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Attachment One

Valuation of Securities (E) Task Force

12/11/16

Draft Pending Adoption

© 2016 National Association of Insurance Commissioners 1

Date: 9/8/16


San Diego, California

August 27, 2016

The Valuation of Securities (E) Task Force met in San Diego, CA, Aug. 27, 2016. The following Task Force members

participated: Anne Melissa Dowling, Chair, represented by Kevin Fry (IL); Todd E. Kiser, Vice Chair, represented by

Jake Garn (UT); Dave Jones represented by Tomoko Stock and Joyce Zeng (CA); Katharine L. Wade represented by

Kathy Belfi (CT); Karen Weldin Stewart represented by Rylynn Brown (DE); David Altmaier represented by Katina Johnson

(FL); Nick Gerhart represented by Jim Armstrong (IA); Ken Selzer represented by Tian Xiao (KS); James J. Donelon

represented by Stewart Guerin (LA); Al Redmer Jr. represented by Lynn Beckner (MD); Bruce R. Ramge represented by

Justin Schrader (NE); Richard J. Badolato represented by Steve Kerner (NJ); Barbara D. Richardson represented by

Omar Akel (NV); Maria T. Vullo represented by Stephen Wiest (NY); John D. Doak represented by Joel Sander (OK);

David Mattax represented by Jamie Walker (TX); Jacqueline K. Cunningham represented by Doug Stolte (VA);

Mike Kreidler represented by Patrick McNaughton (WA); and Ted Nickel represented by Randy Milquet (WI).

1. Adopted its July 18, June 8 and Spring National Meeting Minutes

Mr. Fry requested the Task Force to review its minutes and noted that there was also a non-material correction posted on the

Task Force web page. A summary of the activity that occurred during these meetings includes: 1) adopted and referred an

interrogatory to the Blanks (E) Working Group to remove a segment of the 5* securities population from the Purposes and

Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to an interrogatory; 2) exposed proposed

amendments to the P&P Manual to: a) delete surplus notes guidance in the P&P Manual to conform to revisions to

SSAP No. 41—Surplus Notes; and b) to re-emphasize the regulatory nature of NAIC designations; 3) exposed a preliminary

report of the Structured Securities Group (SSG) discussing the “through-the-cycle” (TTC) orientation to financial modeling

and comparing it to the current pro-cyclical orientation of financial modeling; 4) adopted amendments to the P&P Manual to:

a) add Italian generally accepted accounting principles (GAAP) as a national financial presentation standard (NFPS);

b) modernize the NAIC Bank List process; and c) delete a public meeting requirement to set macroeconomic scenarios in the

financial modeling process; 5) approved the Rules and Systems Modernization Statement as guidelines for the redesign of the

Securities Valuation Office (SVO) systems and related filing rules, and agreed that the lead lender rule negatively impacts

Task Force operations, urging NAIC senior staff to consider an alternative; and 6) adopted and referred to the Statutory

Accounting Principles (E) Working Group an SVO and SSG proposal to amend the definition of loan-backed and structured

securities in SSAP No. 43R—Loan-Backed and Structured Securities.

Ms. Belfi made a motion, seconded by Mr. Milquet, to adopt the Task Force’s July 18 (Attachment One), June 8

(Attachment Two) and April 4 (see NAIC Proceedings – Spring 2016, Valuation of Securities (E) Task Force) minutes. The

motion passed unanimously.

2. Discussed its 2017 Proposed Charges

Robert Carcano (NAIC) summarized the changes to the Task Force’s 2017 proposed charges, which had previously remained

unchanged for approximately five years. One proposed change expands the meaning of the phrase “provide regulatory

leadership and expertise.” The intent to the first revision is operational in nature, for instance: identifying policy and

regulatory issues, providing a forum to discuss those issues, in which criteria, procedure and assessment processes could be

developed, maintaining the P&P Manual and assisting other NAIC guidance by providing and receiving expertise to other

NAIC groups. Other proposed revisions include replacing the full name of the P&P Manual and to specify that the Task

Force would provide oversight of the SSG, but not of the vendors directly. The vendors could be instructed on how the Task

Force would utilize their modeling processes. The 2017 charges also reflect that the SVO has conducted assessments of the

impact of the recalibration process project (which expands the number of NAIC designations). Other revisions reflect the fact

that the Task Force does not control all NAIC systems and processes; they are the responsibility of other NAIC groups.

Further, the Financial Condition (E) Committee instructed staff to delete references to the disbanded Invested Assets (E)

Working Group. Mr. Fry said he has received a lot of questions on the number of changes. Mike Monahan (American

Council of Insurance Commissioners—ACLI) thanked staff for providing a version of the charges containing tracked

changes and comment boxes.

Attachment One


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Given the substantial revisions, Ms. Stock and Ms. Belfi proposed scheduling an interim call to consider adopting the Task

Force’s 2017 proposed charges. The Task Force agreed.

3. Adopted the Report of the Reporting Exceptions Analysis (E) Working Group

Mr. Guerin summarized the report of the Reporting Exceptions Analysis (E) Working Group. The Task Force appointed this

Working Group at the Spring National Meeting in order to consider investment exceptions identified by the SVO and to

provide recommendations to the Task Force by October on how to reduce them. The Working Group met Aug. 8, June 21

and June 6 via conference call.

With respect to international securities, the NAIC has initiated steps to expand coverage of international security

identification numbers (ISINs), which should reduce these exceptions once implemented. With regard to U.S. government

securities, the Working Group believes the current annual statement reporting requirements may be confusing some insurers

and thus directed the SVO and Financial Regulatory Services (FRS) Division staff to prepare a proposal with

recommendations to modify their current reporting requirements to improve clarity. With regard to pre-refunded securities,

the Working Group determined that they should be filed with the SVO because they are no longer rated by a credit rating

provider (CRP). Some interested parties believe that there might be other solutions and the Working Group invited them to

develop and present their proposals for presentation to the Task Force. Until an alternative method has been found in this

regard, insurers should file with the SVO.

With regard to securities dropped from, or never included in, the CRP rating feeds and Bloomberg as a rating source, the

Working Group took two actions. The first was to direct staff to provide recommendations for communicating investment

reporting exceptions to insurers, in the hopes of encouraging discussion between all parties and coming up with other

solutions to the filing exempt (FE) issue. The second was to direct staff to draft a P&P Manual amendment to reconcile

compilation instructions to the current FE instructions in the P&P Manual. Thus, the FE process would become an SVO

administrative function of the AVS+ system, whose designations may be used as the basis for determining exceptions. The

Working Group clarified that insurers could use any source for designations within their financial statements; however, all

designations would be compared against those found on the AVS+ system, and any differences would be considered

exceptions that staff would then relay to the insurers via the AVS+ process currently under development.

Lastly, currently, there is no way to identify the largest group of exceptions—i.e., private letter ratings—in the insurance

investment schedules. The Working Group directed staff to develop a P&P Manual amendment and a blanks referral

suggesting a suffix to identify private letter ratings in the future. Regarding verification of private letter ratings, the Working

Group decided that they, too, should be verified at least annually just like public ratings, and proposed three options for

insurers: 1) provide a copy of the private letter rating to the SVO; 2) file the security with the SVO for a designation; or

3) not file and take a 5*/6* designation. Interested parties requested additional time to consult with others regarding the

confidentiality aspect of private letter ratings and to develop options to address the Working Group’s concern. The issue will

be discussed Aug. 31.

The Working Group expects to provide a final report to the Task Force by the end of September. David Chellgren (Conning

Asset Management) expressed concern that the new process would force insurers to subscribe to other CRP feeds, even if it is

not cost-effective. Conning has elected to subscribe to five of the eight CRP feeds, because it does not have many holdings

covered by the other three CRPs. This may lead to some exceptions because they do not have all of the CRP data feeds. He

hoped that insurers could still get an FE designation from the SVO. Mr. Guerin clarified that the proposed solution would

entail having the SVO convert all of the CRP feeds into an NAIC designation, to which all AVS+ subscribers would have

access.

Mr. Guerin made a motion, seconded by Mr. Akel, to adopt the report of the Reporting Exceptions Analysis (E) Working

Group, including its Aug. 8 (Attachment Three), June 21 (Attachment Four) and June 6 (Attachment Five) minutes. The

motion passed.

4. Heard A Status Report from FRS Staff on the Statutory Accounting Principles (E) Working Group’s Projects that

Concern the Task Force

Attachment One


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Julie Gann (NAIC) updated the Task Force on several Statutory Accounting Principles (E) Working Group projects that also

concern the Task Force. Regarding the subsidiary, controlled and affiliated (SCA) entities filing guidance, the Working

Group adopted the amendment, supported by the Task Force, to move the guidance from the P&P Manual to the Accounting

Practices and Procedures Manual (AP&P Manual). The Working Group will send a referral back to the Task Force to draft

the equivalent P&P Manual amendment.

Regarding money market funds (MMFs), in response to the Task Force’s actions, the Working Group adopted the revised the

SSAP guidance removing the Class One MMF list; as such, all MMFs will be reported as short-term investments on

Schedule DA. At this national meeting, the Working Group exposed an issue paper and a draft SSAP proposing MMFs be

reported as cash-equivalents on Schedule E, Part 2, proposed to be effective as of Jan. 1, 2018. The Industry supports an

earlier effective date. The Working Group also sent a referral to the Capital Adequacy (E) Task Force on the MMF change,

because the revisions might impact risk-based capital (RBC).

Regarding the ongoing Investment Classification Project, at this national meeting, the Working Group directed staff to draft

an issue paper to incorporate several changes to SSAP No. 26—Bonds. The latter include the definition of “security,” so as to

add to the definition of “bond” and to change the definition of “bank loan” to incorporate some of the terms considered by

this Task Force, and a new measurement method structure for SVO-identified bond exchange-traded funds (ETFs). To that

end, the Working Group will expose a calculation to determine “systematic value” proposed by BlackRock and will draft a

referral to the Task Force to review it.

At this national meeting, the Working Group re-exposed the topic of investment reporting schedules, with the inclusion of a

new alternative to collect investment information semiannually instead of the original quarterly proposal. This is a blanks

change; however, notification of the project and solicitation of discussion and input of regulators and interested parties is

being requested at various groups prior to making a formal recommendation to the Blanks (E) Working Group.

Regarding policy statements regarding coordination between the Task Force and the Working Group, this project is currently

deferred and the groups are still planning to conduct a joint call to consider those policy statements.

Ms. Gann also updated the Task Force on several investment issues: 1) credit losses – the Working Group received

information on adopted changes of the Financial Accounting Standards Board (FASB) in ASU 2016-13, replacing the current

“incurred” concept for recognizing impairment, with an “expected credit loss” concept. The Working Group exposed a

summary of this item for comments and anticipates significant GAAP to statutory accounting principles (SAP) differences; 2)

Investment Reporting (E) Subgroup – given that the Task Force received a similar referral, during this national meeting, the

Working Group adopted a response to the Subgroup, noting no opposition to the proposed reduction of collateral codes in

Schedule D, Part 1; 3) repurchase agreements – during this national meeting, the Working Group exposed revisions to the

SSAP No. 103—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities disclosure requirements for

repurchase and reverse-repurchase agreements, along with detailed disclosure templates to capture the information. Ms. Gann

repeated her comment from the Working Group meeting, if reviewing the templates, please do not be overwhelmed, only the

templates relevant to the way the transaction is structured would need to be completed.

The last two items are in response to Task Force referrals: 1) 5* securities – the Working Group adopted revisions to add a

new disclosure to collect information on 5* securities, including comparable information from the prior reporting period in

response to the Task Force referral. This was also exposed by the Blanks (E) Working Group for a new general interrogatory

for the reporting entities to certify their 5* securities; 2) on June 9, the Working Group adopted new accounting guidance for

short sales, as well as guidance for secured borrowing transactions. Ms. Gann emphasized that the guidance is only in place

for those states that allow short sales.

A question was raised about the number of collateral codes. John Bauer (Prudential Financial) clarified that the number of

collateral codes will be reduced to 10 and what will go back to the Investment Reporting (E) Subgroup is a further reduction

of residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), to a total reduction

of eight.

5. Heard Industry Comments Supporting the Proposed SSG Through-The-Cycle (TTC) Methodological Adjustment to

Financial Modeling of Residential Mortgage-Backed Securities (RMBS) and Commercial Mortgage-Backed Securities

(CMBS); Directed Staff to Undertake an In-Depth Study

Attachment One


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The current financial modeling of RMBS and CMBS is done by establishing the macroeconomic assumptions to establish as

base case economic scenario and then use that base scenario to create worse and better case scenarios. Each scenario is

assigned a weight that represents the chance that the economy will perform in accordance with it. The ACLI has consistently

expressed concern that the methodology makes it difficult for life insurance companies to manage capital, primarily because

the weights used in the scenarios change each year. Staff have responded that: 1) the financial modeling process was not

designed to make capital requirements predictable, but to calculate a reasonable balance between possible economic future

outcomes; 2) the method implies that capital treatment for some modeled securities will vary from year to year; and 3) the

concern with understanding likely changes in capital cannot be addressed by adjusting the model. Further, staff want to make

sure the Task Force understands that the ACLI’s concern reflects the use of a pro-cyclical “orientation,” which can be

changed if the Task Force is concerned with the capital issue.

On July 18, the SSG gave a presentation on an alternative, through-the-cycle (TTC) orientation (Attachment Six), which was

exposed for a 30-day public comment period ending Aug. 19. Mr. Monahan expressed the ACLI’s full support of the TTC

model, and strongly encouraged the Task Force to direct staff to move forward with the proposed model and expressed the

ACLI’s willingness to offer technical expertise, if needed. Mr. Carcano reminded everyone that some Task Force members

were not as supportive and expressed concerns about this change. He requested that the ACLI explain the details regarding

how the new model would impact RBC. The project would require significant staff resources. Mr. Monahan said the ACLI

will work on the requested detailed response. Mr. Fry agreed that the Task Force should consider more evidence and get

more industry support before changing the model.

Ms. Brown said her initial concern is that the new model is less conservative, in anticipation of economic downturns;

however, that may not reflect the actual value of a security. Another issue would be the value of the collateral, which may

decrease in value during a downturn. She suggested that, if that is the case, maybe an override mechanism could be put in

place. Ms. Brown said a more in-depth study could help Task Force members understand such issues. She expressed support

for the TTC model.

Ms. Brown made motion, seconded by Ms. Walker, to direct the SSG staff to conduct a more in-depth study of the TTC

financial modeling approach.

6. Heard an SSG Report on BlackRock’s Changes to the CMBS Financial Model and its Impact on Insurer-Held CMBS

On July 18, staff reported that BlackRock had made changes to its CMBS financial model. Staff completed an impact

analysis in order to assist the Task Force in evaluating the impact the changes will have on insurer-owned CMBS and to

consider if any regulatory action, if any, is needed.

Steve Bardzik (NAIC) presented the BlackRock Solutions Enhancements to CMBS Model staff report (Attachment Seven).

BlackRock has been the NAIC’s vendor for analyzing CMBS risk since 2010. The SSG is currently in the process of

analyzing BlackRock’s enhancements to the model and will undertake a transparency process for the new model during 2017

in order to provide a clearer understanding of its effects to both the Task Force and the industry. Staff expect to roll out the

model by year-end 2017, pending Task Force approval.

Preliminary results indicate that the enhanced model is somewhat more conservative than the one currently used. The overall

outline of the credit evaluation process takes the form of a four-step model initiated with an estimation of the macroeconomic

model, which encompasses four different scenarios: base case; optimistic; conservative; and especially conservative. The

enhancements occur in the actual credit model, the second step of the process, which estimates the cash-flows of commercial

mortgages. They are then aggregated for pools of mortgage and put through the Trepp system of the cash-flow waterfall to

allocate the cash-flows to sequential bonds. Finally, staff look at certain key indicators to estimate risk in valuation and

designations.

Mr. Bardzik explained that a CMBS deal is a series of sequential bonds, backed by pools of commercial mortgages put into a

special legal structure. The mortgage collateral cash-flows are pooled and then passed through to the CMBS deal waterfall

where they are allocated to the bond sequentially. Principal and interest payments are typically allocated to the bond

sequentially from the most senior to the most subordinate, while losses are allocated from the bottom up, thus making the

subordinate the riskiest bonds. The subordination levels become very important.

Attachment One


12/11/16



Mr. Bardzik then delineated the actual BlackRock enhancements. In the property cash flow construction, the prior model’s

starting point began at “sustainable cash flow”; however, due to improvements in reporting of property performance, it is

now possible to use property-level financial results as actually reported as the cash-flow starting point. That is rolled forward

in time into lease simulations that are used for specific market forecasts of rent, vacancy, etc. Also, expenses are reevaluated

as fixed or variable, which allows for greater precision in the cash flow forecast and, thus, greater accuracy. In the model, the

Monte Carlo simulation framework has to do with a calculation methodology. Property cash flows are now projected using a

multipath simulation of tenant-lease renewals and lease-up of vacant space, which generates a probabilistic distribution of

property cash flows, which allows for an accounting of divergent property performances within its market. There is no

guarantee that individual properties will perform exactly as the overall market. Property values are determined using a

discounted cash flow approach which also produces a probabilistic distribution of overall values.

Mr. Bardzik said the new model better captures idiosyncratic or property-level risk, those inherent to any individual property,

usually dependent upon tenant performance. Losses under the enhanced model are expected to be somewhat higher across the

vintages of CMBS; larger differences tend to be concentrated along the peak-year vintages 2006, 2007 and in the more recent

issuance in 2014 and 2015. Single-asset transactions are not expected to be affected, because they are typically higher quality

real estate investments and, thus, receive more rigorous underwriting and scrutiny at inception. However, an effect on bond

level designation is expected in legacy conduits prior to 2010, concentrated in the mezzanine AJ and AM bonds from the

peak vintages. This is a result of the conservative modeling, which will lead to moderately higher losses, which will reach a

little higher in the capital structure. On the other hand, that effect will be somewhat muted because those transactions, having

been on the books for seven to nine years, have been paid down and the loan-to-value ratios have declined. Nevertheless,

there have not been major paydowns on more recent vintages and losses are expected to be moderately higher because the

model now better captures those asset specific risks. The effects of these more accurate enhancements are expected to be

more than marginal but overwhelming.

Regarding next steps, Mr. Bardzik said the conceptual framework is well established in accordance with the theory and the

research. Staff is now conducting quality assurance on loan-level and bond-level results, which will continue through the first

quarter of 2017. Once staff becomes comfortable with the results of the model, they will undertake a transparency initiative,

in the first two quarters of 2017, so that the industry can better understand the model effects. Staff will confer with the Task

Force on the findings before finalizing the model. Implementation is expected toward year-end 2017.

7. Adopted a P&P Manual Amendment to Revise Financial Assessment Instructions Reflecting Revisions to SSAP No. 41-

-Surplus Notes

On June 8, the Task Force discussed a referral from the Statutory Accounting Principles (E) Working Group advising that

revisions to SSAP No. 41 required revisions to the surplus notes guidance in the P&P Manual. The Task Force directed staff

to review the revisions and draft a corresponding P&P Manual amendment. On July 18, the Task Force discussed the

amendment and released it for a 30-day public comment period ending Aug. 19. No comments were received.

Mr. Kerner made a motion, seconded by Mr. Milquet, to adopt the amendment to the P&P Manual to revise financial

assessment instructions reflecting the SSAP No. 41 revisions. The motion passed.

8. Exposed a Referral to the Statutory Accounting Principles (E) Working Group to Clarify the Status of Debtor-in-

Possession Financings

On June 8, the Task Force discussed an amendment to the P&P Manual instructions for bank loans and decided to defer

adoption until the Statutory Accounting Principles (E) Working Group concluded is deliberation on the corresponding

accounting guidance. SVO staff recently learned that debtor-in-possessions (DIP) financings, a type of bank loan, are not

specified in the AP&P Manual. Currently, the AP&P Manual may characterize DIP financings as collateral loans in the scope

of SSAP No. 21—Other Admitted Assets, which would mean they would be reported on Schedule BA, Part 1, as other long-

term invested assets. The SVO, therefore, recommended a Task Force referral for the Working Group to consider clarifying

the status of DIP financings during its review of the statutory accounting for this asset class, because it would further align

NAIC guidance for bank loans.

Attachment One


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Ms. Belfi made a motion, seconded by Ms. Stock, to receive and expose the SVO memorandum and recommendations on

DIP financings for a public comment period ending Oct. 1. The motion passed.

9. Adopted an Amendment to the P&P Manual to Add H.R. Ratings de Mexico, S.A. de C.V., to the NAIC List of

Approved Credit Rating Providers (CRPs)

Mr. Carcano stated that, at the 2015 Summer National Meeting, H.R. Ratings de Mexico, S.A. de C.V. (HR Ratings)

requested that it be added to the NAIC CRP List. To that end, the Task Force directed staff to proceed with the contractual

and system arrangements and draft a corresponding P&P Manual amendment when those processes were completed. HR

Ratings is registered with the U.S. Securities and Exchange Commission (SEC) as a nationally recognized statistical rating

organization (NRSRO) for credit ratings issued to government, municipal or foreign governments either for securities or

counterparty risk. H.R. Ratings has met all NAIC requirements under its Policy on the Use of NRSRO Credit Ratings, and

the NAIC Legal Division and NAIC Information Technology Group staff have completed the necessary steps. The NAIC will

begin receiving H.R. Ratings data feeds as of September.

Ms. Stock asked how many securities H.R. Ratings covers. Mr. Carcano did not know and said that NAIC is only required to

verify that a CRP is registered and is regulated as an NRSRO with the SEC. Chris Anderson (Anderson Insights) observed

that it would be helpful if the CRP limitations were indicated in the P&P Manual. Mr. Carcano said that staff have been

considering such a project and will pursue it when time permits. He also explained the particular reasons why it should be

undertaken as a separate project. Mr. Carcano also noted a small change to the proposed amendment to correctly portray H.R.

Ratings with the appropriate parenthetical text.

Mr. Akel made a motion, seconded by Mr. Garn, to adopt the amendment, as modified, to the P&P Manual to add

HR Ratings to the NAIC CRP List and to publish the equivalency of HR credit ratings to NAIC designations in the

P&P Manual. The motion passed.

10. Exposed a P&P Manual Amendment to Delete Two Outdated Instructions for Verifying Credit Ratings and Exchange-

Traded Prices

In the course of Task Force discussions, staff noticed that references were made to instructions in the P&P Manual that are no

longer relevant and should be deleted. Mr. Carcano explained that the amendment seems lengthy because there are two

specific instructions that are repeated in multiple places.

The first instruction is concerned with ways to verify that a security has been rated in the specific circumstance that an insurer

files an FE security with the SVO; for instance, that the insurer provide a copy of the page of the CRP’s rating publication

that shows the rating. Not only does this never happen, the instruction was created when systems were paper-based, and if it

was filed, it would be treated according the FE process; the SVO has no discretion to go higher or lower than whatever that

process derives.

The second instruction is concerned with ways to verify the price at which common stock, warrants or preferred stock trade

on an exchange. An example is that the insurer may print and send a copy of the screen of specified data sources that show

the traded price on a specific date. The instructions are obsolete, because SVO analysts use credit ratings and information on

trading prices from licensed CRP data feeds and pricing vendor data bases incorporated into NAIC computer systems. The

proposed amendment would also delete text that identifies the documentation needed to analyze a security rated below “A,”

or rated differently by two or more NAIC CRPs. The SVO has no analytical missions in which it would require staff to apply

that distinction or ask for the identified documentation.

Mr. Monahan again requested a clean copy of the amendment, along with the one showing tracked changes. Mr. Fry agreed

that staff should post both versions of amendments going forward.

Ms. Stock made a motion, seconded by Mr. Xiao, to receive and expose the amendment to delete two outdated instructions

for verifying credit ratings and exchange-traded prices for a public comment period ending Sept. 30. The motion passed.

11. Received a Referral from the Investment Reporting (E) Subgroup of the Blanks (E) Working Group to Comment on a

Proposal to Reduce Collateral Type Categories

Attachment One


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The item is a referral from the Investment Reporting (E) Subgroup requesting comments from the Task Force on a proposal

to reduce the number of collateral type categories from 21 to 10, and perhaps to eight, in order to provide more detailed

explanations and examples to the remaining categories. Ms. Gann said the Statutory Accounting Principles (E) Working

Group also received the referral and did not oppose the reduction in collateral type categories. Mr. Carcano said the SVO has

no insight on this and thus cannot offer guidance.

Ed Toy (NAIC) explained that the Capital Markets Bureau (CMB) uses that information to do its work and has found it

inconsistent over the years, because of the reporting and because there are some line items with zero or nominal exposures.

The CMB has worked with the Investment Reporting (E) Subgroup, as well as Mr. Bauer and other interested parties to

figure out the categories that add value and clarity to the instructions. Some of the instructions were not clear regarding where

asset classes should go. The proposal is the result of those discussions. The initial staff proposal was to reduce it to

10 categories. The industry had questions about the need of an RMBS/CMBS column because there are separate line codes.

Mr. Toy emphasized, however, that eliminating RMBS/CMBS column might cause confusion among some companies who

might think erroneously that they are no longer under SSAP No. 43R. Mr. Fry asked Mr. Toy whether the CMB found 10 or

eight categories more useful. Mr. Toy answered that 10 was the consensus among staff and the industry.

Ms. Brown made a motion, seconded by Ms. Belfi, to direct staff to prepare a response to the Investment Reporting (E)

Subgroup indicating the Task Force does not oppose its proposal to reduce the number of collateral categories to 10. The

motion passed.

12. Received a Referral from the Statutory Accounting Principles (E) Working Group and Exposed an Amendment to the

P&P Manual to Delete Reporting Instructions for Money Market Mutual Funds (MMF)

The Statutory Accounting Principles (E) Working Group sent the Task Force a referral to inform them it of the revision of

accounting guidance applicable to money market mutual funds (MMFs) and requesting that the Task Force remove reporting

references from the P&P Manual to prevent unintended conflicts with accounting and blanks instructions. Staff drafted a

proposed amendment for the Task Force to consider that would respond to the referral by identifying and deleting reporting

instructions.

Mr. Armstrong made a motion, seconded by Mr. Kerner, to receive the Working Group’s referral and to expose the proposed

P&P Manual amendment to respond to the referral for a public comment period ending Sept. 30. The motion passed.

13. Exposed an SVO Report on Adding Belgium GAAP as an NFPS in the P&P Manual

At the Spring National Meeting, the ACLI requested that the Task Force direct staff to study whether Belgium generally

accepted accounting principles (GAAP) could be included on the NFPS list in the P&P Manual, so that securities can be filed

with the SVO without reconciliation to U.S. GAAP or International Financial Reporting Standards (IFRS). In order to add a

country to the NFPS list, staff must first determine whether an NAIC designation produced using that country’s NFPS would

be comparable to one produced using either U.S. GAAP or IFRS. On June 28, Deloitte Brussels and the Brussels IFRS

Center for Excellence gave a presentation to the SVO to identify relevant financial differences between Belgium GAAP and

IFRS. Staff concluded that it can produce NAIC designations using Belgian GAAP comparable to using U.S. GAAP or IFRS.

Ms. Stock made a motion, seconded by Mr. Milquet, to expose the staff report on adding Belgium GAAP to the NFPS list in

the P&P Manual for a public comment period ending Sept. 30. The motion passed.

14. Directed Staff to Draft an Amendment to the P&P Manual Discussing Operational Processing and Filing Instructions

Under the New VISION Filing System

Mr. Fry said that, on Aug. 31, the NAIC will roll out the first stage of VISION, the new computer platform for filing

securities with the SVO, thus replacing the prior filing platform, Integrated Securities Information System (ISIS). As a result,

references to ISIS in the P&P Manual will no longer apply. Mr. Carcano explained that all the filing instructions are also

obsolete and, thus, instructions for filing via VISION must be drafted. The Task Force directed staff to draft the necessary

amendment to refer to the new VISION filing platform, its filing requirements and instructions.

Attachment One


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15. Discussed Other Matters

Steve Broadie (Property Casualty Insurers Association of America—PCI) announced Doug Barnert’s (Barnert Associates)

retirement after his 30-year contribution to the NAIC’s efforts. The Task Force warmly acknowledged Mr. Barnert’s role and

service.

Having no further business, the Valuation of Securities (E) Task Force adjourned.

W:\National Meetings\2016\Fall\TF\VOS\01VOSTF Summer National 2016 Meeting Minutes - FINAL.docx

Attachment Two Valuation of Securities (E) Task Force

12/11/16


MEMORANDUM TO: Kevin Fry, Chair, Valuation of Securities (E) Task Force Members of the Valuation of Securities (E) Task Force FROM: Stewart Guerin, Chair, Reporting Exceptions Analysis (E) Working Group Members of the Reporting Exceptions Analysis (E) Working Group Bob Carcano, Senior Counsel, NAIC Investment Analysis Office CC: Charles Therriault, Director, NAIC Securities Valuation Office DATE: September 12, 2016 RE: Report and Recommendations of the Reporting Exceptions Analysis (E) Working Group

[Marked to show changes made by the Working Group prior to adoption.]

1. Report – The Reporting Exceptions Analysis (E) Working Group was asked to review an SVO report on reporting anomalies,1 evaluate industry comments on the report,2 identify the causes of the anomalies and formulate recommendations to resolve them. The Working Group makes the following determinations and recommendations. The SVO Report – The SVO report is concerned with anomalies in the reporting data used to compile the SVO List of

Securities (“List”), not the Jumpstart process. The List is a Task Force product and the official source of NAIC Designations. The Working Group recommends that the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) be amended to outline data quality assessment and data anomaly resolution processes, the latter of which should permit direct interaction between the SVO, state examiners and insurers.

International Securities – NAIC computer systems do not currently recognize international security identification numbers (ISINs). The NAIC is integrating ISINs into its systems, which would resolve these anomalies.

U.S. Government Securities – In some cases, U.S. government securities are reported as filing exempt (FE) securities instead of as exempt government securities. Also, the reporting instruction for government securities requires the aggregation of government exempt and government non-exempt securities, which seems to confuse filers. The Working Group recommends that the SVO and the NAIC Financial Regulatory Services (FRS) Division develop a proposal to modify the reporting instructions to ameliorate the cause of the anomaly, for eventual referral to the Blanks (E) Working Group.

1 The SVO report titled, “Report: Causes of, and Recommendations to Address, Exceptions on the Jumpstart Exception Report,” dated March 9, 2016, was presented to the Task Force on April 4 at the Spring National Meeting. 2 The SVO report was received and released for a 30-day public comment period. At the conclusion of the comment period, the SVO transferred the report and comment letters received to the Working Group. The Working Group received and evaluated a joint comment letter from the American Council of Life Insurers (ACLI) and the North American Securities Valuation Association (NASVA), as well as comment letters from American International Group (AIG), Anderson Insights and the Private Placement Investors Association (PPiA).


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Pre-refunded Securities – Pre-refunded securities are not rated. The P&P Manual recognizes this and requires pre-refunded securities to be filed with the SVO. The Working Group recommends that industry representatives be instructed to file these securities and that state examiners be asked to supervise such filings.

Ratings Obtained from Bloomberg and NRSRO Websites – Currently, insurance companies produce and report NAIC Designation equivalents to the NAIC, identifying the securities with the FE suffix. The P&P Manual requires insurers to obtain NAIC credit rating provider (CRP) ratings but does not explicitly require that insurers purchase nationally recognized statistical rating organization (NRSRO) data feeds. It appears that even insurance companies that purchase NRSRO data feeds may not purchase all nine of them. Insurance companies also use a variety of sources to obtain credit ratings. This means that NAIC Designation equivalents produced by insurers may not be consistent across companies. Also relevant is that the P&P Manual instructs the SVO, as part of its compilation function, to independently produce NAIC Designation equivalents for FE securities. To perform this function, the SVO purchases all NRSRO data feeds and uses an electronic process to translate NRSRO credit ratings into an NAIC Designation equivalent. It is not surprising that these circumstances would lead to discrepancies between NAIC Designation equivalents produced by the SVO and those produced by insurers. The List, published in the AVS Plus, is a Task Force product and the NAIC’s official source of NAIC Designations. The Working Group recommends that the FE-related instructions to insurers be reconciled with those of the SVO to make the production of NAIC Designation equivalents for FE securities the exclusive responsibility of the SVO. The P&P Manual should also be amended to say that while insurers can use whatever credit rating source they want for internal operations, the accuracy of their reporting will be evaluated by reference to the NAIC Designation equivalents published in the AVS Plus product.

Private Letter Ratings – Credit ratings communicated in private letters given to the issuer are not distributed in NRSRO

data feeds that are used exclusively for public securities. Since the adoption of the FE rule in 2003, the SVO has sought to obtain private letter ratings from the major NRSROs without success. Even today, NRSROs say they are legally constrained from sharing private letter ratings without the issuer’s permission. They manage this legal obligation through a confidentiality procedure. The Working Group concluded that it is inconsistent with the procedures of the Task Force for securities subject to private letter ratings not to be subject to the same initial reporting and annual review process that applies to all other securities. The Working Group recommends that, beginning Jan. July 1, 2017, insurance companies be required to verify the credit rating assigned to any private letter securities they own. The Working Group recommends the following verification procedure:

a) Insurance company representatives have indicated they will explore the possibility that NAIC CRPs could provide

the SVO with data-feeds containing the credit rating assigned to securities subject to private letter ratings. Until such time as such discussions bear fruit, however, the following procedures are recommended.

b) Insurance companies would promptly file with the SVO private rating letters received from NAIC CRPs after Jan. 1, 2017.

c) The SVO would verify whether the security is rated by an NAIC CRP and that the rating meets the requirements in the FE rule. If the security is rated, the SVO would assign it an NAIC Designation equivalent, attach a new suffix to the security to facilitate identification of private letter ratings for NAIC reporting purposes and input this information into NAIC computer systems.

d) The SVO would subsequently collect all private letter securities with the unique suffix as part of its compilation function and publish that population of securities in AVS Plus.

e) A security no longer the subject of a private letter would be filed with the SVO for an independent credit risk assessment.

f) If the insurance company does not have the necessary documentation for an SVO credit assessment, the insurer would be permitted to apply the 5*/6* procedure. This procedure closely follows what is in place for FE securities.


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3. Implementing Amendments to the P&P Manual – The Working Group also transmits an SVO memorandum containing proposed amendments to the P&P Manual that would implement the recommendations contained in this report. The Working Group proposes that the recommendations of the Working Group and the proposed amendments be received and released by the Task Force for a public comment period. W:\National Meetings\2016\Fall\TF\VOS\REAWG Final Report to the TF 091916.docx

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MEMORANDUM

TO: Stewart Guerin, Chair, Reporting Exceptions Analysis (E) Working Group

Members of the Reporting Exceptions Analysis (E) Working Group

FROM: Bob Carcano, Senior Counsel, NAIC Investment Analysis Office

CC: Charles Therriault, Director, NAIC Securities Valuation Office

DATE: September 12, 2016

RE: Recommended Amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office

(P&P Manual) to Implement Recommendations of the Reporting Exceptions Analysis (E) Working Group to the

Valuation of Securities (E) Task Force.

1. Introduction – This memorandum transmits proposed amendments to the P&P Manual that would implement the

recommendations of the Reporting Exceptions Analysis (E) Working Group to the Valuation of Securities (E) Task Force.

2. Summary of the Amendments – In the order in which they appear, the proposed amendments:

Modify phraseology used in Part One, Section 2 (a) of the P&P Manual (Directive to Conduct Ongoing SVO

Operations) to reflect that SVO would produce NAIC Designation equivalents for filing exempt (FE) securities and for

private letter (PL) securities (hereafter defined). The amendment also modernizes some existing text.

Reposition instructions that limit SVO discretion in the use of nationally recognized statistical rating organization

(NRSRO) credit ratings in Part One, Section 2 (c) (iv) (Limitations on the Use of NAIC CRP Ratings) to Part Three, so

that all instructions related to FE and PL securities are in one location.

Modify the definition of the FE symbol in Part One, Section 3 (Internal Administration) (b) (Definitions of …) (v)

Administrative Symbols) and propose a new definition for the symbol PL to be used to identify private letter rating

securities; modify the text in the Valuation of Securities Process and Filing Exempt Securities Process descriptions and

add a description for PL Securities Process. [The word Process refers to a storage file used to collect and store

information about the corresponding population of securities for the compilation process.]

