FASBIASB Field testing white paper 11 October 2013

Life Insurer Comments on Field Testing ofFASB and IASB Insurance Contracts Proposals

11 October 2013

All rights reserved. The whole, but no part thereof, of this publication may bereproduced, stored in a retrieval system, or transmitted, in any form or by any means(photocopying, electronic, mechanical, recording, or otherwise), without the priorwritten permission of any member of the Group.

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11 October 2013

Mr. Russell G. GoldenChairmanFinancial Accounting Standards Board (FASB)401 Merritt 7PO Box 5116Norwalk, CT 06856-5116

Mr. Hans HoogervorstChairmanInternational Accounting Standards Board (IASB)30 Cannon StreetLondon EC4M 6XHUnited Kingdom

Re: Field testing of the FASB Proposed Accounting Standards Update – InsuranceContracts (Topic 834) and the IASB Exposure Draft (ED) – Insurance Contracts

Dear Mr. Golden and Mr. Hoogervorst

On 20 June and 27 June 2013, the IASB and the FASB, respectively, released EDs on theaccounting for insurance contracts. Both Boards requested feedback on the proposedstandards and results of field testing on or prior to 25 October 2013. In late 2012, we advisedboth the IASB and FASB of our intention to complete field testing during the exposure draftperiod and that we expected the benefits would include:a. Extensive analysis of the potential effects on a wide range of real product portfolios over

different economic scenarios;b. Identification of data and operational issues, thereby allowing the Boards to evaluate the

costs and benefits of the proposed guidance and what should be the appropriate effectivedate of the standards;

c. Identification of interpretive issues and the need for clarification in final guidance throughinteractive discussion of the field-testing processes and results;

d. User feedback through discussions of our field-testing results with financial statementusers, including capital market and rating agency analysts; and,

e. Enhanced industry knowledge through reviews of our testing results with other companiesand trade associations.

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We are fully committed to helping the Boards achieve the goal of aligned high quality globalaccounting standards. As a result, we have spent significant time and effort to complete fieldtesting of both the IASB and FASB proposals within the exposure draft response period. Withthe assistance of a third-party consultant, field testing on the EDs was performed to cover awide range of products and several possible economic scenarios. The results of our testingalong with key findings and observations are the subject of this document.In this document, we do not provide comments on all aspects of the EDs, but instead we focuson areas where we encountered uncertainty interpreting the guidance, challenges applying it,or outcomes that were not reflective of our expectations or the underlying economics of thebusiness. We categorized our key findings and observations in our executive summary underthree main themes (Discount Rate, Complexity and Convergence) and focused on where:a. The results produced were either not in line with our expectations or not reflective of actual

economics;b. The proposals of the Boards may add more complexity than the perceived benefit warrants;

and,c. The non-convergence between the FASB and IASB would result in significant additional

cost, while producing no additional benefit.Considering the complexity of our business and the interactive nature of our assets andliabilities, evaluating the effects of the proposed accounting guidance for both financialinstruments and insurance contracts together is the only way to gain an in-depthunderstanding of the impacts of the proposed accounting for insurance contracts on ourbusiness. Due to time and resource limitations, we have not evaluated the impacts of allaspects of the Boards’ proposals related to financial instruments for the purposes of this fieldtest.In order to publish this report on a timely basis we have focused our efforts on completing andanalyzing our field test results. As such, the Group (working with the consultant) had to make anumber of simplifying assumptions and has not yet fully developed all possible solutions to theissues identified. We have concluded that while many of the principles underlying the standardare sound, once we looked into the details there are a number of significant issues that need tobe addressed before the issuance of a final standard.Our executive summary provides key findings and observations from the field testing and therecommendations or alternatives that we believe the Boards should consider in response tocertain of those key findings and observations. In certain areas, we have not concluded on arecommendation or alternative proposal, but believe that, with due consideration, alternativescould be established. We would welcome the opportunity to work with the Boards to developand test such alternatives.We once again thank you for the opportunity to respond to your proposals and yourconsideration of our key findings, observations and recommendations. Should you have anyquestions or would like to meet with us regarding the contents of this letter, either separately ortogether, please do not hesitate to contact us.

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Very truly yours,

Steve RoderSenior Executive Vice President and Chief Financial OfficerManulife Financial

John C. R. HeleExecutive Vice President and Chief Financial OfficerMetLife, Inc.

John T. FleurantExecutive Vice President and Chief Financial OfficerNew York Life Insurance Company

Peter SayreSenior Vice President and Principal Accounting OfficerPrudential Financial, Inc.

