September RE NAIC Meeting September

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					                                                                These summaries are intended to be representative of what was
                                                                observed to have transpired at the meeting. They have not been
                                                                reviewed for consistency with NAIC meeting minutes. Positions
                                                                taken by various NAIC working groups and committees at their
                                                                respective meetings do not become final NAIC positions until
                                                                they have passed through the appropriate public exposure and
                                                                parent committee approval process as specified by the NAIC.

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FROM:           Ted Schlude

DATE:           September 24, 2004

RE:             NAIC Meeting September 9 – 14, 2004

I attended the NAIC Fall Meeting held September 9-14, 2004 in Anchorage, Alaska including
meetings of the Life and Health Actuarial Task Force (LHATF) and selected meetings of the
NAIC. Summarized below are the activities which took place at these meetings. Any Academy
of Actuaries documents should be available on the Academy website.


The LHATF met on Thursday and Friday and discussed the following topics. While LHATF had
a quorum for the meeting, and generally, good representation by the states, certain active states
were not in attendance including Illinois, California, New Jersey, Connecticut, and Florida.

1.      Model Regulation and Other Topics Related to Implementation of New Non-
        forfeiture Law for Individual Deferred Annuities: Three major topics were discussed
        related to the implementation of the new annuity NF law.

        •   Premium Buckets: Companies desire for the annuity NF law to recognize the process
            used in setting credited rates by allowing for bucketing of NF interest rates in the
            model regulation. The ACLI presented certain examples where bucketing is needed
            (VA with fixed bucket and EIA with fixed option). All regulators agree that they had
            not considered bucketing when drafting the model law and while some feel that the
            language forbids bucketing, others are more liberal in their interpretation of the
            language. Historically, the industry had flexibility on the mortality side and managed
            bucketing by balancing the interest guarantee with the mortality assumption. All
            agree that without bucketing, there is an inconsistency between what the non-
            forfeiture law allows and how companies manage credited rates. The mismatch
            could benefit or hurt policyholders depending on the level of the interest environment
            when the premium was received. Ultimately regulators voted to have the Academy
            put bucketing language back into the model regulation. The draft model regulation
            without bucketing was exposed with the understanding that bucketing language
            would be added back into the model.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 2

       •   25 bp Threshold for EIA Participation: Next the task force discussed the threshold to
           be used for determining whether an equity participation feature justified a reduction
           in the minimum guaranteed rate for EIA products (whether the 25 bp placeholder is
           the right number). The intent of the 25 bp threshold capped at a 100 bp maximum
           reduction to the indexed guaranteed rate for equity participation was to keep
           companies from having a diminimus equity participation yet being able to take
           advantage of the 100 bp reduction to the indexed rate. It was noted that pricing
           currently is at about 200-400 bps based on current equity participations being
           provided in the market so the 25 bps should not be an issue. The language was left at
           the 25 bp threshold.

       •   Timing: The LHATF discussed other drafting changes in the Academy document
           and finally discussed timing issues with respect to the model regulation. The
           industry needs guidance in this area. LHATF and the Academy felt that including
           premium buckets which had already been in the model in the past was not an issue
           and could be handled in interim conference calls with adoption by LHATF in
           December 2004. It was noted that there may be more LHATF representation against
           bucketing on the conference calls where a more complete LHATF would be present.

       •   Actuarial Guideline ABC: This guideline is being written to provide guidance in
           valuation under CARVM with respect to future guaranteed interest rates that are
           indexed and are not known at the date the CARVM reserve is being calculated.
           Generally speaking the guidance specifies the maximum NF interest rate specified in
           the policy be used and eliminates the 100 bp equity participation reduction in those
           future years where the guaranteed rate is unknown. A letter from Noel Abkemier
           objects to eliminating the equity participation adjustment and the Academy also
           supports this position because the value of the participation guarantee can be
           demonstrated to be relatively stable. LHATF will discuss this in more detail on
           conference calls.