Expand the instructions for the Compilation and Publication of the SVO List of Securities in Part One, Section 3 (k) to

clarify that the AVS Plus product is the official source of NAIC Designations; provide for data quality assessment and

reporting anomaly resolution processes; clarify that the NAIC would not publish the credit ratings of NRSROs in the

AVS Plus product or other NAIC publications to ensure compliance with NRSRO licensing restrictions.

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Modify Part One, Section 4 (NAIC Policy on the Use of Credit Ratings of NRSROS) to identify a new location for the

FE rule; redirect NRSRO applicants to the SVO Director; require SVO to report changes in the composition of credit

rating providers (CRPs) to the Task Force and identify PL securities; i.e., the private letter rating population.

Relocate the NAIC CRP List and the credit rating to NAIC Designation conversion tables in Part One, Section 7 (d) to

Part Three, so that all instructions related to FE and PL securities are in one location.

Edit the definitions in Part Two, Section 1 (General Definitions Used in This Manual), for CRP, Filing Exempt

Securities Process, to delete the “Unconfirmed FE” definition and to add a new definition for “PL Securities Process.”

Relocate the FE instructions for converting credit ratings to NAIC Designations in Part Two, Section 4 (d) to

Part Three; retaining the remaining text that applies to Public Common Stock.

Provide for a new “permitted use of 5*/6*” for PL securities in Part Two, Section 5 (i) (Special Reporting Instruction))

(Other Permitted Uses …)

Delete outdated paper-based verification procedures in Section 10 (Reporting Conventions and Required Documents)

that would be inconsistent with the SVO process for producing NAIC Designation equivalents for FE securities. [The

same text was previously identified for deletion in an unrelated project.]

Amend Part Three, Section 1 (a) (Corporate Bonds and Preferred Stock) to more clearly differentiate the methodology

for SVO independent credit quality assessments and modify the Audited Financial Statement requirement to clarify how

SVO administers this aspect of quality assessment operations.

Add a new Section b) to Part Three to house procedures and instructions for the production of NAIC Designation

equivalents for FE securities and for PL securities. This section contains the filing exemption formerly in Part Two,

Section 4 (d). The section proposes to continue current practice that insurers identify securities FE securities. The

section houses a new procedure for PL securities. New text points to SVO discretion to ignore an Eligible NAIC CRP

Credit Rating when it produces FE and PL securities. [This is not a request for a grant of new authority, but an

application of the rule in Part Two, Section 4 (c) (iv) of the P&P Manual (Disclosures and Considerations Related to the

Translation of Credit Ratings into NAIC Designations)] and proposes a Task Force review mechanism to constrain the

exercise of that discretion. Current instructions for how the FE procedure applies to other population of securities is

retained in this section, as is the Table of Equivalents of Eligible NAIC CRP Ratings to NAIC Designations and

existing text limiting SVO Use of NAIC CRP Ratings.

3. Proposed Amendments (Showing text if all proposed amendments are adopted.)

Part One - Purposes, General Policies and Instructions to the SVO

Section 2. Policies Defining the SVO Staff Function

a) Directive to Conduct Ongoing SVO Operations

To support the implementation of the standards specified in the NAIC Financial Conditions Framework, the SVO shall

conduct the following ongoing operations:

(i) Produce NAIC Designations in accordance with the various methodologies, procedures and criteria established by

the Valuation of Securities (E) Task Force in this Manual.

(ii) Determine values, in the form of a Unit Price, for insurer owned securities as and when required to do so and in

accordance with the procedures specified in this Manual.

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(iii) Identify and analyze securities that contain other non-payment risk (as defined in this Manual) and communicate the

result of the analysis by assignment of an appropriate NAIC Designation and the subscript that identifies that the security is

subject to this methodology.

(iv) Such other analytical assignments as may be requested by the Valuation of Securities (E) Task Force; another NAIC

regulator group or members of the NAIC; in accordance with the directives, procedures and general methodologies described

in this Manual.

(v) Compile and publish the SVO List of Securities in the AVS+ products and conduct any and all ancillary processes to

ensure an accurate publication; including the periodic assessment of data quality and the resolution of reporting anomalies in

the data associated with securities reported as owned by insurers in accordance with the instructions provided in this Manual

…

c) Special Instructions to the SVO …

Section 3. Internal Administration …

(b) Definitions of NAIC Designation Categories, Valuation Indicators, Administrative Symbols and Conventions …

(v) SVO Administrative Symbols …

(A) SVO analytical department symbols (except for the SVO SCA Companies Group) …

FE means exempt from filing with the SVO and is used by an insurance company to identify an exempt security. NAIC

Designation for FE securities are assigned by the SVO pursuant to the instructions and procedures in Part Three Section 1 (b)

of this Manual. The NAIC Designation determined by the SVO is disseminated in the SVO List of Securities compiled and

published pursuant to the SVO’s compilation function as described in Section 3 (k) of this Part One. The administrative

symbol FE is used with an NAIC 1 through 6 Designation, and in the case of preferred stock, in combination with the P and

RP Valuation Indicators …

PL stands for a private letter rating and refers to an insurer owned security that has been assigned a private rating by an

NAIC CRP which rating is not publicly disseminated in the CRP’s data-feeds but is instead published in a letter provided by

the CRP to the issuer of the security and to the insurer as an investor or that has subsequently been obtained by the insurer

and submitted to the SVO under the procedures specified in Part Three, Section 1 (b) of this Manual. The administrative

symbol PL is assigned to the security by the insurer in conjunction with reporting instructions to identify such securities. The

administrative symbol PL is used with an NAIC 1 through 6 Designation, and in the case of preferred stock, in combination

with the P and RP Valuation Indicators …

e) Valuation of Securities Process

Upon determination of either component of an Association Value, (i.e., the NAIC Designation or Unit Price), and of a

classification, as the case may be, for an Investment Security, (defined in Part Two, Section 2 (a) of this Manual), the SVO

shall enter such NAIC Designation, Unit Price and classification in the NAIC's Valuation of Securities Process. The

Valuation of Securities Process is used to store NAIC Designations produced by the SVO on the basis of an independent

analysis under the analytical methodology in Part Three, Section 1 (a) of this Manual; or such other methodologies or

procedures specified in this Manual for the population of securities.

The SVO shall not add a Regulatory Transaction, as defined in Part Three, Section 2 (e) of this Manual, to the VOS Process

…

g) Filing Exempt Securities Process

A filing exempt (FE) security is an Investment Security, as defined in Part Two, Section 2 (a) of this Manual, that is exempt

from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual and is subject to the

procedure specified in Part Three, Section 1 (b) of this Manual. Insurance companies report FE securities to the NAIC as part

Attachment Two


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of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list of such securities and information

about them in the Filing Exempt Securities Process. SVO produces and assigns NAIC Designations to FE securities using a

computer process that applies the procedure specified in Part Three, Section 1 (b) of this Manual. The SVO shall not add an

FE security that is a Regulatory Transactions, (defined in Part Three, Section 2 (e) of this Manual), to the Filing Exempt

Securities Process.

h) PL Securities Process

A security subject to private letter rating, i.e., a PL security is an Investment Security, as defined in Part Two, Section 2 (a) of

this Manual, that is exempt from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual,

and is subject to the procedure specified in Part Three, Section 1 (b) of this Manual. Insurance companies report PL securities

to the NAIC as part of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list of such

securities and information about them in the PL Securities Process. SVO produces and assigns NAIC Designations to FE

securities using a computer process that applies the procedure specified in Part Three, Section 1 (b) of this Manual. The SVO

shall not add an PL security that is a Regulatory Transactions, (defined in Part Three, Section 2 (e) of this Manual), to the

Filing Exempt Securities Process …

l) Compilation and Publication of the SVO List of Securities

(i) Status

Until such time as the Valuation of Securities (E) Task Force shall instruct the SVO to publish the SVO List of Securities

(discussed in this sub-section) in a different location, the SVO shall publish the List of Securities only in the AVS Plus

product. The AVS Product is identified as the sole official source of NAIC Designations.

(ii) Data Quality Assessment Procedure

In any given year, prior to the publication of the first quarterly SVO List of Securities, the SVO shall obtain the latest NAIC

year-end reporting data on insurer owned securities, assess the accuracy of the data presented and resolve reporting anomalies

in the reported data as specified in this sub-section.

As used herein, a reporting anomaly means that an Investment Security, defined in Part Two Section 2 (a) of this Manual,

was not filed with the NAIC for assignment of an NAIC Designation in accordance with the applicable methodology or

procedure specified in this Manual; or that the security was reported as having been designated by the SVO when it was not;

or that the security is a Regulatory Transaction and not eligible for treatment as an Investment Security; or that the security is

a form of indebtedness not subject to assignment of an NAIC Designation or that some other reporting inconsistency exists –

which if not corrected would make the data inaccurate.

The SVO shall develop and maintain procedures to identify and resolve reporting anomalies for Investment Securities that

are consistent with the methodology or procedure by which NAIC Designations are assigned to the securities and the specific

Process where data from that category of securities is maintained. The SVO shall:

Compile sub-lists of reporting anomalies corresponding to the specific Process and provide a preliminary assessment of

the cause or source of the anomalies;

Compile the sub-lists into a report;

Identify the top ten (or more or less) companies that own the securities and the state(s) of domicile corresponding to

those companies;

The resulting report shall be a confidential report and may not be publicly disseminated. The SVO shall then schedule, in

accordance with the NAIC Open Meetings Policy, a regulator to regulator session of the Valuation of Securities (E) Task

Force to discuss the report;

Deliver the SVO report to the Valuation of Securities (E) Task Force.

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The Valuation of Securities (E) Task Force shall hear and review the SVO report, provide comments or instructions to the

SVO relative to its subject matter and appoint one or more of its members to represent the Task Force and work with the

SVO Director to communicate with other NAIC regulator groups and the specific state insurance department officials to

resolve the reporting anomalies.

(iii) Compilation and Publication of the SVO List of Securities

On a quarterly basis, the SVO shall:

1) Compile, or cause to be compiled, a list of Investment Securities from each of the VOS Process, Filing Exempt Securities

Process, PL Securities Process; RMBS/CMBS Modeled Securities Process, U.S. Treasury Process and the Exempt U.S.

Government Securities Process (each an SVO Sub-List bearing the name of the corresponding Process).

When compiling or publishing the SVO List of Securities the NAIC shall not publicly show, display or disseminate the credit

ratings of NRSROs in the AVS Plus product or in any other NAIC publication associated with the operations of the Valuation

of Securities (E) Task Force.

2) Aggregate the content of each SVO Sub-List into a single SVO List of Investment Securities (hereafter, the SVO List of

Securities) identifying each Investment Security by name and other pertinent information and showing the NAIC Designation

and/or Unit Price assigned to them by the SVO or pursuant to such other methodology or procedure specified in this Manual.

3) Compile, or cause to be compiled, sub-lists from the informational content of the Derivative Counterparties Process,

Exchange Rates Process, Ex-Dividend Process, Letter of Credit Process, Money Market and Exchange Traded Fund Process

and Surplus Notes Processes (each an SVO Sub-List bearing the name of the corresponding Process and collectively the

“Other Information”).

4) Publish, or cause the SVO List of Securities and the Other Information to be published, by being incorporated into the

NAIC’s AVS + product. …

Section 4. NAIC Policy on the Use of Credit Ratings of NRSROS

a) Providing Credit Rating Services to the NAIC

The NAIC uses credit ratings for a number of regulatory purposes, including, but not limited to, those associated with the

filing exempt rule, discussed in Part Three, Section 1 (b) of this Manual. …

b) Procedure to Become an NAIC Credit Rating Provider

An NRSRO that wishes to provide Credit Rating Services to the NAIC may indicate its interest by sending a letter to the

Director of the SVO in which it:

Indicates an interest in providing Credit Rating Services to the NAIC;

Confirms that it is currently an NRSRO subject to regulation by the SEC;

Provides a chart, in the format shown in Part Three, Section 1 (b) of this Manual, relating its credit rating symbols to

NAIC Designations; and

Indicates that the NRSRO agrees to enter into a legally binding agreement under which the NRSRO will:

Provide Credit Rating Services to the NAIC at no cost;

Reimburse the NAIC for all costs associated with: integration of it data feed into NAIC systems, subsequent changes

to NAIC systems to accommodate changes in the NRSRO’s systems and changes to NAIC systems as a result of the

termination of Credit Rating Services by the NRSRO;

Give written notice 6 month prior to terminating Credit Rating Services; and

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Agree not to claim in marketing literature that the provision of Credit Rating Services indicates NAIC approval or

endorsement of the NRSRO, its products or services.

The SVO Director shall coordinate the contractual and other arrangements with the NRSRO applicant consistent with this

policy and with NAIC internal administrative procedures related to contracts. The SVO shall thereafter administer the NAIC

CRP List.

c) Adding the NRSRO to the NAIC Credit Rating Provider List

When directed to do so by the VOS/TF, the SVO shall add the name of the NRSRO (hereafter described as a Credit Rating

Provider (CRP)) to the NAIC Credit Rating Provider List in the publication of this Manual after the execution of an

agreement between the NAIC and the NRSRO and the completion of any other internal administrative issues.

(i) Impact on the Filing Exempt Rule

Adding the name of an NRSRO to the Credit Rating Provider List means that the SVO will use the Eligible NAIC Credit

Ratings assigned by that NRSRO, if any, as a component rating when it determines the NAIC Designation equivalent for FE

securities and for PL securities. The SVO determines an NAIC Designation for FE securities and for PL securities,

respectively, to develop the Filing Exempt Securities Process and the PL Securities Process components of the SVO List of

Securities as more fully discussed in Part One, Section 3 (l) and Part Three Section 1 (b) of this Manual.

The SVO shall advise the Valuation of Securities (E) Task Force of the decision of NRSROs to no longer participate as

NAIC CRPs and of any other significant changes in the credit rating industry that may impact the regulatory operations of the

Task Force.

Securities that have been assigned ratings that are not Eligible NAIC Credit Ratings are not eligible for filing exemption and

are filed with the SVO for an independent quality assessment as specified in Part Three, Section 1 (a) of this Manual or in

any other section that specifies a different quality assessment methodology or procedure.

(ii) Clarification on PL Securities

PL securities are subject to the filing exemption identified in Part One, Section 4 of this Manual. Please refer to Part Three,

Section 1 (b) for a discussion of the process by which the SVO assigns an NAIC Designation to PL securities.

(iii) Definition - Credit Ratings Eligible for Translation to NAIC Designations

The credit rating of the CRP to which this Section and the NAIC Credit Rating Provider List refers, is the 1) credit rating

assigned by the CRP, 2) by application of its long term obligation ratings scale and methodology to 3) securities. Credit

ratings of a CRP that meet this definition are entitled to a presumption of convertibility to the equivalent NAIC Designation

published in the NAIC Credit Rating Provider List, in Part Three, Section 1 (b) of this Manual, except that the presumption of

convertibility is subject to the following limitations:

(A) Those rating activities or markets in which the entity has CRP status;

(B) Securities with monitored CRP ratings that:

1) Are monitored at least annually by the CRP that issued the rating,

2) Are assigned to a specific issue that must be specifically identified,

3) Apply to securities where the issuer promises to repay principal and interest or dividends;

4)

(X) Convey an opinion as to the likelihood of payment of both principal and interest/dividends due from the issuer to the

holders of the security,

or

(Y) those structured to pay only principal or only interest/dividends, if the monitored CRP rating addresses the likelihood of

payment of either the principal, in the case of a security structured to pay only principal or the interest/dividends, in the case

of security structured to pay only interest/dividends, (an “Eligible NAIC CRP Rating”; and

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(C) The NAIC may determine that the rated security or investment is of a type that is not eligible to be reported on

Schedule D of the NAIC Financial Statement Blank or that the NAIC determines is not appropriate for NRSRO credit ratings

to be used to determine the regulatory treatment of a specific asset class.

(iv) Special Rating Systems

Unless otherwise specifically approved by the VOS/TF and published in Part Three, Section 1 (a) of this Manual, , special

rating systems of any CRP, rating agency or rating organization shall not be entitled to a presumption of convertibility.

Nevertheless, an SVO analyst assessing a security that has been assigned such a rating by any rating organization, including a

CRP, may consider the information imparted by that rating or a related research report under the authority provided in

Section 2 (c) (i) of this Part, as one factor in determining an NAIC Designation.

(iv) Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations

The presumption of convertibility accorded to a credit rating of a CRP should not be interpreted to indicate that NAIC

Designations and CRP credit ratings are produced using identical methodologies or that they are intended to communicate the

same information. SVO quality assessment is conducted in support of those NAIC standards and purposes specified in the

NAIC Financial Conditions Framework that use NAIC Designations as a tool to identify a given regulatory treatment for the

security and may therefore include considerations or address concerns unique to the regulatory community. Accordingly, the

SVO staff has discretion to ignore the rating of any given CRP if and when it is called upon to consider how to translate a

credit rating issued by a CRP into an NAIC Designation.

Before an SVO analyst converts a credit rating assigned by a CRP into an NAIC Designation, he or she must first conclude

that the analytical issues associated with the security and structure are adequately addressed by the CRP and that the SVO has

an approved methodology for evaluating such a security under Section 2(d) of this Part …

Part Two- Filing with the SVO

Section 1. General Definitions Used In This Manual

The following definitions are intended to have relevance only for this Manual. No suggestion is intended that these

definitions have any relevance to any other NAIC publication. …

CRP stands for Credit Rating Provider and refers to the NRSROs on the NAIC Credit Rating Provider List discussed in Part

Three, Section 1 (a) of this Manual …

Filing Exempt Securities Process refers to an electronic file within NAIC electronic computer systems used by the SVO to

store the names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with

the SVO because they are assigned credit ratings by NAIC CRPs (FE securities). The SVO produces NAIC Designations for

FE securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results in the AVS+ products …

PL Securities Process refers to an electronic file within NAIC electronic computer systems used by the SVO to store the

names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with the SVO

because they are assigned private letter ratings by CRPs (PL securities). The SVO produces NAIC Designations for PL

securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results in the AVS+ products.

VOS Process means the Valuation of Securities Process and refers to a process within NAIC electronic computer systems

used to store the names and descriptions of securities owned by state-regulated insurance companies, and the NAIC

Designation categories and/or Unit Price assigned to them by the SVO after independent quality assessment and that is used

in connection with the publication of the AVS+ products …

Section 4. Reporting Exemptions …

d) Filing Exemption for Public Common Stock

Insurers must report values for all securities on their NAIC Financial Statement Blank including for FE securities as defined

in Part Three, Section 1 (b) of this Manual. Refer to Part Five, Section 1 of this Manual for valuation instructions.

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Documentation requirements for securities filed with the SVO are set forth in Part Two, Sections 10 and Part Two, Section

11. These documentation requirements apply when a security must be filed with the SVO.

Section 5. Special Reporting Instruction …

i) Other Permitted Uses of the Principal and Interest Certification Form and the NAIC 5* and 6* Designation

… (viii) PL Securities

The Principal and Interest Certification Form and the NAIC 5* Designation may be used in connection with the

designation of PL securities not rated by an CRP when the documentation necessary for the SVO to assign an NAIC

Designation based on its independent assessment of quality is not available. Please see Part Three, Section 1 (b) of

this Manual for related guidance. …

Section 10. Reporting Conventions and Required Documents …

c) Reporting Conventions and Required Documents

Specific reporting conventions for initial reports that all reporting insurance companies should follow are described below.

(i) Corporate Issues

(A) Rated

Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations

securities rated by an NAIC CRP.

(B) Unrated

In the case of a corporate issue not rated by an NAIC CRP, the reporting insurance company shall complete an SAR and shall

attach the issue's public offering statement or private placement memorandum, as the case may be, the insurance company's

internal credit committee memorandum and the Audited Financial Statement of the issuer for the last three consecutive years.

If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such rating. The SVO will contact

the reporting insurance company if additional information is required. If none of these documents are available, the reporting

insurance company must obtain and complete the SVO's VIM form and submit it with the required documents and

attachments. Insurance companies reporting bonds of not-for-profit entities shall follow the same filing conventions

applicable to bonds of profit-making entities.

(C) Rated Medium Term Notes



…

(E) Investments in Certified Capital Companies …

(3) Procedure for Reporting and Filing with the SVO

The insurance company should first determine the reporting for CAPCOs indicated by the statutory accounting guidance.

This is done by establishing the character of the investment and then applying the appropriate accounting and reporting

guidance and to the extent necessary the related procedures in this Manual for Schedule D or BA assets. If the SVO disagrees

with the insurance company characterization of the investment, it will so inform the insurance company and provide rationale

why the SVO believes the company has misapplied or misinterpreted the guidance of INT 06-02 and request a re-filing if

necessary.

(4) Required Documentation

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(a) Rated — Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign

NAIC Designations securities rated by an NAIC CRP.

(b) Unrated — A CAPCO issue that is not rated by an NAIC CRP, is filed with the SVO and assigned an NAIC

Designation as discussed in Part Three, Section 1 (b) of this Manual. The reporting insurance company shall complete an

SAR and shall attach the issuer’s public offering statement or private placement memorandum, as the case may be, the

insurance company's internal credit committee memorandum and the Audited Financial Statement of the issuer for the last

three consecutive years. If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such

rating. If none of these documents are available, the reporting insurance company must obtain and complete the SVO's VIM

form and submit it with the required documents and attachments.

For CAPCO issues that are not FE securities follow the procedures in Section 11(e)(i) of this Part below (Corporate Issues

not Filing Exempt) to file a subsequent report with the SVO.

(5) Applicable Methodology

Subject to the directive contained in Part One, Section 2 (f) of this Manual, the SVO shall have discretion to apply any

quality assessment methodology or any combination of assessment methodologies detailed in Part Three of this Manual to

assess the quality or credit quality; Part One, Section 3 (b) (ii) of this Manual to assess asset classification of a CAPCO

security or other applicable procedure specified in this Manual.

(ii) Municipal Issues

(A) Rated


securities rated by an NAIC CRP …

(iii) Structured Issues

(A) Rated



(B) Unrated

(1) Credit Tenant Loan (CTL) …

(2) Specific Filing Conventions

(i) Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC

Designations securities rated by an NAIC CRP …

(ii) Municipal Issues not Filing Exempt

(A) Rated

(1) General Rule

A Subsequent Report is required on all rated municipal issues …

Part Three – Credit Assessment

Section 1. Corporate Bonds and Preferred Stock

a) Methodology for Independent Credit Quality Assessments

Corporate bonds defined as the Obligations of domestic and foreign corporations, and preferred stock shall be distinguished

on the basis of the categories discussed below. The creditworthiness of the issuer of any particular category of Obligation

shall be assessed by reference to the general, and any special, rating methodology discussed in this Part, unless the Valuation

of Securities (E) Task Force has specified the use of a different methodology in this Manual. …

(ii) Financial Analysis

Attachment Two


12/11/16


(A) Audited Financial Statement Required

As a first step in the independent assessment, the analyst shall conduct an independent financial analysis of the issuer based

on the financial information presented in the Audited Financial Statement, as defined in this Manual.

The SVO shall base it’s financial analysis on at least three years of historical audited financial information and a minimum of

one year of projected financial information (if available) when the issuer has an operating history of three years or more.

However, the SVO may assign an NAIC Designation based on less than three years of financial information in circumstances

where the issue’s operating history is less than three years or because the issuer’s legal identify has been subsumed as a result

of a merger into a new entity or due to other documentable business circumstances. Where three years of financial

information is not available, the analyst shall review such information as is available, and shall determine if the time period

for which information is available is sufficient to produce a professionally sound opinion.

b) Procedure Applicable to Filing Exempt (FE) Securities and to Private Letter (PL) Rating Securities

(i) Filing Exemption

Bonds, (excluding RMBS and CMBS) and Preferred Stock that have been assigned an Eligible NAIC CRP Rating, as

described in Part One, Section 4 (c) (ii) (B) of this Manual, are exempt from filing with the SVO (FE securities).

(ii) Identification of FE Securities

Insurance companies identify FE securities to the NAIC as part of the NAIC’s Financial Statement Blank reporting process.

The SVO subsequently collects the securities insurers have identified as FE securities by identifying securities reported using

the Administrative Symbol FE when it conducts the quarterly compilation of the SVO List of Securities. SVO then performs

the procedures discussed in sub-section (iii) below to produce the most accurate NAIC Designation equivalent for purposes

of the NAIC Financial Condition Framework. Please refer to Part One, Section 3 (l) of this Manual for a discussion of the

compilation process.

(iv) Direction and Procedure

The SVO shall produce NAIC Designations for FE securities by applying the following procedure in conjunction with the

List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations, shown below.

A Bond that has been assigned an Eligible NAIC CRP Rating will be assigned the equivalent NAIC Designation.

If two Eligible NAIC CRP Ratings have been assigned, then the lowest credit rating will be used to assign the

equivalent NAIC Designation.

In case of a Bond that has been assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for

the Bond will be ordered according to their NAIC equivalents and the credit rating falling second lowest will be used to

determine the equivalent NAIC Designation, even if that rating is equal to that of the first lowest.

The SVO shall not in any manner whatsoever, show, display or disseminate the credit ratings of NRSROs as part of the

compilation or publication of the SVO List of Securities in the AVS Plus product or in any other NAIC publication

associated with the operations of the Valuation of Securities (E) Task Force.

(v) PL Securities

The SVO shall produce NAIC Designations for securities subject to private letter ratings as follows:

The insurance company shall file a copy of the private rating letter with the SVO.

The SVO shall evaluate the private letter to determine whether the security has been assigned an Eligible NAIC CRP

Rating.

Attachment Two


12/11/16


If the SVO verifies that the security has been assigned an Eligible NAIC CRP Rating, it assigns an NAIC Designation

in accordance with the policy and procedure specified in sub-paragraphs (i) and (ii) above. The assumption in the

application of this step of the procedure is that PL securities are typically assigned a credit rating by only one NAIC

CRP. However, if this assumption is inaccurate for any PL security, the SVO applies the same procedure specified for

FE securities above.

If the SVO verifies that the security:

o Has been assigned a credit rating but that the credit rating is not an Eligible NAIC CRP Credit Rating; or

o Has not been rated by an NAIC CRP; or

o Is no longer subject to a private letter rating;

SVO shall notify the company that the security is not eligible for filing exemption. The insurance company shall then either

file that security and necessary documentation with the SVO for an independent credit assessment per Section 1 (a) of this

Part or assign an NAIC 5* Regulatory Designation to the security.

(vi) Discretion to Ignore an Eligible NAIC CRP Credit Rating

Consistent with the policy adopted by the Valuation of Securities (E) Task Force expressed in Part Two, Section 4 (c) (iv) of

this Manual (Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations) when the

SVO applies the procedures in sub-section (ii) and (iii) above, the SVO is charged with an affirmative exercise of discretion

to ignore any Eligible NAIC CRP Rating when it determines that the credit rating produces a result inconsistent with NAIC

financial solvency objectives.

For purposes of illustration and not for purposes of limiting how SVO exercises this discretion; it would be an appropriate

exercise of discretion if the SVO ignores an Eligible NAIC CRP Rating that is significantly lower or significantly higher

than those issued by the other CRPs: or, if in the case when only one CRP has assigned an Eligible NAIC CRP Rating, the

SVO reads the CRP’s research report for the issuer and security and determines there is insufficient information or rating

rationale to explain the CRP’s decision or evaluate the relationship of that credit rating to NAIC financial solvency standards

such as risk-based capital or statutory accounting objectives.

In those circumstances when the SVO exercises its discretion, it shall inform the insurance company that filed the security of

its decision and rationale. If the insurance company vehemently disagrees with the SVO’s determination, the SVO shall

immediately bring the matter to the attention of the Chair of the Valuation of Securities (E) Task Force for discussion and a

preliminary decision whether the SVO decision appears to be consistent with the scope and purpose that underlies the grant

of discretion. The decision of the Chair will be communicated to the insurance company provided that the Chair may direct

the SVO to convene a regulator to regulator session of the Task Force to present the issue to the full Task Force.

(vii) Application of the FE Procedure to Specific Populations

The filing exemption procedure does not apply to investments required to be filed pursuant to Part Five, Section 2 of

this Manual.

Catastrophe-Linked Bonds are filing exempt provided the credit rating assigned to them by a CRP was derived in a

specified manner. Please refer to Part Four, Section 4 of this Manual.

(viii) List of NAIC CRPs

The CRPs that provide Credit Rating Services to the NAIC are:

Moody's Investor's Service,

Standard and Poor's,

Fitch Ratings,

Dominion Bond Rating Service (DBRS),

A.M. Best Company (A.M. Best)

Morningstar Credit Ratings, LLC (for All Structured Finance Securities)

Kroll Bond Rating Agency and

Attachment Two


12/11/16


Egan Jones Rating Company.

(ix) Table of Equivalents of Eligible NAIC CRP Ratings to NAIC Designations

(A) Moody’s Investor’s Service

Corporate, Government Counterparty and Municipal Ratings SVO

Aaa; Aa 1, 2, 3; A 1, 2, 3 1

Baa 1, 2, 3 2

Ba 1, 2, 3 3

B 1, 2, 3 4

Caa, 1, 2, 3 5

Ca, C 6

Commercial Paper and Short Term Counterparty Ratings SVO

P 1 1

P 2 2

P 3 3

N P (Not prime) 6

Preferred Stock SVO

Aaa; Aa 1, 2, 3; A 1, 2, 3 1

Baa 1, 2, 3 2

Ba 1, 2, 3 3

B 1, 2, 3 4

Caa 5

Ca, C 6

(B) Standard and Poor’s

Corporate Counterparty and Municipal Ratings -- Public

Bonds

SVO

AAA, AA+, AA, AA-, A+, A, A- 1

BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6

Commercial Paper (Standard & Poor’s continued) SVO

A, A 1 1

A 2 2

A 3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C, D 6

(C) Fitch Ratings

Attachment Two


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Fixed Income and Counterparty Ratings SVO

AAApre 1*


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC, 5

CC, C, DDD, DD, D 6

* This rating is assigned to pre-refunded municipal debt.

Commercial Paper SVO

F 1+, F 1 1

F 2 2

F 3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C 6

(D) Dominion Bond Rating Service

Bond and Long Term Debt SVO

AAA, AA (high), AA, AA (low), A (high), A, A (low) 1

BBB (high), BBB, BBB (low) 2

BB (high), BB, BB (low) 3

B (high), B, B (low) 4

CCC (high 5

CC, C (low), D 6

Preferred Stock SVO

Pfd-1 (high), Pfd-1, Pfd 1 (low) 1

Pfd-2 (high), Pfd-2, Pfd-2 (low) 2



Pfd-5 (high), 5

Pfd-5, Pfd-5 (low), D 6

Commercial Paper and Short Term Debt SVO

R 1 (high), R-1 (middle), R-1 (low) 1


R-3 3

R-4 5

R-5, D 6

(E) A.M. Best Company

Bond, Long Term Debt and Preferred SVO

Attachment Two


12/11/16


aaa, aa+, aa, aa-, a+, a, a- 1

bbb+, bbb, bbb- 2

bb+, bb, bb- 3

b+, b, b- 4

ccc+, ccc, ccc- 5

cc, c, d 6


AMB-1+, AMB-1 1

AMB-2 2

AMB-3 3

AMB –4 6

(F) Morningstar Credit Ratings, LLC

for All Structured Finance Securities SVO

AAA, AA, A 1

BBB 2

BB 3

B 4

CCC, CC, C* 6

D 6

* Morningstar defines CCC, CC, C as "likely to default" which we here equate to the NAIC 6 definitional concept of a

security "in or near default." Morningstar's D, defined as "in default" is also equated to an NAIC 6.

(G) Kroll Bond Rating Agency

Long-Term Corporate, Counterparty and Municipal Ratings SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6

Short-Term and Commercial Paper Ratings SVO

K1+, K1 1

K2 2

K3 3

B 4

C 5

D 6

Preferred Stock Ratings SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6

(H) Egan Jones Rating Company

Corporate Ratings SVO


BBB+, BBB, BBB- 2

Attachment Two


12/11/16


BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6


A, A1, A1+ 1

A2 2

A3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C, D 6

(x) Securities no longer Assigned an Eligible NAIC CRP Credit Rating

Any Bond or Preferred Stock that at one time was assigned an Eligible NAIC CRP Credit Rating by an NAIC CRP but is no

longer rated must be filed with the SVO within 120 days of the loss of the credit rating, as if the security had never been

filing exempt.

(xi) Limitations on Use of NAIC CRP Ratings

(A) NAIC Designation Is Capped To Highest NAIC CRP Rating

The SVO shall not assign an NAIC Designation for a rated security that reflects an opinion of credit quality greater than that

indicated by the rating assigned by an NAIC CRP, except as provided in Paragraph (B) below, and except that the SVO may

assign the NAIC Designation it deems appropriate to:

(1) Municipal bonds and;

(2) Military housing bonds or securities as defined in Part Four, Section 5(b) of this Manual.

(B) Split Ratings

For filing exempt securities as defined in Part Two, Section 4 (d) of this Manual, the NAIC Designation assigned will be the

NAIC Designation equivalent that results from the application of the filing exemption process described in Part Two, Section

4 (d) of this Manual. This rule will also apply to replication transactions defined in Part Four, Section 2(a) of this Manual and

other instances where NAIC CRP ratings are used by the SVO.

(C) Unrated Transaction of Issuer with NAIC CRP Rated Debt

When presented with an unrated security of an issuer that has another issue rated by an NAIC CRP, the staff may consider

the rated issue and its position in the capital structure of the issuer to arrive at an NAIC Designation for the unrated security,

provided that the staff shall first consult with the rating agency and independently consider the terms of the unrated security

and its impact on payment risk …

4. Proposed Amendments (Showing strike-through from current P&P Manual text) -




Attachment Two


12/11/16


To support the implementation of the standards specified in the NAIC Financial Conditions Framework, the The SVO shall

conduct the following ongoing operations:

(i) Produce NAIC Designations in accordance with the various methodologies, procedures and criteria established by

the Valuation of Securities (E) Task Force in this Manual. Analysis of credit risk for purposes of assigning an NAIC

Designation.

(ii) Determine values, in the form of a Unit Price, for insurer owned securities as and when required to do so and in

accordance with the procedures specified in this Manual; Valuation analysis to determine a Unit Price.

(iii) Identify ication and analyze sis of securities that contain other non-payment risk (as defined in this Manual) and

communicate ion the result of the analysis of this information by assignment of an appropriate the NAIC Designation and the

subscript that identifies that the to such security is iessubject to this methodology.

(iv) Such oOther analytical assignments as may be requested by the Valuation of Securities (E) Task Force; another

NAIC regulator group or members of the NAIC regulatory community; in accordance with the directives, procedures and

general methodologies described in this Manual.

(v) Compile and publish the SVO List of Securities and publish in the AVS+ products and conduct any and all ancillary

processes to ensure an accurate publication; including the periodic assessment of data quality and the resolution of reporting

anomalies in the data associated with securities reported as owned by insurers in accordance with the instructions provided

in this Manual.

c) Special Instructions to the SVO …

(iv) Limitations on Use of NAIC CRP Ratings







(B) Split Ratings









and its impact on payment risk.

…


(A) SVO analytical department symbols (except for the SVO SCA Companies Group) …

FE means exempt from filing with the SVO and is used by an insurance company an insurance company to identify

report an NAIC Designation for an exempt security. NAIC Designation for FE securities are assigned by the SVO pursuant

to the instructions and procedures in Part Three Section 1 (b) of this Manual. The NAIC Designation determined by the SVO

is disseminated in the SVO List of Securities compiled and published pursuant to the SVO’s compilation function as

described in Section 3 (k) of this Part One. , on the NAIC Financial Statement Blank. When reporting a security on its annual

or quarterly financial statements, Tthe administrative symbol FE is used with an NAIC 1 through 6 Designation, and in

Attachment Two


12/11/16


addition, in the case of preferred stock, in combination with the P and RP Valuation Indicators. FE signifies that the reported

security meets the criteria set forth in Part Two, Section 4(d) of this Manual and that the NAIC Designation was arrived at by

the insurer by converting the NAIC CRP rating(s) into a corresponding NAIC Designation in accordance with the conversion

instructions set forth in Part Two, Section 4 (d) (i)(A) and (B) of this Manual and the rating equivalency identified in Section

7(d) (ii) of this Part or by the NAIC in comparing the security with the NAIC CRP rating feeds.