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Contents1. Executive Summary 12. Introduction 143. Methodology and Approach 16

3.1 Scope ....................................................................................................................................... 16

3.2 Key Baseline Modeling Techniques and Assumptions ............................................................... 18

3.3 Key FASB/IASB-Specific Modeling Techniques and Assumptions ............................................. 20

4. Segment-Level Results 244.1 Differences between Current U.S. GAAP and the Proposals ..................................................... 24

4.2 Traditional Life Segment ........................................................................................................... 25

4.2.1 Key observations ...................................................................................................................... 25

4.2.2 Discussion of results ................................................................................................................. 25

4.3 Retirement Segment ................................................................................................................. 29



4.4 Participating Segment ............................................................................................................... 33



4.5 Variable Annuity Segment ......................................................................................................... 37



5. Key Observations on Discount Rate Impacts 415.1 Observations on Discounting Longer-Duration Cash Flows ....................................................... 41

5.2 Observations on Potential Accounting Mismatches ................................................................... 44

6. Findings and Observations 456.1 Initial and Subsequent Measurement of the Insurance Liability (Asset) ...................................... 45

6.1.1 Expected future cash flows ....................................................................................................... 45

6.1.2 Current discount rates ............................................................................................................... 47

6.1.3 Market risk premiums (adjustments for expected and unexpected defaults) ............................... 52

6.1.4 Risk adjustment (IASB) ............................................................................................................. 54

6.2 Recognition of Insurance Contract Revenues, Expenses and Other Comprehensive Income(Subsequent Measurement) ...................................................................................................... 56

6.2.1 FASB margin ............................................................................................................................ 56

6.2.1.1 Driver for release ..................................................................................................................... 56

6.2.1.2 Adjusting the FASB margin ...................................................................................................... 57

6.2.2 IASB contractual service margin and unlocking ......................................................................... 58

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6.2.2.1 Driver for release ..................................................................................................................... 58

6.2.2.2 Unlocking the contractual service margin ................................................................................. 59

6.2.3 Changes in discount rates — non-asset-impacted cash flows (OCI) .......................................... 62

6.2.4 Changes in discount rates — unlocking the interest accretion rate (FASB) ................................ 63

6.2.5 Changes in discount rates — cash flows impacted by returns on assets the entity is not requiredto hold (IASB) ........................................................................................................................... 65

6.2.6 Splitting fixed and variable cash flows (IASB) ............................................................................ 65

6.2.7 Loss-making contracts .............................................................................................................. 66

6.2.8 Acquisition costs ....................................................................................................................... 68

6.3 Insurance Contracts Revenue and Expense Presentation ......................................................... 70

6.3.1 FASB earned premium ............................................................................................................. 70

6.3.2 IASB earned premium ............................................................................................................... 71

6.3.3 Observations concerning both approaches................................................................................ 72

6.4 Other Specific Topics ................................................................................................................ 73

6.4.1 Transition.................................................................................................................................. 73

6.4.2 Separation of non-insurance components ................................................................................. 74

6.4.3 Portfolio .................................................................................................................................... 75

6.4.4 Contract boundary .................................................................................................................... 76

Appendix A – Detailed Methodology and Approach 77Appendix B – Detailed Results 89Appendix C – Earned Premium Presentation 110Appendix D – Glossary 112

Each member of the Group has independently provided data to a third-party consultantunder strict confidentiality protocols for the purpose of aggregation and simulation toprovide field testing of the Exposure Drafts on the Accounting for Insurance Contactspublished by the FASB and IASB. The field testing results are not financial informationrelating to any individual company or the companies in aggregate and should not berelied upon separately or in conjunction with information filed by the companies in anyjurisdiction under securities regulation or for any other purpose.

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1. Executive SummaryIn late June 2013, the International Accounting Standards Board (IASB) and the FinancialAccounting Standards Board (FASB) (collectively, the Boards) both released Exposure Drafts(EDs) on the accounting for insurance contracts.Manulife, MetLife Inc., New York Life and Prudential Financial Inc. (the Group or we) are fullycommitted to helping the Boards achieve the goal of aligned high quality global accountingstandards. The Group performed field testing of both the IASB and FASB proposals (with theassistance of a third-party consultant, “the consultant”) within the exposure draft responseperiod. The results of this field testing exercise along with key findings and observations arethe subject of this document.Considering the complexity of our business and the interactive nature of our assets andliabilities, evaluating the effects of the proposed accounting guidance for both financialinstruments and insurance contracts together is the only way to gain an in-depthunderstanding of the impacts of the proposed accounting for insurance contacts on ourbusiness. Due to time and resource limitations, we have not evaluated the impacts of allaspects of the Boards’ proposals related to financial instruments for the purposes of this fieldtest, but we expect that, as currently proposed, they could result in more invested assetsreported at fair value with impacts of changes in fair value reported in pretax income. Thisoutcome would compound the accounting mismatches we observed in pretax income duringthis field testing.Nine product lines were selected for our testing, representative of typical products written bylife insurance companies in North America. We then engaged the consultant to collect andreview the data necessary to perform the field testing, and to do so in a manner that wouldpreserve the confidentiality of each Group member’s competitive information. All productstested utilized the building block approach, reflecting the long-term nature of most of ourproducts. We tested the results over the December 2007 to December 2012 period andprovided historic U.S. Generally Accepted Accounting Principles (U.S. GAAP) results forcomparative purposes.To replicate the level of aggregation expected for actual financial reporting, and to preserve theconfidentiality of each Group member’s individual product data (both from each other and thepublic), the consultant scaled and combined the data received from the Group members,ultimately presenting it under four operating segments prior to it being released to the Group.The observations at the segment level are generally consistent with the observations for theunderlying products and each Group member is amenable to confidential sharing of company-specific information with the Boards, at their request, should the Boards deem that beneficial.Our scope did not include product lines using the premium allocation approach andreinsurance.In order to publish this report on a timely basis we have focused our efforts on completing andanalyzing our field test results. As such, the Group (working with the consultant) had to make anumber of simplifying assumptions (highlighted in Sections 3 and 6 of this document) and hasnot yet fully developed all possible solutions to the issues identified. We have concluded thatwhile many of the principles underlying the standard are sound, once we looked into the details