2.     Update on C-3 Phase II Work on Variable Annuity Guarantees: LHATF received
       several reports and discussed the status of other aspects of this project as highlighted

       •   Modeling of Hedges: LHATF first reviewed certain areas where the Academy has
           devoted significant effort, in particular, hedging strategies. Larry Gorski reviewed
           the work performed by the Academy in this area which is captured in Appendix 7 –
           Modeling of Hedges in the current AG VACARVM. A section on Appendix 8 –
           Certification Requirements was also added to the AG. Gorski reviewed the
           requirements necessary for a “clearly defined hedging strategy”.

           It was noted that an Academy Committee has been formed to begin work on a
           Practice Note related to AG VACARVM. It is rather unlikely that this group would
           have a draft to be reviewed at the December 2004 NAIC meeting given it was
           recently formed but the Academy will try its best to have something.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 3

           There is also an upcoming educational seminar to be held after the Valuation Actuary
           Symposium on C-3 Phase II in Boston.

       •   Review of AG VACARVM: Tom Campbell representing the Academy discussed
           revisions to AG VACARVM which had been made since the last LHATF meeting.
           LHATF exposed this document for comment but substituted Dennis Lauzon’s (New
           York) current standard scenario document dated August 20, 2004. Note that this
           exposure includes three year phase-in language similar to that accorded to other
           recently adopted actuarial guidelines, subject to the Commissioner’s approval.

           A particular issue that New York would like considered is whether mutual fund
           revenue sharing should be included in the reserve calculations given that this revenue
           is not part of the variable annuity contract with the policyholder. If such revenue is
           allowed, criteria New York would include is whether the revenue sharing is
           guaranteed by contract and whether the rights of the company are transferable to
           subsequent owners such as rehabilitators.

           Specific language has been added in the alternative GMDB methodology which
           specifies that if a contract does not have GMDB benefits that the actuary would use
           AG 33 for the standard scenario.

           Finally, Tom Campbell discussed Appendix 7 – Modeling of Hedges and noted that
           an error factor has been included in the CTE calculation which would reflect the
           relative sophistication of the stochastic cash flow model in developing the overall
           CTE requirement.

       •   Accounting Issues: It was noted that a joint subgroup of actuaries and accountants is
           in the process of being formed to consider implications of using modeling approaches
           for reserving.

       •   New York Standard Scenario: Dennis Lauzon reviewed the August changes to the
           standard scenario. Major changes increased revenue (charges) and there were also
           some lapse refinements for death benefit only products. It was noted that because the
           standard scenario is policy by policy based that there are not the benefits of policy
           aggregation in the standard scenario that are seen when actual modeling is performed.
           The most recent changes did, however, reduce differences between modeled results
           and the standard scenario results. The ACLI proposed that the interest rate be AIFR
           based in order to make the reserve calculations as tax efficient as possible. Lauzon
           stated that the purpose of the VA CARVM calculation is to use current rates which
           are inconsistent with issue year based valuation rates.

           Other outstanding issues related to the standard scenario include whether recognition
           of mutual fund revenue sharing should be allowed and whether use of forward
           interest rates in determining cost is consistent with the conservative nature of
           statutory reserving given that the forward rates increase over time. The Academy
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 4

           also suggested consideration of a utilization percentage for free partial withdrawals
           other than 100%.

           Finally, the Academy went over recent testing results for a hypothetical population of
           products which consisted of approximately 50% ROP, 25% Annual Ratchet and 25%
           5% Rollup products. The comparison includes comparing both the July and August
           standard scenario results with modeled results. The results under the August 20,
           2004 Standard Scenario were improved dramatically from prior testing but there still
           remain some issues mainly related to the benefit of aggregation in the model
           compared to the policy by policy calculation required by the Standard Scenario. A
           complete set of results will be posted on the Academy’s website.

       •   Regulatory Oversight Summary: Dennis Lauzon summarized the status of the
           regulatory oversight subgroup which has been studying guidance in other
           jurisdictions (Canada, Australia). He reviewed a list of open issues which include
           use of forward rates, application of prudent best estimate to the various assumptions,
           recognition of mutual fund revenue sharing, and non-proportional reinsurance
           recognition, among other things.