PL stands for a private letter rating and refers to an insurer owned security that has been assigned a private rating by an

NAIC CRP which rating is not publicly disseminated in the CRP’s data-feeds but is instead published in a letter provided by

the CRP to the issuer of the security and to the insurer as an investor or that has subsequently been obtained by the insurer

and submitted to the SVO under the procedures specified in Part Three, Section 1 (b) of this Manual. The administrative

symbol PL is assigned to the security by the insurer in conjunction with reporting instructions. The administrative symbol PL

is used with an NAIC 1 through 6 Designation, and in the case of preferred stock, in combination with the P and RP

Valuation Indicators.

e) Valuation of Securities Process

Upon determination of either component of an Association Value, (i.e., the NAIC Designation or Unit Price), and of a

classification, as the case may be, for an Investment Security, (as defined in Part Two, Section 2 (a) of this Manual), the SVO

shall enter such NAIC Designation, Unit Price and classification in the NAIC's Valuation of Securities OS Process. The

Valuation of Securities Process is used to store NAIC Designations produced by the SVO on the basis of an independent

analysis under the analytical methodology in Part Three, Section 1 (a) of this Manual; or such other methodologies or

procedures specified in this Manual for the population of securities.

The SVO shall not add a Regulatory Transaction, as defined in Part Three, Section 2 (e) of this Manual, to the VOS Process.

…

g) Filing Exempt Securities Process

A filing exempt (FE) security is an Investment Security, as defined in Part Two, Section 2 (a) of this Manual, that is exempt

from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual and is subject to the

procedure specified in , as otherwise required by Part ThreeTwo, Section 12 (ba) of this Manual. Insurance companies report

FE securities to the NAIC as part of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list

of such securities and information about them in the Filing Exempt Securities Process. SVO produces and assigns NAIC

Designations to FE securities using a computer process that applies the procedure specified in Part Three, Section 1 (b) of

this Manual., pursuant to the filing exemption in Part Two, Section 4 (d) of this Manual. Insurance companies derive NAIC

Designations for FE securities by applying the conversion instructions in Part Two, Section 4(d) (i) (A) and (B) of this

Manual and the equivalency relationships disclosed in Section 7(d) (ii) of this Part.

NAIC Designations assigned to FE securities are reported by the insurance company to the NAIC and subsequently added by

NAIC staff to the FE Data File.

The SVO Insurance companies shall not add an FE security that is a report Regulatory Transactions, (defined in Part Three,

Section 2 (e) of this Manual), as FE securities, and the NAIC staff shall not add a Regulatory Transaction to to the Filing

Exempt Securities ProcessE Data File.

h) PL Securities Process

A security subject to private latter rating, i.e., a PL security is an Investment Security, as defined in Part Two, Section 2 (a) of

this Manual, that is exempt from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual,

and is subject to the procedure specified in Part Three, Section 1 (b) of this Manual. Insurance companies report PL securities

to the NAIC as part of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list of such

securities and information about them in the PL Securities Process. SVO produces and assigns NAIC Designations to FE

securities using a computer process that applies the procedure specified in Part Three, Section 1 (b) of this Manual. The SVO

shall not add a PL security that is a Regulatory Transactions, (defined in Part Three, Section 2 (e) of this Manual), to the

Filing Exempt Securities Process. …

lk) Compilation and Publication of the SVO List of Securities

(i) Status

Attachment Two


12/11/16


Until such time as the Valuation of Securities (E) Task Force shall instruct the SVO to publish the SVO List of Securities

(discussed in this sub-section) in a different location, the SVO shall publish the List of Securities only in the AVS Plus

product. The AVS Product is identified as the sole official source of NAIC Designations.

(ii) Data Quality Assessment Procedure

In any given year, prior to the publication of the first quarterly SVO List of Securities, the SVO shall obtain the latest NAIC

year-end reporting data on insurer owned securities, assess the accuracy of the data presented and resolve reporting anomalies

in the reported data as specified in this sub-section.

As used herein, a reporting anomaly means that an Investment Security, defined in Part Two Section 2 (a) of this Manual,

was not filed with the NAIC for assignment of an NAIC Designation in accordance with the applicable methodology or

procedure specified in this Manual; or that the security was reported as having been designated by the SVO when it was not;

or that the security is a Regulatory Transaction and not eligible for treatment as an Investment Security; or that the security is

a form of indebtedness not subject to assignment of an NAIC Designation or that some other reporting inconsistency exists –

which if not corrected would make the data inaccurate.

The SVO shall develop and maintain procedures to identify and resolve reporting anomalies for Investment Securities that

are consistent with the methodology or procedure by which NAIC Designations are assigned to the securities and the specific

Process where data from that category of securities is maintained. The SVO shall:

Compile sub-lists of reporting anomalies corresponding to the specific Process and provide a preliminary assessment of

the cause or source of the anomalies;

Compile the sub-lists into a report;

Identify the top ten (or more or less) companies that own the securities and the state(s) of domicile corresponding to

those companies;

The resulting report shall be a confidential report and may not be publicly disseminated. The SVO shall then schedule, in

accordance with the NAIC Open Meetings Policy, a regulator to regulator session of the Valuation of Securities (E) Task

Force to discuss the report;

Deliver the SVO report to the Valuation of Securities (E) Task Force.

The Valuation of Securities (E) Task Force shall hear and review the SVO report, provide comments or instructions to the

SVO relative to its subject matter and appoint one or more of its members to represent the Task Force and work with the

SVO Director to communicate with other NAIC regulator groups and the specific state insurance department officials to

resolve the reporting anomalies.

(iii) Compilation and Publication of the SVO List of Securities

On a quarterly basis, the SVO shall:

1) Compile, or cause to be compiled, a list of Investment Securities from each of the VOS Process, Filing Exempt Securities

E Data Process, PL Securities Process; RMBS/CMBS Modeled Securities Process, U.S. Treasury Process and the Exempt

U.S. Government Securities Process (each an SVO Sub-List bearing the name of the corresponding Process).

When compiling or publishing the SVO List of Securities the NAIC shall not publicly show, display or disseminate the credit

ratings of NRSROs in the AVS Plus product or in any other NAIC publication associated with the operations of the Valuation

of Securities (E) Task Force.

2) Aggregate the content of each SVO Sub-List into a single SVO List of Investment Securities (hereafter, the SVO List of

Securities) identifying each Investment Security by name and other pertinent information and showing the NAIC Designation

and/or Unit Price assigned to them by the SVO or pursuant to such other the methodology or procedure otherwise specified in

this Manual.

Attachment Two


12/11/16


3) Compile, or cause to be compiled, sub-lists from the informational content of the Derivative Counterparties Process,

Exchange Rates Process, Ex-Dividend Process, Letter of Credit Process, Money Market and Exchange Traded Fund Process

and Surplus Notes Processes (each an SVO Sub-List bearing the name of the corresponding Process and collectively the

“Other Information”).

4) Publish, or cause the SVO List of Securities and the Other Information to be published, by being incorporated into the

NAIC’s AVS + product. …

Section 4. NAIC Policy on the Use of Credit Ratings of NRSROS

a) Providing Credit Rating Services to the NAIC

The NAIC uses credit ratings for a number of regulatory purposes, including, but not limited to, those associated with the

filing exempt rule, discussed in Part Threewo, Section 14 (bd) of this Manual. …

b) Procedure to Become an NAIC Credit Rating Provider

An NRSRO that wishes to provide Credit Rating Services to the NAIC may indicate its interest by sending a letter to the

Chair of the VOS/TF with a copy to the Director of the , SVO in which it:

Indicates an interest in providing Credit Rating Services to the NAIC;

Confirms that it is currently an NRSRO subject to regulation by the SEC;

Provides a chart, in the format shown in Part Three, Section 1 (b) of this Manual, Section 7 (d) (ii) of this Part

relating its credit rating symbols to NAIC Designations; and

Indicates that the NRSRO agrees to enter into a legally binding agreement under which the NRSRO will:

Provide Credit Rating Services to the NAIC at no cost;

Reimburse the NAIC for all costs associated with: integration of it data feed into NAIC systems, subsequent changes

to NAIC systems to accommodate changes in the NRSRO’s systems and changes to NAIC systems as a result of the

termination of Credit Rating Services by the NRSRO;

Give written notice 6 month prior to terminating Credit Rating Services; and

Agree not to claim in marketing literature that the provision of Credit Rating Services indicates NAIC approval or

endorsement of the NRSRO, its products or services.

The SVO Director shall coordinate the contractual and other arrangements with the NRSRO applicant consistent with this

policy and with NAIC internal administrative procedures related to contracts. The SVO shall thereafter administer the NAIC

CRP List.

c) Adding the NRSRO to the NAIC Credit Rating Provider List

When directed to do so by the VOS/TF, the SVO shall add the name of the NRSRO (hereafter described as a Credit Rating

Provider (CRP)) to the NAIC Credit Rating Provider List in the publication of this Manual after the that follows the

execution of an agreement between the NAIC and the NRSRO and the completion of any other internal administrative issues.

(i) Impact on Regulatory Significance – the Filing Exempt Rule

Adding the name of an NRSRO to the Credit Rating Provider List means indicates that the SVO will insurance companies

must use the Eligible NAIC Credit Ratings credit ratings assigned by that NRSRO, if any, as a component rating when it

when determines ing the NAIC Designation equivalent for FE securities and for PL securities.a security. The SVO

determines an NAIC Designation for FE securities and for PL securities, respectively, to develop the Filing Exempt

Attachment Two


12/11/16


Securities Process and the PL Securities Process components of the SVO List of Securities as more fully discussed in Part

One, Section 3 (l) and Part Three Section 1 (b) of this Manual.

The SVO shall advise the Valuation of Securities (E) Task Force of the decision of NRSROs to no longer participate as

NAIC CRPs and of any other significant changes in the credit rating industry that may impact the regulatory operations of the

Task Force.

to be reported under the filing exempt rule, discussed in Part Two, Section 4 (d) of this Manual.

Only those CRP ratings that meet the definition in Section 4(c) (ii) below may be translated into NAIC Designations under

the filing exempt rule discussed in Part Two, Section 4(d) of this Manual.

Securities that have been assigned ratings by CRPs that are not Eligible NAIC Credit Ratings are not eligible for filing

exemption and are do not meet the definition of Section 4(c) (ii) below, shall be filed with the SVO for an independent

quality assessment as specified in Part Three, Section 1 (a) of this Manual or in any other section that specifies a different

quality assessment methodology or procedure.

The translation of a CRP rating into an NAIC Designation is conducted in accordance with the procedures described in

Section 3(e) and Section 7 (d) (i) of this Part.

(ii) Clarification on PL Securities

PL securities are subject to the filing exemption identified in Part One, Section 4 of this Manual. Please refer to Part Three,

Section 1 (b) for a discussion of the process by which the SVO assigns an NAIC Designation to PL securities.

(iii) Definition - Credit Ratings Eligible for Translation to NAIC Designations

The credit rating of the CRP to which this Section and the NAIC Credit Rating Provider List refers, is the 1) credit rating

assigned by the CRP, 2) by application of its long term obligation ratings scale and methodology to 3) securities.

Credit ratings of a CRP that meet this definition are entitled to a presumption of convertibility to the equivalent NAIC

Designation published in the NAIC Credit Rating Provider List, in Part Three, Section 1 Section 7 (bd) of this ManualPart,

except that the presumption of convertibility is subject to the following limitations:

(A) Those rating activities or markets in which the entity has CRP status;

(B) Securities with monitored CRP ratings that:

1) Are monitored at least annually by the CRP that issued the rating,

2) Are assigned to a specific issue that must be specifically identified,

3) Apply to securities where the issuer promises to repay principal and interest or dividends;

4)

(X) Convey an opinion as to the likelihood of payment of both principal and interest/dividends due from the issuer to the

holders of the security,

or

(Y) those structured to pay only principal or only interest/dividends, if the monitored CRP rating addresses the likelihood of

payment of either the principal, in the case of a security structured to pay only principal or the interest/dividends, in the case

of security structured to pay only interest/dividends, (an “Eligible NAIC CRP Rating”); and …”

(C) The NAIC may determine that the rated security or investment is of a type that is not eligible to be reported on

Schedule D of the NAIC Financial Statement Blank or that the NAIC determines is not appropriate for NRSRO credit ratings

to be used to determine the regulatory treatment of a specific asset class.

(iviii) Special Rating Systems

Unless otherwise specifically approved by the VOS/TF and published in Part Three, Section 1 (a) Section 7 (d) of this

Manual, Part, special rating systems of any CRP, rating agency or rating organization shall not be entitled to a presumption of

convertibility. Nevertheless, an SVO analyst assessing a security that has been assigned such a rating by any rating

Attachment Two


12/11/16


organization, including a CRP, may consider the information imparted by that rating or a related research report under the

authority provided in Section 2 (c) (i) of this Part, as one factor in determining an NAIC Designation.

(iv) Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations

The presumption of convertibility accorded to a credit rating of a CRP should not be interpreted to indicate that NAIC

Designations and CRP credit ratings are produced using identical methodologies or that they are intended to communicate the

same information. SVO quality credit assessment is conducted in support of those for NAIC regulatory standards and

purposes specified in the NAIC Financial Conditions Framework that use NAIC Designations as a tool to identify a given

regulatory treatment for the security and may therefore include considerations or address concerns unique to the regulatory

community. Accordingly, the SVO staff has discretion to ignore the rating of any given CRP if and when it is called upon to

consider how to translate a credit rating issued by a CRP into an NAIC Designation.

Before an SVO analyst converts a credit rating assigned by a CRP into an NAIC Designation, he or she must first conclude

that the analytical issues associated with the security and structure are adequately addressed by the CRP and that the SVO has

an approved methodology for evaluating such a security under Section 2(df) of this Part …

Section 7. Administrative Guidance and Information

d) List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations

(i) CRPs on the NAIC Credit Rating Provider List

The CRPs that provide Credit Rating Services to the NAIC, either pursuant to the terms of Section 4 of this Part or otherwise,

are:



Fitch Ratings,






(ii) CRP Credit Rating Equivalent to SVO Designations

Please note that the existence of a rating does not eliminate the requirement to file on SAR on any insurer owned security not

currently listed in the VOS manual unless exempted from filing as detailed in Part Two, Section 4 (d) of this Manual.


Corporate, Government Counterparty and

Municipal Ratings SVO

Aaa; Aa 1, 2, 3; A 1, 2, 3 1

Baa 1, 2, 3 2

Ba 1, 2, 3 3

B 1, 2, 3 4

Caa, 1, 2, 3 5

Ca, C 6

Commercial Paper and

Short Term Counterparty Ratings SVO

P 1 1

P 2 2

P 3 3

N P (Not prime) 6

Preferred Stock SVO

Aaa; Aa 1, 2, 3; A 1, 2, 3 1

Baa 1, 2, 3 2

Ba 1, 2, 3 3

B 1, 2, 3 4

Caa 5

Ca, C 6

Attachment Two


12/11/16



Corporate Counterparty and Municipal Ratings --

Public Bonds SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6


A, A 1 1

A 2 2

A 3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C, D 6

(C) Fitch Ratings


AAApre 1*


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC, 5

CC, C, DDD, DD, D 6



F 1+, F 1 1

F 2 2

F 3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C 6







CCC (high 5

CC, C (low), D 6

Preferred Stock SVO

Attachment Two


12/11/16






Pfd-5 (high), 5





R-3 3

R-4 5

R-5, D 6




bbb+, bbb, bbb- 2

bb+, bb, bb- 3

b+, b, b- 4

ccc+, ccc, ccc- 5

cc, c, d 6


AMB-1+, AMB-1 1

AMB-2 2

AMB-3 3

AMB –4 6



AAA, AA, A 1

BBB 2

BB 3

B 4

CCC, CC, C* 6

D 6

* Morningstar defines CCC, CC, C as "likely to default" which we here equate to the NAIC 6 definitional concept of a

security "in or near default." Morningstar's D, defined as "in default" is also equated to an NAIC 6.


Long-Term Corporate, Counterparty and

Municipal Ratings SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6


K1+, K1 1

K2 2

K3 3

B 4

C 5

D 6



BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

Attachment Two


12/11/16


CCC+, CCC, CCC- 5

CC, C, D 6




BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6


A, A1, A1+ 1

A2 2

A3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C, D 6

Part Two- Filing with the SVO



definitions have any relevance to any other NAIC publication. …

CRP stands for Credit Rating Provider and refers to the NRSROs on the NAIC Credit Rating Provider List discussed in Part

ThreeOne, Section 1 (a) 4 of this Manual and identified in Part One, Section 7(d)(i) of this Manual …

Filing Exempt Securities Process File refers to an electronic file within NAIC electronic computer systems used by the SVO

to store the names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing

with the SVO because they are assigned credit ratings by NAIC CRPs (FE securities). and that insurers: 1) have reported in

quarterly or annual statements (NAIC Financial Statement Blank) filed with the NAIC; or 2) requested to be included in the

FE Data File through the Integrated Securities Information System (ISIS) and in both cases, The SVO produces NAIC

Designations for FE securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results for which an

NAIC CRP rating has been confirmed by the NAIC in the and that is used in connection with the publication of the AVS+

products.

Unconfirmed FE refers to a security that is neither in the VOS Database nor in the FE Datafile with a current year NAIC

Designation. This includes but is not limited to securities in the VOS Database that have not been reviewed in the current

year by the SVO; securities submitted for FE status using ISIS, but an independent check of the NAIC CRP rating status of

the security by the NAIC could not verify an NAIC CRP rating for the FE security; and securities with private letter ratings.

…

PL Securities Process refers to an electronic file within NAIC electronic computer systems used by the SVO to store the

names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with the SVO

because they are assigned private letter ratings by NAIC CRPs (PL securities). The SVO produces NAIC Designations for PL

securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results in the AVS+ products.

VOS Process means the Valuation of Securities Process and refers to a process within NAIC electronic computer systems

used to store the names and descriptions of securities owned by state-regulated insurance companies, and the NAIC

Attachment Two


12/11/16


Designation categories and/or Unit Price assigned to them by the SVO after independent quality assessment and that is used

in connection with the publication of the AVS+ products …

Section 4. Reporting Exemptions …

d) Filing Exemption for Public Common Stock

Insurers must report values for all securities on their NAIC Financial Statement Blank including for FE securities as defined

in Part Three, Section 1 (b) of this Manual. Refer to Part Five, Section 1 of this Manual for valuation instructions.



NOTE: This Section sets forth filing exemptions for certain securities that are rated by an NAIC CRP in the equivalent of the

NAIC 1 through NAIC 6 Designation categories. Because these securities will not be filed with the SVO, the SVO will not

be able to monitor any innovation or regulatory risk in these securities.

The SVO does not have responsibility for determining whether specific securities should be filing exempt. An insurer who is

uncertain whether a specific security qualifies for exemption should not contact the SVO for guidance, but should either file

the security with the SVO or use the EIV Regulatory Treatment Analysis Service process described in Part Four, Section 3 of

this Manual and obtain an opinion on exemption for that security.

Because these filing exemption provisions are set forth without any compliance mechanism, the SVO will not be able to

verify whether insurers have filed all securities that are required to be filed with the SVO. State insurance department

regulators may wish to create their own compliance mechanisms to protect any interests they may have relative to their

domiciliary insurers.

(i) An insurance company must file all securities with the SVO except those securities that meet, and continue to meet,

the conditions of either Paragraph (A), (B) or (C) below. Any security that at one time met the conditions of Paragraphs (A),

(B) or (C) below, but does not continue to meet such conditions must be filed with the SVO within 120 days of such failure,

as if the security had never been filing exempt.

These filing exemptions do not apply to investments required to be filed pursuant to Part Five, Section 2 of this Manual.

Catastrophe-Linked Bonds are filing exempt provided the credit rating assigned to them by a CRP was derived in a specified

manner. Please refer to Part Four, Section 4 of this Manual.

(A) Bonds

Bonds, excluding RMBS and CMBS, (please refer to Section 4 (e), below), assigned an Eligible NAIC CRP Rating, as

defined in Part One, Section 4 (c) (ii) (B) of this Manual, are exempt from filing with the SVO. Bonds assigned Eligible

NAIC CRP Ratings will be assigned the equivalent NAIC Designation. If two Eligible NAIC CRP Ratings have been

assigned, then the lowest rating will be assigned. In case of a security assigned three or more Eligible NAIC CRP Ratings, the

Eligible NAIC CRP Ratings for the security will be ordered according to their NAIC equivalents and the rating falling second

lowest will be selected, even if that rating is equal to that of the first lowest.

(B) Preferred Stock

Preferred Stock assigned Eligible NAIC CRP Ratings, as defined in Part One, Section 4 (c) (ii) (B) of this Manual, are

exempt from filing with the SVO. Preferred Stock assigned Eligible NAIC CRP Ratings will be assigned the equivalent

NAIC Designation. If two Eligible NAIC CRP Ratings have been assigned, then the lowest rating will be assigned. In the

case of a security assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for the security will be

ordered according to their NAIC equivalents and the rating falling second lowest will be selected, even if that rating is equal

to that of the first lowest.

(C) Public Common Stock

NOTE: Insurers must report values for all securities, including those subject to filing exemption under this Section on their

NAIC Financial Statement Blank. Refer to Part Five, Section 1 of this Manual for valuation instructions.



(i) SVO Authority to Require Filing of Filing Exempt Securities

The filing exemptions described above do not limit the authority of the SVO to require filings with respect to any security

that is otherwise filing exempt at any time for the purpose of reviewing the provisions, terms, covenants or structural features

of the security and designating the quality of the security. Upon completion of such review, the SVO is authorized to report

its findings and recommendations to the VOS/TF.

Section 5. Special Reporting Instruction …

Attachment Two


12/11/16


i) Other Permitted Uses of the Principal and Interest Certification Form and the NAIC 5* and 6* Designation

… (viii) PL Securities

The Principal and Interest Certification Form and the NAIC 5* Designation may be used in connection with the

designation of PL securities not rated by an NAIC CRP when the documentation necessary for the SVO to assign an

NAIC Designation based on its independent assessment of quality is not available. Please see Part Three, Section 1

(b) of this Manual for related guidance.



Specific reporting conventions for initial reports that all reporting insurance companies should follow are described below.

(i) Corporate Issues

(A) Rated

In the case of a corporate issue that is rated by an NAIC CRP that must be reported to the SVO for whatever reason despite

the availability of the filing exemption provided in Section 4(d) of this Part, above, the reporting insurance company shall

submit a completed SAR with evidence of the NAIC CRP rating. The evidence can be in the form of a copy (or copies) of the

rating letter from the NAIC CRP or a copy of the page from each NAIC CRPs rating publication showing the date of the

publication. If the issue is rated below “A” or is rated differently by two or more NAIC CRPs, a prospectus and a rating

rationale memorandum from each NAIC CRP that rated the transaction must accompany the submission. Insurance

companies reporting bonds of not-for-profit entities shall follow the same filing conventions applicable to bonds of profit-

making entities. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign

NAIC Designations securities rated by an NAIC CRP.

(B) Unrated

In the case of a corporate issue not rated by an NAIC CRP, the reporting insurance company shall complete an SAR and shall

attach the issue's public offering statement or private placement memorandum, as the case may be, the insurance company's

internal credit committee memorandum and the Audited Financial Statement of the issuer for the last three consecutive years.

If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such rating. The SVO will contact

the reporting insurance company if additional information is required. If none of these documents are available, the reporting

insurance company must obtain and complete the SVO's VIM form and submit it with the required documents and

attachments. Insurance companies reporting bonds of not-for-profit entities shall follow the same filing conventions

applicable to bonds of profit-making entities.

(C) Rated Medium Term Notes

In the case of Obligations defined as medium term notes in the offering prospectus or private placement memorandum, where

the issuer is rated by an NAIC CRP, that must be reported to the SVO for whatever reason despite the availability of the

filing exemption provided in Section 4(d) of this Part, above, the reporting insurance company must file a completed SAR

and evidence of proof of rating or ratings. The evidence can be in the form of a copy of the rating letter from the NAIC CRP

or a copy of the page from each NAIC CRP rating publication showing the date of the publication. Please refer to Part Three,

Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC

CRP.

…

(E) Investments in Certified Capital Companies …

(3) Procedure for Reporting and Filing with the SVO

The insurance company should first determine the reporting for CAPCOs indicated by the statutory accounting guidance.

This is done by establishing the character of the investment and then applying the appropriate accounting and reporting

guidance and to the extent necessary the related procedures in this Manual for Schedule D or BA assets. If the CAPCO

Attachment Two


12/11/16


investment is subject to the SVO filing process and does not meet the filing exempt requirements, it should be filed with the

SVO. If the SVO disagrees with the insurance company characterization of the investment, it will so inform the insurance

company and provide rationale why the SVO believes the company has misapplied or misinterpreted the guidance of INT 06-

02 and request a re-filing if necessary.

(4) Required Documentation

(a) Rated — In the case of a CAPCO issue that is eligible for filing exemption by virtue of its rating by an NAIC CRP

but filed with the SVO despite the availability of the filing exemption provided for in Section 4 (d) of this Part above the

reporting insurance company shall submit a completed SAR with evidence of the NAIC CRP rating. The evidence can be in

the form of a copy (or copies) of the rating letter from the NAIC CRP or a copy of the page from each NAIC CRP’s rating

publication showing the date of publication. If the issue is rated below “A” or is rated differently by two or more NAIC

CRP's, a prospectus and a rating rationale memorandum from each NAIC CRP that rated the transaction must accompany the

submission. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC

Designations securities rated by an NAIC CRP.

(b) Unrated — A In the case of a CAPCO issue that is not rated by an NAIC CRP, is filed with the SVO and assigned

an NAIC Designation as discussed in Part Three, Section 1 (b) of this Manual. Tthe reporting insurance company shall

complete an SAR and shall attach the issuer’s public offering statement or private placement memorandum, as the case may

be, the insurance company's internal credit committee memorandum and the Audited Financial Statement of the issuer for the

last three consecutive years. If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such

rating. If none of these documents are available, the reporting insurance company must obtain and complete the SVO's VIM

form and submit it with the required documents and attachments.

For CAPCO issues that are not FE securities filing exempt follow the procedures in Section 11(e)(i) of this Part below

(Corporate Issues not Filing Exempt) to file a subsequent report with the SVO.

(5) Applicable Methodology

Subject to the directive contained in Part One, Section 2 (f) of this Manual, the SVO shall have discretion to apply any

quality credit assessment methodology or any combination of credit assessment methodologies detailed in Part Three of this

Manual to assess the quality or credit quality; or Part One, Section 3 (b) (ii) of this Manual to assess asset classification of a

CAPCO security or other applicable procedure specified in this Manual. .

(ii) Municipal Issues

(A) Rated

In the case of an NAIC CRP- rated municipal issue that must be reported to the SVO for whatever reason despite the

availability of the filing exemption provided in Section 4(d) of this Part above, the reporting insurance company shall file a

completed SAR with evidence of each NAIC CRP. Such evidence can be in the form of a printed copy of a computer screen

display showing the rating as reported by Bloomberg Financial Services, Interactive Data Corporation, JJ Kenny Co, Inc. or

Muller Data Corporation or may be evidenced by submission of a copy of the official statement if the issue is within one year

of the date given for interest payments to begin. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the

procedure used to assign NAIC Designations securities rated by an NAIC CRP. …

(iii) Structured Issues

(A) Rated

In the case of transactions that meet the criteria for Credit Tenant Loan-Variants Requiring an NAIC CRP Rating, as defined

in Part Four, Section 1(a)(vii) of this Manual, debt, common or preferred stock issued by a real estate investment trust,

commercial mortgage-backed securities, residential mortgage-backed securities, collateralized mortgage obligations, asset

backed securities, collateralized bond obligations and collateralized loan obligations, and that must be reported to the SVO

for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurance

company shall submit a completed SAR, evidence of a current rating from each NAIC CRP and a prospectus or private

placement memorandum for the transaction.

Attachment Two


12/11/16


For purposes of this subsection, a current rating is defined as one issued or reviewed within the past 12 calendar months.

Evidence of a current rating may also be submitted in the form of a Bloomberg RCHG screen or other similar screen

acceptable to the NAIC from another information vendor. Evidence of a current rating may also take the form of a final

prospectus or complete private placement memorandum that contains "condition to issuance language." For purposes of this

paragraph, "condition to issuance language" means text within the prospectus or private placement memorandum which

unequivocally states that it is a condition to the issuance of the securities named in the prospectus or private placement

memorandum that the securities shall have been assigned specific ratings by one or more named NAIC CRPs. Please refer to

Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated

by an NAIC CRP.

(B) Unrated

(1) Credit Tenant Loan (CTL) …


(i) In the case of a corporate issue rated “A-/A3” or better by an NAIC CRP, that must be reported to the SVO for

whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurer

requesting that the SVO update the NAIC Designation shall file evidence of an NAIC CRP rating. Evidence of a rating may

take the form of a printed copy of the complete Bloomberg Description Screen (“DES”) display, showing the rating(s)

assigned by an NAIC CRP. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to

assign NAIC Designations securities rated by an NAIC CRP.

(ii) In the case of a corporate issue rated less than “A-/A3” by an NAIC CRP, or rated differently by two or more NAIC

CRPs, the reporting insurance company shall file the issuer's Audited Financial Statement and evidence of rating(s) from all

NAIC CRPs that have rated the security.

…

(ii) Municipal Issues not Filing Exempt

(A) Rated

(1) General Rule

A Subsequent Report is required on all rated municipal issues.


(i) In the case of a municipal issue rated “A-/A3” or better by an NAIC CRP, that must be reported to the SVO for

whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurer

requesting that the SVO update the NAIC designation shall file evidence of an NAIC CRP rating which may take the form of

a printed copy of the complete Bloomberg Description Screen (“DES”) display, showing the rating(s) assigned by an NAIC

CRP or a copy of the rating in an NAIC CRP publication that shows the rating.

(ii) In the case of a municipal issuer rated less than “A-/A3” by an NAIC CRP, or rated differently by two or more

NAIC CRPs that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in

Section 4(d) of this Part above, the reporting insurance company shall file the issuer's Audited Financial Statement and

evidence of a rating from all NAIC CRPs that have rated the security. Evidence of a rating may take the form of a printed

copy of the complete Bloomberg Description Screen (“DES”) display, showing the rating(s) assigned by an NAIC CRP or a

copy of the rating in an NAIC CRP publication that shows the rating. …


Section 1. Corporate Bonds and Preferred Stock

a) Assessment Methodology for Independent Credit Quality Assessments

Corporate bonds defined as the Obligations of domestic and foreign corporations, and preferred stock shall be distinguished

on the basis of the categories discussed below. The creditworthiness of the issuer of any particular category of Obligation

shall be assessed by reference to the general, and any special, rating methodology discussed in this Part, unless the Valuation

of Securities (E) Task Force has specified the use of a different methodology in this Manual.context of the analysis requires a

different approach …

(ii) Financial Analysis

Attachment Two


12/11/16


(A) Audited Financial Statement Required

As a first step in the independent assessment, the analyst shall conduct an independent financial analysis of the issuer based

on the financial information presented in the . The analyst shall review the Audited Financial Statement, as defined in this

Manual. and conduct an analysis.

The SVO shall base it’s financial analysis based on at least three years of historical audited financial information and a

minimum of one year of projected financial information (, if available) when the issuer has an operating history of three years

or more.

However, the SVO may assign an NAIC Designation based on less than three years of financial information in circumstances

where the issue’s operating history is less than three years or because the issuer’s legal identifty has been subsumed as a

result of a merger into a new entity or due to other documentable business circumstances. Where three years of financial

information is not available, the analyst shall will review such information as is available, and shall determine if the time

period for which information is available is sufficient to produce a professionally sound opinion. but will proceed to assign an

NAIC Designation only if the analyst concludes that the time period for which information is available is sufficient to

produce a professionally sound opinion.

b) Procedure Applicable to Procedures Applicable to Filing Exempt (FE) Securities and to Private Letter (PL)

Rating Securities

(i) Filing Exemption

Bonds, (excluding RMBS and CMBS) and Preferred Stock that have been assigned an Eligible NAIC CRP Rating, as

described in Part One, Section 4 (c) (ii) (B) of this Manual, are exempt from filing with the SVO (FE securities).

(ii) Identification of FE Securities

Insurance companies identify FE securities to the NAIC as part of the NAIC’s Financial Statement Blank reporting process.

The SVO subsequently collects the securities insurers have identified as FE securities by identifying securities reported using

the Administrative Symbol FE when it conducts the quarterly compilation of the SVO List of Securities. SVO then performs

the procedures discussed in sub-section (iii) below to produce the most accurate NAIC Designation equivalent for purposes

of the NAIC Financial Condition Framework. Please refer to Part One, Section 3 (l) of this Manual for a discussion of the

compilation process.

(iv) Direction and Procedure

The SVO shall produce NAIC Designations for FE securities by applying the following procedure in conjunction with the

List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations, shown below.

A Bond that has been assigned an Eligible NAIC CRP Rating will be assigned the equivalent NAIC Designation.

If two Eligible NAIC CRP Ratings have been assigned, then the lowest credit rating will be used to assign the

equivalent NAIC Designation.

In case of a Bond that has been assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for

the Bond will be ordered according to their NAIC equivalents and the credit rating falling second lowest will be used to

determine the equivalent NAIC Designation, even if that rating is equal to that of the first lowest.

The SVO shall not in any manner whatsoever, show, display or disseminate the credit ratings of NRSROs as part of the

compilation or publication of the SVO List of Securities in the AVS Plus product or in any other NAIC publication

associated with the operations of the Valuation of Securities (E) Task Force.

(v) PL Securities

Attachment Two


12/11/16


The SVO shall produce NAIC Designations for securities subject to private letter ratings as follows:

The insurance company shall file a copy of the private rating letter with the SVO.

The SVO shall evaluate the private letter to determine whether the security has been assigned an Eligible NAIC CRP

Rating.

If the SVO verifies that the security has been assigned an Eligible NAIC CRP Rating, it assigns an NAIC Designation

in accordance with the policy and procedure specified in sub-paragraphs (i) and (ii) above. The assumption in the

application of this step of the procedure is that PL securities are typically assigned a credit rating by only one NAIC

CRP. However, if this assumption is inaccurate for any PL security, the SVO applies the same procedure specified for

FE securities above.

If the SVO verifies that the security:

o Has been assigned a credit rating but that the credit rating is not an Eligible NAIC CRP Credit Rating; or

o Has not been rated by an NAIC CRP; or

o Is no longer subject to a private letter rating;

SVO shall notify the company that the security is not eligible for filing exemption. The insurance company shall then either

file that security and necessary documentation with the SVO for an independent credit assessment per Section 1 (a) of this

Part or assign an NAIC 5* Regulatory Designation to the security in the related Interrogatory.

(vi) Discretion to Ignore an Eligible NAIC CRP Credit Rating

Consistent with the policy adopted by the Valuation of Securities (E) Task Force expressed in Part Two, Section 4 (c) (iv) of

this Manual (Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations) when the

SVO applies the procedures in sub-section (ii) and (iii) above, the SVO is charged with an affirmative exercise of discretion

to ignore any Eligible NAIC CRP Rating when it determines that the credit rating produces a result inconsistent with NAIC

financial solvency objectives.

For purposes of illustration and not for purposes of limiting the how SVO exercises this discretion; it would be an appropriate

exercise of discretion if the SVO ignores an Eligible NAIC CRP Rating that is significantly lower or significantly higher

than those issued by the other CRPs: or, if in the case when only one CRP has assigned an Eligible NAIC CRP Rating, the

SVO reads the CRP’s research report for the issuer and security and determines there is insufficient information or rating

rationale to explain the CRP’s decision or evaluate the relationship of that credit rating to NAIC financial solvency standards

such as risk-based capital or statutory accounting objectives.

In those circumstances when the SVO exercises its discretion, it shall inform the insurance company that filed the security of

its decision and rationale. If the insurance company vehemently disagrees with the SVO’s determination, the SVO shall

immediately bring the matter to the attention of the Chair of the Valuation of Securities (E) Task Force for discussion and a

preliminary decision whether the SVO decision appears to be consistent with the scope and purpose that underlies the grant

of discretion. The decision of the Chair will be communicated to the insurance company provided that the Chair may direct

the SVO to convene a regulator to regulator session of the Task Force to present the issue to the full Task Force.

(vii) Application of the FE Procedure to Specific Populations

The filing exemption procedure does not apply to investments required to be filed pursuant to Part Five, Section 2 of

this Manual.

Catastrophe-Linked Bonds are filing exempt provided the credit rating assigned to them by a CRP was derived in a

specified manner. Please refer to Part Four, Section 4 of this Manual.

