STAT / GAAP Update

1. STAT / GAAP Update April 25, 2019

2. Agenda STAT • NAIC update GAAP • Targeted improvements to the accounting for long-duration contracts • Fair value measurement – changes to the disclosure requirements for fair value measurement • CECL implementation, readiness, and emerging issues

3. NAIC update

4. NAIC Spring Meeting Highlights • Adopted 1 substantive revisions to SSAP Structured Settlements Acquired as Investments • Adopted a number of non-substantive revisions to various SSAPs • Exposed the following substantive revisions: • SSAP No. 22 – Leases • Issue Paper 16X – proposed changes to SSAP No. 62R – Property and Casualty Reinsurance • Working group updates: • Working Group action related to ASU 2106-13 until FASB clarifies the transition • Surplus Note Accounting

5. Recognition and Measurement: Broad ProjectsInsurance: Targeted Improvements to the Accounting for Long-Duration ContractsASC Topic 944

6. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Insurance Contracts – FASB initiatives

7. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Agenda

8. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Long-duration contracts – Timeline • Apply the standard to contracts in force as of the beginning of the earliest period presented • Retrospective application is allowed • Transition:

9. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Overview – Changes to liability for future policy benefits • Best estimate assumptions • Cash flow assumptions reviewed at least annually, and when changed, updated on a catch-up basis • Discount rate assumptions updated each reporting period on an immediate basis • Income statement impact • Cash flow assumption changes reflected in P&L • Discount rate assumption changes reflected in OCI • Market risk benefit (MRB) changes reflected in P&L, except instrument-specific credit risk of MRB in a liability position is reflected in OCI Traditional and Limited-Payment Long-Duration Contracts • Reserving model • Retained the net premium reserving model • Provision for risk of adverse deviation removed from determination of the liability • Premium deficiency analysis is no longer required, however the net premium ratio cannot exceed 100% • Disclosures • Disaggregated rollforwards • Information about significant inputs, judgments, assumptions and methods

10. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Traditional and limited-payment contracts – Key changes • Unlocking of assumptions is meant to provide more relevant estimates of future policy benefit reserves • Key changes: • Reviewed at least annually at the same time every year, but more frequently if suggested by experience • If assumptions change, updates made on a catch-up basis through net income • Update for actual experience on an annual basis, unless assumptions are updated • Expense assumptions updated consistently with other cash flow assumptions, but can elect on an entity-wide basis to not update (lock-in) • Groups used to calculate reserves do not cross issue years, may be annual or quarterly groups • Cash flow assumptions Reflected in the net premium %

11. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Traditional and limited-payment contracts – Key changes • Unlocking of the discount rate better reflects the market environment of the liabilities • Key changes: • Unlocked and updated at each reporting date on an immediate basis in other comprehensive income • Determine discount rate using an upper-medium grade (low-credit risk), fixed income instrument yield (generally an A rating) • Discount rate Not reflected in the net premium %

12. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Traditional and limited-payment contracts – Net premium reserving model Discount rate unlocked PV (Net Premium % x Gross Premiums) PV (Benefits + Expenses) Reservet All cash flow assumptions* unlocked Discount rate not unlocked PV (Benefits + Expenses) PV (Gross Premiums) Net premium % • Expense assumptions should be updated consistently with the standard’s new methodology used for other cash flow assumptions, unless an entity-wide election is made to not update the expense assumption

13. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Traditional and limited-payment contracts - Discount rate • Determine discount rate using an upper-medium grade (low-credit risk), fixed income instrument yield (generally an A rating) • Insurance entities are required to: • Maximize the use of observable inputs and minimize the use of unobservable inputs; • Use reliable information that reflects duration characteristics of the liability for future policy benefits; and • Use the original discount rate as the interest accretion rate • Current practice is that the discount rate can vary depending on the type of insurance contract. Discount rates can be currently based on: expected investment yield, policy crediting rate, or dividend interest rate. • IMPACT: With the discount rates on investments and reserves no longer connected, the asset liability management discount rate may not be consistent with the discount rate used in the reserve calculation

14. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Traditional and limited-payment contracts - Transition • Apply to contracts in force using existing carrying amounts at the transition date, adjusted to remove related amounts in accumulated OCI (prospective basis) • Transition date defined as the beginning of the earliest period presented • Discount rate assumption used to calculate the liability immediately before transition used to: • calculate the ratio of net premiums to gross premiums at transition and • interest accretion in future periods • Remeasure the liability on the balance sheet using the current upper-medium grade (low-credit risk), fixed-income instrument yield to determine the adjustment to opening AOCI at the transition date • Option to apply the guidance retrospectively, with a cumulative adjustment to opening retained earnings • Required to use same contract issue year level on an entity-wide basis for that issue year and all subsequent issue years • Required to use actual historical experience information • Transition • IMPACT: Availability of historical information may limit the use of retrospective application for all issue years

15. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Participating contracts • No change to measurement of the future policy benefit liability for participating contracts • Simplified DAC amortization model applies to participating contracts • Accrued terminal dividends recognition changed to expense at a constant rate based on the present value of the base used for the amortization of DAC • Under current US GAAP, the future policy benefits liability for participating contracts is measured using a separate accounting model that is different from the model used for nonparticipating insurance contracts. • IMPACT: DAC amortization and terminal dividend recognition no longer linked to estimated gross margin amounts for participating contracts

16. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Long-duration contracts with market risk benefits • Approach • One measurement model for all types of contracts with market risk benefits (MRB) • Measured at fair value and presented separately on the statement of financial position • Recognize the change in fair value: • in other comprehensive income (OCI) when attributable to a change in the instrument-specific credit risk of market risk benefits in a liability position • remainder as a separate line item in the statement of operations • Market risk benefits A contract or contract feature that: • Protects the contract holder from other-than-nominal capital market risk; and • Exposes the insurance entity to other-than-nominal capital market risk IMPACTS: 1. Contracts or contract features that were previously embedded derivatives may now be MRBs 2. Increased volatility in the P&L due to changes in FV of features that meet the definition of MRB, but currently are measured using an insurance accrual model

17. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Long-duration contracts with market risk benefits (continued) • Retrospective application at the beginning of the earliest period presented • Maximize the use of relevant observable information as of contract inception • Hindsight may be used for assumptions that are unobservable or unavailable • Difference between fair value and carrying amount at the transition date, excluding changes in instrument-specific credit risk, recognized in opening retained earnings • Cumulative effect of changes in instrument-specific credit risk between contract issue date and transition date recorded in accumulated OCI • Transition

18. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Deferred Acquisition Costs (DAC) • DAC amortization method replaced with a principle in which: • DAC amortized on a constant level basis over the expected term of the contract(s) • Individual contracts: Amortized on a straight-line basis • Grouped contracts: Amortized on a constant-level basis that approximates straight-line amortization on an individual contract basis • Amortization should not be a function of revenue or profit emergence • Contracts should be grouped consistent with the grouping used to calculate the reserve • DAC written off for unexpected contract terminations • Under current US GAAP, DAC is amortized in proportion to premiums, gross profits or gross margins • IMPACT: Simplifies the amortization of DAC

19. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Deferred Acquisition Costs (DAC) (continued) • Deferred sales inducements amortized using same methodology and assumptions as DAC • Types of acquisition costs eligible for deferral are not affected • Balances amortized consistent with DAC will need to be assessed to determine whether amortizing these balances consistent with DAC remains appropriate (e.g. value of business acquired (VOBA), present value of future profits (PVFP) and costs of reinsurance) • VOBA or PVFP still subject to impairment testing • Accruing interest on the unamortized balance of DAC • Adjusting DAC for the effect of investment performance or changes in expected future liability cash flows (shadow adjustments) • Impairment analysis on DAC • Concepts eliminated under the new standard: Other considerations: • IMPACT: Simplifies the amortization of DAC and deferred sales inducements. Decision to be made about other balances that follow DAC amortization.

20. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Deferred Acquisition Costs (DAC) (continued) • Apply to existing carrying amounts at the transition date, adjusted to remove related amounts in accumulated OCI (prospective basis) • Option to apply the guidance retrospectively, with a cumulative adjustment to opening retained earnings • Required to elect DAC transition method and issue-year level consistent with the liability for future policy benefits • Transition • IMPACT: Availability of historical information may limit the use of retrospective application for all issue years

21. Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Disclosures • Provides a principle for determining how to disaggregate the new disclosures to provide meaningful information without including a large amount of insignificant detail or aggregating items with significantly different characteristics • Provides examples of disaggregation characteristics (e.g. type of coverage, etc.) • Consider how information about the liability for future policy benefits or DAC has been disaggregated for other purposes when determining which categories would be the most relevant and useful • Cannot aggregate amounts from different reportable segments • Additional disaggregated disclosures for the liability for future policy benefits and DAC include rollforwards of opening and closing balances and information about significant inputs, judgments, assumptions and methods used in the measurement of the liabilities for future policy benefits and DAC. • IMPACT: The standard significantly expands the disclosure requirements for long-duration contracts in the annual and interim financial statements

22. ASU 2018-13Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

23. Disclosure Framework Disclosure Review – Fair Value MeasurementOverview • FASB issued the final ASU 2018-13, Disclosure Framework – Changes to the Disclosure for Fair Value Measurement on August 28, 2018 • It modifies the disclosure requirements in ASC Topic 820, Fair Value Measurement. • The proposal applies to all entities that are required under existing US GAAP to disclose recurring or nonrecurring fair value measurements. • The ASU is effective for all entities for all reporting periods (annual and interim) beginning after December 15, 2019 • Early adoption is allowed • An entity may elect to early adopt only the eliminated or modified disclosure requirements

24. Disclosure Framework Disclosure Review – Fair Value MeasurementOverview • The ASU eliminates, amends and adds disclosure requirements: • Eliminated disclosures: • The amount of and reasons for transfers between Level 1 and Level 2 • The policy of timing of transfers between the various Levels • The valuation policies and procedures for Level 3 measurements • For nonpublic companies, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements • Amended disclosures: • Level 3 Rollforward – nonpublic companies should disclose purchases/sales and transfers into and out of Level 3 instead of rollforward • For investments in certain companies that calculate net asset value, the timing of liquidation of investee’s assets, and the date when restrictions from redemption might lapse need to be disclosed only if known • Measurement uncertainty – communicates information about the uncertainty in measurement as of the reporting date • The term ‘at a minimum’ is removed from the disclosure requirements to make it clear that materiality and discretion are appropriate considerations. • New disclosures – not applicable to nonpublic companies: • Changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements. • Disclose additional supporting information used to derive significant unobservable inputs for fair value measurements under Level 3 (range and weighted average, median and arithmetic average, as appropriate).

25. ASU 2018-19:Codification Improvements to Topic 326, Financial Instruments – Credit Losses • ASC Topic 326

26. Credit impairment Financial instruments – standard-setting update Issued: ASU 2018-19, Codification improvements – CECL • Amends the effective date of the credit impairment standard to require companies that are not public business entities to adopt the amendments for annual and interim periods for fiscal years beginning after December 15, 2021; and • Clarifies that operating lease receivables accounted for under ASC 842 would be excluded from the scope of the credit impairment standard. Effective 2020 Nov 2018 for SEC filers 2021 for non-SEC filers

27. CECL Q3 2018 Implementation Readiness and Emerging Issues

28. CECLIndustry Survey

29. KPMG CECL Survey - Highlights • Institutions have reached varying stages of implementation. • Assessment Phase: 24% have completed identifying key technical accounting, modeling, and system issues and gaps • Design Phase: 42% have created the initial governance structure and project plan and are currently developing accounting policies, models and processes • Implementation Phase: 31% are in the process of implementing the accounting and credit processes for CECL reporting • Various key decisions are still open for many institutions. • At least 50% of institutions surveyed noted the following open items • Determining the length of the reasonable and supportable forecast period • Defining reasonable expectation of a troubled debt restructuring • Determining how to include estimated recoveries • Defining the life of an asset • Data quality remains a key issue and challenge. • Only 39% of institutions believe the data in their future CECL source systems are complete and reliable. Register to receive entire survey results later this fall at advisory.kpmg.us/forms/subscribe-cecl-survey-2018.html * Percentages may not add to 100% due to rounding or non-responses

