include whatever is in the NAIC, no matter how calculated Not likely to be effective in next two or three years

Tax Reserve Audit Issues Deficiency reserves in statutory cap Effective date for AG’s AG 34: Projection rate; asset value drops Assuming AG’s not retroactive for tax, what method is used for contracts issued prior to issuance of AG? See TAM for pre-AG 34 – still questions. Future: stat cap on AG 43, maybe stochastic in FPR, similar issues on Life PBR