(viii) List of NAIC CRPs

The CRPs that provide Credit Rating Services to the NAIC are:

Attachment Two


12/11/16




Fitch Ratings,






(ix) Table of Equivalents of Eligible NAIC CRP Ratings to NAIC Designations


Corporate, Government Counterparty and Municipal Ratings SVO

Aaa; Aa 1, 2, 3; A 1, 2, 3 1

Baa 1, 2, 3 2

Ba 1, 2, 3 3

B 1, 2, 3 4

Caa, 1, 2, 3 5

Ca, C 6

Commercial Paper and Short Term Counterparty Ratings SVO

P 1 1

P 2 2

P 3 3

N P (Not prime) 6

Preferred Stock SVO

Aaa; Aa 1, 2, 3; A 1, 2, 3 1

Baa 1, 2, 3 2

Ba 1, 2, 3 3

B 1, 2, 3 4

Caa 5

Ca, C 6


Corporate Counterparty and Municipal Ratings --

Public Bonds

SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6


A, A 1 1

A 2 2

A 3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

Attachment Two


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BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C, D 6

(C) Fitch Ratings


AAApre 1*


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC, 5

CC, C, DDD, DD, D 6



F 1+, F 1 1

F 2 2

F 3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C 6







CCC (high 5

CC, C (low), D 6

Preferred Stock SVO





Pfd-5 (high), 5





R-3 3

R-4 5

Attachment Two


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R-5, D 6




bbb+, bbb, bbb- 2

bb+, bb, bb- 3

b+, b, b- 4

ccc+, ccc, ccc- 5

cc, c, d 6


AMB-1+, AMB-1 1

AMB-2 2

AMB-3 3

AMB –4 6



AAA, AA, A 1

BBB 2

BB 3

B 4

CCC, CC, C* 6

D 6

* Morningstar defines CCC, CC, C as "likely to default" which we here equate

to the NAIC 6 definitional concept of a security "in or near default."

Morningstar's D, defined as "in default" is also equated to an NAIC 6.


Long-Term Corporate, Counterparty and Municipal Ratings SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6


K1+, K1 1

K2 2

K3 3

B 4

C 5

D 6



BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6

Attachment Two


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BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC+, CCC, CCC- 5

CC, C, D 6


A, A1, A1+ 1

A2 2

A3 2

B 4

C 5

D 6

Preferred Stock SVO


BBB+, BBB, BBB- 2

BB+, BB, BB- 3

B+, B, B- 4

CCC 5

CC, C, D 6

(x) Securities no longer Assigned an Eligible NAIC CRP Credit Rating

Any Bond or Preferred Stock that at one time was assigned an Eligible NAIC CRP Credit Rating by an NAIC CRP but is no

longer rated must be filed with the SVO within 120 days of the loss of the credit rating, as if the security had never been

filing exempt.

(xiiv) Limitations on Use of NAIC CRP Ratings







(B) Split Ratings









and its impact on payment risk.

…

Section 7. Administrative Guidance and Information

Attachment Two


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W:\National Meetings\2016\Fall\TF\VOS\Task Force 2016 PP Amendments Related to REAWG Recommend.docx

To: Stewart Guerin, Chair, Reporting Exceptions Analysis (E) Working Group Members of the Reporting Exceptions Analysis (E) Working Group

From: North American Securities Valuation Association Executive Committee


Date: September 30, 2016

RE: Recommended Amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office to

Implement Recommendation of the Reporting Exceptions Analysis (E) Working Group to the Valuation of

Securities (E) Task Force

Dear Mr. Guerin:

North American Securities Valuation Association (NASVA) appreciates the opportunity to comment on the

above.

It appears that this document includes detailed changes to support the summary that was finalized on

September 19, 2016 by the Reporting Exceptions Analysis Working Group. In regards to the 35 page document

proposal, NASVA believes the document deserves time and attention paid to each one of its technical details.

We recommend comprehensive public discussions on each one of the proposed procedural and technical

amendments. There are many small but impactful changes in this document that will need robust discussion

before industry will be comfortable with the direction the working group may or may not be taking. The

shortened comment period has not allowed the appropriate time for this level and amount of important detail.

We highlight below a few of the most concerning items. We would like the opportunity to hear a full explanation of each one of the elements from the author, in a public forum.

Modify the definition of the FE/PL symbol to an Internal Administration function.

o It was the understanding of NASVA that industry would be permitted to use NRSRO ratings from any

source and calculate that FE using the defined rules set out in the current P&P language. What was

agreed upon was if there was a difference in the reporting Insurance Companies reported NAIC

designation and the AVS database that difference would be placed on a report that was shared with

the state regulator as well as the insurance company.

o This wording would not allow an insurance company to calculate and report a NAIC FE designation

but would be solely reliant on the AVS database. This proposed process offers no transparency into

AVS database calculations. That was not the spirit or intent of the summary.

Add new Section b) to Part Three to house procedures and instructions for the production of NAIC

Designation equivalents for FE securities and PL securities.

o New text points to SVO discretion to ignore an Eligible NAIC CRP Credit Rating when it produces FE

and PL securities.


12/11/16


o Industry would like to understand when and why the SVO would ignore an Eligible NAIC CRP Credit

Rating when producing FE and PL securities. If this is an authority that is needed by the SVO then

rules, transparency and process needs to be discussed. If the SVO will be using this discretion when

preparing FE or PL securities industry will have no idea what CRPs were used and which ones were

not. It would be impossible for insurance companies to validate or produce evidence of the FE/PL

designations produced by the SVO.

NASVA looks forward to the discussion of the above items as well as the entire document. With

transparency and robust dialog we believe we will find the right language to support the summary that was

agreed upon September 19, 2016.

We look forward to teaming with the working group to find reasonable solutions and language to assist in

this compliance function of Statutory Reporting.

Laurie Armstrong

NASVA, President


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Bloornberg BloombeFg

September 29, 2016

Mr. Stewart GuerinChair, Reporting Exceptions (E) Working GroupChief ExaminerLouisiana Department of Insurance1702 N. Third StreetP.O. Box 94214Baton Rouge, LA 70802

RE: Comments on (1) Report and Recommendations of the Repofling Exceptions Analysis (E)Working Group, dated September 12, 2016 (the ‘REAWO Repofl’9 and (2) RecommendedAmendments to the Purposes and Procedures Manual (the “P&P Manual”) of the NAICInvestment Analysis Office to Implement Recommendations of the Reporting ExceptionsAnalysis (E) Working Group to the Valuation of Securities (E) Task Force, dated September12, 2016 (the “Recommended P&P Manual Amendments”)

Dear Mr. Guerin:

Bloomberg L.P. (“Bloomberg”) appreciates having been able to participate in various calls of theReporting Exceptions Analysis (E) Working Group (“REAWG”) and provides the followingcomments in response to the above-referenced documents with the understanding that thesecomments will be included in the package of materials that will be circulated to the Valuation ofSecurities (E) Task Force.

Background Regarding Material Conflict Between The REAWG Report and The ProposedAmendments Re Data Sources

Bloomberg recognizes the work done by the REAWG in an effort to address various issuesinvolving ratings exceptions, both in terms of improving data quality and reducing the number ofdiscrepancies. As explained below, however, Bloomberg is deeply concerned that the proposedRecommended P&P Manual Amendments conflict with the REAWG Report that was adopted bythe REAWG and would create additional discrepancies and confusion unless they are revised toconform to the report.

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BloombergSpecifically, the following statements contained in the draft meeting minutes of the REAWGconference call held on August 8, 2016, summarize the agreement that Bloomberg understood theREAWG to have reached regarding insurers’ choice of data sources for their filing purposes:

• “Insurers would have the right to use any source that they see fit to determine thedesignation that they are going to report in their statutory financial statements. However,those designations would be compared to those found in the AVS+ system.”

• Any differences to the AVS+ system would be exceptions that would be communicated toinsurers... [Inconsistencies] can be resolved via the reporting process... whereby insurersare informed of discrepancies and have a chance to respond, because it would establish adialogue between all parties involved.”

• “Mr. Guerin said the designations in the AVS+ would be used as the starting point forregulatory purposes to determine what a designation should be.”

We have reviewed the REAWG Report and the Recommended P&P Manual Amendments in termsof those statements.

As explained below, Bloomberg believes that the REAWG Report, only after being amended toreflect comments offered by Mr. James Everett of the New York Department of Financial Serviceson the September 19, 2016, call of the REAWG, reflects the substance of the REAWG telephonecalls that preceded its publication and other comments made by members of the REAWG.

The Proposed P&P Manual Amendments, in contrast, do not reflect, indeed they contradict, thesubstance of the REAWG Report and they have yet to be amended or otherwise corrected.Bloomberg respectfully requests that the Recommended P&P Manual Amendments be redrafted toconform to the REAWG Report, as adopted, and to the agreed directives of the REAWG, asexplained further below.

The REAWG Report, As Adopted, Per September 19, 2016 REAWG Call, Re Data Sources

Following several important clarifications that were suggested on the September 19, 2016,REAWG call (the draft minutes had not been made available at the time of this letter), Bloombergbelieves that the REAWG Report is now consistent with what had been discussed on prior REAWGcalls regarding data sources. Significantly, as noted above, the draft minutes of the REAWGconference call held on August 8, 2016—insurers can use whatever credit rating sources theywant”—confirm that insurers will remain able to identify and rely on whatever information they eachbelieve to be the most accurate in terms of filing financial statements with state insuranceregulators.

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BloombergSpecifically, although we have yet to see a written copy of the REAWO Report as adopted,Bloomberg understands that in the REAWG Report, as adopted, recommends in relevant part that:

1. The filing exempt (“FE”) related instructions to insurers be reconciled with those of the NAICSecurities Valuation Office (the “SVO”) to make the production of the official NAIC Designationequivalents for FE securities the responsibility of the SVO provided that processes will also bedeveloped by the NAIC to enable insurers to interact with the SVO at any time to attempt to reconciledifferences in the insurers’ designations for FE securities as compared to those of the SVO and tohave a right to appeal SVO decisions; and

2. The P&P Manual should also be amended to say that, while insurers can use whatever creditrating source they choose in deriving NAIC Designations, the accuracy of their reporting will be evaluatedby reference to the official NAIC Designation equivalents published in the AVS Plus product, subiect tothe process for reconciling differences as mentioned above.

Bloomberg understands that these recommendations mean that any insurer that files a statutoryfinancial statement containing a Designation that conflicts with that issued by the SVO will need to bein a position to explain that decision if questioned. Thus, insurers will continue to be able to submitfinancial reports that are based on what they believe to be the best, most accurate information and,indeed, will be expected to do so. At the same time, by having the SVO create a benchmark ratingdesignation, all insurers’ submissions can be compared to a common reference point. This processshould make it easier to identify discrepancies and then reduce their numbers as well as improvingthe process overall.

Recommended P&P Manual Amendments Re Data Sources

As drafted, the Recommended P&P Manual Amendments do not implement the principlesregarding SVO designations and other data sources as set out in the REAWO Report and theREAWG Directives (See Attachment 1 regarding the latter). Our comments are focused only onthose aspects of the proposed amendments that relate to data source issues addressed above.

Part One, Section 39), “Compilation and Publication of the SVO List of Securities,” of the proposedamendments includes the following statements:

i. ‘Status. Until such time as the Valuation of Securities (E) Task Force shall instruct the SVOto publish the SVO List of Securities (discussed in this sub-section) in a different locationthe SVO shall publish the List of Securities only in the AVS Plus product. The AVS Productis identified as the sole official source of NAIC Designations.” Section 3(1)0).

ii. “Data Quality Assessment Procedure. In any given year, prior to the publication of the firstquarterly SVO List of Securities, the SVO shall obtain the latest NAIC year-end reportingdata on insurer owned securities, assess the accuracy of the data presented and resolvereporting anomalies in the reported data as specified in this sub-section The SVO

3


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Bloomberg

shall develop and maintain procedures to identify and resolve reporting anomalies forInvestment Securities that are consistent with the methodology or procedure by which NAICDesignations are assigned to the securities and the specific Process where data from thatcategory of securities is maintained.

The SVO shall:

-Compile sub-lists of reporting anomalies corresponding to the specific Process and provide apreliminary assessment of the cause or source of the anomalies;

-Compile the sub-lists into a report;

-Identify the top ten (or more or less) companies that own the securities and the state(s) ofdomicile corresponding to those companies.

-The resulting report shall be a confidential report and may not be publicly disseminated. TheSVO shall then schedule, in accordance with the NAIC Open Meetings Policy, a regulator toregulator session of the Valuation of Securities (E) Task Force to discuss the report;

-Deliver the SVO report to the Valuation of Securities (E) Task Force.

The Valuation of Securities (E) Task Force shall hear and review the SVO report, providecomments or instructions to the SVO relative to its subject matter and appoint one or more of itsmembers to represent the Task Force and work with the SVO Director to communicate withother NAIC regulator groups and the specific state insurance department official to resolve thereporting anomalies.” Section 3(l)(ii).

Ni. Compilation and Publication of the SVO List of Securities. On a quarterly basis, the SVOshall:

1) Compile or cause to be compiled a list of Investment Securities. .. . When compiling orpublishing the SVO List of Securities the NAIC shall not publicly show, display ordisseminate the credit ratings of NRSROs in the AVS Plus product or in any other NAICpublication associated with the operations of the Valuation of Securities (E) Task Force.

2) Aggregate the content of each SVO Sub-List into a single SVO List of InvestmentSecurities . . .

3) Compile, or cause to be compiled, sub-lists. .

4) Publish, or cause the SVO List of Securities and the Other Information to be published,by being incorporated into the NAIC’s AVS÷ product. . . . Section 3(l(iN).

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Bloomberg

The Proposed Amendments Materially Conflict With The REAWG Report As Adopted AndWould Create More Discrepancies and Introduce Additional Confusion Unless Revised ToConform To the Report.

The draft text regarding the Data Quality Assessment Procedure and the SVO List of Securitiesconflicts with the principles that the REAWG agreed. For example:

1. Insurers need to be able to rely on the most accurate information available, regardless ofsource. As drafted Section 3(1)0 & fl) appear to imply that the SVO will be the only sourceof ratings designations that insurers may rely on and that the SVO will be the final arbiter ofratings designations even though it is not a state regulator. This needs to be corrected toconform to the REAWG Report.

At a minimum, we suggest that consideration be given to adding language in Section 3(1)0)to clarify this point: “The official NAIC Designation shall be the benchmark against which allinsurers’ submissions will be assessed. As described below, the Data Quality AssessmentProcedure contemplates that each insurer shall rely on what it believes to be the mostaccurate information available and, if questioned by the SVO, the insurer will have theopportunity to explain why it chose the data that it chose. The relevant state regulator shalldecide whether that choice was appropriate.”

2. When the SVD investigates discrepancies, it will sometimes find that the discrepancy arosebecause the insurer relied on information that was more current (or otherwise moreaccurate) than the standard data feeds to which the SVO subscribes. For example, asnoted in the draft meeting minutes of the August 8, 2016, REAWG call, I offered commentsas to how and why Bloomberg invests substantial resources on a 24 hour/7 day per week,global, basis to provide more accurate CRP ratings data than can be obtained from theCRP’s standard, direct data feeds. The proposed amendments do not explain what thestandard is for when the SVQ would be able to conclude that data sourced from any sourceother than the SVQ and submitted by an insurer is not appropriate and must be changed.

3. If the SVO is to reject an insurer’s submission, the insurer should have the ability to know thebasis for such a rejection so it can meets its burden of explaining any discrepancy.

4. There is no provision set for when and how an insurer and the SVQ shall resolvedifferences regarding whether an insurer’s reliance on a given data source is appropriate,except in the specific circumstance where the NAIC exercises discretion to ignore aneligible NAIC CRP credit rating (See Part 3, Section 1 (b)(vi)) of the Recommended P&PManual Amendments). A specific mechanism and sequence of events needs to beprovided for to address other potential differences in judgment.

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Bloomberg

5. In any instance where the SVO believes that its standard data feed is correct and theinsurer’s data source is not, the SVO is barred from communicating information to theinsurer about the underlying CRP data at issue. If this is the case, it is not clear how therecan be a discussion that will lead to the best data being selected as appropriate.

6. This flaw would be exacerbated if the SVO, as it seems to contemplate, were permitted to useits own discretion as to when to accept or not accept data sent by an CRP because that wouldintroduce subjectivity compared to the transparent, rules-based approach followed by insurerstoday.

The Proposed Amendments Should Be Redrafted To Eliminate The Existing MaterialConflicts With, And Accurately Implement, the REAWG Report As Adopted.

Based on these material conflicts, Bloomberg requests that the proposed amendments be revisedto accurately implement the principles set out in the REAWG Report, as adopted. In particular,Bloomberg requests that a new set of proposed amendments be drafted that specifically andexclusively reflect Directives 3 & 4 of the REAWG Directives (See Attachment 1).

I hope that these comments will prove constructive in promoting the related goals of havinginsurers rely on the most accurate information and reducing the number of discrepancies. I lookforward to reviewing and discussing a revised draft of the proposed amendments.

Respectfully submitted,

Chris CaseyHead, Regulatory & Reference DataBloomberg L.P.

CC: Members of the Reporting Exceptions Analysis (E) Working GroupMr. Bob Carcano, Senior Counsel, NAIC Securities Valuation OfficeMr. Charles Therriault, Director, NAIC Securities Valuation Office

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BloombergAttachment 1: REAWG Directives

(A) REAWG Directives Re Data Sources, Based On Conference Calls

The following reflects Bloomberg’s attempt to identify the specific directives for which the REAWGrequested that the SVO staff draft proposed implementing language and that relate to insurers’choice of data sources. The relevant directives were the third and fourth of six that we understoodto have been issued. We do not understand the other directives to be relevant to this issue.

Directive #3, Item 2, August 8, “Directed NAIC Staff to Draft a P&P Manual Amendment toDisseminate a List of Securities Dropped from or Never Included in CRP Data Feeds

“The Working Group then discussed securities that have been dropped or were neverincluded inCRP data feeds and Bloomberg as a ratings source. These exceptions have arisen because otherratings sources are being used, resulting in inconsistencies with the CRP data feeds. Theseexceptions are not regularly communicated to insurers and, therefore, insurers are unaware of theexceptions or in a position to address them. The Working Group concluded that insurers andregulators should be informed of these security exceptions and that, in order to resolve the issue.NAIC staff should release a list of exceptions to insurers. This dialogue will undoubtedly result inenhancements to the FE process, which will then reduce the exceptions in the future. LaurieArmstrong (Principle Global Investors—PSI) asked how the information would be communicatedand what the time frame would be. Mr. Guerin said that the Working Group would direct NAIC staffto come up with guidance and bring it back to either the Working Group or the Task Force....Ms. Stock made a motion, seconded by Mr. Milguet, moved to direct NAIC staff to develop arecommendation on how todisseminate these investment reporting exceptions to insurers and regulators on a regular basis.The motion passed.

Directive #4, Item #3. August 8, “Directed Staff to Draft a P&P Manual Amendment to ReconcileInstructions and to Create a Process for Publicly Reporting Anomalies”

“Mr. Guerin said that the SVD has recommended that the production of NAIC designations throughthe FE process be made an administrative function of the AVS÷ system. The NAIC designationsthat would then be produced in the AVS+ system would be the basis from which any exceptionswould be determined. Insurers would have the right to use any source that they see fit to determinethe designation that they are going to report in their financial statements. However, thosedesignations would be compared to those found in the AVS+ system. Any differences to the AVS+system would be exceptions that would be communicated to insurers through the process justdiscussed....””... Mr. Carcano referred to the P&P Manual on page 52, “Compilation andPublication of the SVO List of Securities.” He said that this is something that the SVO performsquarterly and includes the FE process, along with designations assigned through other processes.He said all of this is published, per the P& P Manual, into AVS+....” ...“ Mr. Everett asked who wasresponsible for determining what was FE, and Mr.Guerin answered regulators, ultimately...””...Mr. Everett asked who would ultimately be responsible for determining if a security is FE. Mr.Guerin answered that the regulators would, but the communication process and the process of

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Bloomberg

working through the exceptions is yet to be determined....’’ ...Mr. Milguet méde a motion,seconded by Mr. Garn, moved to direct NAIC staff to draft a P&P Manual amendment to reconcilethe compilation instructions to the instructions in the FE policy and to make recommendations tothe Task Force on a process for sharing information about reporting anomalies with insurers andregulators. The motion passed.”

(B) Other REAWG Directives, Based On Conference Calls

For the sake of completeness, the following reflects Bloomberg’s attempt to identify those specificdirectives for which the REAWG requested that the SVO stall draft proposed implementinglanguage other than those that relate to insurers’ choice of data sources as noted above.

Directive #1, Item 4b Government guarantees Exceptions, June 6, 2016

“The Working Group directed the SVO and the FRS to prepare a proposal and recommendationsto identify the necessary modifications to the reporting requirement that might address these typesof exceptions and use that memorandum as the basis for a recommendation to the Task Force.”

Additional information about this directive: “ The exceptions in this group seem to be causedbecause exempt and non-exempt securities are required to be reported on the same line, whichmay confuse regulators and insurers. Fixing this exception may require that a new subcategory becreated for reported or that a different symbol be adopted. Mr. Monahan said the ACLI and NASVAalso believe that this category is due to an identification problem instead of a compliance one thatcan be resolved through dialogue. Mr. Guerin echoed the ACLI/NASVA comment that the ongoingsystem redesign may provide some additional processes that will eliminate these types ofexceptions.”

Directive #2, Item 1, August 8, “Discussed Pre-Refunded Securities”

He (Mr. Guerin) said regarding U.S. government securities (embedded in pre-refunded securities),the current annual statement reporting requirements may be resulting in confusion among someinsurers. The Working Group directed NAIC staff to prepare a proposal and recommendation tomodify the current reporting requirements to eliminate any such confusion in the future. TheWorking Group then agreed that prerefunded securities that are no longer rated by credit ratingproviders (CRPs) are not filing exempt (FE) and, therefore, should be filed with the SecuritiesValuation Office (SVO). However, discussion of filing fees is outside the Working Group and theValuation of Securities (E) Task Force’s purview. If there are alternative proposals regarding theinstructions in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&PManual) for pre-refunded securities, they should be brought before Task Force for consideration...”

Directive #5, Item 4, August 8, “Directed SVO Staff to Work with FRS Staff to Develop A P&PManual Amendment and a Referral to the Blanks (E)Working Group Whereby a Proposed SuffixChange Would Identify Private Letter Ratings”

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Bloomberg“Mr. Garn made a motion, seconded by Mr. Milquet, to direct SVO staff to work with FinancialRegulatory (FRS) staff to develop a P&P Manual amendment and a referral to the Blanks (E)Working Group whereby a proposed suffix change would identify private fetter ratings. The motionpassed.”

Directive #6, August 31 (Minutes are not available to quote the directive precisely).Instruct staff to develop P&P language to require that evidence of a valid CRP rating must beprovided for all privately placed securities for which the NAIC that rating.

9


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Attachment Two


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Date: 10/20/16

Reporting Exceptions Analysis (E) Working Group

Conference Call

September 19, 2016

The Reporting Exceptions Analysis (E) Working Group of the Valuation of Securities (E) Task Force met via conference call

Sept. 19, 2016. The following Working Group members participated: Stewart Guerin, Chair (LA); Jake Garn (UT); Tomoko

Stock (CA); Jim Everett (NY); Jamie Walker (TX); Patrick McNaughton (WA); and Randy Milquet (WI). Also participating

was: Kevin Fry (IL).

1. Adopted a Recommendation of a July 1, 2017, Implementation Deadline for the Proposed Rule for Private Letter Ratings

On Aug. 31, the Working Group agreed to monitor private letter ratings at least annually, the same frequency used for public

ratings. Insurers could either provide a copy of the private letter rating directly to the SVO or the credit rating providers

(CRP) could do so via their data feeds. If neither method was possible, the insurer could file the security for an SVO

designation. Lastly, the insurer could accept a 5*/6* designation instead of the prior options. The industry submitted

comment letters agreeing with that approach. The only issue to be discussed further is implementation; staff recommended a

Jan. 1, 2017, implementation date, while the industry proposed a Dec. 31, 2017, implementation date. A joint comment letter

was submitted by the American Council of Life Insurers (ACLI), the Private Placement Investors Association (PPiA) and the

North American Securities Valuation Association (NASVA).

Mike Monahan (ACLI/PPiA/NASVA) said that, in order to work collaboratively, a reasonable transition period should be

established. The ACLI, the PPiA and NASVA strongly oppose the Jan. 1 date and will voice their dissent to the Task Force

should the Working Group recommend it. Mr. Guerin proposed a compromise of a Jan. 1, 2017, effective date only for those

letters insurers receive after that date; letters received after that date can be submitted to the SVO via PDF file through an

NAIC system that would maintain confidentiality. Mr. Guerin asked if Mr. Monahan also rejected that solution and

Mr. Monahan said he did, stressing that such an early date would be an onerous cost for the industry and, therefore,

unreasonable. He pushed for extending the implementation deadline. Charles Therriault (NAIC) stressed that no fees have

been set for 2017. As an administrative function, he expects that any fees associated with manually processing these

documents would be very low and does not know how the industry has estimated the onerous costs cited earlier. Staff

consider this to be procedurally similar to an annual update, occurring over the course of the entire filing year.

Robert Carcano (NAIC) added that staff support Mr. Guerin’s proposed compromise, because insurers have assured staff for

the past two years that they have these letters and, hence, staff believes it is all a matter of insurers’ providing them to the

SVO; staff would not oppose further modification of the second and third proposed steps in the process, if the industry needs

more time, because some letters have expired or because they may not have the entire population. Therefore, Jan. 1, 2017,

would be the effective date to begin filing letters, with a June 1, 2017, or July 1, 2017, deadline to submit a complete

document package to submit the security or taking a 5*/6* designation. Mr. Monahan said a July 1, 2017, effective date

would work based on the items outlined in the memo. Mr. Guerin asked for clarification from Mr. Carcano regarding his

latter proposal, to which Mr. Carcano explained that a Jan. 1, 2017, date for any new letters and a July 1, 2017, date for filing

the security with the SVO if letters are not available. Mr. Monahan said the ACLI would request an additional two weeks to

gather input from its members. Brian Keating (Guardian Life) added that the difficulty for insurers does not lie in assembling

the documents and submitting them, but, rather, in educating the rating agencies and getting their consent on the proposed

new process. Mr. Carcano asked Mr. Keating for a workable sequence given that concern. Mr. Keating said he is not

confident that he could file every letter received in January with the SVO; July 1 would be a better effective deadline.

Mr. Therriault clarified that staff would expect to begin receiving the letters in January and give insurers until Dec. 31, 2017,

to submit, similar to an annual update. Mr. Carcano said staff would agree to a July 1 deadline to begin receiving them and

staff is agreeable to that date; the real concern is that the issue will not be resolved by year-end. Ms. Stock asked if the goal is

for insurers to make a decision about which option they want to take for private letter ratings by July 1, but they would have

until Dec. 31, 2017, to submit documents or PDF files. Ms. Stock asked if the July 1 date would work for the industry and

Mr. Monahan said it would, noting that the industry will work with rating agencies to see if the ratings will be added to their

feeds by that date; if that is not achieved, the industry will submit the letters by some other means. Mr. Milquet added that it

was all semantics, because the real implementation deadline is Dec. 31, 2017. Laurie Armstrong (NASVA) added that a lot of

private letter ratings are issued to insurers in December and that would entail a work overload to the SVO at year-end, so

there is a real need to consider these dates. Internally insurers have considered any issue held in 2016 was for 2016 reporting.

Mr. Guerin reminded everyone that the Working Group is only considering recommendations to the Task Force; hence there

will be more opportunity for discussion and deliberation once it goes up the chain, and Ms. Armstrong’s point can be

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addressed at that level. Ms. Stock said that NASVA and staff will need to work out the logistics of when filing must be done

by, as per Ms. Armstrong’s point. Mr. Carcano agreed and said staff would take an instruction from the Working Group to

work with NASVA. He also said it would be helpful if staff could unofficially see copies of the letter before the deadline, so

as to work out the details for the new process. He asked for the Working Group’s permission to work that out at the staff

level. The Working Group agreed. Michele Werner (American International Group—AIG) asked for clarification that, if the

industry is able to persuade the nationally recognized statistical rating organizations (NRSROs) to carry these ratings on their

feeds, there will be no need for insurers to file them. Mr. Guerin agreed, for those particular letters.

Mr. Milquet made a motion, seconded by Ms. Stock, to adopt the recommendation for a July 1, 2017, implementation date

for insurers to file private letter ratings with the SVO. The motion passed.

2. Adopted a Revised Version of the “Report and Recommendations of the Reporting Exceptions Analysis (E) Working

Group” and Referred it to the Task Force

Mr. Guerin brought up the “Report and Recommendations of the Reporting Exceptions Analysis (E) Working Group,” which

was distributed prior to the call. Various people voiced concerns regarding the section titled, “Ratings Obtained from

Bloomberg and NRSRO Websites.” Mr. Guerin said that, while the section accurately reflects the Working Group’s

decisions, clarification is warranted whereby the SVO will take the ratings feed and come up with the official NAIC

designation for them. These designations will then be compared to the insurers’ holdings, which will, no doubt, generate

some exceptions. Mr. Guerin said the Working Group has established that it will develop and outline a process for resolving

these exceptions: 1) the exceptions will be communicated to the insurer, along with the domiciliary state insurance regulator;

2) the insurer will have a chance to respond to the exceptions, and submit additional information to staff and regulators to

support the ratings it files; 3) regulators and staff will make a determination based on the new information. Mr. Guerin said

the memo should have outlined this process explicitly. This is also reflected in the Working Group’s prior meeting minutes.

He will alert the Task Force about this yet-to-be developed process once the final report is presented. Mr. Everett suggested

several edits to the text in order to reflect that the SVO and the industry will continue to discuss the following issues: deleting

“exclusive” from the phrase “the exclusive responsibility” in the paragraph about filing exempt (FE)-related instructions; and

deleting “for internal operations” in the phrase “insurers can use whatever credit rating source they want for internal

operations.” He said the revisions would reflect the fact that continued discussions are called for. Mr. Carcano said staff do

not object to those edits, noting that staff propose a process that mirrors how they have conducted business for several years,

which includes a process through which staff and Task Force members interact directly with state insurance regulators. It also

allows for insurers to identify what they consider inaccuracies and appeal a designation. Chris Casey (Bloomberg) said that

any proposed rewording of the memo should include the fact that insurers could use any information source they deem

accurate in terms of submitting their designations and that discussions between all parties will be held before a final

designation is struck. Mr. Guerin said his understanding is that the memo reflects all of that, but he will make it clear to the

Task Force when it is presented. Mr. Everett had additional questions about the procedure for reconciling these exceptions,

and that the accuracy of the reporting will be evaluated by reference to the NAIC designation equivalence. In that NAIC

designations are being separated from a credit default or loss give default model, he asked that there be some criteria for

reconciling the NAIC designation with what has generated by the NRSROs. Mr. Guerin explained that Mr. Everett’s

comments would be better addressed at the Task Force level when the process and the resulting amendments to the

Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) are worked out. Mr. Everett

continued with his concern about the phrase “evaluated in reference to,” if the phrase means that there will be specific criteria

set out for the reconciliation. Mr. Carcano clarified that the phrasing is currently used to refer to a list of credit rating

providers (CRPs) with equivalent NAIC designations to their rating categories, so the phrase “NAIC equivalent” refers to the

current nine CRPs and aligning their ratings in accordance with the FE rule and selecting the NAIC designation category that

corresponds to that process. He proposed deleting the word “equivalents” from “NAIC Designation equivalents” and making

the phrase in the memo “…evaluated by reference to the NAIC Designations published in the AVS Plus product.”

Mr. Everett said his concern is about how the two would be deemed the equivalent by reference to NAIC designation

equivalent, given that the Task Force is reconsidering the concept of what a designation is and what the equivalent of what an

NAIC designation would be. He added that specific procedures be set out for the “evaluation by” reference or “evaluated

with” reference to the NAIC designation equivalents. Mr. Carcano and Mr. Therriault said the phrasing is in the P&P Manual

and no changes on this particular issue are anticipated. Mr. Casey asked if it would be possible for staff to release a revised

version of the report before it is presented to the Task Force. Mr. Guerin declined due to the Working Group’s short life and

explained that there will be another opportunity to revise the amendment language at the Task Force level. Mr. Casey asked

for reassurance that Mr. Everett’s changes will be incorporated. Staff answered they would be. Ms. Stock added that item 3

talks about amending the P&P Manual and she asked which manual would be the appropriate place for capturing the annual

financial statement crosscheck process.

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Mr. Guerin explained that if the Task Force accepts the recommendations in the memo, it will direct staff to work with the

appropriate entities to figure out the process in detail. He directed staff to figure out the process at this juncture. Mr. Carcano

agreed with Mr. Guerin that it is up to the Task Force to decide what the next steps will be.

Mr. Milquet made a motion, seconded by Mr. Everett, to adopt the report as revised and refer it to the Valuation of Securities

(E) Task Force. The motion passed.

3. Received and Exposed the “Recommended Amendments to the P&P Manual to Implement Recommendations of the

Reporting Exceptions Analysis (E) Working Group to the Valuation of Securities (E) Task Force” for a Two-Week

Comment Period

Mr. Guerin explained that the report, “Recommended Amendments to the P&P Manual to Implement Recommendations of

the Reporting Exceptions Analysis (E) Working Group to the Valuation of Securities (E) Task Force,” is a starting point and

it is up to the Task Force to determine the verbiage. Mr. Everett asked if the Working Group will submit the interested

parties’ comments to the Task Force. Mr. Guerin said any comment letters received will be included with the referral to the

Task Force. He clarified that the Task Force will likely re-expose the proposed amendments and comment letters, so this is

not the last chance for the industry to weigh in or for revisions to be made. Mr. Everett asked about the timeline for adopting

the amendments. Mr. Guerin said the Working Group is set to disband by the end of September, but there is no specific

deadline for the Task Force to adopt the amendments; as such, there will be ample time to work on finalizing them.

Mr. Casey reiterated that the memo should clarify the previously discussed points before it is presented. Mr. Guerin added

that Mr. Casey’s comment would be on the record.

Ms. Stock made a motion, seconded by Mr. Garn, to receive and expose the recommended P&P Manual amendments to

implement the Working Group’s recommendations for a two-week public comment period ending Sept. 30. The motion

passed.

Mr. Guerin said this would likely be the Working Group’s last call, and he thanked all the members and interested parties for

their work and contributions in accomplishing the Working Group’s goals in the time allotted. As this issue moves forward,

he believes that it will result in a more effective and efficient regulatory process to eliminate exceptions.

Having no further business, the Reporting Exceptions Analysis (E) Working Group adjourned.

\\svoclusterfs\svovol1\GROUP\SECVAL\DATA\Vos-tf\REA WG\September\REAWG 09.19.16 Meeting Minutes - FINAL.docx

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Date: 10/3/16

Reporting Exceptions Analysis (E) Working Group

Conference Call

August 31, 2016

The Reporting Exceptions Analysis (E) Working Group of the Valuation of Securities (E) Task Force met via conference call

Aug. 31, 2016. The following Working Group members participated: Stewart Guerin, Chair (LA); Jake Garn, Vice Chair

(UT); Tomoko Stock (CA); Jim Everett (NY); Jamie Walker (TX); Patrick McNaughton (WA); and Randy Milquet (WI).

Also participating was: Kevin Fry (IL).

1. Discussed Options for Private Letter Rating Annual Verification and Exposed a Joint ACLI/PPiA/NASVA Comment

Letter for a Two-Week Period

On Aug. 8, the Working Group discussed the issue of verifying private letter ratings and agreed that it should be monitored as

frequently as public ratings are—at least annually. Three options were discussed: 1) insurers could provide a copy of the

security’s rating to the Securities Valuation Office (SVO); 2) they could file it with the SVO; or 3) they could take a 5*/6*

designation on it. At the request of interested parties, the Working Group granted additional time to devise other options that

address regulator concern while also encompassing the confidentiality aspect. The Working Group received a joint comment

letter from the American Council of Life Insurers (ACLI), the Private Placement Investors Association (PPiA) and the North

American Securities Valuation Association (NASVA).

John Bauer (ACLI/PPiA/NASVA) said that all three entities believe that an automated solution is the best way to reduce

jumpstart report exceptions produced by private placements. They believe an automated delivery mechanism for private

ratings would reduce both regulator and industry administrative burdens. The rating agencies would provide electronic

private ratings that the SVO would access either through data feeds or by providing it access to the agencies’ electronic

databases. Mr. Bauer said the ACLI/PPiA/NASVA already communicated with some rating agencies regarding feasibility.