30. Control Considerations

31. CECL Internal Control Framework All elements of the CECL control framework need to operate effectively. The methodology needs to be structured, transparent, and repeatable. Documentation of all assumptions and decisions remains of utmost importance, and effective challenge by those charged with governance is needed. Board Committee allowance approval Entity Level review of the allowance estimate Process level controls addressing “process risk points” and ensuring that the approved CECL methodology is followed to determine the expected credit loss estimate from period to period. Transaction and Detail/Attribute Level risks and controls addressing “process risk points” and controls over the completeness and accuracy of relevant data elements. Is expanded internal data complete and accurate? Are ad hoc data flows production quality? Governance control that reviews, challenges, and approves the CECL estimate methodology, including overseeing management’s judgments and estimates (i.e. the establishment and maintenance of the overall CECL estimate methodology) Is external data more relevant or reliable than internal data? Is reversion method approved? Are forecast periods approved? Are qualitative adjustments approved?

32. CECL: Governance Risks

33. Technical Accounting Update

34. Technical Developments

35. Technical Developments (continued)

36. Technical Developments (continued)

37. Technical Developments (continued)

38. Accounting Change and Data Risks

39. CECL: AccountingChange Risks

40. CECL: DataManagement ProcessArea KeyExpectation Identifying Control Points &Procedure Risk 1. Data governance Lack of or inadequate data governance framework, inclusive of data quality, processing, reconciliation, storage, and metadata management, may result in inaccurate model inputs and downstream ECLcalculations. Anorganized data governance model, inclusive of data quality, processing, reconciliation, storage, and metadata management, is in place to support model calculations and reporting across jurisdictions, products, andbusinesses • Review governance framework to determine if the following processes are documented in policies and procedures and are in place andoperational: • Review and verify edit checks / datavalidation • Identification of CECL critical dataelements • Identification of operational root cause for datadefects • Validation of aggregated versus loan-leveldata • Process to ensure data integrity andcompleteness • Retention of data is appropriate to support an audit or regulatory examination • Reconciliation process for applicable data elements, systems, andreports • Data backupschedule • Data sources (e.g. internal,external) Data used as CECL model inputs are reliableto meet CECLmeasurement objectives(e.g. data quality, data horizons, data attributepoints). 2. Data Requirements Insufficient understanding of data requirements may result in unreliable credit allowance calculations and non-compliance with CECLrequirements. • Determine if detailed macro-level data, risk factors, and data across assets that are in CECL models are analyzed to assess the impact of various scenarios on credit losses. Verifythat: • Appropriate data horizons (e.g. historical data, current data, forward looking data) are captured for the calculation of credit losses. • Data attributes captured and utilized as model inputs are sufficient based upon CECL measurement objectives. • Data points collected have been analyzed, organized, and prepared for input into CECL models. 3. Data Architecture Absence of a robust data architecture may lead to incomplete or inaccuratedata used in CECL calculations across various jurisdictions, products, or businesses, resulting in a misstated credit loss allowance. A robust, unified data architecture is in place that serves as a cross business, product, and organizational repository for all relevant data elements. • • Review the business requirement documents and systems parameters to verify that the tools and systems cover the scope of accountssubject to CECL. Verifythat: • Credit risk data aggregation capabilities and risk reporting practices are part of the business continuity planning (BCP)process. • There is an integrated data dictionary and lineage across jurisdictions, products, or businesses, asapplicable. • Roles and responsibilities are clearly established and documented as it relates to the ownership and quality of credit data and information for both the business and technologyfunction. • Systems are managed as part of the corporate information technology process.

