P r in c iple -B as e d R e s e r v e s

1. 42ndAnnualInsuranceTax Conference Principle-BasedReserves • PANELISTS: • Richard Bush, Ameriprise • Peter Winslow, Scribner Hall & Thompson LLP • MODERATOR: • Sheryl Flum, KPMG LLP

2. Agenda • Background/Summary of Tax Reserve Rules • IRS Guidance & Issues • Industry Issue Resolution • Tax Compliance/Product Issues • Recent Developments • Questions

3. BACKGROUND AND SUMMARY OF TAX RESERVE RULES

4. Life PBR Tax Considerations Overview • Life PBR represents at least as great a change for tax reserves as it does for statutory reserves. • Unlike the NAIC, the IRS must administer a Federal statute – the Internal Revenue Code – which uses statutory accounting as a starting point but did not contemplate the mechanics of Life PBR • IRS has provided life insurance product guidance under Life PBR, and promises additional guidance on reserves

5. The Valuation Manual • NAIC amended the Standard Valuation Law (SVL) and Standard Nonforfeiture Law in 2009, enabling the Valuation Manual (VM) • VM contains all relevant models and guidelines that exist today, plus new sections on principle-based reserves • VM-20 – new Life Principle-Based Reserves (PBR) • VM-21 – existing Actuarial Guideline (AG) 43 for variable annuities • VM-22 – adopted for interest rate only on fixed annuity, PBR portion still in development • VM-20 generally applies to individual life insurance contracts issued on or after the “operative date” of the VM

6. Basic Structure of Life PBR - Past vs. Future • Pre-PBR Statutory for Life Insurance • VM-20 PBR for Life Insurance • CRVM – formulaic and rules-based • Prescribed mortality and interest • Implicit provisions for adverse deviation (PAD) in prescribed assumptions • Lapse only considered in special cases • Less prescriptive, principles-based • Three components • Net premium reserve (NPR) • Seriatim and formulaic • Prescribed assumptions (mortality, interest, lapse) • Floored at net surrender value • Deterministic reserve (DR) • Aggregate, using cash flow modeling • Company-specific assumptions • Stochastic reserve (SR) • Aggregate, using cash flow modeling • Company-specific and stochastic assumptions • CTE 70 (average of 30% worst scenarios), like AG 43 • Assumptions based on company and/or industry experience • Annual unlocking of assumptions • Explicit PAD (prudent estimates) included on individual assumptions

7. AG 43/VM-21 • VM-21 – existing Actuarial Guideline (AG) 43 for variable annuities • The requirements constitute the CARVM for variable annuities by defining the assumptions and methodologies that will comply with the SVL. • The contracts subject to these requirements are aggregated with the contracts subject to AG43 for purposes of performing and documenting the reserve calculations. • VM-21 requirements mirror the requirements of AG 43.

8. Reserve Components under Life PBR (VM 20) Valuation Manual Three components: Minimum reserve NPR NPR minus due/deferred premium = Greaterof DRorSR + Excess over

9. IRS GUIDANCE/ISSUES

10. Notice 2008-18 • Issued by IRS in Feb. 2008, when PBR was still in development stages for both life and annuities • Anticipates new rules would apply for tax purposes only to contracts issued after the date of adoption, regardless of transitions permitted for statutory reserves • Identifies areas of concern • Requests comments • Treasury/IRS indicate it would be inappropriate to: • Cause life companies to be taxed as nonlife companies due solely to changes in statutory reserve guidance • Effect a wholesale change in the standards for qualification of “life insurance contracts”

11. Notice 2010-29 • Issued by IRS in March 2010, shortly after AG 43 became effective • Safe harbor delaying implementation for statutory reserving has no effect on FPR • Delayed implementation reflected in statutory cap • Impact due to change in statutory cap on inforce business spread over 10 years (but not under section 807(f)) • Defines a safe harbor for variable annuity contracts issued on or after 12/31/2009 • “No inference should be drawn from this notice” on any other federal tax issues, including those arising from Life PBR

12. INDUSTRY ISSUE RESOLUTION (IIR)

13. Life PBR Guidance: Why the IRS Can’t Fail • Priority Guidance Plan • LB&I (Large Business & International) “Campaign” • Industry Issue Resolution • Current issue at Exam/Appeals for AG 43 • Oliver Wyman Report For IRS, the stakes could not be higher

14. Overview of LB&I’s Launch of Campaign Process • On January 31, 2017 the LB&I announced detailed information on the first tranche of issues to be addressed using a new method for audits of large corporate taxpayers • LB&I continues to position the division to address compliance and resource challenges • Campaign development requires strategic planning and deployment of resources, training and tools, metrics and feedback • The launch of campaigns is the culmination of an extensive effort to redefine compliance work and build a supportive infrastructure • Movement towards issue-based examinations which allows the division flexibility in determining the best steps to achieve compliance

15. Insurance Related Campaign Process • Deferred Variable Annuity Reserves & Life Insurance Reserves Industry Issue Resolution (IIR) • The IIR program will help develop guidance to address uncertainties on issues important to the Life Insurance Industry. The issues include amounts to be taken into account in determining tax reserves for both deferred variable annuities with Guaranteed Minimum Benefits, and Life Insurance contracts. The campaign's objective is to collaborate with industry stakeholders, Chief Counsel and Treasury to develop published guidance that provides certainty to taxpayers regarding these related issues.