He said the rating agencies were open to further discussion and on collaborating going forward. Automation will require

time, and technology and process changes, as well as industrywide education for all parties involved. Mr. Bauer stressed that

it is early and that there might be push-back from the rating agencies later on. He also noted that the private letter rating

process is much stronger with new transactions than with existing ones. The ACLI/PPiA/NASVA propose emailing private

letter ratings for those existing transactions that are not able to be converted to an electronic rating format. The three entities

hope to have the new process in place by Dec. 31, 2017. Mr. Guerin asked what would happen if one of the rating agencies

were to decline to participate. Would insurers file a portable document format (PDF) instead? Mr. Bauer does not foresee that

happening because that would put any holdouts in a bad position vis a vis the other credit rating providers (CRPs). Mr.

Guerin said that he did not want to be in the position where anything the Working Group receives is dependent on the

agencies. As previously discussed, if the information is not received through any of the proposed solutions, companies may

incur more punitive actions or file the security with the SVO, at their option. Mr. Guerin mentioned that he was thinking of

Jan. 1, 2017, as an implementation start date. He also suggested resorting to the PDF method in the interim.

Ms. Walker asked if email submissions would be sent to the SVO because the letter does not mention specific recipients.

Mr. Bauer said yes, email submissions would be sent to the SVO. Mr. Milquet and Mr. Guerin found the mention of

Committee on Uniform Security Identification Procedures (CUSIP) and private placement number (PPN) identifiers in the

letter confusing. Mr. Bauer explained that private placement letters would provide a way for SVO staff to match up the

securities. Laurie Armstrong (NASVA) added that historic letters can be directly tied to an identifier via a maturity date and

the coupon. Industry can find a way to add an identifier to new letters but wants to ensure that historic letters without an

identifier will be accepted. Sasha Kamper (PPiA) clarified that historic letters were often created before a deal closed and

were updated annually, so often they reference a maturity date or coupon instead of a CUSIP since the latter had not yet been

issued. Mr. Guerin said that insurers could identify the CUSIP in their submittals, be they via email or electronically.

Mr. Therriault agreed that would be SVO staff’s expectations for PDF submissions: Ideally through the VISION application,

they would contain sufficient information to identify the issue and the issuer. Mr. Fry asked if private letter ratings also

indicate any other type of information, apart from the rating itself, such as size or other characteristics.

Ms. Kamper answered that it varies, deal to deal; most letters list coupon and maturity date, while some also list transaction

size or the debt’s place in the capital structure. In the latter case, the private placement notes are the only notes in that point in

the capital structure. The industry perspective is that letters must contain enough specific information so that the issue can be

matched correctly. However, there is no consistency in that regard. Mr. Fry suggested that uniformity be established.

Ms. Armstrong agreed and asked what data regulators may need so that industry can provide it. Ms. Stock asked if the

historic deals will also contain three key elements: 1) annual monitoring; 2) issue specific; and 3) covering principal and

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interest. Ms. Kamper said that the historic letters usually contain a date; some will indicate the rating is updated no less than

annually, while others will provide a new letter each year. Industry proposes that as long as the private letter rating date is

within a year of the filing date, it be accepted as a reviewed rating; if the one year point is missed, then it would not meet the

annual update requirement. Regarding the rating addressing principal and interest, rating agencies generally rate corporates

on the assumption of the timely payment of principal and interest, which the letter may not specifically state. Unless stated

otherwise, industry has assumed this applies. Once the electronic system is wholly established, ratings information would be

updated daily, and the concerns would become moot. Ms. Stock observed that the main goal is to establish the electronic

system and to save money. Ms. Armstrong said that industry’s goal is to see 90% of private placements on the electronic feed

because it would require no work from industry or NAIC staff. She reiterated that new deals will negotiate exactly what the

Working Group and regulators want, but some compromise must be made on old ones.

There was some confusion about the effective date for implementing the plan to submit letters to the SVO. Mr. Guerin

clarified that he proposed Jan. 1, 2017, not 2016, as a possible effective date. Ms. Armstrong answered that rating letters

received after Jan. 1, 2017, would be used for Dec. 31, 2017, reporting and stressed that implementation would take a full

year as the letters would come in throughout the year.

The Working Group agreed to expose the joint letter for a two-week public comment period and discuss next steps in a

follow-up call.

2. Directed NAIC Staff to Draft a Summary of the Working Group’s Actions for Submission to the Valuation of Securities

(E) Task Force

Mr. Guerin asked Bob Carcano (NAIC) to prepare a report summarizing the Working Group’s actions to be presented to the

Valuation of Securities (E) Task Force.

Having no further business, the Reporting Exceptions Analysis (E) Working Group adjourned.

W:\National Meetings\2016\Fall\TF\VOS\02-C REAWG 08.31.16 Meeting Minutes (FINAL).docx

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© 2016 National Association of Insurance Commissioners

MEMORANDUM

TO: Valuation of Securities (E) Task Force

FROM: Kevin Fry (IL), Chair, Investment Risk-Based Capital (E) Working Group

DATE: October 31, 2016

RE: Referral Regarding Increased Granularity in the Life RBC Formula

Background Information

The Investment Risk-Based Capital (E) Working Group is charged with developing recommendations for revisions to the

current asset risk structure and factors in each of the risk-based capital (RBC) formulas, and the Working Group has been

considering numerous issues to address this charge for a number of years. To assist the Working Group, the American

Academy of Actuaries (Academy) developed a bond modeling process that considered default probabilities in order to

analyze the current RBC bond structure and factors given modern loss default experience. In August 2015, the Academy

released its report, which recommends an increase in the number of RBC categories for bonds in the life formula and

includes updated factors for the expanded categories.

The life bond structure has been discussed by the Working Group on several occasions, and there is a general consensus that

the number of RBC categories for bonds should be expanded from the current six categories (plus the exempt category) to

20 categories (plus exempt.) The current RBC factors are based on the NAIC designations. The expansion would provide

more robust and accurate results, primarily as it increases the granularity of the formula and reduces the “cliffs” between the

different factors for the different NAIC designations. That is, an insurer may have an incentive to invest in lower-quality

bonds within the same NAIC designation category and get the same RBC charge as a higher-quality bond within the same

NAIC designation category.

Summary of Proposed Changes and Referral

In short, the expansion to the 20 categories (plus exempt) would be accomplished by including a new electronic-only column

in Schedule D. The Academy’s report suggests that these categories be based on the bond’s credit rating from a nationally

recognized statistical rating organization (NRSRO). The electronic-only column would be used to accumulate bonds into the

20 bond categories for inclusion in the asset valuation reserve (AVR) default worksheet, and AVR would be calculated based

on the new expanded categories. The bond amounts in the AVR default worksheet would then be used to populate the

information for bonds in the life RBC formula. The current six NAIC designation categories would continue to be used for

accounting and reporting purposes, as well as for state investment law purposes. The Working Group is not proposing any

changes in the structure for other assets that received the bond treatment (e.g., Schedule BA) but may consider changes to

these investments in the future. Regarding securities valued under Statement of Statutory Accounting Principles (SSAP)

No. 43R—Loan-Backed and Structured Securities, the breakpoints for both modeled and non-modeled securities would need

to be updated to use the 20-category framework.

During an Oct. 20 conference call, the Working Group discussed that it should coordinate its work with the Valuation of

Securities (E) Task Force, so that the Task Force may consider any impact on its current areas of responsibilities and the

operations and procedures followed by the NAIC Investment Analysis Office. Please consider this referral as the Working

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Group’s formal request for the Task Force’s review of the bond expansion proposal related to RBC. The Working Group has

discussed a target implementation date of year-end 2017, so it would appreciate the Task Force’s feedback/recommendation

in the near future.

Thank you for your assistance, and please contact me or Julie Garber (NAIC) if you have any questions.

W:\National Meetings\2016\Fall\TF\VOS\VOS (E) TF referral Oct 2016.docx

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MEMORANDUM

TO: Kevin Fry, Chair, Valuation of Securities (E) Task Force

Members of the Valuation of Securities (E) Task Force



DATE: June 3, 2016

RE: Technical Adjustments to the Definition of NAIC Designation

1. Issue and Discussion – Inquiries from members of the International Association of Insurance Supervisors (IAIS),

senior NAIC staff, third-party administrators (TPAs) for insurers and other persons over the past year or so indicate some

degree of misunderstanding about the role and function of NAIC Designations. The NAIC process involves the determination

of an opinion of the quality of an obligation (i.e., investment security or asset) using a variety of analytical, regulatory and

policy criteria. The specific approach used for a given sub-population of obligations may differ from that used for another

sub-population. Irrespective of how the quality of an obligation is determined, all quality opinions are expressed as NAIC

Designations and all NAIC Designations serve as triggers for various components of regulation, which together constitute a

part of the NAIC financial solvency monitoring process. The regulatory meaning of an NAIC Designation for a given

obligation is, therefore, the cumulative effect of treatment accorded by the various regulatory processes. The Purposes and

Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) contains text that accurately (if today,

imperfectly) describes NAIC goals and processes.1 However, over time, text in the P&P Manual has evolved so that it can be

read to suggest an exclusive link between NAIC Designations and credit risk assessment methodologies; including in the

definitions of NAIC Designations.2 This reflects that the primary SVO methodology to determine quality and assign NAIC

Designations is credit assessment and that NAIC Designations derived from Nationally Recognized Statistical Rating

Organization (NRSRO) credit ratings must be incorporated into this SVO-centered framework. The SVO proposes

amendments (shown below) that would: 1) more accurately associate NAIC quality determinations with NAIC Designations;

2) discuss the analytical, regulatory or policy approaches used to derive quality; and assign NAIC Designations and 3)

explain how NAIC Designations are used in NAIC regulatory processes.3

2. Proposed Amendment - The SVO proposes the amendments shown below.

Part One – Purposes, General Policies and Instructions to the SVO

SECTION 1. ABOUT THE NAIC …

b) The VOS/TF and the SVO Staff Function

The NAIC has determined that the credit quality of insurance company investments and the Unit Price for a security provide

a sound empirical anchor for certain regulatory functions related to financial solvency regulation. As used in this Manual,

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quality means the likelihood that an Investment Security, asset or other Obligation owned by an insurance company will be

available to pay policyholder claims.

The VOS/TF formulates and implements NAIC's quality credit assessment, classification and securities valuation policy.

The SVO is the professional staff responsible for carrying out of the VOS/TF policies responsible for the day-to-day credit

quality assessment and valuation of securities owned by state-regulated insurance companies. The SVO also performs such

other duties as are specified by VOS/TF.



The SVO shall conduct the following ongoing operations:

(i) Analysis of the quality of an obligation credit risk for purposes of assigning an NAIC Designation.

(ii) Valuation analysis to determine a Unit Price.

(iii) Identification and analysis of securities that contain other non-payment risk and communication of this information

by assignment of the NAIC Designation subscript to such securities.

(iv) Other analytical assignments requested by the Valuation of Securities (E) Task Force or members of the regulatory

community; in accordance with the directives, procedures and general methodologies described in this Manual.

(v) Compile and publish the AVS+ products in accordance with instructions in this Manual.

b) SVO Regulatory Products

(i) NAIC Designations

The result of SVO's credit analysis of the quality of an obligation, as it pertains to credit risk (hereafter defined), shall be

expressed as an opinion of credit quality by assignment of an NAIC Designation, notched to reflect the position of the

specific liability in the issuer’s capital structure. Collectively, NAIC Designation categories defined in Part One, Section 3 b)

(i) of this Manual, a credit quality-risk gradation range from highest quality (least risk) to lowest quality (greatest risk).

Subject to Part One, Section 2(f) of this Part, NAIC Designations express opinions about quality credit risk except when

accompanied by the NAIC Designation subscript, described in paragraph (iii) below.

When the SVO’s analysis of the quality of an obligation involves or requires the use of credit assessment methodology;

Ccredit risk is defined as the relative financial capability of an obligor to make the payments contractually promised to a

lender. Credit analysis is performed solely for the purpose of designating the quality of an investment made by an insurance

company to enable the NAIC member's department of insurance to determine regulatory treatment …

d) Application of Analytical Instructions

(i) Relationship to Policy

The directives in Section 2(a) and (e) of this Part One evince a policy determination to ensure analytical resources to support

financial solvency objectives of state insurance regulators as expressed in the NAIC Financial Conditions Framework.

Regulation Standards and Accreditation Program and or other NAIC developed regulatory guidance embodied in state law.

…

g) Review of SVO Credit, Classification or Valuation Decisions …

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(ii) Appeals of SVO Analytical Decisions

(A) Condition to Filing of an Appeal

Any insurer that owns a security for which the SVO has performed a quality credit assessment, a classification analysis or a

valuation, or which is an SCA investment, may appeal the SVO quality credit assessment, classification or valuation

decision, provided that the appeal must be filed within 120 days of the SVO decision. Any insurer can ascertain the date of

the original SVO decision by accessing the ISIS Inquiry Service and noting the Review Date shown therein. The Review

Date is the date of the original decision …

(B) Procedure for Filing an Appeal …

This appeal procedure applies only to situations where the SVO has expressed an analytical conclusion in the exercise of its

quality assessment credit, classification, valuation functions or its analysis of Subsidiary, Controlled and Affiliated (SCA)

investments. The stated procedure encompasses initial filings, annual updates and securities not rated by an NAIC CRP…

(iv) Status of NAIC Designation during Appeal

Until such time as the SVO credit committee determines that a previous quality credit assessment, classification analysis or

valuation should be amended and the NAIC Designation, classification decision or price is changed, the previous decision of

the SVO remains in full force and effect.

SECTION 3. INTERNAL ADMINISTRATION

a) General …

b) Purpose of NAIC Designations, Definitions of NAIC Designation Categories, Valuation Indicators,

Administrative Symbols and Conventions

(i) Purpose of NAIC Designation

NAIC Designations are proprietary symbols that the NAIC SVO uses to denote a category or band of qualitycredit risk . of an

Investment Security, asset or other Obligation used in NAIC financial solvency monitoring processes. The regulatory

treatment associated with an NAIC Designation category is the cumulative regulatory treatment accorded to that NAIC

Designation category in the NAIC Financial Conditions Framework. [NOTE: Section 3A of this Part provides an illustration

of the NAIC Financial Conditions Framework]. For purposes of this Manual, NAIC Financial Conditions Framework means:

The Purposes and Procedures Manual of the NAIC Investment Analysis Office,

The NAIC Accounting Practices and Procedures Manual,

The NAIC Financial Statement Blank and associated annual statement reporting instructions,

The Risk-Based Capital (RBC) for Insurers Model Act (#312);

The Credit for Reinsurance Model Law (#785) the NAIC Investments of Insurers Model Act

Any other NAIC Model Law or Model Regulation now maintained by the NAIC or subsequently developed;

Other NAIC procedures, principles, formulas, instructions or guidance;

that refer to, is based on, or incorporates NAIC Designations, whether in the individual insurance laws or regulations of a

state or territory of the US or pursuant to the adoption by the state or territory of the NAIC Accreditation Program.

(ii) Regulatory and Methodology Considerations Applicable to the Production of NAIC Designations

(A) Post Purchase Insurer Owned Investment Securities

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NAIC Designations are only assigned to Investment Securities, assets or Obligations owned by insurance companies on a

post purchase basis – and then only for purposes of reporting the Investment Security, assets or Obligations with its state

insurance department and the NAIC for purposes reflected in the NAIC Financial Conditions Framework.

(B) Various Methodologies

NAIC Designations are produced or derived using analytical methodologies, regulatory criteria or policy decisions the

VOS/TF has determined are adequate to secure the specific financial solvency monitoring objective intended.

The following lists identifies methodology or approaches used to determine the quality of an Investment Security, asset of

other Obligation from which an NAIC Designation is derived and assigned.

Special Instructions to the SVO may require it to assign an NAIC 6 to an Investment Security involving related parties.

Or SVO may be required to advise an insurance company that a security cannot be assigned an NAIC Designation under

NAIC rules, for example, because the security, asset or obligation is not regulated on the basis of NAIC Designations in

the NAIC Financial Conditions Framework. See, Part One, Section 2 (b) (iv) and Section 2 (c) (ii), (iii) and (v);

SVO may be required to identify a new investment security or financial product to the VOS/TF with a recommendation

that the NAIC develop guidance before insurers can purchase it because of a feature that makes it a different quality

under the NAIC Financial Conditions Framework despite the assigned NAIC CRP credit rating. See, Part One, Section

2 (e) and 2 (f);

The terms or characteristics of certain securities may require the SVO to notch down from the obligor’s NRSRO

assigned credit rating to reflect concerns with Other Non-Payment Risk in an Investment Security which are unique to

the NAIC reporting framework. See, Part One, Section 3;

The SVO may be required to direct an insurer to file an NAIC CRP rated investment security for which the insurer

claims filing exemption on the basis of NRSRO credit ratings. The SVO may subsequently file a recommendation with

the VOS/TF that the class of security should be excluded from the filing exemption and regulated on some other basis.

See, Part Two, Section 4 (d) (i);

Certain US government securities are assigned NAIC 1 Designations pursuant to a policy decision specified in Part

Two, Section 4 (c) and in NAIC reporting instructions;

A computer process identifies US Treasury securities and assigns NAIC 1 Designations per a regulatory convention

specified in Part Two, Section 10 (c) (v);.

Investment Securities rated by one or more NRSROs are assigned NAIC Designations by insurance companies pursuant

to instructions in Part Two, Section 4 (d) and Sections 7 (d);

The SVO produces and assigns NAIC Designations to Investment Securities not rated by an NRSRO using credit

assessment methodology contained in Part Three but may also be required to incorporate regulatory criteria specified in

the NAIC Financial Conditions Framework;

Certain Certificates of Deposit are assigned NAIC Designations pursuant to a formula specified in Part Two, Section 4

(e);

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A Special Reporting Instruction assigns regulatory treatment equal to that for an NAIC 5 or NAIC 6 Designation to

Investment Securities based on an insurer certification or as a required SVO response in certain analytical processes

identified in Part Two, Section 5;

CAPCOs securities are assigned NAIC Designations by reference to analytical and statutory accounting criteria as

discussed in Part Two, Section 10 (c) (i) E;

Working Capital Finance Investments are subject to an analytical process that incorporates financial, structural, legal

and statutory accounting criteria as discussed in Part Three, Section 6;

Credit Tenant Loans receive bond treatment only if they meet financial, structural and legal criteria specified in Part

Four Section 1, or otherwise are reported as mortgages;

Intrinsic prices for of RMBS and CMBS generated by a financial modeling process conducted by the SSG pursuant to

Part Seven are converted to NAIC Designations by insurers in accordance with statutory accounting instructions

provided in SSAP No. 43R;

Military Hosing Bonds are assigned NAIC Designations based on a combined insurer certification and SVO analytical

processes specified in Part Two, Section 10 (c)(i) (F) and Part Three, Section 4 b;

Transactions between an insurer and related parties are subject to special rules under the SSAPs No. 25, Affiliates and

Other Related Parties and SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities of the NAIC

Accounting Practices and Procedures Manual;

Some Capital and Surplus Debentures are assigned NAIC Designations based on NRSRO credit ratings as an exception

to a statutory accounting based valuation methodology.

(C) Use of NRSRO Credit Ratings

The determination of quality on the basis of NRSRO credit ratings and the derivation of such determinations into NAIC

Designations per the conversion process described in Part Two, Section 4 (d) and the conversion chart published in Part Two,

Section 7 (d) is not intended to convey that the NAIC thinks of NAIC Designations as equivalent to credit ratings or that the

conversion of NAIC Designations into credit ratings is appropriate. The only meaning that should be ascribed to NAIC

Designations is the meaning specified for them in the NAIC Financial Conditions Framework.

(iii) Proprietary Nature of Designations; Notching Practices for Credit and Other Non-Payment (i.e., regulatory)

Risk; Other Symbols Associated with NAIC Designations.

NAIC Designations are proprietary symbols that the NAIC SVO uses to denote a category or band of credit risk.

NAIC Designations are adjusted in accordance with the notching procedures described in subparagraph (iii) (A), (B) and (C)

below, so that an NAIC Designation for a given security reflects the position of that specific security in the issuer’s capital

structure.

NAIC Designations may also be adjusted by notching to reflect the existence of other non-payment risk in the specific

security in accordance with the procedures described in subparagraph (ii) and (iii) (C) below.

When applied to preferred stock, the valuation indicator P is placed in front of the NAIC Designation to indicate that the

SVO has classified the security as a perpetual preferred stock. The valuation indicator RP is placed in front of the NAIC

Attachment Four


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Designation to indicate that the SVO has classified the security as a redeemable preferred stock for the purposes of valuation

under SAP.

(iv) Definition of NAIC Designation Categories

NAIC 1 is assigned to obligations exhibiting the highest quality under the criteria and methodology specified in this Manual

for the Investment Security or asset being assessed for quality.. Credit An NAIC 1 means that the obligation exhibits the

highest quality because risk is at its lowest and the issuer's credit profile is stable. This means that interest, principal or both

will be paid in accordance with the contractual agreement and that repayment of principal is well protected. An NAIC 1

obligation should be eligible for the most favorable treatment provided under the NAIC Financial Conditions Framework.

NAIC 2 is assigned to obligations of high quality under the criteria and methodology specified in this Manual for the

Investment Security or asset being assessed for quality. NAIC 2 means that the obligation is of high quality because . Credit

risk is low but may increase in the intermediate future and the issuer's credit profile is reasonably stable. This means that for

the present, the obligation's protective elements suggest a high likelihood that interest, principal or both will be paid in

accordance with the contractual agreement, but there are suggestions that an adverse change in circumstances or economic,

financial or business conditions will affect the degree of protection and lead to a weakened capacity to pay. An NAIC 2

obligation should be eligible for relatively favorable treatment under the NAIC Financial Conditions Framework.

NAIC 3 is assigned to obligations of medium quality under the criteria and methodology specified in this Manual for the

Investment Security or asset being assessed for quality. NAIC 3 means that the obligation is of medium quality because .

Credit risk is intermediate and the issuer's credit profile has elements of instability. These obligations exhibit speculative

elements. This means that the likelihood that interest, principal or both will be paid in accordance with the contractual

agreement is reasonable for the present, but an exposure to an adverse change in circumstances or economic, financial or

business conditions would create an uncertainty about the issuer's capacity to make timely payments. An NAIC 3 obligation

should be eligible for less favorable treatment under the NAIC Financial Conditions Framework.

NAIC 4 is assigned to obligations of low quality under the criteria and methodology specified in this Manual for the

Investment Security or asset being assessed for quality. NAIC 4 means the obligation is of low quality because . Credit risk is

high and the issuer's credit profile is volatile. These obligations are highly speculative, but currently the issuer has the

capacity to meet its obligations. This means that the likelihood that interest, principal or both will be paid in accordance with

the contractual agreement is low and that an adverse change in circumstances or business, financial or economic conditions

would accelerate credit risk, leading to a significant impairment in the issuer's capacity to make timely payments. An NAIC 4

obligation should be accorded stringent treatment under the NAIC Financial Conditions Framework.

NAIC 5 is assigned to obligations of the lowest credit quality, which are not in or near default under the criteria and

methodology specified in this Manual for the Investment Security or asset being assessed for quality. NAIC 5 means the

obligation is of the lowest quality because . Credit risk is at its highest and the issuer’s credit profile is highly volatile, but

currently the issuer has the capacity to meet its obligations. This means that the likelihood that interest, principal or both will

be paid in accordance with the contractual agreement is significantly impaired given any adverse business, financial or

economic conditions. An NAIC 5 Designation suggests a very high probability of default. An NAIC 5 obligation should incur

more stringent treatment under the NAIC Financial Conditions Framework.

NAIC 6 is assigned to obligations that are in or near default under the criteria and methodology specified in this Manual for

the Investment Security or asset being assessed for quality.

NAIC 6 means that the obligation is in or near default because . This means that payment of interest, principal or both is not

being made, or will not be made, in accordance with the contractual agreement. An NAIC 6 obligation should incur the most

severe treatment under the NAIC Financial Conditions Framework.

…

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Section 5. NAIC POLICIES PERTAINING TO SVO WORK PRODUCT

a) For NAIC Members Only – Official Source

NAIC Association Values serve as the starting point for a variety of policies detailed in the NAIC Financial Conditions

Framework, including accounting policy. The rules that detail the application of any component regulation in the NAIC

Financial Conditions Framework are these accounting standards are found in the official NAIC guidance for that regulatory

process – not in this this Manual. NAIC Accounting Practices and Procedures Manual and the Annual Statement Instructions.

NAIC Designations and Unit Prices Association Values are produced solely for the benefit of NAIC members. NAIC

members, acting in their capacity as state officials, may incorporate the research produced by the staff of their Association as

official regulatory policy. However, state regulators have statutory duties that may require them to incorporate a variety of

factors in addition to or in lieu of the research produced by the staff of their voluntary Association.

The VOS Products is designated as the official NAIC source for publication of NAIC Designations and Unit Prices

Association Values assigned by the SVO to the securities reported by insurance companies. To the extent that an NAIC

member, acting in its capacity as a state official, instructs an insurance company to incorporate Association Values in the

filings made by that company to the state insurance department, the NAIC member is advised that Oonly NAIC Designations

and Unit Prices obtained from the most recently published VOS Products should be used by an insurance company to report

an NAIC Designation and/or a Unit Price on an NAIC Financial Statement Blank prepared in accordance with SAP.

b) This Manual

This Manual contains is the official expression of NAIC's credit assessment methodologies and valuation policies and takes

precedence over other SVO or NAIC publications. The policies, procedures, methodologies or language of this Manual shall

be eliminated, amended or modified changed only through a resolution adopted by the VOS/TF in accordance with the NAIC

Constitution and Bylaws.

NAIC Designations and Unit Prices are produced solely to provide NAIC members with a reliable, independent and uniform

source for quality determinations and Unit Prices and for their interpretation credit risk and pricing information. Accordingly,

the NAIC member must interpret the significance of an Association Value in a specific context by reference to the NAIC

Financial Conditions Framework and applicable state insurance laws, rules and regulations.

NAIC Designations or Unite Prices Association Values are not intended or designed to function as an aid to an investment

decision.

Section 3A – Illustration of NAIC Financial Conditions Framework

a. NAIC Statutory Accounting Valuation Rules*

Bonds - Excerpted from Statement of Statutory Accounting Principle (SSAP) No. 26, Bonds at paragraph 7

Reporting entities that maintain an Asset Valuation Reserve (AVR), report bonds at amortized cost. Bonds designated

NAIC 6 are reported at the lower of amortized cost or fair value.

Reporting entities that do not maintain an AVR, report bonds designated NAIC 1 and 2, respectively at amortized cost.

Bonds designated NAIC 3 through NAIC 6 are reported at the lower of amortized cost or fair value.

Preferred Stock - Excerpted from Statement of Statutory Accounting Principle (SSAP) No 32, Preferred Stock at paragraph

16

Reporting entities that maintain an AVR, report redeemable preferred stocks and perpetual preferred stocks designated

NAIC RP1 to RP3/P1 to P3, respectively at book value. Redeemable preferred stocks and perpetual preferred stocks

designated NAIC RP4 to RP6/P4 to P6, respectively are reported at the lower of book value or fair value.

Attachment Four


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Reporting entities that do not maintain an AVR, report redeemable preferred stocks designated NAIC RP1 and RP2,

respectively, at book value. Perpetual preferred stocks designated NAIC P1 and P2, respectively is reported at fair value.

Redeemable preferred stocks and perpetual preferred stocks designated NAIC RP3 to RP6/P3 to P6, respectively is

reported at the lower of book value or fair value.

Loan Backed and Structured Securities (LBaSS) - Statement of Statutory Accounting Principle (SSAP) No. 43R,

paragraph 25

Reporting entities that maintain an AVR, report LBaSS at amortized cost, except that those designated NAIC 6 are

reported at the lower of amortized cost or fair value.

Reporting entities that do not maintain an AVR, report LBaSS designated NAIC 1 and 2, respectively at amortized cost.

LBaSS designated NAIC 3 to 6, respectively is reported at the lower of amortized cost or fair value.

b. Risk-Based Capital

Description

Current

Life RBCa

Pre-Tax

Factor

Current

Life RBC

After-Tax

“Factor”

Current

P&C RBC

Factor*

Current

AVRb

Maximum

Reserve

Factor

Bonds /Preferred Stock

Classc 1 0.4% 0.3% 0.3% 0.3%

Class 2 1.3% 1.0% 1.0% 1.0%

Class 3 4.6% 3.4% 2.0% 3.4%

Class 4 10.0% 7.4% 4.5% 7.5%

Class 5 23.0% 17.0% 10.0% 17.0%

Class 6 30.0% 19.5% 30.0% 20.0%

FACTOR COMPARISON a - The risk-based capital (RBC) is a calculation of the regulatory minimum capital and surplus that a company should have

which is compared to the actual capital and surplus a company has. Certain actions by the company or state are specified if

the minimum capital level is not met. No liability is set up on the balance sheet as a result of the RBC calculation. b - The asset valuation reserve (AVR) is a liability that is set up on the balance sheet of a life insurer or fraternal benefit

society based on the assets that are owned and the credit-related gains or losses that the company incurs. c - The word class means and refers to the noted NAIC Designation category.

* - For Schedule BA assets the RBC is 20% irrespective of the NAIC Designation category assigned to the security.

The information in this Section 3A is rudimentary and non-comprehensive and is presented only as an illustration of two

regulatory components of the NAIC Financial Conditions Framework that incorporate NAIC Designations.

The authority to determine and interpret existing statutory accounting guidance in, or to develop new statutory accounting

guidance for, the NAIC Accounting Practices and Procedures Manual, is vested in NAIC regulator groups with responsibility

for statutory accounting, including the Statutory Accounting Principles (E) Working Group, not the VOS/TF.

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The authority to determine and interpret existing risk-based capital (RBC) factors, or to develop new guidance for RBC is

vested in NAIC regulator groups with responsibility for capital standards, including the Capital Adequacy Principles (E) Task

Force, not the VOS/TF.

In all cases you must refer to official NAIC guidance for the full text and related guidance applicable to the NAIC statutory

accounting guidance or the NAIC risk-based capital (RBC) process of RBC factors.

Part Two – Filing with the SVO



definitions have any relevance to any other NAIC publication.

…

NAIC Financial Conditions Framework means the instructions, formulas, regulatory treatment, devices or mechanisms set

forth in the NAIC Accounting Practices & Procedures Manual, Annual Statement Instructions and Financial Condition

Examiners Handbook as adopted by the states.

W:\National Meetings\2016\Fall\TF\VOS\Task Force - Technical Amendments to Defintion of NAIC Designations.docx

1 The DISCLOSURE STATEMENT in the Dec. 31, 2015 publication of the Purposes and Procedures Manual says, in relevant part: “An NAIC designation

for quality (NAIC Designation) … is produced solely for NAIC members who should interpret the designation for quality, … in the context of the NAIC

Financial Conditions Framework, a member’s state insurance laws and regulations, and the regulatory or financial solvency profile of a specific insurance

company … NAIC Designations are not intended to be and should not be used as if they were the functional equivalent of the ratings of nationally

recognized statistical rating organizations or other rating organizations whose ratings are intended to be used by investors as predictive opinions of default

risk …”

Part One, Section 2 (b) of the Purposes and Procedures Manual provides: SVO Regulatory Products - (i) NAIC Designations ... Credit analysis is

performed solely for the purpose of designating the quality of an investment made by an insurance company to enable the NAIC member's department of

insurance to determine regulatory treatment ... An NAIC Designation must be interpreted by the NAIC member in context of the NAIC Financial Conditions

Framework, other characteristics of the investment, and the specific regulatory status of the insurance company. …

Part One, Section 2 (d) of the Purposes and Procedures Manual provides: Application of Analytical Instructions - (i) Relationship to Policy - The

directives in Section 2(a) and (e) of … (are intended to) ensure analytical resources to support financial solvency objectives of state insurance regulators as

expressed in the NAIC Financial Regulation Standards and Accreditation Program and or other NAIC developed regulatory guidance embodied in state law.

2 For example: NAIC 1 is assigned to obligations exhibiting the highest quality. Credit risk is at its lowest and the issuer's credit profile is stable. This means

that interest, principal or both will be paid in accordance with the contractual agreement and that repayment of principal is well protected. An NAIC 1

obligation should be eligible for the most favorable treatment provided under the NAIC Financial Conditions Framework.

3 The primary text fulfilling this function links NAIC Designations to the definition of NAIC Financial Conditions Framework and or to the NAIC

Accreditation program. However, the definition of NAIC Financial Conditions Framework (reproduced below) is in the general definitions in Part Two,

Section 1 instead of being a part of the definition of NAIC Designation in Section 3. .

NAIC Financial Conditions Framework means the instructions, formulas, regulatory treatment, devices or mechanisms set forth in the NAIC

Accounting Practices & Procedures Manual, Annual Statement Instructions and Financial Condition Examiners Handbook as adopted by the

states.

The reference to NAIC Financial Regulation Standards and Accreditation Program (reproduced below) appears in Part One, Section 2 (d).

Application of Analytical Instructions (i) Relationship to Policy The directives in Section 2(a) and (e) of this Part One evince a policy

determination to ensure analytical resources to support financial solvency objectives of state insurance regulators as expressed in the NAIC

Financial Regulation Standards and Accreditation Program and or other NAIC developed regulatory guidance embodied in state law.”

Attachment Four


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This definition is clearly more useful for the resolution of the issue discussed in this memorandum because it precisely identifies how NAIC Designations

are in fact incorporated in state regulatory mechanisms developed through the NAIC. Accreditation is more formally called the NAIC Policy Statement on

Financial Regulation Standards (SFRS) and is expressed in annual Accreditation Program Manuals. The key portion of the Manual for the issue discussed in

this memorandum is Part A wherein are identified laws and regulations (standards) deemed necessary to financial solvency regulation. Of the standards

identified in Part A 5 directly or indirectly incorporate NAIC Designations as follows: i.e.:

Standard 2 requires the adoption of the Risk-Based Capital (RBC) for Insurers Model Act (#312) which assigns RBC factors for securities based on

NAIC Designations.

Standard 3 requires the adoption of the Accounting Practices and Procedures Manual which uses NAIC Designations or Price Grids to identify

valuation rules applicable to an investment and the reserved capital amount the insurer must report.

Standard 5 requires that insurer owned securities be valued in accordance with the standards promulgated by the NAIC Investment Analysis Office.

Standard 8, pertains to state investment regulations that may incorporate NAIC Model Laws or Regulations that limit asset allocations by reference to

the percentage of admitted assets assigned a given NAIC Designation category.

Standard 10, the Credit for Reinsurance Model Act (#785) identifies securities compiled by the SVO, and letters of credits issued by the banks on the

NAIC Bank List administered by the SVO, as eligible for use as collateral in reinsurance transactions.

The approach I have followed is to identify these standards independently instead of just referring to Accreditation. This would cover both the regulatory

components of financial solvency monitoring that incorporate NAIC Designations via Accreditation as well states laws that incorporate the Purposes and

Procedures Manual through legislation that preceded the adoption of Accreditation.

Attachment Five


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MEMORANDUM


Members, Valuation of Securities (E) Task Force

FROM: Bob Carcano, Senior Counsel, Investment Analysis Office

DATE: July 20, 2016

RE: Referral from the Statutory Accounting Principles (E) Working Group Pertaining to Reporting Instructions

Applicable to Money Market Mutual Funds (MMFs)

1. Introduction – The Statutory Accounting Principles (E) Working Group has revised its guidance to clarify that certain

money market mutual funds (MMMFs): i) are subject to SSAP No. 2—Short-Term Investments; ii) are reported on Schedule

DA – Short-Term Investments; iii) are accounted for in the same way as similar long-term investments; and iv) with the

exception of MMMFs on the “U.S. Direct Obligations/Full Faith and Credit Exempt List,” follow SSAP No. 30—Unaffiliated

Common Stock and are reported at fair value. The Working Group requests that the Task Force delete from the Purposes and

Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) text that purports to communicate reporting

guidance to prevent unintended conflicts with accounting and blanks instructions. The referral identified two instances of

such instructions. This item was placed on the agenda of the interim meeting held July 18, but the time allotted for the call

expired before it could be reached. The Securities Valuation Office (SVO) has reviewed the P&P Manual and prepared an

amendment that would be responsive to the referral from the Working Group. The SVO recommends that both the referral

from the Working Group and the proposed amendment to the P&P Manual to remove reporting instructions for MMFs be

received and released for a 30-day public comment period.