41. CECL: Data Management(Continued) ProcessArea Risk KeyExpectation Identifying Control Points &Procedure 4. Data Lineage& Profiling Data transformation errors may lead to inaccuracies in CECL model outputs and reporting. Comprehensive data flows and corresponding controls are in place for CECL models and reports from upstream source systems to the model output andreports. • Verify that data flows, definitions, and lineage clearly documented.Understand: o o o Where there are handoffs and data istransformed. Business logic, assumptions, and transformation applied to the data. Controls around manual transfer of data across systems andtemplates. 5. Data Retention & Backup Lack of data retention requirements may lead to untimely retrieval of data for model calculation and reporting of provision requirements. There are data retention requirements in place for data that supports the model calculation and reporting for provisionrequirements. • Determine if data retention and backup requirements are clearly defined in policies and procedures. Verifythat: • Data retention requirements capture an appropriate observation horizon and a statistically robust data set for CECL modeling and reporting requirements. • Data backups are scheduled through automated scripts. • Administrator access and access to modify the backup schedule is restricted to the appropriate users based upon job roles andresponsibilities. Inadequate data governance and controls may lead to data feed errors that are not identified and corrected before the data is used in CECL modeling and reporting. Absence of Service Level Agreements (SLAs) and Key Performance Indicators (KPIs) for credit and risk data may lead to inaccurateor untimely data being provided to the modeling group for CECL modeling andreporting. 6. Datacapture There are defined controls for extraction and transformation of data including operational audit log, error logs, etc., and SLAs are maintained with data providers that include agreed timeframes for CECL modeling and reporting. • • • Determine if procedures address the handling of data feeds from upstream systems, (and as required across jurisdictions andproducts). Procedures include processes for data extraction and transformationprior to being stored in the datawarehouse. Controls are documented for data feeds (i.e., exception reports in place, data validity checks) andinclude: • User defined business rules checks: Business rules developed internally on some key data elements for each model serve as an additional source of confidence in the data (i.e., data validitylogs) • Operational audit logs that capture any changes or processing of the data (user ID making the change, date and timestamps of changes, valueschanged) • Permissions to the log directories prevent log deletion or modification • Review the final dataset to determinethat: o o All expected data feeds are included (i.e. completenesscheck) Automatically-identified errors do not exist in the final dataset (i.e. accuracycheck)

42. CECL: Data Management(Continued) ProcessArea KeyExpectation Identifying Control Points &Procedure Risk 7. KeyData Elements/ Reference Data Management Absence of defined key data elements and reference data library or processes may lead to instances where data is inaccurately mapped to CECL models andreports. There are clearly defined key data elements and a reference data library that defines data elements and their attributes for CECL modeling and reporting requirements. • • Determine if there is one-source of truth or if key data elements and criteria for key data element identification is clearly defined and managed with proper controls in detailed policies andprocedures. Verify that there are robust data quality checks to identify missing / inaccurate key data elements and referencedata. 8. Source Data QualityControl Lack of data quality controls to ensure the integrity, accuracy, and relevancy of source data sets used in the CECL models may result in inaccurate CECL calculation. Data quality controls are in place to review the relevancy and accuracy of source data usedtomodel expected credit lossesfor in scope assets in accordance with CECLrequirements. • • Determine the source of data (i.e., internal or external). If the data is obtained externally, determine if the data is publically availableor provided by a third-party. Verifythat: • Data import files, rules, and data are complete, accurate, and submitted in a timely manner. In addition, determine if the data is formatted in the agreed uponstandards. • Source data is reviewed prior to model input to identify any gaps or inaccuracies (i.e., missing values, inaccurate values). Data used for reporting purposes is reconciled to the "single source of truth" and signed off by senior management / leadership prior to finalization to determine completeness and accuracy. 9. Data Reconciliation, Attestation,and Sign-Off Failure to complete a periodic review, reconciliation, and sign-off of final data intended for reporting usage may result in unidentified data or calculation errors or inconsistencies. • • • Determine if a comprehensive quality assurance review was performed on final data sets prior to use in financialreporting. At what level are reconciliation procedures executed (e.g. account level, product level, portfolio level) and if the procedures clearly defined control and reconciliation points through theprocess. Evaluate the resolution process when differences or gaps are identified to determine thefollowing: • How adjustments aremade? • Are adjustments documented and explained? • Is there an escalation process when multiple stakeholder groups are involved? • Who is responsible for approvingadjustments?