           Two interim conference calls will be scheduled to continue work on this project.

3.     Reserves for Universal Life with Secondary Guarantees – Actuarial Guideline 38
       (AG AXXX): At it’s June, 2004 meeting, the LHATF had decided that enforcement
       issues related to AG AXXX in the area of reserves for UL products with secondary
       guarantees should be left up to each state during examination. They felt that the general
       introductory language at the beginning of the guideline clearly spelled out the intent and
       therefore they would regulate it as such during examination.

       Some regulators felt that tightening language for this product was only a stop gap
       measure until the next innovative product comes to the market place. The concern of
       certain industry representatives was that this enforcement position would mean different
       things in different states and prescribed practices would vary by state.

       In August, New York submitted a proposal that is simple on the surface and is focused on
       setting reserves for UL products with secondary guarantees following a present value of
       future benefits less present value of future net premiums approach based on the
       guarantees provided for in each product. A revised New York AG AXXX document was
       discussed at the LHATF meeting.

       Other industry representatives emphasized that XXX creates reserves that are too high
       and developments in the capital markets such as life securitizations were evidence that
       statutory reserves for these products were excessive. LHATF received at least two letters
       to this effect one from Larry Gorski and another form a group of companies that
       suggested fixing the guideline by adding an asset adequacy requirement for now and then
       focusing on a longer term solution to XXX via the Academy of Actuaries.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 5

       They next received testimony from various industry representatives from both sides of
       the UL secondary guarantee issue. Finally, it was suggested in another comment letter
       that an attained age level reserve method (AALR) similar to the Variable Life AG might
       be used in this situation.

       At one point the group considered exposing all three proposals for comment but then
       simply requested further comments on each of the proposals. They also asked for
       information from the Academy related to the potential for a long term solution. Leslie
       Jones, chair of LHATF, stated that these issues would receive the same level of
       deliberation as all other matters and that there should be no impression that LHATF is
       ram-rodding the New York proposal through for December 2004 adoption. An interim
       conference call will be scheduled to continue discussion of this topic

       Next, the Academy reviewed progress of the SVL II and UL Working Group and a longer
       term solution to the UL secondary guarantee issue as well as other issues. Products with
       complex guarantees and/or tail risk clearly need stochastic type analysis according to the
       Academy. The group will be considering reserving for VUL and UL products with
       secondary guarantees after the GMDB/VAGLB project is completed.

       Other comments included:

       −   New York indicated that regulating principle based approaches to reserves will be
           difficult. Independent opinions most likely will be required and regulators will have
           to catch up with current methodologies.

       −   ACLI: The ACLI indicated that their concern is tax deductibility of reserves and
           stochastic reserve setting processes work well for capital requirements but not for tax

       Note that the AG 38 issue was also discussed at the Emerging Accounting Issues
       Working Group meeting and is discussed later in this report.

4.     Areas of Possible Revision to the Standard Valuation Law: LHATF received an oral
       report from Dave Sandberg representing the Academy on two topics: 1) the non-
       guaranteed elements question (blueprint) and 2) valuation related work (referred to as
       SVL II). The focus of both projects is a principle based approach with discipline and
       accountability. First a review of the blueprint was discussed in a prior conference call
       and regulatory and industry feedback was requested. It was emphasized that the NGE
       Plan Concept Project and Valuation Principles Project (SVL II) need to dove tail with
       each other.

       For the standard valuation law project a three to five year plan will help to accommodate
       four dimensions: 1) all product types, 2) all kinds of risks, 3) diversification issues
       (across product lines, seriatim vs. aggregation of policies, etc.) and 4) recognize all risks
       even though some are difficult to quantify. The medium term plan is to focus on C2/C3
       risk related to certain products (GMDB/VAGLB, EIA’s, LTC (morbidity) and long term
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 6

       mortality risks). They are deferring work on C1/C4 risk for now. The Academy asked
       for comments from regulators, industry, and professional groups as part of this process.
       Another update will be provided by the Academy at the December 2004 meeting.