2. Proposed Amendment


Section 9. Specialized SVO Forms, Products and Systems

a) Mutual Fund Forms

Mutual funds, including money market funds, are typically classified as common stock and reported in

Schedule D - Part 2 - Section 2 of the NAIC Financial Statement Blank. The VOS/TF has determined

that money market funds that meet the conditions of 17 C.F.R. 270.2a-7 and certain bond mutual funds

that are registered with the Securities and Exchange Commission under the Investment Company Act of

1940 (15 U.S.C. 80a-1 et seq.), and which also meet the conditions set forth in Part Six, Section 2 of this

Manual, may be reported on Schedule DA - Part 1 and Schedule D - Part 1, respectively, of the NAIC

Financial Statement Blank.

Attachment Five


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The SVO maintains a money market fund and a list of bond mutual funds. Investments in these funds by

reporting insurance companies are eligible for more favorable reserve treatment than funds not so listed,

as noted above. These lists are published on a quarterly basis.

Money market funds that meet certain criteria for exemption from NAIC reserve requirements may be

listed on the U.S. Direct Obligations/Full Faith and Credit Exempt List.

Bond mutual funds that meet certain criteria may be listed on the bond mutual fund list (Bond List). and

insurance companies that own these bond mutual funds are permitted to maintain a reserve using the

more favorable bond reserve factor.

The U.S. Direct Obligations/Full Faith and Credit Exempt List Application Form is used to list a money

market fund on the U.S. Direct Obligations/Full Faith and Credit Exempt List. The Bond Application

Form is used to list a bond mutual fund on the Bond List. Refer to Part Six, Section 2 of this Manual for

additional information on the process. Any questions regarding the process or its purpose should be

addressed to the Corporate Securities Group of the SVO …

Section 10. Reporting Conventions and Required Documents

c) Reporting Conventions and Required Documents …

(vii) Mutual Funds

Any money market fund wishing to establish that it meets the conditions for listing on the U.S.

Direct Obligations/Full Faith and Credit Exempt List and any bond mutual fund wishing to

establish that it meets the conditions for listing on the Bond List, must submit a completed

submission package to the SVO with the following documentation:

(A) The appropriate money market or bond mutual fund application form;

(B) Authorization letter requesting review of the fund for approved list purposes;

(C) Prospectus of the fund;

(D) Statement of Additional Information (SAI);

(E) Most recent annual report of the fund, and, if more recent, the latest semi-annual

report; and

(F) Rating letter from an NAIC CRP dated in the year of the filing.

Reporting insurance companies that invest in mutual funds on the U.S. Direct Obligations/Full Faith and Credit Exempt List

or Bond List need not file an SAR with the SVO. and are not required to obtain or place a PPN/CUSIP number in Schedule

DA or Schedule D of the NAIC Financial Statement Blank. Mutual funds not rated by an NAIC CRP, and/or those that do not

meet the above-listed documentation requirements, will not be considered for listing. The reporting insurance company

should follow the procedures required for reporting common stock for filing on Schedule D of the NAIC Financial Statement

Blank.

Section 11. Subsequent Reporting …

(v) Mutual Funds

Subsequent reporting for money market funds on the U.S. Direct Obligations/Full Faith and

Credit Exempt List or the Class 1 List, or for bond mutual funds on the Bond List, consists of an

annual submission of the following information due prior to April 30 of each year:

(A) The appropriate money market or bond mutual fund application form;

(B) Prospectus and Statement of Additional Information of the fund;

Attachment Five


12/11/16


(C) Most recent annual report of the fund and, if more recent, the latest semi-annual

report; and

(D) Rating letter from an NAIC CRP dated in the year of the filing.

Failure to provide the information required may result in removal of the money market fund or bond mutual fund from the

list. and reclassification of the fund as a common stock reported on Schedule D - Part 2 - Section 2.

Part Five Valuation of Securities …

c) SVO Valuation Methodologies …

(F) Shares of Mutual Funds

Fair value of mutual funds, including money market fund shares, shall be equivalent to

the net asset value of such shares calculated as of the close of business of the reporting

period. However, those funds that qualify for favorable reserve treatment for purposes of

the Asset Valuation Reserve shall be reported on Schedule DA - Part 1 in the case of

money market funds, and on Schedule D - Part 1 in the case of bond mutual funds.

W:\National Meetings\2016\Fall\TF\VOS\15 Task Force 2016 Delete Rpt Instruc MMMFs.docx

Attachment Six


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MEMORANDUM





DATE: September 9, 2016

RE: Proposed Amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P

Manual) to Implement the Decision to Transfer Oversight of Subsidiary, Controlled and Affiliated Entity

Investments to the Statutory Accounting Principles (E) Working Group.

1. Introduction – During a conference call held Feb. 22, 2016, the Valuation of Securities (E) Task Force agreed to

transfer oversight for the valuation of investments in subsidiary, controlled and affiliated (SCA) entities to the Statutory

Accounting Principles (E) Working Group. The Task Force requested that the SVO advise when the Working Group had

determined where it would house the guidance and that SVO prepare a proposed amendment to the P&P Manual that would

retain a filing requirement but delete the valuation rules from P&P Manual. In a memorandum dated September 7, the

Working Group notified the Task Force that it adopted revisions to SSAP No. 97—Subsidiary, Controlled and Affiliated

Entities (SSAP No. 97) that incorporate the SCA guidance from the P&P Manual into a new appendix within SSAP No. 97.

Consistent with the prior direction of the Task Force, the SVO presents a proposed amendment to the P&P Manual. The

proposed amendment, shown below, would:

Delete references to SCA investments in Part One, Section 2 (b) related to the process governing appeals of SVO

decisions;

Delete text describing administrative symbols and their application to SCA investments from Part One, Section 3 (b) (v)

(B);

Delete the definition of SCA in Part Two, Section 1;

Delete information in Part Two, Section 8 describing when and how to use the SUB 1 and SUB 2 forms; insert a filing

requirement for SCA investments, a reference to the Appendix to SSAP No. 97 and text distinguishing between SCA

investments filed with the FRS Division and bonds between related parties that may still be filed with the SVO;

Delete instructions pertaining to required documentation for SCA investments in Part Two, Sections 10 and 11;

Modify the special procedure that applies to SCA bond investments in Part Three, Section 2 (d) to reflect the division of

valuation responsibility between the FRS and SVO, and

Delete the SCA valuation instructions in Part Five, Section 2.

2. Proposed Amendments

Attachment Six


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Part One - Purposes, General Policies and Instructions to the SVO …

Section 2. Policies Defining the SVO Staff Function …

b) Review of SVO Credit, Classification or Valuation Decisions

(i) Requests for Clarification of SVO Decisions

Any insurer that owns a security for which the SVO has provided an NAIC Designation, a classification or a valuation, or

which is an SCA investment, may request a clarification of the decision from the SVO …



Any insurer that owns a security for which the SVO has performed a credit assessment, a classification analysis or a

valuation, or which is an SCA investment, may appeal the SVO credit assessment, classification or valuation decision,

provided that the appeal must be filed within 120 days of the SVO decision …

(B) Procedure for Filing an Appeal …

This appeal procedure applies only to situations where the SVO has expressed an analytical conclusion in the exercise of its

quality assessment, credit risk assessment, classification or , valuation functions or its analysis of Subsidiary, Controlled and

Affiliated (SCA) investments. The stated procedure encompasses initial filings, annual updates and securities not rated by an

NAIC CRP...

(v) Review of SVO Decisions by the VOS/TF

(A) Task Force Review for Alleged Violations of Procedures

(1) Request for Review

Any insurer that has filed a security for an NAIC Designation, a classification or a valuation, or which is an SCA investment,

and is concerned that a decision relative to the security was not made in accordance with the procedures in this Manual, may

request consideration of this concern by the VOS/TF.


b) Definitions of NAIC Designation Categories, Valuation Indicators, Administrative Symbols and Conventions

…

(v) SVO Administrative Symbols

SVO administrative symbols convey information about a security or an administrative procedure instead of an opinion of

credit quality or Unit Price. The administrative symbols in use by the SVO and their meanings are described below …

(B) The SVO SCA Companies Group Administrative Symbols

The SVO SCA Companies Group uses the following administrative symbols to denote the status of the filing or to comment

on the value claimed by the reporting insurance company. The symbols and their meaning are published here solely to

facilitate understanding by NAIC members.

When entered in the status field of the VOS Database screen:

NV signifies Not Valued and means that the SVO SCA Companies Group has received and processed a SUB-1 form

filing for the SCA investment shown. See Part Five, Section 2(d)(v) of this Manual for a discussion of the significance of this

administrative symbol.

AP indicates that the value claimed by the reporting insurance company for the SCA investment in its SUB 2 filing was

approved by the SVO SCA Companies Group and entered into the status field of the VOS Database screen.

Attachment Six


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D indicates that the value claimed by the reporting insurance company in its SUB 2 filing was disapproved, the value

entered in the status field of the VOS Database screen was determined by the SCA Companies Group and the two values

differ materially.

R indicates that the information submitted in support of a SUB 1 or SUB 2 filing is incomplete and the SVO SCA

Companies Group has issued an InfoReq request for the missing information.

When entered in the comment field of the VOS Database screen:

a indicates that the value claimed by the reporting insurance company in its SUB 2 filing was disapproved, the value

entered into the comment field of the VOS Database screen was determined by the SVO SCA Companies Group and the two

values differ slightly.

e indicates that the value entered in the comment field of VOS Database screen differs materially from the value

claimed by the reporting insurance company for the SCA investment. This administrative symbol is only used with the status

field administrative symbol D discussed above.

i indicate that the value entered in the comment field of the VOS Database was not calculated on the basis of 12/31

financial statements.

When entered by an insurance company in its annual financial statement blank:

J means, when used in context of SCA Companies Group, that the valuation reported for the SCA investment was

reviewed by the SVO and was deemed to be reasonable, calculated in accordance with an appropriate valuation method under

Part Five, Section 2 (c) of this Manual, and calculated accurately by the insurance company.

K when used to report an SCA investment, means that the valuation reported for the SCA investment was not assigned

or reviewed by the SVO but was derived by the insurance company itself pending a valuation analysis by the SVO, or is an

SCA investment described in Part Five, Section 2(b) (iv) (B) of this Manual, that is not required to be reviewed by the SVO.

…

Part Two Filing with the SVO



definitions have any relevance to any other NAIC publication …

SCA (Subsidiary, Controlled or Affiliated) company, as used in Part Five, Section 2 of this Manual and other portions of this

Manual related to Part Five, Section 2 of this Manual, means a company (the SCA company) that is in a relationship with

another company ("person") that possesses, directly or indirectly, the power to direct or cause the direction of the

management and policies of the SCA company, whether through the ownership of voting securities, by contract (other than a

commercial contract for goods or non-management services) by common management or otherwise, unless the power is the

result of an official position with or corporate office held by the company. Control shall be presumed to exist if any person,

directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing ten percent (10%) or more

of the voting securities of any other person.

Section 8. When to use SUB 1 or SUB 2 Forms Investments in Subsidiary, Controlled and Affiliated Entities

An investment in the form of common stock issued by an insurance or non-insurance subsidiary, controlled or affiliated

company of the reporting insurance company or an investment in the form of a preferred stock issued by an insurance

subsidiary, controlled or affiliated company of the reporting insurance company is reported by filing a SUB 1 form within 30

days of the acquisition or formation of the investment.

Attachment Six


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An insurer makes a SUB 1 filing in order to report the SCA investment to the SVO and to obtain confirmation that the

investment is economic and reasonable within the meaning of Part Five, Section 2 (d)(iii) of this Manual.

In June of the following year, the insurance company that reported the SCA investment on a SUB 1 form in the previous year

is required to file a SUB 2 form. SUB 2 filings are made in order to obtain SVO's opinion as to whether the value claimed by

the insurer is approved or disapproved as the value to be reported on its next NAIC Financial Statement Blank. Refer to Part

Five, Section 2 of this Manual for a detailed description of the procedures and criteria applicable to SUB 1 and SUB 2 form

filings.

To generate the appropriate form, the reporting insurance company highlights the appropriate menu item in ISIS. With either

form, a valid securities identifier and an NAIC Company Code for the parent, ultimate parent and/or the subsidiary,

controlled or affiliated company that is the subject of the filing is required. No SIC Code is required for an SCA filing.

An investment in the form of common stock issued by an insurance or non-insurance subsidiary, controlled or affiliated

(SCA) entity of the reporting insurance company or an investment in the form of a preferred stock issued by an insurance

subsidiary, controlled or affiliated company of the reporting insurance company is required to be filed with the NAIC

Financial Regulatory Services Division in the manner and form and with the documentation provided for in the

Appendix to Statement of Statutory Accounting Principles (SSAP) No. 97, Investments in Subsidiary, Controlled and

Affiliated Entities.

An investment in the form of a bond issued by an insurance or noninsurance SCA entity of the reporting insurance company

is filed with the SVO. To file an SCA bond investment, the reporting insurance company files a completed SAR, an Audited

Financial Statement for the subsidiary, a copy of the corporate resolution authorizing the issuance of the debt, written

evidence that the transaction has been approved by the state of domicile or that no such approval is necessary and, if the

subsidiary is an insurance company, the subsidiary's most recent NAIC Financial Statement Blank, together with the

reporting insurance company's NAIC Financial Statement Blank, internal investment committee memorandum for the

investment and loan documentation appropriate to the transaction.

An investment in the form of a preferred stock issued by a noninsurance SCA entity of the reporting insurance company is

filed with the SVO. To file an SCA preferred stock issued by a non-insurer, the reporting insurance company files an

Audited Financial Statement for the issuer of the preferred stock, a copy of the corporate resolution authorizing the issuance

of the preferred stock, written evidence that the transaction has been approved by the state of domicile or that no such

approval is necessary, together with details of the terms of the preferred stock, as well as the NAIC Financial Statement

Blank for the reporting insurance company.

Part Three, Section 2(d) of this Manual describes the additional analytical procedures applicable to such filings.



Specific reporting conventions for initial reports that all reporting insurance companies should follow are described below …

(iv) Subsidiaries, Controlled and Affiliated (SCA) Companies

(A) Debt Issued by an SCA Company

Responsibility for analysis and valuation of SCA investments in the form of a bond is assigned to SVO Corporate Securities

Group. Part Three, Section 2(d) of this Manual describes the additional analytical procedures applicable to such filings. To

report an SCA bond investment, the reporting insurance company shall file a completed SAR, an Audited Financial

Statement for the subsidiary, a copy of the corporate resolution authorizing the issuance of the debt, written evidence that the

transaction has been approved by the state of domicile or that no such approval is necessary and, if the subsidiary is an

insurance company, the subsidiary's most recent NAIC Financial Statement Blank, together with the reporting insurance

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company's NAIC Financial Statement Blank, internal investment committee memorandum for the investment and loan

documentation appropriate to the transaction.

(B) Preferred Stock Issued by an SCA Company

Responsibility for analysis and valuation of SCA investments in the form of preferred stock issued by a non-insurer is

assigned to the SVO Corporate Securities Group. Part Three, Section 2(d) of this Manual describes the additional analytical

procedures applicable to such filings.

To report an SCA preferred stock issued by a non-insurer, the reporting insurance company shall file an Audited Financial

Statement for the issuer of the preferred stock, a copy of the corporate resolution authorizing the issuance of the preferred

stock, written evidence that the transaction has been approved by the state of domicile or that no such approval is necessary,

together with details of the terms of the preferred stock, as well as the NAIC Financial Statement Blank for the reporting

insurance company.

(C) Common Stock and Preferred Stock Issued by an SCA Company

Responsibility for analysis and valuation of SCA investments in the form of common stock and preferred stock issued by an

insurer is assigned to the SVO SCA Companies Group. Common stock of an SCA company may be filed using any of the

valuation methods listed under Part Five, Section 2(c)(i)(B)(1) and (2) of this Manual. The following paragraphs detail the

documentation that must accompany SUB form filings for year-end when any one of the valuation methods discussed in Part

Five, Section 2(c) of this Manual, is chosen. Prior to following these instructions, the reader should be thoroughly familiar

with Part Five, Section 2 of this Manual. Insurance companies without Audited Financial Statements should use the statutory

equity method discussed immediately below.

If the statutory equity* method in Part Five, Section 2(c)(i)(B)(1) and (2) of this Manual is chosen, submit:

(1) The most recent NAIC Financial Statement Blank of the direct insurer Parent,

(2) The balance sheet & income statement of the SCA Company (adjusted for non-admitted assets), and

(3) The Treasury Stock Form (required where there is mutual ownership of common stock between the parent and the

SCA).

See, Part Five, Section 2(b)(iv) of this Manual for a Special Reporting Instruction applicable to SCA investments involving

domestic insurance company subsidiaries.

If the GAAP Equity method in Part Five, Section 2(c)(i)(B)(3) of this Manual is chosen, submit:

(1) The most recent NAIC Financial Statement Blank and Audited Financial Statement of the Parent,

(2) The latest Audited Financial Statement of the SCA Company,

(3) The Goodwill Work Sheet (if goodwill is part of the value), and

(4) The Treasury Stock Form (required where there is mutual ownership of common stock between the Parent and the

SCA Company).

If the Market Value method in Part Five, Section 2(c)(i)(A) of this Manual is chosen, submit:

(1) The most recent NAIC Financial Statement Blank of the Parent,

(2) The most recent Audited Financial Statement of the SCA Company, and

(3) The Treasury Stock Form (required where there is mutual ownership of common stock between the Parent and the

SCA Company).

SSAP No. 97, paragraph 8a sets forth base discount percentages that are tied to the ownership percentages in an SCA valued

at market value. Pursuant to paragraph 7, the SVO may determine a discount rate above the established base discounts. The

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reporting insurance company may obtain the discount rate to be applied to its common stock from the Manager of the

Subsidiaries Group of the SVO.

If the Preferred Stock of Insurance Subsidiaries method in Part Five, Section 2(c)(i)(B)(6) of this Manual is chosen, submit:

(1) The most recent NAIC Financial Statement Blank of the Parent,

(2) The most recent Audited Financial Statement of the SCA Company if it is not an insurance company or the most

recent NAIC Financial Statement Blank of the SCA company if it is an insurance company, and

(3) A document containing the details and terms of the preferred stock.

If the Foreign Subsidiary method in Part Five, Section 2(c)(i)(B)(4) and (5) of this Manual is chosen, submit:

(1) The most recent NAIC Financial Statement Blank of Parent, and

(2) The most recent Audited Financial Statement (in English) of the SCA Company.

Section 11. Subsequent Reporting …

e) Reporting Conventions and Required Documents

Specific reporting conventions that all reporting insurance companies should follow are described below …

(vii) Subsidiary, Affiliated and Controlled Companies

Subsequent reporting for an SCA company consists of the filing of a SUB 2 form and the documentation required

under Section 10(c)(iv) of this Part above.


Section 2. Corporate Bonds and Preferred Stock – Special Assessment Situations

Bonds and preferred stock that fit the description set out below shall be subject to the general procedures specified above as

well as the specific or special procedures identified below.

d) SCA Debt and Preferred Stock

Part Five, Section 2 of this Manual governs valuation of Subsidiary, Controlled and Affiliated (SCA) investments in the form

of common stock and in the form of preferred stock issued by an insurance company. This section applies to credit

assessment of any SCA investment in the form of a debt instrument purchased (or otherwise acquired) from an insurance or

non-insurance entity (SCA debt) and preferred stock issued by a non-insurer entity (SCA preferred stock). This procedure is

used to determine whether an SCA debt or SCA preferred transaction is eligible for reporting as an Investment Security

pursuant to Part Two Section 2 (a) of this Manual.

(i) Procedure

Prior to applying the procedures required by Part Five, Section 2 of this Manual, the SVO shall:

(A) Confirm that the SCA relationship has been reported to the NAIC Financial Reporting Services Division. SVO per

Part Five, Section 2 of this Manual and that the SVO has conducted the analysis required by Part Five, Section 2(d)(iii) of

this Manual and found the SCA common stock transaction to be reasonable within the meaning of that section. If the SCA

common stock transaction has not been reported, the SVO shall issue an InfoReq for documentation pertinent to the SCA

common stock transaction and conduct the analysis required by Part Five, Section 2(d)(iii) of this Manual before processing

the SCA debt or SCA preferred stock. If the SCA common stock transaction was reported but was not deemed to be

reasonable, the SVO shall not process the SCA debt or SCA preferred stock transaction and shall inform the reporting

insurance company and the state of domicile in writing of this decision.

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(B) If the SCA common stock transaction was reported and found to be reasonable, the SVO shall:

(1) Inform the state insurance department of the reporting insurance company's state of domicile that the SCA debt or

SCA preferred stock has been filed with the SVO.

(2) Review the holding company system of which the reporting insurance company is a part, including the impact that

the SCA transaction may have on SVO's ability to assign an NAIC Designation to the SCA debt or SCA preferred stock

transaction.

(3) Evaluate whether the SCA debt or SCA preferred stock is an arms-length and an economic transaction within the

meaning of NAIC statutory accounting guidance on related party transactions. . In making this determination, the Corporate

Securities Group shall consider the same elements discussed in Part Five, Section 2(d)(iii) of this Manual and may consider

other appropriate criteria as well.

(4) Evaluate whether the SCA debt or SCA preferred stock transaction is circular within the meaning of Part One,

Section 2(c)(ii) of this Manual.

(5) In the case of SCA preferred stock, determine the SCA preferred stock issuer's senior unsecured debt designation

and obtain the appropriate designation level for the preferred stock by applying the methodology specified in Section 1(b) of

this Part above …

Part Five – Valuation of Securities

Section 2. Valuation of Subsidiary Controlled and Affiliated Investments

a) The SCA Reporting Cycle

An SCA investment, as defined in Part Two, Section 1 of this Manual, purchased during any one calendar year will be

reported to the SVO on a SUB 1-form within 30 days of the acquisition or formation of the investment. The SVO will

process that filing in the same year but will not at that time approve or disapprove a value for the SCA investment. By June

of the following year, the insurance company will submit a SUB 2 filing for the previously purchased SCA investment

reported on a SUB 1-form and later that year, the SVO SCA Companies Group will approve a value for the transaction. The

value approved by the SVO at the conclusion of the SUB 2-form filing is reported by the insurance company on its NAIC

Financial Statement Blank. If the insurance company has reported a value for the SCA investment on its NAIC Financial

Statement Blank that differs from the value approved by the SVO, the insurer is required to adjust the reported value in its

next quarterly NAIC Financial Statement Blank unless otherwise directed by the insurer's state of domicile.

b) Reporting Framework

(i) Value of Common Stock

Insurance companies described in Part Two, Section 2(a) of this Manual, shall use one of the valuation methods described in

sub-paragraph (c) below to calculate the value of their common stock investments in insurance and non-insurance SCA

companies. Not later than June 1 for existing SCA investments, and within 30 days of the acquisition or formation of a new

SCA investment, an insurance company shall calculate the value of its common stock investments in foreign insurance and

all non-insurance company SCA entities and report the value to the SVO. Please refer to sub-paragraph (b)(iv)(B) of this

Section, below.

(ii) Initial Reporting of SCA Investments

(A) Reporting Method

Reporting the acquisition or formation of a new investment is accomplished by submitting a completed SUB 1-form for each

investment, disclosing (i) the valuation reported or to be reported by the insurance company on its latest or next quarterly

NAIC Financial Statement Blank, (ii) which method of those described in sub-paragraph (c) below was used to arrive at the

valuation, (iii) the factual context of the transaction and (iv) economic and business motivations for the transaction. The

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submission will be processed by the SVO only if the SVO determines it has been provided with all material information with

respect to all SCA companies of the reporting insurance company that require valuation.

(B) Purpose of SUB 1-Form Filing

The purpose of a SUB 1 filing is to determine whether the reported SCA investment provides economic value to the

insurance company and whether the value claimed is reasonable in view of the totality of the transaction and the specifics of

the insurance company. If the SVO SCA Companies Group determines that the reported transaction meets the tests specified

in this sub-Part, it enters the administrative symbol NV in the status field of the VOS Database screen. If the SVO SCA

Companies Group determines that the transaction does not meet the tests specified in this sub-Part, it shall not enter the

transaction into the VOS Database and instead notifies the reporting insurance company and the state of domicile in writing

of its determination.

(iii) Subsequent Reporting of SCA Investments

(A) Reporting Method

By June of the year following the acquisition or formation, and reporting of an SCA investment on the SUB 1 - form, the

insurance company shall submit a SUB 2 - form filing for the same SCA investment.

(B) Compliance and Administration

Each year the SVO SCA Companies Group shall compile a list of all SCA investments reported as SUB 1 - form filings for

which a SUB 2 - form filing has not yet been received. For these transactions, the SVO SCA Companies Group will notify

the responsible reporting insurance company and its state of domicile that it has not received a SUB 2 filing for the SCA

investment.

By June of each year, any insurance company that has made a SUB 2 - form filing in a previous year must update the

information by filing an updated SUB 2 - form filing. All SCA investments from the same ultimate Holding Company must

be submitted together.

(C) Purpose of SUB 2-Form Filing

As more specifically described below, the purpose of the SUB 2 filing is to determine whether the value calculated by the

reporting insurance company for the SCA investment is appropriate and to approve that or some other value for reporting on

the insurer's NAIC Financial Statement Blank.

(iv) Special Instructions

(A) SCA Investments Completed at or Near Year-End

An insurance company that concludes an SCA transaction at year-end may be unable to file a SUB 1 - form prior to the time

it would be required to file a SUB 2 - form. Where this is the case, the SVO SCA Companies Group is authorized to accept a

SUB 1 filing from such an insurance company and to process such SUB 1 filing as a combined SUB 1 and SUB 2 filing.

(B) Special Instruction - Book Value of U.S. Insurer's Common Stock

No filing of an investment in the common stock of a domestic SCA insurance company valued pursuant to Part Five, Section

2, (c)(i)(B)(1) of this Manual shall be made with the SVO after January 1, 1999. Insurers who select the Section 2(c)(i)(B)(1)

valuation method to value an investment of common stock of a U.S. insurance SCA company after January 1, 1999 shall

continue to apply the methodology and rules of this valuation method. The calculations made in support of such valuations

and the rationale employed to address other relevant issues under Section 2(c)(i)(B)(1) of this Part shall be retained for the

benefit of state insurance examiners.

(v) Consistency in Application of Chosen Valuation Method

Nothing in this Part shall be read as requiring an insurance company to value all of its SCA company common stock pursuant

to the same method. However, the valuation method used for a specific SCA company shall be applied consistently from year

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to year. An insurer that has previously selected any valuation method and that now wishes to change to another valuation

method may only do so with the approval of the domiciliary Commissioner. Once the approval of the domiciliary

Commissioner has been obtained, the reporting insurance company shall provide the SVO with evidence of that approval as

part of the SUB 1 or SUB 2 filing.

c) Valuation Methods

Statutory accounting guidance for investments in SCA entities is contained in:

SSAP No.97—Investments in Subsidiary, Controlled and Affiliated Entities, A Replacement of SSAP No. 88,

SSAP No. 68—Business Combinations and Goodwill,

SSAP No. 41—Surplus Notes, and

SSAP No.32—Investments in Preferred Stock, (including investments in preferred stock of subsidiary, controlled

and affiliated entities).

The reader should refer to the NAIC Accounting Practices and Procedures Manual for detailed accounting guidance.

(i) Market and Equity Valuation Methods

Insurance companies may use the Market Valuation Method described in paragraph (A) below or one of the equity methods

described in paragraph (B) below. For investments in SCAs described in Section 2(c)(i)(B) 1, 2, 3, 4, 5 and 6 of this Part, the

reporting insurance company shall compute its shares of earnings or losses after deducting the investee’s preferred dividends

on outstanding cumulative preferred stock, whether or not such dividends are declared.

(A) Market Valuation Method

(1) Conditions to Use

A reporting insurance company may use the Market Valuation Method for any subsidiary whose common stock trades on the

New York Stock Exchange, the American Stock Exchange, the NASDAQ National Exchange, or the Tokyo Stock Exchange

provided ownership in the subsidiary is between 10% and 85%. Once the reporting insurance company uses the Market

Valuation Method for a particular subsidiary, it must obtain the approval of the domiciliary commissioner before changing

the valuation method to an equity method. The SCA must have at least 2 million shares outstanding with a total market value

of at least $50 million in the public’s control.

(2) Calculation of Discount Rate

(X) Upon receipt of subsidiary information, the SVO shall calculate the subsidiary's market value by reference to the

market value of the stock, discounted for size and depth of the market and, in the case of restricted common stock, for legal

restrictions on transferability.

(Y) The resulting discount rate may be greater depending on the ownership percentages (measured at the holding

company level) detailed below.

If an investment in a SCA results in an ownership percentage between 10% and 50%, a base discount percentage

between 0% and 20% on a sliding scale basis is required;

If an investment in a SCA results in an ownership percentage greater than 50% up to and including 80%, a base

discount percentage between 20% and 30% on a sliding scale basis is required;

If an investment in a SCA results in an ownership percentage greater than 80% up to and including 85%, a minimum

base discount percentage of 30% is required. Further, the SCA must have at least two million shares outstanding, with a total

market value of at least $50 million in the public's control; and

Any ownership percentages exceeding 85% will result in the SCA being recorded on an equity method.

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(Z) The reporting insurance company that selects this method shall obtain the discount rate to be applied to its common

stock from the SVO. The discounts listed above are minimum discounts. The SVO calculation may result in discounts in

market value higher than the illustrations set forth above.

(B) Equity Methods

If a SCA investment does not meet the requirements for the market valuation approach in Section 2(c)(i)(A) of this Part

above, or if the requirements are met, but a reporting entity elects not to use the market valuation approach, the reporting

entity’s proportionate share of its investments in SCAs shall be recorded as follows:

(1) Investments in U.S. Insurance SCA Entities

Investments in U.S. insurance SCA entities shall be recorded based on the underlying audited statutory equity (where equity

is defined as net of preferred stock and surplus notes of the investee) of the respective entity’s financial statements, adjusted

for any unamortized goodwill as provided for in SSAP No. 68.

(2) Investments in Non-Insurance SCA Entities Statutory Basis

Investments in non-insurance SCA entities engaged in the activities described in SSAP No. 97, paragraph 8b.ii. shall be

adjusted to an audited statutory basis of accounting, if 20% or more of the SCA’s revenue is generated from the reporting

entities and its affiliates. For purposes of this section, revenue means GAAP revenue reported in the audited GAAP financial

statements, excluding realized and unrealized capital gains and losses. Statutory basis of accounting shall be based on the

underlying audited U.S. GAAP equity of the respective entity with the adjustments required by paragraph 9 of SSAP No. 97.

If the reporting entity also holds an investment in preferred stock and or surplus notes refer to paragraphs 23 through 27 of

SSAP No. 97. For guidance on investments in downstream holding companies refer to paragraphs 17-19 of SSAP No. 97.

(3) Investments in Non-Insurance SCA Entities GAAP Basis

Investments in non-insurance SCA entities that do not qualify under the preceding subparagraph (B)(2) shall be recorded

based on the audited GAAP equity of the investee.

(4) Investments in Foreign Insurance SCA Entities

Investments in foreign insurance SCA entities shall be recorded based on the underlying audited US GAAP equity of the

respective entity adjusted to a statutory basis of accounting, for reserves of the foreign insurance SCA with respect to the

business it assumes directly and indirectly from an US insurer using the statutory accounting principles promulgated in the

NAIC Accounting Practices and Procedures Manual and for any audit adjustments resulting from the annual GAAP audit.

Statutory basis of accounting shall be based on the underlying U.S. GAAP equity of the respective entity with the

adjustments required by paragraph 9 of SSAP No. 97.

GAAP is defined as those pronouncements included in the United States GAAP Hierarchy as described in AICPA Statement

of Auditing Standard No. 69, The Meaning of Present Fairly in Conformity With GAAP. Foreign SCA entities are defined as

those entities incorporated or otherwise legally formed under the laws of a foreign country. Foreign insurance SCA entities

are defined as alien insurers formed according to the legal requirements of a foreign country.

(5) Investments in Foreign Non-Insurance SCA Entities

Investments in foreign non-insurance SCA entities shall follow the guidance in this Section 2 (c)(i)(B)(2) or (3) based on the

revenue and activity criteria noted above, which requires that accounting be based on the underlying adjusted audited US

GAAP equity of the respective entity. Statutory basis of accounting shall be based on the underlying audited US GAAP

equity of the respective entity with the adjustments required by paragraph 9 of SSAP No. 97.

(6) Investments in the Preferred Stock of an SCA

Investments in the preferred stock of an SCA shall be accounted for in accordance with the provisions of SSAP No. 32. If in

addition to preferred stock the reporting entity also holds an investment in common stock and/or surplus notes refer to

paragraphs 23 through 27 of SSAP No. 97 and paragraph 10 of SSAP No. 41.

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d) SVO Assessment and Review of SUB 1-Form

Upon receipt of the reporting insurance company's SUB 1 filing, the SVO SCA Companies Group shall conduct an

assessment in the following manner:

(i) Extraneous Factors

If the SVO SCA Companies Group is aware of any broad regulatory concerns or issues affecting the reporting insurance

company or the reported SCA investment, it shall determine whether such concerns or issues are relevant to valuation of the

SCA investment. If so, the SVO SCA Companies Group shall take such action as seems appropriate under the circumstances.

If no concerns or issues relevant to valuation exist, the SVO SCA Companies Group shall proceed to the step described in (ii)

below.

(ii) Appropriateness of Valuation Method

The SVO SCA Companies Group shall ensure that the value reported by the insurance company on a SUB 1-form has been

arrived at by application of one of the permitted valuation methods described in Section 2(c)(i)A and B of this Part above. If

a reporting insurance company submits a SUB 1-form filing that reports a value calculated under an inappropriate method,

the SVO SCA Companies Group shall contact the insurer to resolve the discrepancy or it shall recalculate the value of the

SCA investment under the most appropriate valuation method and notify the reporting insurance company of such action.

Upon completion of this review process, the SVO SCA Companies Group shall proceed to the step described in (iii) below.

(iii) Assess Transaction

The SVO SCA Companies Group shall review the factual, business and economic context of the transaction to determine

whether (i) the SCA investment appears to be an arms-length business arrangement with a reasonable economic value to the

reporting insurance company, (ii) the valuation method chosen is reasonable in view of the factual, business and economic

context of the transaction, (iii) the transaction is reasonable in the context of all the known facts surrounding the insurance

company and its operations and (iv) the value reported appropriately reflects economic value to the insurance company. The

SVO SCA Companies Group may consider other factors that appear relevant from the context of the transaction including:

(A) The specific tax, accounting or other regulatory treatment sought.

(B) Whether the transaction effects a legally effective, binding and permanent transfer of the risks and rewards of

ownership.

(C) The effect of the SCA valuation on the solvency of the insurer.

(D) The degree of affiliation between the insurer and the party from whom such company was acquired, the form of the

consideration (cash, property or the exchange of stock), evidence of ability to recover cost and whether the acquisition price

represented the result of arms-length dealing between economic equals.

(E) The right to dividends or other payments from the SCA and any limitations thereto.

(F) The nature, extent and demonstrable financial value of the business operations of the SCA.

(G) The value of the assets owned by the SCA.

If the SVO SCA Companies Group determines that the transaction does not seem to present economic value to the insurance

company, or that the transaction tends to obscure issues that might be relevant to an NAIC member or that the information

provided is insufficient or unreliable as a basis upon which to make a determination, then the SVO SCA Companies Group

shall notify the reporting insurance company and the NAIC member of the reporting insurance company's state of domicile

and request guidance.

(iv) Valuation Method

If the SVO SCA Companies Group determines that the SCA investment raises no issues under subsection (iii) above, the

SVO SCA Companies Group shall proceed to review whether the reporting insurance company has correctly applied the

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procedure described in Section 2(c) of this Part for the chosen valuation method and made the adjustments called for in sub-

paragraph (f) below.

(v) Enter Not Valued (NV)

If the SCA investment reported on the SUB 1-form filing is deemed to meet the assessment and reviews described in

subsections (i) through (iv) above, the SVO SCA Companies Group shall enter the administrative symbol NV in the status

field of the VOS Database. The administrative symbol NV will be applied to every SUB 1 filing where the reported SCA

investment meets the tests described above, with the exception of those filings described under Section 2(b)(iv) of this Part

above. The NV symbol will be revised to a value if and when the filer submits a SUB 2-form on the same transaction and the

SCA Companies Group approves a final value based on the information provided.