16. Life PBR Guidance:Industry Issue Resolution • August, 2016 – request for IIR • February 7, 2017 – opening meeting • February 17, 2017 – IRS request for information and legal analysis • March – June, 2017 – detailed written responses to IRS • September, 2017 – IRS request for Industry proposal and submission of proposal • September 27, 2017 – second meeting and IRS request for revised Industry proposal • October, 2017 – submission of second Industry proposal • October 27, 2017 – third meeting • Next steps?

17. Reserve Transition Rules:Internal Revenue Code • Section 807(d) provides rules for determining life insurance reserves for any contract • Greater of net surrender value or Federally prescribed reserve • In no event greater than “amount which would be taken into account with respect to such contract . . . in determining statutory reserves” • Federally prescribed reserve (FPR) • Method – CRVM prescribed by the NAIC which is in effect on the date of the issuance of the contract (for a contract covered by the CRVM)

18. Reserve Transition Rules:Valuation Manual • Generally, Life PBR is effective for contracts issued on or after 1/1/2017 – but there are exceptions • Initial three-year transition period • Companies may elect to use existing requirements for business issued in first three years after operative date • Small-company exemption permits companies to use existing requirements if they meet defined criteria • Single-state exemption available in many states, with permission from commissioner • Not all states adopted PBR as of 1/1/2017

19. Reserve Transition Rules:Discussion of Issues • IRS policy not to provide “retroactive” guidance (January 2017, ABA Taxation Section Insurance Companies Committee, Helen Hubbard) • If a company defers implementation or is exempt from Life PBR, when (if at all) must it implement Life PBR for purposes of computing the FPR? • If a company is not subject to Life PBR because it operates only in states that have not enacted the current SVL, when (if at all) must it implement Life PBR for purposes of computing the FPR? • Different structure for effective date and transition rules in Life PBR vs. AG 43 • Regardless of timing of IRS guidance, many companies have to consider now what substantive reserve positions they will take on their tax returns.

20. TAX COMPLIANCE/ PRODUCT ISSUES

21. Policy Tax Compliance • Section 7702: Qualification as a life insurance contract • Contract must be a life insurance contract under the applicable law • Contract must either: • Meet the cash value accumulation test, or • Meet the guideline premium requirements AND fall within cash value corridor

22. Reasonable Mortality Charges • Section 7702(c)(3)(B) sets forth basis for determining the guideline single premium • Determination is based on “reasonable mortality charges” that meet the requirements (if any) prescribed by regulations • Previous guidance issued as new mortality tables become “prevailing” • Notice 88-128 provides guidance upon the adoption of 1980 CSO tables • Generally relies upon section 7702 effective date rules to determine when a contract is treated as newly issued and therefore tested under most recent tables

23. Reasonable Mortality Charges, Cont’d • Notice 2006-95 provides guidance upon the adoption of the 2001 CSO tables • Generally builds upon the approach of Notice 88-128 • Optional three-year transition period • Sets forth as safe harbors a number of circumstances that are not treated as resulting in the issuance of a new contract or as requiring testing under new tables • Guidance needed to address 2017 CSO transition – Notice 2016-63 addresses many issues, but permanent mortality transition guidance preferable

24. Routine Changes Versus “Pursuant to the Terms of the Contract” • Accommodation of routine, non-tax motivated changes that are pursuant to policyholder expectations • Changes in death benefit • Reconsideration of ratings (smokers who stop smoking) • Reinstatements • Addition of qualified additional benefits, change in death benefit option, addition/removal of rider

25. Notice 2016-63 • Issued by IRS on October 19, 2016 • Supplements Notice 88-128 and updates Notice 2006-95 • Addresses prevailing tables for section 7702 purposes • Provides safe harbors concerning the use of the 2017 CSO tables as prevailing tables • Provides guidance as requested by the industry concerning reductions in death benefits • If the only change to an existing contract is a reduction or deletion in benefits, the change will not affect the determination of the contract’s issue date for purposes of the safe harbor

26. PBR Tax Return Decisions • Do we deduct Stochastic and/or Deterministic Reserve Components of VM-20 on the tax return? • If not, how do we preserve our right if it is determined that these components are deductible? • What adjustments to later statutory reserves, if any, should be made if we deduct Stochastic and/or Deterministic Reserves on the tax return? • How do we preserve our rights if it is later determined that the adjustments made were too large? • Is a tax provision required under ASC 730 (and IRS Schedule UTP)?

27. Other PBR Tax Issues • What tax assumptions should be used for pricing? • Will updating assumptions be a change in basis of computing reserves? • Unlocking of assumptions? • Updates to VM-20? • Any impact on • Life company qualification? • Tax hedge accounting? • Reinsurance accounting?

28. QUESTIONS