       Lastly, the task force discussed its response to certain international requests including: 1)
       Response to IAIS Request from the Accounting Subcommittee reviewing standards being
       developed by the IASB and 2) IAIS Solvency Subcommittee’s Global Framework for
       Solvency. It was noted by the industry that some health carriers may not be ready for the
       types of approaches being contemplated in these documents.

5.     2005 GRET Factors: Based on further analysis and feedback from the SOA in the area
       of branch office expenses, LHATF will not be adopting any new GRET factors for use in
       2005. The old factors will continue to be used and the SOA will update its analysis for
       another year and then focus on appropriate GRET factors for 2006.

6.     NAIC Model Law and Regulation Review: LHATF has been asked to look at several
       models related to the NAIC’s overall model review process which is intended to
       eliminate or modify out of date models or ones that have not been widely adopted by the

       The models include the Interest Indexed Annuity Model, the VA and the MGA models as
       well as the Reinsurance Model Regulation on risk transfer.

       It turned out that modifying the VA and MGA models for the new Annuity SNF Law is
       more complicated than originally contemplated. They will schedule a conference call to
       discuss. It was noted that even though these models are not widely adopted, the
       accounting and reserving guidance is incorporated into Appendix A of codification.

       Reinsurance Model Regulation: LHATF recommended keeping this model but recognize
       that in a longer term project this regulation was in need of certain revisions. The ACLI’s
       reinsurance subcommittee will be making some recommendations for revision at a point
       in the future. A letter will be sent by LHATF to the Financial Condition (E) Committee
       recommending that this model be retained.

7.     Other Matters: Regulators discussed two other matters:

       −   Regulatory Chat Room at NAIC: This would be a regulator only chat room to
           discuss actuarial issues that arise. LHATF thought this was a good idea provided
           items related to LHATF proceedings were not discussed in order to maintain a public
           meeting forum for these topics.

       −   Referral from Statutory Accounting Principles WG on Life Reserve Credits: The
           SAPWG forwarded certain material to LHATF for consideration. The issue relates to
           appropriate reserve credits for reinsurance contracts that fall somewhere in between
           straight coinsurance and YRT reinsurance where the statutory reserving guidance is
           not clear.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 7


I attended the Accident and Health Working Group meeting where certain items of interest to life
actuaries are outlined below.

1.     Revisions to Blanks for Greater Consistency: The results of this project were adopted
       and forwarded to the Blanks Working Group for incorporation into the Annual Statement.
       The main items pertain to the A&H Policy Experience Exhibit where the line of business
       designations were refined and will now line up between the Health Blank and the
       Life/Health Blank.

       A referral will be made to the P&C Accounting Task Force for its consideration of these
       revisions as some P&C companies also have health insurance reported through the P&C

2.     Premium Deficiency Reserve: The working group discussed an Academy draft which
       contained examples and possible methods for handling premium deficiency reserves
       (PDRs) in light of basic gross premium reserve (GPV) requirements for health insurance.

       Other examples will be provided at the next meeting. A PDR subgroup of the A&HWG
       was formed to study this issue further. The accounting and reserving guidance is not
       clear from the regulators’ standpoint as to the level of PDR or GPV and as to which
       calculation should come first, or whether even both are needed.

3.     1985 Cancer Claim Cost Table Revision: A&HWG received an oral report on the
       development of a new cancer table from the SOA. A committee has been formed and is
       in the process of formulating their data requirements. A written status report on this
       project will be submitted at the December 2004 meeting. Regulators view the 1985
       Table as out of date and as being inconsistent with the types of benefits being provided in
       contracts today.

4.     Long Term Care Working Group Issues Referral (Limited Pay Contingent Benefit
       on Lapse): The A&HWG exposed the material for comment which includes revisions to
       the Long Term Care Model Regulation as well as the LTC Guidance Manual in the area
       of limited pay LTC contracts.