Assignment of the administrative symbol NV to an SCA investment does not mean and shall not be interpreted to mean that

the SVO is expressing an opinion as to the value claimed by the reporting insurance company for the reported SCA

investment. The NV administrative symbol implies only that based on the information provided the SVO SCA Companies

Group has determined that the SCA investment meets the tests described in this sub-paragraph (d).

e) SVO Assessment and Review of SUB 2 - Form

(i) Monitoring of VOS Database

By June 1 of each year, the SVO SCA Companies Group shall initiate a review of all SCA investments for which new SUB

2-form filings have been received as well as an annual update review of SUB 2 SCA investments already logged in the VOS

Database. The SVO SCA Companies Group's review shall encompass a review of the parent insurance company's Schedule

Y (to ascertain the identity of the members of the holding company system and to ensure that information for all SCA

companies has been submitted), a review of the parent's NAIC Financial Statement Blank to ascertain the materiality of SCA

investments and a review of the VOS Database to determine whether SCA debt and SCA preferred securities have been

assigned NAIC Designations. As part of its analysis, the SVO shall review the portion of the bond investments carried by the

parent or a subsidiary insurer with a Z notation. If the SVO determines that the portion of the Z bonds shown on the

documentation is significant, the SVO shall not process the SUB 2 filing until the insurance company reports the bonds to

permit removal of the Z notation.

(ii) Assess and Adjust Reported Values

Upon completion of the procedures described above, the SVO SCA Companies Group will determine whether the value

reported by the insurance company was calculated in accordance with the instructions for the valuation method chosen and

verify that the claimed value reflects the adjustments required by sub-paragraph (f) below.

(iii) Check NAIC Financial Statement Blank; Finalize a Value

(A) NAIC Financial Statement Blank

Prior to finalizing a value for the reported SCA investment, the SVO SCA Companies Group will verify that the value

reported to the SVO and the value reported on the NAIC Financial Statement Blank are the same. If the values are not the

same, the SVO SCA Companies Group will approve the lower value.

(B) Finalize Value

The SVO SCA Companies Group will remove the administrative symbol NV and enter the approved value in the status field

of the VOS Database, except in the case of filings made under sub-paragraph 2(b)(iii) of this Part in which case the SCA

Companies Group shall assign the final value, if any.

(C) Written Notification

The SVO SCA Companies Group shall report its determination to the insurance company. If a significant discrepancy exists

between the value claimed by the reporting insurance company and the value approved by the SVO, the SVO SCA

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Companies Group shall enter the administrative symbol D in the status field of the VOS Database and provide written

notification to the reporting insurance company and the company's state of domicile of this action.

f) Make Adjustments to Reported Value

The SVO SCA Companies Group shall adjust the value reported by the insurance company on a SUB 1 or SUB 2 filing in

accordance with the following procedures:

(i) Reduction of Goodwill

The capital and surplus of a reporting insurance company, reported on the statutory balance sheet filed with the domiciliary

state commissioner, may not include an amount greater than 10%, in the aggregate, of goodwill from all sources, including

life, accident and health, and deposit-type assumption reinsurance. See also, SSAP No. 68 for definitions of and accounting

guidance for goodwill.

(ii) Non-admitted Asset Value

(A) For non-insurance SCA entities that meet the revenue and activity criteria of paragraph 8bii of SSAP No. 97 and

foreign insurance SCAs described in 8biv, that use a method other than market value, the value of the reporting company's

SCA investment is calculated by reducing GAAP equity by the value of any asset that does not conform to the criteria for an

admitted asset as outlined in paragraph 9a. of SSAP No. 97.

(B) Costs that are capitalized in accordance with GAAP but expensed pursuant to statutory accounting as promulgated

in the NAIC Accounting Practices and Procedures Manual (e.g., deferred policy acquisition costs) should be expensed.

(C) Capital and surplus shall be adjusted pursuant to the procedure described in paragraph 9c. of SSAP No. 97.

(D) Pursuant to paragraph 9d. of SSAP No. 97 in the case of non-insurance and foreign insurance SCA entities, the

reporting insurance company shall non-admit the amount of goodwill of the SCA in excess of 10% of the audited GAAP

equity of the SCA’s last audited financial statement.

(E) Non-admit the amount of net deferred tax assets (DTAs) of the SCA in excess of 10% of the audited GAAP equity

of the SCA’s last audited financial statements.

(F) Adjust the GAAP annuity account value reserves of a foreign insurance SCA, with respect to the business it wrote

directly, using the Commissioners Annuity Reserve Valuation Method (CARVM) as described in paragraphs 12 and 13 of

Appendix A-820 (including the reserving provisions in the various actuarial guidelines which support CARVM). The

valuation interest rate and mortality tables to be used in applying CARVM should be those prescribed by the foreign

insurance SCA’s country of domicile. If the foreign SCA’s country of domicile does not prescribe the necessary tables and or

rates, no reserve adjustment shall be made.

(iii) Reciprocal Ownership

(A) Reciprocal Ownership Relationships

1. A reporting entity that has direct ownership of shares of an upstream intermediate or ultimate parent owns an

interest in itself and is required to eliminate the value of those shares from the value of the reporting entity. This is referred to

as elimination of reciprocal ownership.

2. If the shares of the parent are owned indirectly by a reporting entity, for example, because the reporting entity owns

a downstream SCA entity that directly owns shares in the parent, the entity that owns the parent’s shares must reduce its

value by the value of the shares in the parent. This is referred to as elimination of the reciprocal ownership.

3. Any parent reporting entity that owns an interest in itself via either direct or indirect ownership of a down-stream

affiliate, which in turn owns shares of the parent reporting entity, shall eliminate its proportionate interest in these shares

from the valuation of such affiliate.

(B) Investments in Downstream Holding Companies

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The reader should refer to paragraph 17 of SSAP No. 97 for details regarding the valuation of a downstream holding

company. In lieu of separate GAAP audits of SCA entities of the downstream holding company, the insurer can choose to

have a GAAP audit performed at the holding company level with a consolidating balance sheet showing GAAP equity of all

the SCA entities. The consolidating balance sheet shall then be adjusted for GAAP to SAP differences of the insurance

entities as described in SSAP No. 97. This adjusted amount would then be the reported value of the investment in

downstream holding company at the higher-level insurance company.

(C) Investments in Surplus Notes of a Subsidiary, Controlled and Affiliated Entity

Investments in the surplus notes of an SCA shall be accounted for in accordance with the provisions of SSAP No. 41. If the

reporting entity also holds an investment in preferred stock or surplus notes refer to paragraphs 23 through 27 of SSAP No.

97.

W:\National Meetings\2016\Fall\TF\VOS\Task Force 2016 Amend P&P For SCAs.docx

Attachment Seven


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MEMORANDUM






RE: Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office

(P&P Manual) to Update the Categories of Credit Ratings for the NRSROs on the NAIC CRP List.

1. Introduction – At the present time the NAIC List of credit rating providers (CRPs) does not identify the credit rating

categories for which a CRP has registered as a nationally recognized statistical rating organization (NRSRO). The credit

rating categories for which a credit rating agency may be an NRSRO are identified in the NRSRO definition used in the

federal Securities Exchange Act of 1934.1 The credit rating categories in which a credit rating agency has registered as an

NRSRO are shown in the Order Granting Registration2 published by the U.S. Securities and Exchange Commission (SEC) on

its website when it finalizes the application. To address the possibility that the information on the SEC website may not have

been updated, we also reviewed each CRP’s annual Form NRSRO certification.‡ The proposed amendment would identify

the credit rating categories for which each CRP has registered as an NRSRO.

2. Proposed Amendment – Proposed additional text is shown in red.

a) List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations

(i) CRPs on the NAIC Credit Rating Provider List

The CRPs that provide Credit Rating Services to the NAIC, either pursuant to the terms of Section 4 of this Part

or otherwise, are:

Moody's Investor's Service, for credit ratings issued to financial institutions, brokers, or dealers; insurance

companies; corporate issuers; issuers of asset-backed securities and issuers of government securities,

municipal securities, or securities issued by a foreign government.

Standard and Poor's, for credit ratings issued to financial institutions, brokers, or dealers; insurance



‡ The information for Egan Jones on the SEC website differed from the information on Egan Jones’ Form NRSRO.

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Fitch Ratings, for credit ratings issued to financial institutions, brokers, or dealers; insurance companies;

corporate issuers; issuers of asset-backed securities and issuers of government securities, municipal securities,

or securities issued by a foreign government.

Dominion Bond Rating Service (DBRS), for credit ratings issued to financial institutions, brokers, or

dealers; insurance companies; corporate issuers; issuers of asset-backed securities and issuers of

government securities, municipal securities, or securities issued by a foreign government.

A.M. Best Company (A.M. Best) for credit ratings issued to insurance companies; corporate issuers and

issuers of asset-backed securities.

Morningstar Credit Ratings, LLC for credit ratings issued to financial institutions, brokers, or dealers;

corporate issuers and issuers of asset-backed securities.

Kroll Bond Rating Agency for credit ratings issued to financial institutions, brokers, or dealers; insurance



Egan Jones Rating Company for credit ratings issued to financial institutions, brokers, or dealers; insurance

companies and corporate issuers.

HR Ratings de Mexico, S.A. de C.V. for credit ratings issued to issuers of government securities, municipal

securities, or securities issued by a foreign government.

Note: The information shown above for each NRSRO was obtained from the U.S. SEC’s web-site: www.

Sec.gov/ocr on October 14, 2016 and confirmed against each NRSROs annual FORM NRSRO certification.

W:\National Meetings\2016\Fall\TF\VOS\Task Force 2016 Fall Nat Mtg Update CRP FE Status E.docx

1 Securities Exchange Act of 1934; Section 3. (a) When used in this title, unless the context otherwise requires (62) Nationally recognized statistical rating organization.—The term “nationally recognized statistical rating organization” means a credit rating agency

that—

(A) issues credit ratings certified by qualified institutional buyers, in accordance with section 78o–7(a)(1)(B)(ix) of this title, with respect to— (i) financial institutions, brokers, or dealers;

(ii) insurance companies;

(iii) corporate issuers; (iv) issuers of asset-backed securities (as that term is defined in section 1101(c) of part 229 of title 17, Code of Federal Regulations, as in effect on

September 29, 2006);

(v) issuers of government securities, municipal securities, or securities issued by a foreign government; or (vi) a combination of one or more categories of obligors described in any of clauses (i) through (v); and

(B) is registered under section 78o–7 of this title.

2 The following excepted information appears on the SEC’s website as of October 14, 2016 (emphasis added).

SECURITIES EXCHANGE ACT OF 1934 Release No. 56511/September 24, 2007 ORDER GRANTING REGISTRATION OF MOODY’S INVESTORS

SERVICE, INC. … (as an NRSRO) for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act … IT IS

ORDERED, … that the registration of Moody’s Investors Service, Inc. with the Commission as an NRSRO under Section 15E of the Exchange Act for the

classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act is granted ...

SECURITIES EXCHANGE ACT OF 1934 Release No. 34-56513/September 24, 2007 ORDER GRANTING REGISTRATION OF STANDARD &

POOR’S RATINGS SERVICES … (as an NRSRO) for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act … IT IS ORDERED, … that the registration of Standard & Poor’s Ratings Services with the Commission as an NRSRO under Section 15E

of the Exchange Act for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act is granted ...

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SECURITIES EXCHANGE ACT OF 1934 Release No. 34-56509/September 24, 2007 ORDER GRANTING REGISTRATION OF FITCH, INC. … (as an

NRSRO) for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act ... IT IS ORDERED, … that the

registration of Fitch, Inc. with the Commission as an NRSRO under Section 15E of the Exchange Act for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act is granted ...

SECURITIES EXCHANGE ACT OF 1934 Release No. 34-56508/September 24, 2007 ORDER GRANTING REGISTRATION OF DBRS LIMITED …

(as an NRSRO) for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act ... IT IS ORDERED, … that

the registration of DBRS Limited with the Commission as an NRSRO under Section 15E of the Exchange Act for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act is granted.

Release No. 34-56507/September 24, 2007 ORDER GRANTING REGISTRATION OF A.M. BEST COMPANY, INC. (as an NRSRO) for the classes of credit ratings described in clauses (i)

through (iv) of Section 3(a)(62)(B) of the Exchange Act ... IT IS ORDERED, … that the registration of A.M. Best Company, Inc. with the Commission as an

NRSRO under Section 15E of the Exchange Act for the classes of credit ratings described in clauses (i) through (iv) of Section 3(a)(62)(B) of the Exchange Act is granted. Registration as a Nationally Recognized Statistical Rating Organization (NRSRO) With Respect to Financial Institutions On Sept. 24,

2007, the Commission issued an order granting the registration of AM Best as an NRSRO in the following classes of credit ratings: (1) financial institutions;

(2) insurance companies; (3) corporate issuers; and (4) issuers of asset-backed securities. On March 29, 2011, AM Best furnished to the Commission on

Form NRSRO a notice of withdrawal from registration in the category of financial institutions. Pursuant to Rule 17g-1 under the Exchange Act, AM Best’s

withdrawal from registration in the category of financial institutions became effective on May 13, 2011, 45 calendar days after the notice was furnished to

the Commission. Thus, as of May 13, 2011, AM Best should not be treated as an NRSRO with respect to credit ratings for financial institutions.

SECURITIES EXCHANGE ACT OF 1934 Release No. 58000 / June 23, 2008 ORDER GRANTING REGISTRATION OF REALPOINT LLC … (as an

NRSRO) for the class of credit ratings described in clause (iv) of Section 3(a)(62)(B) of the Exchange Act ... Based on the application and Exemptive Order, the Commission finds that the requirements of Section 15E of the Exchange Act are satisfied. Accordingly,

IT IS ORDERED, … that the registration of Realpoint LLC with the Commission as an NRSRO under Section 15E of the Exchange Act for the class of

credit ratings described in clause (iv) of Section 3(a)(62)(B) of the Exchange Act is granted.

SECURITIES AND EXCHANGE COMMISSION Release No. 34-78671 August 24, 2016

Order Granting Registration of Morningstar Credit Ratings, LLC for Two Additional Classes of Credit Ratings … Morningstar Credit Ratings, LLC (“Morningstar”) is a credit rating agency registered as an NRSRO under the Exchange Act in the asset-backed securities class of credit ratings described in

clause (iv) of section 3(a)(62)(A) of the Exchange Act. On July 1, 2016, Morningstar filed with the Commission an application on Form NRSRO to add the

classes of credit ratings described in clauses (i) and (iii) of section 3(a)(62)(A) of the Exchange Act (“financial institutions class” and “corporate issuers class,” respectively) ... Based on the information in Morningstar’s application and on the Exemptive Order, the Commission, pursuant to section

15E(a)(2)(C) of the Exchange Act, finds that the requirements of section 15E of the Exchange Act are satisfied and does not find grounds for denying

registration.

SECURITIES EXCHANGE ACT OF 1934 Release No. 57300 / February 11, 2008 ORDER GRANTING REGISTRATION OF LACE FINANCIAL

CORP … (as an NRSRO) for the classes of credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act … Based on the application and Exemptive Order, the Commission finds that the requirements of Section 15E of the Exchange Act are satisfied. Accordingly, IT IS

ORDERED, … that the registration of LACE Financial Corp. with the Commission as an NRSRO under Section 15E of the Exchange Act for the classes of

credit ratings described in clauses (i) through (v) of Section 3(a)(62)(B) of the Exchange Act is granted ...

SECURITIES EXCHANGE ACT OF 1934 Release No. 57031/December 21, 2007 ORDER GRANTING REGISTRATION OF EGAN-JONES RATING

COMPANY … (as an NRSRO) for the classes of credit ratings described in clauses (i) through (iii) of Section 3(a)(62)(B) of the Exchange Act … IT IS ORDERED, under paragraph (a)(2)(A) of Section 15E of the Exchange Act, that the registration of Egan-Jones Rating Company with the Commission as an

NRSRO under Section 15E of the Exchange Act for the classes of credit ratings described in clauses (i) through (iii) of Section 3(a)(62)(B) of the Exchange

Act is granted. SECURITIES EXCHANGE ACT OF 1934 Release No. 59056/December 4, 2008 ORDER GRANTING REGISTRATION OF EGAN-

JONES RATING COMPANY TO ADD TWO ADDITIONAL CLASSES OF CREDIT RATINGS Egan-Jones Rating Company, … (registered) for the

two classes of credit ratings described in clauses (iv) and (v) of Section 3(a)(62)(B) of the Exchange Act … IT IS ORDERED, under paragraph (a)(2) of

Section 15E of the Exchange Act, that the registration of Egan-Jones Rating Company with the Commission for the classes of credit ratings described in clauses (iv) and (v) of Section 3(a)(62)(B) of the Exchange Act is granted.

SECURITIES EXCHANGE ACT OF 1934 Release No. 34-68160/November 5, 2012 ORDER GRANTING REGISTRATION OF HR RATINGS DE

MÉXICO, S.A. DE C.V. … (as an NRSRO) for the class of credit ratings described in clause (v) of Section 3(a)(62)(A) of the Exchange Act. … IT IS

ORDERED, under paragraph (a)(2)(A) of Section 15E of the Exchange Act, that the registration of HR Ratings de México, S.A. de C.V. with the

Commission as an NRSRO under Section 15E of the Exchange Act for the class of credit ratings described in clause (v) of Section 3(a)(62)(A) of the Exchange Act is granted …

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MEMORANDUM




CC: Charles Therriault, Director, NAIC Securities Valuation Office;

DATE: November 1, 2016

RE: Proposed Amendment to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P

Manual) to delete instructions related to the NAIC Integrated Securities Information System computer platform and

to provide information for the new VISION platform.

1. Introduction – The NAIC’s new computer platform for the NAIC Securities Valuation Office (SVO) is called VISION.

VISION replaced the SVO’s Integrated Securities Information System platform effective Sept. 6, 2016. The SVO

proposes an amendment to the P&P Manual that would delete existing (now obsolete) information about the Integrated

Securities Information System platform and direct the reader to an NAIC website that houses information about VISION,

including general information, user guides, online demonstrations, help desk contacts, links to the web-based application,

information about systems issues and release notes/updates. The text to be deleted and the reference to the new website

are shown below.

2. Amendments



…

g) Review of SVO Credit, Classification or Valuation Decisions

(i) Requests for Clarification of SVO Decisions

Any insurer that owns a security for which the SVO has provided an NAIC Designation, a

classification or a valuation, or which is an SCA investment, may request a clarification of the

decision from the SVO. The SVO analyst responsible for the decision may respond informally to

informal requests for clarification and, in response to written requests, shall provide as much

clarification as possible in writing within 10 days after receipt of the written request. Any reply

from the SVO shall be a confidential communication between the SVO and the insurer.



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Any insurer that owns a security for which the SVO has performed a credit assessment, a

classification analysis or a valuation, or which is an SCA investment, may appeal the SVO credit

assessment, classification or valuation decision, provided that the appeal must be filed within 120

days of the SVO decision. Any insurer can ascertain the date of the original SVO decision by

accessing the ISIS VISION Inquiry Service and noting the Review Date shown therein. The

Review Date is the date of the original decision.

An appeal is initiated by filing a completed Appeal ATF with a written correspondence

specifically and clearly identifying the analytic basis of the appeal, supported by such documents

or financial or other information or data as in the insurer’s opinion supports the claim that the

original decision of the SVO should be reviewed.

(B) Procedure for Filing an Appeal

Filing an appeal with the SVO is accomplished through a computer linkup with the ISIS VISION

computer system of the SVO. The following is a summary description of the steps in the filing

process. See Part Two, Section 6 of this Manual for a more complete description of the filing

process.

(1) Link up with ISIS VISION

(2) Login by presenting an appropriate username and password

(3) Go to the Authorization to File (ATF) process

(4) Enter the valid CUSIP/PPN/CINS identifier of the security to be filed

(5) Select the analytical Department involved in the decision

(6) Select an Option for Security Type and the Appeal option under the Filing Type

List

(7) Enter the relevant information into the Appeal ATF

(8) Finish and submit the Appeal ATF. Include a letter in support of the appeal.

This appeal procedure applies only to situations where the SVO has expressed an analytical

conclusion in the exercise of its credit, classification, valuation functions or its analysis of

Subsidiary, Controlled and Affiliated (SCA) investments. The stated procedure encompasses

initial filings, annual updates and securities not rated by an NAIC CRP.

Securities rated by an NAIC CRP may be appealed only if the SVO designates securities

differently than the NAIC CRP and the SVO retains responsibility for review of NAIC CRP rated

transactions.

…


Section 1. General Definitions Used in This Manual


definitions have any relevance to any other NAIC publication.

Association Value means, collectively, an NAIC Designation and the Unit Price published in the AVS+ Products

for a security.

Audited Financial Statement means, collectively, for any given year, the auditor's Opinion, the issuer's income

statement, balance sheet, the statement of cash flows, all notes to the financial statements, and any supplementary

information thereto typically created, generated or otherwise provided to investors, in English, and prepared by a

certified public accountant or the international equivalent thereto, showing financial results for the reported year

together with the prior year prepared and presented in accordance with a Global Financial Presentation Standard, a

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Reconciled Financial Presentation Standard or a National Financial Presentation Standard. For purposes of this

definition:

Global Financial Presentation Standard means:

U.S. Generally Accepted Accounting Principles (US GAAP); or

International Financial Reporting Standards (IFRS) as published by the International Accounting Standards

Board (IASB).

Reconciled Financial Presentation Standard means:

A standard other than Global Financial Presentation Standard or National Financial Presentation Standard

with a reconciliation to US GAAP or IASB IFRS; or

National IFRS with such additional information as required by IASB standards to make National IFRS

comparable to IASB IFRS.

National Financial Presentation Standard means:

National GAAP or National IFRS, without a reconciliation to US GAAP or IASB IFRS, authorized to be

used for filing a transaction with the SVO pursuant to the procedure specified in Section 10(c)(i)(D) of this

Part below.

In this definition, National GAAP refers to the generally accepted accounting policies as required by a

country’s national accounting standards board and National IFRS refers to the international financial

reporting standards required by the country’s national accounting standards board.

Please refer to Section 10(c)(i)(D)(5) of this Part below for the List of Countries and Associated National

Financial Presentation Standard.

Foreign issuers not using the accounting standards of a country on the List of Countries and Associated

National Financial Presentation Standard must provide the SVO with an Audited Financial Statement

prepared in accordance with a Global Financial Presentation Standard or a Reconciled Financial

Presentation Standard.

For insurance companies, an Audited Financial Statement will be prepared in accordance with SAP.

For municipal and U.S. Government securities, an Audited Financial Statement will be prepared in accordance with

generally accepted auditing standards and government auditing standards issued by the Comptroller General of the

United States. For municipal securities only, the statements will be accepted if they have been submitted to,

reviewed and certified by a state comptroller's office.

Authorization to File (ATF) means the component of ISIS VISION that permits reporting insurance companies to

file a security with the SVO.

Automated Valuation Service (AVS) means a subscription service offered by the NAIC permitting access to

portions of the VOS Database and showing updated Association Values prior to publication in the AVS+ Products.

AVS+ products refers to the quarterly compilation of the SVO List of Securities and the Other Information as those

terms are defined in Part One, Section 3 (k) of this Manual.

Bond means any Obligation with a stated maturity at the time of issuance longer than one year.

CINS stands for CUSIP International Numbering System and refers to a numbering system used to identify

foreign securities administered by S&P CUSIP.

Credit Rating Services is used in connection with the NAIC Credit Rating Provider List discussed in Part One,

Section 4 and Part One, Section 7 (d) (i) of this Manual and means:

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Electronic data feed transmissions of credit ratings assigned by the NRSRO with their corresponding

CUSIP number and other pertinent security specific information in English, updated as frequently as

provided to other customers;

Other analytical services or products, in English, provided to other customers; and

Access to the NRSRO’s rating analysts by SVO staff.

CRP stands for Credit Rating Provider and refers to the NRSROs on the NAIC Credit Rating Provider List

discussed in Part One, Section 4 of this Manual and identified in Part One, Section 7(d)(i) of this Manual.

CUSIP stands for the Committee for Uniform Securities Identification Procedures and, as used herein, refers to

a numbering system owned by the American Bankers Association and administered by S&P CUSIP that is used to

identify publicly traded U.S. securities.

CUSIP Identifier means a security identification number assigned to publicly traded U.S. securities by S&P

CUSIP.

Derivative Counterparties Process means a file in NAIC electronic systems used to store the names of

counterparties on the List of Counterparties for Schedule DB – Part D – Section 1 for purposes of netting of

derivative exposures that is used in connection with the publication of the AVS+ products.

Exchange Rates Process means a file in NAIC electronic systems used to store currency exchange rates used by

insurance companies to convert the value of foreign investments into U.S. dollars for reporting purposes and used in

connection with the publication of the AVS+ products.

Exempt U.S. Government Securities Process refers to a process within NAIC electronic computer systems used to

store the names and descriptions of U.S. Government Securities that are exempt from filing with the SVO and that is

used in connection with the publication of the AVS+ products.

Ex-Dividend Process means a file created in NAIC electronic systems used to store information about stock

dividends and that is used in connection with the publication of the AVS+ products.

Executive Headquarters means the NAIC staff function responsible for day-to-day conduct of activity in support

of the NAIC members and includes the SVO.

Filing Exempt Process File refers to an electronic file within NAIC electronic computer systems used to store the

names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with

the SVO because they are assigned credit ratings by NAIC CRPs and that insurers: 1) have reported in quarterly or

annual statements (NAIC Financial Statement Blank) filed with the NAIC; or 2) requested to be included in the FE

Data File through the Integrated Securities InformationVISION System (ISISVISION) and in both cases, for which

an NAIC CRP rating has been confirmed by the NAIC and that is used in connection with the publication of the

AVS+ products.

Guaranteed or insured means that a guarantor or insurer has made an unconditional and irrevocable promise to

perform, insure or purchase the obligation of an obligor upon the default of such obligor.

Initial Report means the report and documentation filed with the SVO by a reporting insurance company as

discussed in Section 10(a) of this Part below.

InfoReq means an information request sent by the SVO to a reporting insurance company detailing informational

deficiencies associated with an Initial or a Subsequent Report, as discussed in Section 10 (b) of this Part below.

Inquiry Service means the reporting insurance company's view of the Work Flow component of ISISVISION.

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ISISVISION stands for Integrated Securities Information System and refers to the SVO's electronic computer

system for reporting and tracking securities.

Letter of Credit Process means a file in NAIC electronic systems used to store the names of banks that issue letters

of credit in support of credit for reinsurance arrangements and that meet eligibility criteria to be placed on the NAIC

Bank List that is used in connection with the publication of the AVS+ products.

Money Market and Exchange Traded Fund Process refers to the component of NAIC electronic systems used to

store the names of Money Market Funds and Exchange Traded Funds eligible for reporting as bonds used in


NAIC Designation means any one of the symbols defined in Part One, Section 3(b)(i) of this Manual and may

reflect notching pursuant to one or both of the notching procedures discussed in Part One, Section 3 (b) (iii) of this

Manual.

NAIC Financial Conditions Framework means the instructions, formulas, regulatory treatment, devices or

mechanisms set forth in the NAIC Accounting Practices & Procedures Manual, Annual Statement Instructions and

Financial Condition Examiners Handbook as adopted by the states.

NAIC Financial Statement Blank means the Quarterly and the Annual Statement Blank, as the context may

require, in the form then in use by the NAIC that is used by state-regulated insurance companies to report

investments to a state insurance department.

NAIC Member means the chief insurance regulatory official from any one of the 50 states, the District of Columbia

or the four U.S. territories, or their duly authorized representatives.

Obligation means bonds, notes, debentures, certificates, including equipment trust certificates, production

payments, bank certificates of deposit, bankers' acceptances, credit tenant loans, loans secured by financing net

leases and other evidences of indebtedness for the payment of money (or a participation, certificates or other

evidences of an interest in any of the foregoing), whether constituting general obligations of the issuer or payable

only out of certain revenues or certain funds pledged or otherwise dedicated for payment.

Person means an individual, a business entity, a multilateral development bank or a government or quasi-

governmental body, such as a political subdivision or a government-sponsored enterprise.

Preferred Stock means preferred, preference or guaranteed stock of a corporation, or other business entity

authorized to issue such stock, that has a preference in liquidation over the common stock of the corporation or other

business entity.

PPN stands for Private Placement Number and refers to a security identification number assigned to privately

placed U.S. securities by S&P CUSIP.

RMBS/CMBS Modeled Securities Process refers to a Process within NAIC electronic computer systems used to

store the names and descriptions of residential mortgage-backed securities and commercial mortgage-backed

securities that have been financially modeled by the Structured Securities Group (SSG) and that is used in


SAP stands for Statutory Accounting Principles.

S&P CUSIP means the CUSIP Service Bureau of Standard & Poor's Corporation.

SCA (Subsidiary, Controlled or Affiliated) company, as used in Part Five, Section 2 of this Manual and other

portions of this Manual related to Part Five, Section 2 of this Manual, means a company (the SCA company) that is

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in a relationship with another company ("person") that possesses, directly or indirectly, the power to direct or cause

the direction of the management and policies of the SCA company, whether through the ownership of voting

securities, by contract (other than a commercial contract for goods or non-management services) by common

management or otherwise, unless the power is the result of an official position with or corporate office held by the

company. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the

power to vote, or holds proxies representing ten percent (10%) or more of the voting securities of any other person.

SIC Code stands for Standard Industrial Code and refers to a 4-digit classification scheme established by the U.S.

Department of Commerce for organizing commercial entities by industry specialization.

SSAP stands for Statement of Statutory Accounting Principles and refers to one or more individual statements of

statutory accounting principles contained in the NAIC Accounting Practices and Procedures Manual. When used in

this Manual, the phrase SSAP is followed by a reference to the specific number (i.e., No 1) and the title of the SSAP.

Subsequent Report means the report and documentation filed with the SVO by a reporting insurance company as

discussed in Section 11 of this Part below.

SVO stands for the Securities Valuation Office of the NAIC and refers to the portion of the Executive

Headquarters that serves as the professional staff of the Valuation of Securities (E) Task Force (VOS/TF).

Unconfirmed FE refers to a security that is neither in the VOS Database nor in the FE Datafile with a current year

NAIC Designation. This includes but is not limited to securities in the VOS Database that have not been reviewed in

the current year by the SVO; securities submitted for FE status using ISIS, but an independent check of the NAIC

CRP rating status of the security by the NAIC could not verify an NAIC CRP rating for the FE security; and

securities with private letter ratings.

Unit Price means the value determined for a security by the SVO pursuant to Part Five, Section 1 of this Manual for

purposes of valuation under SAP.

U.S. Treasury Securities Process refers to a process within NAIC electronic computer systems used to store the

names and descriptions of U.S. Treasury Securities and that is used in connection with the publication of the AVS+

products.

VOS Database means the Valuation of Securities Database and refers to that component of the SVO's Integrated

Securities InformationVISION System (ISISVISION) used to store the names and descriptions of securities owned

by state-regulated insurance companies, together with the NAIC Designation categories and/or Unit Price assigned

to them.

VOS Process means the Valuation of Securities Process and refers to a process within NAIC electronic computer

systems used to store the names and descriptions of securities owned by state-regulated insurance companies, and

the NAIC Designation categories and/or Unit Price assigned to them by the SVO and that is used in connection with

the publication of the AVS+ products.

VOS/TF stands for the Valuation of Securities (E) Task Force of the NAIC and refers to the NAIC member group

responsible for formulating and implementing NAIC's credit assessment and securities valuation policy.

Work Flow means the component of the SVO's Integrated Securities Information System (ISIS) that tracks

submission and status of all Initial and Subsequent Reports filed by, or on behalf of, reporting insurance companies.

Part Two – Filing With the SVO

Section 2. General Reporting Framework

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a) Obligation to Report

Insurance companies domiciled in any state of the United States, or any of its territories or possessions, and

required by the law of their domiciliary state or territory to report NAIC Association Values for their

Investment Securities in the NAIC Financial Statement Blank, shall report purchases of Investment Securities

to the SVO or, in the case of Investment Securities exempt from filing with the SVO, for example, pursuant

to Section 4 (d) of this Part below, to the NAIC, as required by this Manual.

For purposes of this Part Two, Section 2 (a), an Investment Security means an instrument evidencing a

lending transaction between an insurance company as lender and a non-affiliated borrower, where the

borrower’s sole motivation is to borrow money and the insurance company’s sole motivation is to make a

profit on the loan that the state of domicile regulates by reference to the NAIC Financial Conditions

Framework.

The SVO shall have no authority to issue NAIC Designations or any other NAIC analytical product to an

insurance company for a Regulatory Transaction under this Section 2 (a).

See Part Three, Section 2 (e) of this Manual below for the definition of Regulatory Transaction and a

description of the processes governing their assessment.

b) Authority to Require a Filing with the SVO

The existence of a filing exemption for a transaction, security, financial asset or investment activity in any

part of this Manual is not intended to, and shall not be read as, prohibiting a state insurance regulator from

requiring its domiciled insurance company to file a transaction, security, financial asset or investment activity

with the SVO for analysis.

In addition, nothing in this Manual should be read as prohibiting a state insurance regulator from asking for

SVO or SSG analytical assistance with respect to any investment related activity, or in connection with

assessment of investment-related aspects of a Regulatory Transaction, as defined in Part Three, Section 2 (e)

of this Manual and directing an insurance company to file relevant information with the SVO or the SSG for

that purpose.

c) Reporting

Reporting to the SVO is accomplished by filing the appropriate form or application and providing the initial

and continuing information required by this Manual or such additional information as may be requested by

SVO staff.

d) Reporting Responsibilities

Reporting is the responsibility of the insurance company that has purchased the investment. There are

procedures that reduce multiple reporting on the same securities by different insurance companies. These

procedures are discussed below.

As a general rule, the reporting of privately placed securities is the responsibility of the insurance company

lender with the largest dollar investment in the transaction. Also, only previously unreported investments

need be reported to the SVO. To ascertain whether another insurance company has previously reported a

security to the SVO, the reporting insurance company should consult the most recent AVS+ Products, the

Automated Valuation Service or Inquiry ServiceVISION.

No reporting is necessary if the security (i) is listed in the AVS+ Products with a recently assigned NAIC

Designation/Unit Price, (ii) is listed in the Automated Valuation Service with a current year review date and a

symbol that is other than an NR or UP or (iii) has been logged into Inquiry ServiceVISION.

e) Use of a Filing Agent

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Insurance companies may designate an agent to perform filings with the SVO by providing the SVO with

written notification of the agent's appointment, on the insurance company's letterhead, identifying the agent,

detailing the agent's authority, expiration date of the authority and an acknowledgment that the insurance

company remains legally obligated to file all necessary information and to pay all appropriate fees.

f) Security Identification Numbers

No security may be reported to the SVO without a valid CUSIP, PPN or CINS Identifier. Only S&P CUSIP

may assign CUSIP Identifiers, PPNs and CINS.

To obtain filing and fee information and a CUSIP Identifier, PPN or CINS number, reporting insurance

companies must contact S&P CUSIP at: CUSIP Service Bureau, Standard & Poor's Corporation, Attention:

Senior Copy Editor, 55 Water Street, 47th Floor, New York, N.Y. 10041, e-mail address is

[email protected], Facsimile (212) 438-6572.

…

Section 6. The Mechanics of Reporting With the SVO

Information about the VISION platform, including general information, user guides and on-line demonstrations can

be found at http://www.naic.org/svo_vision.htm and the application itself can be found at https://vision.naic.org.

Determining whether a security subject to reporting under Section 2(a) of this Part above has been reported to the

SVO is accomplished through a computer link up with SVO's Integrated Securities Information System (ISIS). If the

security has not been previously reported to the SVO and is not known to be exempt, ISIS will assign an

Authorization To File (ATF) number at the end of the ATF process. The reporting entity receiving an ATF number

must then file the completed ATF form and required documentation with the SVO office. The following is a

summary description of the steps in the reporting confirmation process.

(a) Link to ISIS

(b) Login by presenting appropriate username and password

(c) Go to the Authorization to File (ATF) process

(d) Enter the valid CUSIP/PPN/CINS identifier of the security to be reported. ISIS will then process

that security based on its identifier:

(i) Already Contained in VOS Database:

If the CUSIP identifier is found in the VOS database with a current year review date, ISIS will deny the

reporting entity's request to file an initial or subsequent report and display a message that the

CUSIP/PPN/CINS already exists in VOS. If so, this ends the reporting process for that security.

(ii) Previously Reported/ATF Already Issued:

(A) If the CUSIP/PPN/CINS identifier does not exist in the VOS database but is found in Inquiry

Service due to reporting by another reporting entity, ISIS will deny the entity's request to file an initial or

subsequent report and will display a message that an ATF number has been issued or an ATF filing has

been received.