       This new guidance would require that contingent benefits be paid to the policyholder on
       lapse to recognize the significant pre-funding of benefits that would have taken place on a
       ten year or twenty year limited pay LTC contract. This is viewed as critical in situations
       where rate increases are implemented creating an affordability issue for the policyholder
       and causing a lapse after many years of paying higher limited pay premiums.

5.     Medicare Supplement (HR 1): Finally, the A&H WG discussed preparing repricing
       guidance for Medicare Supplement plans that will have to be repriced as a result of the
       policyholder electing to have drugs covered by Medicare under HR 1.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 8

6.     Individual Medical Market: Closed Block Death Spiral: The working group spent
       several hours discussing the Academy’s model constructed for purposes of analyzing the
       individual major medical market and the closed block death spiral. Several alternative
       approaches have been modeled. A detailed discussion took place but no decisions were


Lou Felice chair of the task force noted that he was going to recommend to the Financial
Condition (E) Committee that CADTF reform the individual working groups for Life, Health and
P&C issues because it appeared that CADTF had too wide a variety of projects with which they
were dealing and was not able to focus on the specific details to the extent necessary.

The task force reviewed interim minutes where the following decisions were made:

       −   Preferred Stock Notching: P&C/Health RBC formula has adopted the preferred
           stock notching proposal similar to the prior Life RBC adoption to recognize that
           rating agencies do not rate separately preferred stock from bonds but rather the
           structure of the security is reflected in the overall rating process. Preferred stock
           factors are now the same as the bond factors.

       −   Workers’ Compensation Carve Out Proposal for Life RBC: This proposal will
           have a 3 year phase in period based on decisions made by Executive and Plenary.

       −   C-3 Phase II Meeting in August: A special two day educational meeting was held
           in Kansas City in August to bring regulators up to date on the C-3 Phase II work by
           the Academy.

Other matters are discussed below.

1.     Property/Casualty Subgroup: CADTF received a recommendation from the Academy
       related to a two-tiered combined ratio trend test for the P&C RBC formula. It involves
       monitoring a Company’s combined ratio together with its general capital adequacy level.
       The Academy found that companies in the following categories were more likely to slip
       into some level of regulatory action at some point in the future.

                               RBC Ratio
                     (% of Regulatory Action Level)     Combined Ratio
                             200% to 300%              Greater than 120%
                             300% to 350%              Greater than 134%

       This approach was recommended by the P&C subgroup to the Capital Adequacy Task
       Force and was exposed for comment. The approach was generally well received by
       regulators. Ultimately, the RBC Model Law will need to be revised to include a trend
       test for P&C companies.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 9

2.     Life RBC Subgroup (C3 Phase II Project): The Life RBC Subgroup recommended
       that an updated proposal for C-3 Phase II be exposed for comment, effective for yearend
       2005. The recommendation includes the Academy’s June 2004 report as supplemented
       by its November 2003 report. The June 2004 Academy report includes new sections on
       Appendix 10 – Modeling of Hedges and Appendix 11 – Certification and Documentation
       Requirements as well as defines the term “Clearly Defined Hedging Strategy”. It also
       introduces covariance methodology for integrated models of C-1 and C-3 risk. The
       recommendation of the Life Subgroup as of June 2004 included:

       −   ACLI recommended transition and smoothing methodology.

       −   Inclusion of C-3 Phase II calculated amount in the Trend Test (because of

       −   Using Alterative Methodology factors based on mortality of 100% of the 1994
           MGDB Table.

       −   Requiring a standard scenario as set forth by New York.

       The subgroup continues to study issues related to the appropriate level of mortality,
       standard scenario, testing and comparison of reserve and RBC results under a modeling
       approach and the alternative methodology.

       It was noted that the most recent New York Standard Scenario dated August 20, 2004
       served to improve the results mainly due to an increase to revenue in the model and
       adjustment to lapse rates for death benefit only contracts. The ACLI noted that it
       strongly opposes the Standard Scenario for RBC purposes but favors it for reserving
       purposes because it sets a benchmark for reserves for tax deductibility purposes.

       There is still a significant disconnect between the Standard Scenario results and modeled
       results because the standard scenario is a policy by policy calculation while modeling
       achieves benefit from aggregation. It was also noted that the Standard Scenario will not
       react well to changes in the marketplace but the principle based approach methodology
       should. The Academy reports and New York’s Standard Scenario were exposed for
       comment and the CADTF will have a conference call to discuss further course of action.

       Finally, the CADTF discussed a letter from New York summarizing open issues related
       to the C-3 Phase II Reserving and Capital Proposals. Issues raised include:

       −   Clarification of the Term “Prudent Best Estimate”: New York’s position is that 90
           CTE should apply to all of the assumptions. A separate paper was submitted on
           Deterministic Assumptions in C-3 Phase II for consideration.

       −   95 CTE vs. 90 CTE for Capital Requirements: New York had recommended 95 CTE
           at a prior meeting.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 10

           −   Mutual Fund Revenue Sharing: New York recommends not considering revenue
               sharing because the cash flows are not cash flows from the insurance contracts. If the
               revenues were reflected then some constraints should be added to ensure that
               revenues are guaranteed to the company or its successor and are net of associated

           −   Use of Forward Rates: New York questions use of forward rates from the swap
               curve for determining GMIB cost as an optimistic deviation that should not be
               allowed for regulatory purposes.

           −   Non-proportional Reinsurance: Reductions for non-proportional reinsurance need to
               be clear and are only appropriate if the treaties comply with model laws and

           −   85% of MGDB Table for Reserves: New York feels that mortality in the Alternative
               Methodology is too low and recommends 85%.

           Lou Felice asked for New York and the Academy to continue to work to reconcile
           differences with respect to these and any other issues that arise. The material was
           received by the task force and they will hold an interim conference call to discuss them
           and possibly expose them for comment.

3.         Other Items: The task force discussed a recent Long Term Care proposal from the
           Academy’s Long Term Care Risk Based Capital Work Group dated June 2004. The
           proposal is claims based as opposed to premium based. This will serve to increase capital
           levels for small companies with high loss experience, but for the industry generally will
           decrease capital requirements significantly. A comparison of the recommendation to the
           existing formula is illustrated below.

                   Recommendation                                  Current Formula
     37% of First $35 million of Incurred Claims     25% of First $50 million of earned premium
     +12% of Incurred Claims above $35 million       +15% of Earned Premium above $50 million
     +5% of Claim Reserves                           +5% of Claim Reserves

                                   Note: These are post-tax factors.

           The group then discussed a letter from Florida objecting to the change on a line of
           business which has had a history of mispricing, under reserving, troubled companies, etc.
           The Pennsylvania department withdrew its objection to the revisions which it had raised
           in prior meetings. CADTF received the report and will discuss it in detail on conference

           All remaining items were deferred to an interim conference call and include the modco
           dividend liability adjustment issue as well as issues related to the impact of unauthorized
           reinsurance in the RBC formula.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 11


I attended several meetings of working groups reporting to the Accounting Practices and
Procedures Task Force as described below.

1.     Emerging Accounting Issues Working Group (EAIWG): The EAIWG considered the
       following items which may be of interest to life actuaries.

       −   Syndicated Letters of Credit: EAIWG affirmed that syndicated Letters of Credit
           were permitted under current accounting guidance and no change to the AP&P
           Manual was necessary.

       −   Classification of Bad Faith Expenses: The group adopted consensus that judgments
           against insurers related to bad faith should be accrued as a liability at the time the
           court renders a decision regardless of whether or not all appeals and petitions have
           been exercised.