(B) If an ATF number has been issued, Inquiry will display the CUSIP/PPN/CINS identifier, ATF

number, and the date of ATF expiration or the date the SVO received the ATF submission.

(C) If the ATF submission is not received at the SVO by the ATF expiration date, ISIS will delete the

CUSIP/PPN/CINS identifier from Inquiry. If this occurs, it is the responsibility of the reporting entity to

re-report the security.

(D) If an ATF submission has been received at the SVO, this ends the reporting process for that

security.

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(iii) Already Deemed to be Filing Exempt:

(A) If the CUSIP/PPN/CINS identifier is found in the Filing Exempt data file, ISIS will display a

message that informs the entity that the security is Filing Exempt.

(B) The entity is then given the option to continue the ATF process in spite of the security’s FE status

(for instance, if required by a state regulator). If the answer is “No” that ends the reporting process for that

security.

(iv) Not Yet Deemed to be Filing Exempt:

(A) If the CUSIP/PPN/CINS identifier is not found in the Filing Exempt data file, the reporting entity

may request through ISIS that the security be run through the filing exempt application. This can be done

even if the security is found in the VOS database or Inquiry Service.

(B) ISIS will search the NAIC CRP feeds for a match and, if a match is found, the application will

translate the NAIC CRP ratings into the equivalent NAIC designation, which will be available in the

subsequent FE data file. The reporting entity will have to access the FE data file contained within AVS on

the following day in order to view the equivalent NAIC designation.

(C) The entity is then given the option to continue the ATF process in spite of the security’s FE status

(for instance, if required by a state regulator). If the answer is “No,” that ends the reporting process for that

security.

(v) Filing Required:

(A) If the CUSIP/PPN/CINS identifier entered by the reporting entity is not Filing Exempt, in VOS, or

in Inquiry Service, ISIS will grant the filer access to a series of menu options designed to permit the entity

to bring up the appropriate ATF filing form on its personal computers, fill out necessary information and

generate a hard copy form of the ATF for filing with the SVO.

(B) ISIS will permit the reporting entity to access, electronically, all of the forms that are required to

be filed with the SVO, (with the exception of the Application for Regulatory Treatment Analysis Service,

which can only be submitted on an original hard copy form obtained from the SVO). The printed ATF and

other applicable forms are then to be forwarded to the SVO with the required documentation for the

security within 120 days of the triggering event. The reporting process for this security is complete when

the ATF submission and filing has been received by the SVO.

(C) When the ISIS processing of a security is complete (an ATF is either issued or denied), ISIS will

ask the entity if it wishes to enter the CUSIP/PPN/CINS identifier of a new security. If you have a question

about filing requirements for a given security, consult the How To Comply Manual, which is available from

the NAIC Publications Department. See the notice at the end of the table of contents.

Section 7. When to Use the Securities Acquisition Report (SAR)

A security issued by an entity unaffiliated with the reporting company is reported by creating, completing and

submitting the SAR form. The reporting insurance company must submit the SAR to the SVO not later than 120

days after the purchase of the security.

a) SIC Code

As an internal administrative matter, for all Corporate securities, the SVO will distribute Initial and

Subsequent Reports in accordance with the industry specialization of SVO's credit analysts. Therefore, the

Industry Code identified on the SAR must be accurate. The reporting insurance company chooses the correct

Industry Code from a menu embedded in ISIS. Only the first two digits of the Code itself are necessary for

SVO purposes. For example, the SIC Code for a luggage manufacturing company is 3160 but, for SVO

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purposes, the SIC Code 3100 (Leather and Leather Products) is sufficient. The SVO Help Desk will provide

assistance in determining the correct SIC Code.

…

Section 9. Specialized SVO Forms, Products and Systems

Certain transactions between the SVO and a reporting insurance company will require submission of a form, an application

or a letter in addition to an SAR. This section describes these transactions and the appropriate form to be used. Please note

that all of these forms are accessible directly through ISIS, or indirectly through a link to the SVO's page on the NAIC

website. Also note that the information on these forms is used to enter these transactions into Work Flow. If the form is not

completely and accurately filled out, it will not be processed. Work Flow will record that the submission could not be

processed due to informational deficiency.

a) Official Forms Only

ISIS pre-prints bar codes that link the ATF and other forms submitted to the SVO with Inquiry Service. However,

the ATF and other forms must be accompanied by supporting documentation as detailed in other sections of this

Manual. ATFs and or/forms that are not completely and accurately filled out will not be processed. Work Flow will

record that the submission could not be processed due to informational deficiency.

b) Counterparty Rating Report

An insurance company that intends to use a Person as a counterparty in a derivatives transaction, or a Person

engaged in the business of serving as counterparty in such transactions, will file Form CRR-1 (the Counterparty

Rating Report) with the SVO. The reporting insurance company obtains this form directly from ISIS and in the case

of this transaction, only this particular form is filed.

c) Bond Lease Based and Credit Lease Based CTL Evaluation Forms

These Evaluation Forms are used to report Credit Tenant Loans that are defined in Part Four, Section 1(a) of this

Manual. The reporting insurance company is required to provide a summary of the transaction and other analysis of

data and should obtain the Evaluation Forms prior to the time the transaction must be filed with the SVO. A Credit

Tenant Loan Form must also be accompanied by an ISIS-generated SAR. Questions regarding substantive aspects of

Credit Tenant Loans should be directed to the Structured Securities Group of the SVO.

d) Project Information Memorandum (PIM) and Power and Pipeline Projects Annual Review Summary

PIM is used to report non-NAIC CRP rated power and pipeline projects. It requires the reporting insurance company

to provide a summary of the analysis, as well as detailed attachments of information, and therefore should be

obtained prior to the time the transaction actually has to be filed. PIM must be accompanied by an ISIS-generated

SAR. The Summary is used to make Subsequent Reports for all power and pipeline projects whether rated or not by

an NAIC CRP. The Summary must be accompanied by the Audited Financial Statement of the issuer and by an

ISIS-generated Annual Update ATF. Questions regarding substantive aspects of the transactions should be

addressed to the Corporate Securities Group of the SVO.

e) Mutual Fund Forms

Mutual funds, including money market funds, are typically classified as common stock and reported in Schedule D -

Part 2 - Section 2 of the NAIC Financial Statement Blank. The VOS/TF has determined that money market funds

that meet the conditions of 17 C.F.R. 270.2a-7 and certain bond mutual funds that are registered with the Securities

and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), and which also

Attachment Eight


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meet the conditions set forth in Part Six, Section 2 of this Manual, may be reported on Schedule DA - Part 1 and

Schedule D - Part 1, respectively, of the NAIC Financial Statement Blank.

The SVO maintains two lists of money market funds and one list of bond mutual funds. Investments in these funds

by reporting insurance companies are eligible for more favorable reserve treatment than funds not so listed, as noted

above. These lists are published on a quarterly basis.

Money market funds that meet certain criteria for exemption from NAIC reserve requirements may be listed on the

U.S. Direct Obligations/Full Faith and Credit Exempt List.

Other money market funds that meet certain criteria may be listed on the class 1 list (Class 1 List) and insurance

companies that own investments in these funds may reserve for them by using the more favorable bond class one

reserve factor.

Bond mutual funds that meet certain criteria may be listed on the bond mutual fund list (Bond List) and insurance

companies that own these bond mutual funds are permitted to maintain a reserve using the more favorable bond

class one reserve factor.

The U.S. Direct Obligations/Full Faith and Credit Exempt List Application Form is used to list a money market fund

on the U.S. Direct Obligations/Full Faith and Credit Exempt List. The Class 1 Application Form is used to list a

money market fund on the Class 1 List. The Class 1 Bond Application Form is used to list a bond mutual fund on

the Bond List. Refer to Part Six, Section 2 of this Manual for additional information on the process. Any questions

regarding the process or its purpose should be addressed to the Corporate Securities Group of the SVO.

f) Application Form for Listing on Bank List

This Application Form is used by a bank that seeks listing on the Bank List. The Bank List is updated on a quarterly

basis. Questions regarding the procedure for being placed on the Bank List should be addressed to the Corporate

Securities Group of the SVO.

g) Regulatory Treatment Analysis Service Application Form

This form is used to request that the SVO conduct an assessment or valuation and/or to request guidance within the

NAIC Financial Conditions Framework with respect to an emerging investment vehicle (EIV). As a convenience to

the filer, the form is provided in electronic form. However, only an original signed copy of the form will be

accepted. Facsimiles and photocopies are not acceptable. The SVO has discretion to refuse an application for

Regulatory Treatment Analysis Service. The requesting person is urged to contact the SVO as early in the

investment process as is feasible if it contemplates making use of this service. For details about the service and SVO

policies related to them, refer to Part Four, Section 3 of this Manual. Questions regarding the Regulatory Treatment

Analysis Service should be addressed to the Corporate Securities Group of the SVO.

h) Valuation Information Memorandum

The Valuation Information Memorandum (VIM) is used whenever the reporting insurance company is unable to

supply a prospectus, private placement memorandum or official statement. The form requires a substantial degree of

information as well as summaries, analysis and Audited Financial Statements and, therefore, the form should be

obtained prior to the time the transaction actually has to be filed with the SVO. Questions regarding substantive

aspects of transactions, or the nature and meaning of the information requested by the memorandum, should be

addressed to the Manager of the analytical group responsible for the Initial or Subsequent Report.

i) Treasury Stock and Reciprocal Ownership Elimination Worksheet (Worksheet)

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The Worksheet is used in conjunction with SCA company filings to eliminate the proportional statutory value of an

SCA when an issuer owns itself via (i) direct ownership of shares of an upstream intermediate or ultimate parent or

(ii) treasury stock, via direct or indirect ownership of a downstream SCA. Questions regarding substantive aspects of

the SCA reporting process or the Worksheet should be addressed to the SCA Companies Group of the SVO.

j) Collateral Loan Form

This form accompanies any transaction wholly or partially secured by collateral if the reporting insurance company

anticipates that SVO's credit assessment may be substantially affected by the nature and value of such collateral.

k) The Automated Valuation Service (AVS) Subscription Package

Persons interested in subscribing to the SVO's Automated Valuation Service may obtain appropriate subscription

forms from the AVS Administrator in the Database Products Department in the Kansas City NAIC office.

l) Inquiry Service

This service is provided by the SVO to allow insurance companies to ascertain whether a security has been filed

with the SVO.

m) Discount Factor Form

This form is used to enable a reporting insurance company to request from the SVO SCA Companies Group the

discount factor to be applied to the market value of an SCA investment. For details about the market value valuation

option or the SCA investment reporting process, refer to Part Five, Section 2 of this Manual.

n) Military Housing Bond or Securities Certification Form

This form is used in connection with the certification process discussed in Part Four, Section 5 of this Manual. This

form permits an investment officer of an insurance company that has filed a military housing bond or security with

the SVO to attest to the accuracy of the facts, data and analytical conclusions discussed in the analytical

memorandum required to be provided to the SVO. Please note that this form is a required part of the submission

package and that a transaction cannot be analyzed until a completed copy of this form has been received. Please also

note that the investment officer who gives the certification is required to be familiar with the financial status of the

housing project/investment.

o) Filing Instructions for Working Capital Finance Investments

A request for assignment of an NAIC Designation to a Working Capital Finance Program by an Investor who wants

to purchase Working Capital Finance Investments is made by filing an RTAS Application with the SVO. Please

refer to Part Four, Section 3 of this Manual for a description of the RTAS process. The RTAS application is

available at www.naic.org/documents/svo_rtas_app.pdf.

Please note that the RTAS Application is a required part of the submission package, that the form requires the

submission of specified documents and that a submission for a proposed program cannot be analyzed until a

completed copy of this form and all accompanying documentation has been received.

Please refer to Part Three, Section 6 of this Manual for a discussion of Working Capital Finance Investments and for

the meaning ascribed to the terms used above.

Please refer to SSAP No. 105—Working Capital Finance Investments for detailed requirements that must be met for

a Working Capital Finance Program and Working Capital Finance Investments generated thereunder to be

Attachment Eight


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considered an admitted asset. Readers are urged to familiarize themselves with this guidance before filing an RTAS

Application with the SVO.

Section 10. Reporting Conventions and Required Documents

a) Initial Report

An initial filing consists of a completed form(s) and information, documentation and data in quantity and

quality sufficient to permit the SVO to conduct an analysis of the creditworthiness of the issuer and the terms

of the security to determine an Association Value. It is the obligation of the reporting insurance company to

provide the SVO with all necessary information. It is the responsibility of the SVO to determine whether the

information provided is sufficient and reliable for its purposes and to communicate informational deficiencies

to the reporting insurance company.

b) Informational Deficiencies

Upon receipt of a submission by a reporting insurance company, the submission is logged into Work Flow by

date and time received and assigned to the appropriate staff analyst for credit assessment or unit pricing. If the

staff analyst determines that there is an informational deficiency, he or she will so advisecomplete an InfoReq

letter, log the InfoReq into Work Flow and provide a copy to the reporting insurance company.

The transaction for which a request for additional information is requested the InfoReq was issued will be

held without processing for a period not to exceed 45 days. If, at the completion of the 45 days, the reporting

insurance company has failed to provide the information requested, the SVO will discard the filing and all

documentation submitted with it in VISIONand Work Flow will reflect that the filing was discarded due to

insufficient information.

On an exception basis, the SVO may grant an InfoReq response extension to the reporting insurance company

but not to exceed 90-days in total with the time-period to begin on the date that the information

requestInfoReq was issued. If such an extension is granted, and if the reporting insurance company has failed

to provide the information requested within the time provided, the SVO will discard the filing and all

documentation submitted with it at the end of the 90-day period and Work Flow will reflect that the filing was

discarded due to insufficient information.

Either at the expiration of the 45-day or 90-day period InfoReq response period, the reporting insurance

company shall be obligated to file the security again if it wishes to obtain an NAIC Designation.

If the SVO determines it requires additional information after it has received a response to its request for

additional informationan InfoReq response has been received, a new 45-day period shall beingbegin, unless

an InfoReq response extension is granted as indicated above, in which case a new 90-day period will begin.

…

W:\National Meetings\2016\Fall\TF\VOS\08 Task Force 2016 Fall National Mtg VISION v2.docx

Attachment Nine


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MEMORANDUM



FROM: Umberto Serrano, Credit Analyst II, Securities Valuation Office

Bob Carcano, Senior Counsel, Investment Analysis Office


DATE: August 3, 2016

RE: Staff Report – Belgium GAAP as a Financial National Financial Presentation Standard

1. Introduction – Audited financial statements submitted to the SVO must be prepared in accordance with U.S. generally

accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) (each a Global Financial

Presentation Standard (GFPS)), or local GAAP/IFRS reconciled to a GFPS (a Reconciled Financial Presentation Standard)

unless the local accounting standard is an authorized National Financial Presentation Standard (NFPS), in which case the

NFPS can be used without a reconciliation.

During the Spring National Meeting, the ACLI requested that the SVO study Belgium GAAP as an NFPS in accordance with

the procedure in Part Two, Section 10 (c) (i) (D) (2) of the Purposes and Procedures Manual of the NAIC Investment

Analysis Office (P&P Manual), and the Task Force directed the SVO to proceed with the requested study. The procedure in

Section 10 (c) requires an expert accounting firm to provide the SVO with an educational session on aspects of financial

presentation relevant to assessment of credit risk.

2. Report – On June 28, Thomas Carlier, a partner at Deloitte Brussels, and Stefaan Cloet, a director in the Brussels IFRS

Centre of Excellence, provided the SVO with an analysis of differences between Belgium GAAP and IFRS. As background,

Mr. Carlier and Mr. Cloet noted that: i) Belgium is rated AA/Aa3/AA by Fitch Ratings, Moody’s Investors Service and

Standard & Poor’s, respectively; ii) Belgium tax law requires all entities to prepare financial statements in accordance with

Belgium GAAP; and iii) “large groups” or publicly traded companies also file audited consolidated financial statements

conforming to IFRS;1 and iv) there are more than 150 private issuers in Belgium with revenues between $200 million and

$2 billion that would consider obtaining financing from the U.S. private placement market.

1 A “large group” is defined as meeting two of the following three-pronged test in two consecutive years: 1) annual revenues of at 34 million euros;

2) balance sheet of at least 17 million euros; and/or 3) at least 250 employees.

Attachment Nine


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Key differences between Belgium GAAP and IFRS are summarized below:

TOPIC BELGIUM GAAP IFRS IMPACT

Long-Dated

Construction

Contracts

Not recognized in income

statement until contract is

satisfied

Percentage of

completion applied to

income statement

Income statement impact

Balance sheet impact

Leases Only if full recovery

Off balance sheet if

finance lease-back

Capitalized Balance sheet impact

with increase in assets

and liabilities

Goodwill and

Intangible Assets

Capitalizes startup and

restructuring costs

Intangible assets have

finite lives

Expense borrowing costs

Tax-driven amortization

Startup and restructuring

costs are expensed

Intangible assets may

have finite or indefinite

useful lives

Intangibles with

indefinite useful lives are

tested annually for

impairment

Balance sheet lower

Income higher

Income lower

Financial

Instruments Measured at cost

Possible to expense loan

issue cost

Derivatives not

recognized

Flexible hedging

accounting

Treasury shares as assets

Measured at amortized

cost or fair value

Derivatives recognized

Stricter hedging

accounting

Treasury shares

subtracted from equity

Derivatives reported on

balance sheet; more

volatility on income

statement

Impact on balance sheet

Deferred Taxes Not recognized in

balance sheet

Temporary differences

creates deferred taxes as

tax base differs from

book amount

Balance sheet impact as

liabilities increase, offset

by increase in property,

plant and equipment

(PP&E)

Employee Benefits

(Pension Plans)

No provision for

unfunded benefit

obligations

Provision for unfunded

benefit obligations

Balance sheet impact as

liabilities increase

Income statement impact

Cash Flow Statement No Yes Need to create, as it

impacts analysis

The information presented leads the SVO to conclude that the most significant difference between Belgium GAAP and IFRS

is that Belgium GAAP does not require a cash flow statement. This means financial information necessary to calculate two of

six ratios used by the SVO would have to be obtained or derived from the notes to the financial statements or from other

information provided under Belgium GAAP. 3. Recommendation – In the view of the staff, the key differences discussed in the analysis above will not prevent the

SVO from producing NAIC designations using Belgium GAAP comparable to those produced using GFPS. The SVO,

therefore, recommends that Belgium GAAP be added to Part Two, Section 10 (c) (D) (5) as an NFPS.

W:\National Meetings\2016\Fall\TF\VOS\16 Task Force 2016 Staff Report On Belgian GAAP Final.docx

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MEMORANDUM


Members, Valuation of Securities (E) Task Force


CC: Charles Therriault, Director, Securities Valuation Office


RE: Proposed Amendment to Add Belgium GAAP as an NFPS in the Purposes in the and Procedures Manual of the

NAIC Investment Analysis Office (P&P Manual)

1. Background – The ACLI requested that the SVO study Belgium generally accepted accounting principles (GAAP) as a

national financial presentation standard (NFPS) during the Spring National Meeting.1 The Task Force directed the SVO to

proceed with the requested study and the SVO filed its recommendation during the Summer National meeting, which was

received and exposed for a public comment period. Staff has prepared an amendment to the P&P Manual to add Belgium

GAAP as an NFPS for consideration by the Task Force at this Fall National meeting. The proposed amendment is shown

below.

2. Proposed Amendment –

SECTION 10. REPORTING CONVENTIONS AND REQUIRED DOCUMENTS

c) Reporting Conventions and Required Documents …

(D) Foreign Issuers …

(5) Countries and Associated National Financial Presentation Standards …

…

Belgium GAAP.

W:\National Meetings\2016\Fall\TF\VOS\Task Force 2016 Belgium GAAP as NFPS.docx

1 The request was made under the procedure in Part Two, Section 10 (c) (i) (D) (2) of the P&P Manual.

Attachment Ten


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MEMORANDUM



FROM: Charles Therriault, Director, NAIC Securities Valuation Office

Eric Kolchinsky, Director, NAIC Structured Securities Group

Bob Carcano, Senior Counsel, NAIC Investment Analysis Office

DATE: November 14, 2016

RE: Referral of the Statutory Accounting Principles (E) Working Group – Proposed Systematic Value Methodology to

Calculate Amortization of Bond-Like ETFs

1. Introduction – The Statutory Accounting Principles (E) Working Group has exposed a draft issue paper that would

revise various aspects of Statement of Statutory Accounting Principles (SSAP) No. 26—Bonds for a comment period ending

Dec. 7, 2016. Among the revisions is the removal of certain instruments that are considered to be debt-like under Task Force

rules, such as exchange-traded funds (ETFs), from the definition of “bond”; development of statutory guidance for them

separately from bonds and a requirement they be reported at fair value (using net asset value (NAV) as a practical expedient),

unless the investment qualifies for, and the reporting entity elects, a documented systematic value approach. The issue paper

is being exposed at the same time as a BlackRock proposal for a “systematic value” calculation approach for debt-like ETFs,

and the Working Group has asked that the Task Force review and comment on the proposed calculation approach and

proposed restrictions on its use. The NAIC Investment Analysis Office (IAO) evaluated the proposed “systematic valuation”

methodology to amortize debt-like ETFs at the request of the chair of the Task Force.

2. IAO Evaluation

a. IAO Approach – The IAO was provided with BlackRock’s Excel model, which was locked; as such, IAO staff were

prevented from manipulating the data it contained. The IAO therefore replicated several months of BlackRock’s performance

data. The IAO created a hypothetical ETF that holds five investments. Each investment pays interest once a year and repays

principal at maturity. The IAO ran a simulation of the hypothetical fund to generate an initial investment and four year-end

values. The IAO then introduced an adverse scenario for both models, consisting of a 20% default of all future interest and

principal payments, to examine what changes in the carrying value of the ETF systematic value calculations would show. As

discussed more fully below, we concluded that the proposed methodology would conceal material other-than-temporary

impairment (OTTI) within the ETF and is not appropriate for use to amortize bond-like ETFs.

b. Observation – The systematic value methodology produced a relatively stable book value when there were no material

changes to the cash flows in each period. However, when we introduced an assumed 20% permanent impairment of future

cash flows, we observed that systematic valuation produced minimal changes in amortization and book values, noting that

these changes only appeared in the period following the event. That is, the proposed “systematic valuation” approach muted

and delayed the book value changes.

Attachment Ten


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c. Comparison – We compared the systematic value approach to a constant purchase yield (CPY) approach. In CPY, the

net present value (NPV) of future cash flows is calculated using the “purchase” internal rate of return or yield. Like

systematic valuation, NPV produces stable values under normal operating conditions. However, when we introduced a

permanent 20% loss in future cash flows caused by a sudden default of future principal and interest, NPV recognized the

significant reduction in the cash flow generating capacity of the fund and, because the methodology aims at identifying a

CPY, it also identified a corresponding drop in book value.

d. Relevance to Credit Assessment – An ETF’s credit quality is evaluated annually and conducted by reference to the ETF’s

underlying investments. Had our hypothetical default occurred in an ETF’s portfolio after an annual review, the defaulted

securities would have been removed from the ETF’s holdings before the next annual credit assessment. This means the NAIC

designation for the ETF would be unchanged year-over-year because, the NAIC Securities Valuation Office (SVO) credit

assessment would not look for or examine changes in market value or cash flow variations of the underlying portfolio in the

period between annual reviews.

e. Relevance of Statutory Accounting – To be comparable in objective with the evaluation of bond performance, the

accounting methodology should identify when the economic performance of the ETF investment is, or could be, permanently

diminished. Systematic valuation methodology produced stable values when we assumed no impairments, but only captured

minimal changes in value in the period following the event when an impairment event was introduced.

3. Conclusion – Systematic value does not appear to be consistent with an amortizing mechanism for “debt-like” ETFs.

The methodology masks significant and permanent declines in cash flow generating capacity and would misstate the book

value of the ETF investment. NPV would be a more appropriate approach for ETFs, because the CPY approach focuses on

cash flow changes at the accounting measurement period to get at the NPV needed to keep the purchase yield the same.

4. Recommendation – We recommend that BlackRock be requested to submit a new proposal using a CPY for each

purchased lot, with amortization/accretion driven by the NPV change of future cash flows discounted at the purchase internal

rate of return or yield. The projected cash flows should reflect what the ETF investors should expect to actually receive

(i.e., after expenses). While systematic calculation includes fund distributions in its calculation, the CPY NPV distributions

would reduce future cash flows, which would then reflect changes in cash flow in the value calculated. Accordingly, cash

flows in the form of trading costs, management fees, trading losses and impairments would be captured under an NPV

methodology, while it is unclear if such cash flows would be captured in the “systematic valuation” calculation.

W:\National Meetings\2016\Fall\TF\VOS\11 Task Force 2016 SAPWG Referral and IAO Review of Systematic Value.docx

Attachment Ten


12/11/16


To: Ed Toy, Director, NAIC Capital Markets Bureau

From: Dale Bruggeman, Chair of the Statutory Accounting Principles (E) Working Group

Re: Systematic Value Proposed Calculation

Date: October 26, 2016

On October 25, 2016, the Statutory Accounting Principles (E) Working Group exposed a draft issue paper

proposing substantive revisions to SSAP No. 26—Bonds for a public comment period ending Dec. 7, 2016. This

issue paper incorporates the following key elements:

a. Removes SVO-identified instruments (as defined in the SSAP) from the definition of a bond, and

provides guidance for these instruments separately from bonds. Within this explicit section, specific

guidance for SVO-identified instruments is provided, which includes a requirement for these

instruments to be reported at fair value (using net asset value (NAV) as a practical expedient), unless

the investment qualifies for, and the reporting entity elects, use of a documented systematic value

approach.

b. Incorporates the definition of “security” within the definition of a bond, as well as definitions for non-

bond, fixed-income instruments captured in the scope of SSAP No. 26. These changes include

removal of the term “bank participations” with inclusion of guidance to reflect bank loans acquired

through a participation, assignment or syndication.

With the exposure of the issue paper, the Working Group continued exposure of BlackRock’s suggested

calculation for a “systematic value” for qualifying SVO-Identified bond ETFs. With the concurrent exposure of

the Issue Paper and BlackRock’s proposed systematic value calculation, the Working Group agreed to send a

referral to the NAIC Capital Markets Bureau requesting a review of the proposed calculation, in accordance with

the Issue Paper guidance, with a request that the Bureau provide comments on the proposed approach to

determine systematic value, as well as the issue paper restrictions on the use of systematic value.

The following excerpts from BlackRock’s methodology and BlackRock’s responses to “Questions Raised on

BlackRock’s Calculated Valuation Proposal,” provide an overview of the proposed calculation approach:

The proposed valuation method is similar to the effective interest method applied to individual fixed income securities, but also reflects the changing composition of the ETF’s underlying bond portfolio over time without introducing noise (in the form of interest rate fluctuations and market influences) into the valuation process, which should not be present from a statutory accounting perspective for fixed income investments. The ACF methodology recognizes that ETFs represent a collection of cash flows that are purchased or sold at a price (similar to an individual bond) and that the price of these cash flows corresponds to a yield. The methodology uses aggregated cash flows for the ETF’s underlying bond portfolio to calculate a book yield for a given price of the ETF. This yield is then applied in a manner similar to the Effective Interest Method for individual bonds, in which the cost basis is adjusted by the difference between the calculated effective interest of the ETF and its actual cash flows (i.e. the distributions).

Attachment Ten


12/11/16


This approach draws on the established method of amortized cost calculation for individual bonds but also recognizes that the underlying ETF portfolio and cash flows will gradually evolve over time in keeping with the current yield environment and in accordance with the explicit rules of the benchmark.

The exposed issue paper, BlackRock’s methodology overview, BlackRock’s responses to “Questions Raised on

BlackRock’s Calculated Valuation Proposal” and an excel spreadsheet illustrating BlackRock’s calculation is

available on the SAPWG website. The excel spreadsheet is multiple tabs, with several lines of cash flow data.

(With the amount of detail included, the size of the excel spreadsheet is quite large, hindering electronic (email)

distribution.) Furthermore, to assist with your review, please note that as a result of initial questions on the

calculation, BlackRock expanded the spreadsheet examples to illustrate purchases/sales (multiple lots) of an ETF.

These additional excel worksheets are noted as “lot 2.”

If possible, the Working Group would like to receive comments from the Bureau by Dec. 31, 2016. Although the

public comment deadline is Dec. 7, 2016, this earlier deadline is intended to allow the Working Group to receive

a summary of preliminary comments/general themes from the exposure during the Fall National Meeting. As

detailed discussion of the comments will not occur until a SAPWG conference call in January 2017, the Bureau

comments by Dec. 31, 2016 will facilitate January 2017 discussion, Please notify NAIC staff if the Capital

Market Bureau requires additional time.

The link to the SAPWG website, and links to the noted items from the exposure page, is provided below:

SAPWG Website: http://www.naic.org/cmte_e_app_sapwg.htm

EXPOSURES With COMMENT DEADLINE OF DEC. 7, 2016

2013-

36

Issue

Paper

Investment Classification

Project BlackRock's Systematic

Valuation Methodology

[PDF] | [EXCEL]

Updated 9/6/2016 Updated to include additional

examples to illustrate

purchases/sales (multiple lots) of

an ETF. The additional excel

worksheets are noted as “lot 2.”

BlackRock’s Responses

related to “Questions Raised on

BlackRock’s Calculated

Valuation Proposal”

Exposed Issue Paper proposing substantive revisions to SSAP No. 26—

Bonds. Key elements included in the Issue Paper:

1) Removes SVO-Identified instruments from the definition of a bond and

provides separate guidance for these instruments.

2) Incorporates the definition of "security" as well as definitions for non-

bond, fixed-income instruments captured in scope.

The BlackRock's Systematic Value Methodology and BlackRock's

responses to previous questions raised on their calculated valuation proposal

will continue to be exposed concurrently with the Issue Paper.

Thank you for considering this referral. Please contact SAPWG staff, Julie Gann, if you have any questions.

Cc: Julie Gann, Robin Marcotte, Josh Arpin, Charles A. Therriault, Robert Carcano

G:\DATA\Stat Acctg\1. Statutory\E. Referrals\2016\VOSTF\SAPWG to CMB - Systematic Method.docx

http://www.naic.org/cmte_e_app_sapwg.htm

http://www.naic.org/documents/committees_e_app_sapwg_exposure_13_36.docx


http://www.naic.org/documents/cmte_e_app_sapwg_exposure_13_36_ip.docx


http://www.naic.org/meetings1608/committees_e_app_sapwg_2016_summer_nm_black_rock.pdf

http://www.naic.org/meetings1608/committees_e_app_sapwg_2016_summer_nm_black_rock.xlsx

http://www.naic.org/documents/committees_e_app_sapwg_exposure_13_36_black_rock.pdf

Attachment Ten


12/11/16


To: Director, Anne Melissa Dowling, Chair of the Valuation of Securities (E) Task Force

From: Dale Bruggeman, Chair of the Statutory Accounting Principles (E) Working Group

Re: Systematic Value Proposed Calculation

Date: October 26, 2016

On October 25, 2016, the Statutory Accounting Principles (E) Working Group exposed a draft issue paper

proposing substantive revisions to SSAP No. 26—Bonds for a public comment period ending Dec. 7, 2016. This

issue paper incorporates the following key elements:

a. Removes SVO-identified instruments (as defined in the SSAP) from the definition of a bond, and

provides guidance for these instruments separately from bonds. Within this explicit section, specific

guidance for SVO-identified instruments is provided, which includes a requirement for these

instruments to be reported at fair value (using net asset value (NAV) as a practical expedient), unless

the investment qualifies for, and the reporting entity elects, use of a documented systematic value

approach.

b. Incorporates the definition of “security” within the definition of a bond, as well as definitions for non-

bond, fixed-income instruments captured in the scope of SSAP No. 26. These changes include

removal of the term “bank participations” with inclusion of guidance to reflect bank loans acquired

through a participation, assignment or syndication.

With the exposure of the issue paper, the Working Group continued exposure of BlackRock’s suggested

calculation for a “systematic value” for qualifying SVO-Identified bond ETFs. With the concurrent exposure of

the Issue Paper and BlackRock’s proposed systematic value calculation, the Working Group agreed to send a

referral to the Valuation of Securities (E) Task Force requesting a review of the proposed calculation, in

accordance with the Issue Paper guidance, with a request that the Task Force provide comments on the proposed

approach to determine systematic value, as well as the issue paper restrictions on the use of systematic value.

The following excerpts from BlackRock’s methodology and BlackRock’s responses to “Questions Raised on

BlackRock’s Calculated Valuation Proposal,” provide an overview of the proposed calculation approach:

The proposed valuation method is similar to the effective interest method applied to individual fixed income securities, but also reflects the changing composition of the ETF’s underlying bond portfolio over time without introducing noise (in the form of interest rate fluctuations and market influences) into the valuation process, which should not be present from a statutory accounting perspective for fixed income investments. The ACF methodology recognizes that ETFs represent a collection of cash flows that are purchased or sold at a price (similar to an individual bond) and that the price of these cash flows corresponds to a yield. The methodology uses aggregated cash flows for the ETF’s underlying bond portfolio to calculate a book yield for a given price of the ETF. This yield is then applied in a manner similar to the Effective Interest

Attachment Ten


12/11/16


Method for individual bonds, in which the cost basis is adjusted by the difference between the calculated effective interest of the ETF and its actual cash flows (i.e. the distributions).

This approach draws on the established method of amortized cost calculation for individual bonds but also recognizes that the underlying ETF portfolio and cash flows will gradually evolve over time in keeping with the current yield environment and in accordance with the explicit rules of the benchmark.

The exposed issue paper, BlackRock’s methodology overview, BlackRock’s responses to “Questions Raised on

BlackRock’s Calculated Valuation Proposal” and an excel spreadsheet illustrating BlackRock’s calculation is

available on the SAPWG website. The excel spreadsheet is multiple tabs, with several lines of cash flow data.

(With the amount of detail included, the size of the excel spreadsheet is quite large, hindering electronic (email)

distribution.) Furthermore, to assist with your review, please note that as a result of initial questions on the

calculation, BlackRock expanded the spreadsheet examples to illustrate purchases/sales (multiple lots) of an ETF.

These additional excel worksheets are noted as “lot 2.”

If possible, the Working Group would like to receive comments from the Task Force by Dec. 31, 2016. Although

the public comment deadline is Dec. 7, 2016, this earlier deadline is intended to allow the Working Group to

receive a summary of preliminary comments/general themes from the exposure during the Fall National Meeting.

Task Force comments by Dec. 31, 2016 will facilitate January 2017 discussion, Please notify NAIC staff if the

Task Force requires additional time.

The link to the SAPWG website, and links to the noted items from the exposure page, is provided below:

SAPWG Website: http://www.naic.org/cmte_e_app_sapwg.htm

EXPOSURES With COMMENT DEADLINE OF DEC. 7, 2016

2013-

36

Issue

Paper

Investment Classification

Project BlackRock's Systematic

Valuation Methodology

[PDF] | [EXCEL]

Updated 9/6/2016 Updated to include additional

examples to illustrate

purchases/sales (multiple lots) of

an ETF. The additional excel

worksheets are noted as “lot 2.”

BlackRock’s Responses

related to “Questions Raised on

BlackRock’s Calculated

Valuation Proposal”

Exposed Issue Paper proposing substantive revisions to SSAP No. 26—

Bonds. Key elements included in the Issue Paper:

1) Removes SVO-Identified instruments from the definition of a bond and

provides separate guidance for these instruments.

2) Incorporates the definition of "security" as well as definitions for non-

bond, fixed-income instruments captured in scope.

The BlackRock's Systematic Value Methodology and BlackRock's

responses to previous questions raised on their calculated valuation proposal

will continue to be exposed concurrently with the Issue Paper.

Thank you for considering this referral. Please contact SAPWG staff, Julie Gann, if you have any questions.

Cc: Julie Gann, Robin Marcotte, Josh Arpin, Charles A. Therriault, Robert Carcano

W:\National Meetings\2016\Fall\TF\VOS\SAPWG to VOSTF - Systematic Method.docx

http://www.naic.org/cmte_e_app_sapwg.htm





http://www.naic.org/meetings1608/committees_e_app_sapwg_2016_summer_nm_black_rock.pdf

http://www.naic.org/meetings1608/committees_e_app_sapwg_2016_summer_nm_black_rock.xlsx

http://www.naic.org/documents/committees_e_app_sapwg_exposure_13_36_black_rock.pdf