       −   Form B Filing on AG 38 (UL with Secondary Guarantees): Northwestern Mutual
           filed the original NY proposal to fix AG 38 to EAIWG in order to attack this issue on
           two fronts (EAIWG and LHATF). A subsequent New York proposal had been
           received by LHATF at an earlier meeting along with two other industry proposals.
           Certain members of the EAIWG felt that they needed to adopt a tentative consensus
           on this issue, with knowledge that the form of the AG AXXX revisions might
           change, in order to be able to reach a final consensus in December for application to
           2004 yearend. It was noted by the industry that LHATF has not committed to any of
           the proposals and in fact had decided at its June, 2004 meeting not to make any
           revisions to AG AXXX. Also that the New York proposal in the Form B filed by
           NML is an outdated version of the New York proposal. The EIAWG adopted this
           tentative consensus with knowledge that they might change the form of the revised
           AG AXXX pending LHATF’s review and conclusions.

       −   New GAAP Disclosure Requirements: This item involves making it clear that
           GAAP disclosure requirements which the accounting firms feel they must abide by
           for statutory accounting purposes are not applicable to SAP accounting until the
           NAIC has considered them and adopted them as SAP.

       −   Permitted Practices Meeting: Finally it was noted that a special meeting of the
           Financial Condition (E) Committee was to be held to consider the impact of state
           permitted practices in statutory accounting. The fundamental issue relates to a
           particular state’s allowance of permitted practices on a P&C Company that
           eventually went insolvent. After a strenuous debate related to the forum for such a
           resolution (i.e., whether SAPWG or the E Committee is the forum for such a motion),
           the E committee exposed guidance related to disclosure of permitted practices by the
           insurance department and required notification of the permitted practice 30 days prior
           to its use in the financial statement.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 12

2.     International Accounting Standards Working Group (IASWG): A brief summary of
       the IASWG meeting is provided below.

       −   Insurance Contracts Phase II: Educational seminars were held in July and eleven
           Issues have been identified as needing further resolution. No decisions have been
           made. At their September meeting, additional educational seminars will be held.
           The IASB has formed an insurance working group consisting of regulators, actuarial
           representatives and industry representatives to assist on this project.

       −   IASB Exposure Drafts: The IASB released two exposure drafts, Credit Insurance
           and Financial Instruments. It was noted that the NAIC disagrees with IASB’s
           interpretation that credit insurance be removed from IFRS No. 4 Insurance Contracts
           and be included with other financial guarantees. A comment letter was approved and
           will be forward to the IASB.

       −   IAIS Accounting Subcommittee: There is a meeting in London on September 14-15
           on which certain NAIC comments related to the Future Liability Measurement
           Project will be heard. Six major issues have been identified by the IASWG in a
           memorandum from Rob Esson dated September 9, 2004. Issues include matching,
           credit worthiness, cash surrender value floor on reserves, renewal rights of
           policyholders, and discounting.

       −   ACLI/IAA Joint Research Report: Alan Close of NML representing the ACLI
           discussed a recent report which reviews some of the implications of recognition of
           renewal premiums and participation features for a UL contract under FAS 97. Three
           scenarios were presented 1) no future premiums, 2) expected premiums and
           3) minimum premium pattern. It was noted that the document is not intended to
           reach conclusions simply illustrate the results. A formal position paper will be
           developed by the ACLI over the next three months.                     Property/Casualty
           representatives indicated that discounting inherent in the joint research report was not
           necessarily supported by that industry.

3.     Statutory Accounting Principles Work Group (SAPWG):

       Hearing Agenda: Several items were discussed at the hearing agenda which are of

       a) RBC and Permitted Practices: SAWG adopted a non-substantive change which
          provides guidance with respect to permitted practices that might impact RBC by
          requiring disclosure in the annual statement only if reversal of the permitted practice
          would trigger a regulatory event under the RBC model.

       b) Financial Condition (E) Committee Meeting: It was noted that in a prior meeting the
          (E) Committee exposed a document which would require domestic regulators to
          disclose to other states permitted practices for companies in their state that have
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 13

           significant impact on surplus 30 days prior to use of the permitted practice. This
           action resulted from a troubled P&C Company in a particular state. A November,
           2004 meeting will be held to discuss this proposal.

       Meeting Agenda: Several items reviewed during the meeting are discussed below.

       a) New Model Regulations and Revisions to be Incorporated into Codification: These
          include the DI reserve revisions in the area of company experience recognition,
          revisions to the health reserve model in the area of LTC, and the new Credit Life
          Reserves Model Regulation No. 818.

       b) Hedge Options and VA Guarantees: A joint SAPWG/LHATF subgroup will be
          formed to assist in developing guidance with respect to accounting treatment to be
          accorded for C-3 Phase II.

       c) Recent GAAP Disclosure Guidance: Tentative guidance from SAPWG is to reject
          any GAAP disclosure guidance until it has officially been considered by the SAPWG
          as to whether or not it is applicable to statutory accounting.

4.     NAIC/AICPA Working Group: The NAIC/AICPA Working Group reviewed the
       status of various projects pertaining to the NAIC Model Audit Rule to incorporate
       provisions of Sarbanes-Oxley. Several subgroups have been formed to work on specific
       issues and several interim meetings have been held to work on these issues. The most
       difficult issue continues to be management’s internal self-assessment. Doug Stolte (VA),
       the chairman, indicated that the regulators need the industry’s assistance in implementing
       the important aspects of SOX into the Model Audit Rule

       Next, the AICPA reviewed the status of two projects as described below.

       −   SOP 03-01: Several questions and answers will constitute additional guidance with
           respect to SOP 03-01 and will be formally issued by the AICPA in the next couple of
       −   DAC on Internal Replacements: A revised SOP will be exposed for comment in
           mid-September for a thirty day comment period.


Several other meetings are summarized below.

1.     Life Insurance (A) Committee: The Life (A) Committee first discussed work of the
       small face amount study group and hopes to have a progress report in December. One
       member expressed a desire to finish this project in 2005.
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 14

       Next, the Committee deleted three model regulations the Two-Tier Annuity Model
       Regulation, the Bulletin on Illustrated Interest Projections and the Modified Guaranteed
       Life Insurance Regulation because these models are obsolete or have not been adopted by
       any states.

2.     Risk Assessment Working Group: The Risk Assessment Working Group reviewed its
       initial outline for the examiners handbook revisions for risk assessment by examiners of
       an insurance company’s operations. They have hired a consultant to help with drafting
       and hope to expose a document for comment in late September.

3.     Reinsurance Task Force: The task force discussed briefly the Hague Convention and
       progress made in the area of enforcement of foreign judgments. Proposed amendments
       by the IAIS/IAB suggest language that the convention applies to insurance and
       reinsurance contracts. The process is very political and requires persistence with respect
       to these issues. Work will continue to ensure that proper language gets into the
       convention to cover insurance and reinsurance.

       A working draft of the reinsurance working trust was reviewed. A representative from
       LeBoeuf Lamb said that the working trust is perceived by foreign reinsurers as only a
       partial solution to the funding problem.

       The task force is also considering fixing the model law to ensure that intermediaries
       cooperate fully in discovery proceedings related to reinsurance disputes where it has been
       noted that full cooperation can be a problem especially when the commercial relationship
       between the insurer or reinsurer and the intermediary is no longer in existence.

       Finally, the Reinsurance Task Force readopted the Life Reinsurance Model Regulation on
       risk transfer subject to the potential for a future proposal for amendments to refresh
       certain areas of the model that are in need of revision.

       Property/Casualty Market Update: The task force received an update on recent storms in
       Florida from industry representatives.

                       Event                            Cost
               Charley/Frances                     2% of industry capital
               Andrew                             10%
               9/11                                9%
               Citizens Ins. Co. and Florida Hurricane CAT Fund will assume
               approximately 30% of the losses from Charley/Frances.

       A similar life update will be provided in December, 2004.

                            *        *         *        *          *
Memorandum Re. NAIC Meeting September 9 – 14, 2004
September 24, 2004
Page 15

Please contact me if there are any questions related to this write-up. The next NAIC meeting will
be held in December 2004 in New Orleans, Louisiana.


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