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there are a number of significant issues that need to be addressed before the issuance of afinal standard.We have summarized our top concerns into three main themes: Discount rate, Complexity andConvergence.

1. Discount Rate:

The discount rate is the most significant assumption in the measurement proposals. While theOther Comprehensive Income (OCI) solution introduced in the proposed standards is intendedto reduce the accounting mismatch between assets and liabilities, when combined with ourinterpretation of the discount rate methodology, it produced extreme unwarranted volatility inboth pretax income and accumulated other comprehensive income. Below we outline the fivekey drivers of the volatility:

a. Effect of market consistent rates on long-dated cash flows (refer to Sections 5.2 and6.1.2)

For longer duration insurance contracts, expected future cash flows often extendbeyond the point on the yield curve where observable market interest rates are derivedfrom active markets and, in many cases, beyond the point where observable marketinterest rates exist at all.While the guidance is not explicit, our interpretation of the rate to be used was a marketconsistent discount rate, consistent with a fair value measurement principle thatmaximizes the use of observable inputs. In our testing, we held constant the last pointon the observable market yield level for the periods beyond the last observable point.As the last observable rate was updated each period, the rate used on all cash flows inthe unobservable period was updated by the same amount. We do not believe thatthese market-consistent rates are a good predictor of future rates, a view historysubstantiates. This assumption change from period to period resulted in the extremeshort-term volatility.To demonstrate the sensitivity of the assumption, we calculated the impact of a parallelupward shift of 50 basis points for all tenors on the yield curve after year 20 and alsoafter year 30. To demonstrate the impact of a potential solution, we calculated theimpact of grading to a long-term average rate starting in year 15, with the long-term rate(6% used for illustrative purposes) held constant after year 30 and also grading to thesame long-term rate starting in year 30 with the long-term rate held constant after year40. We believe the scenario where we graded the discount rates to long term averagesresulted in movements in the insurance liability that were more consistent with the long-term nature of the business.

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* Note, in addition to assets held as Available-For-Sale (AFS), certain assets are also recorded at fairvalue with changes recorded in pretax income and at amortized cost.

The margin established at inception is also heavily dependent on the prevailing interestrate environment at inception. During a period of market volatility, long duration policieswritten a few quarters apart, with nearly identical terms and risks, would be expected tohave similar cumulative profits over the lifetime, but could end up having a very differentpattern of underwriting profit and investment earnings over that time period.We recommend that the discount rate grade to a long-term average ratebeginning at the point at which observable inputs are less relevant. This wouldbe accompanied by required disclosure of the methodology and significantassumptions used, as well as sensitivities to alternative assumptions.

b. Effect of all discount rate changes required to be in OCI (refer to Sections 5.2 and 6.2.3)

Asset and Liability Management (ALM) is a key activity designed to monitor and activelymanage the investment and reinvestment risk related to fulfilling insurance contractobligations. Derivative gains and losses and realized investment gains and losses, bothof which may be neutral from an economic view (i.e., an ALM view), are reported inpretax income, while impacts of changes in discount rates for the liabilities are reportedin OCI. Therefore, even when assets and liabilities are reasonably matched from aduration perspective, the accounting would show a much different result. This resultdistorts the true performance of the company.

1 All financial information is presented in currency units (CUs).

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U.S. statutory reporting addresses this issue by amortizing certain realizedinvestment gains and losses over time as a yield adjustment to the remainingasset portfolio. A solution would be to provide the option to reflect changes indiscount rates in pretax income.

c. Reset of rates for participating contracts (refer to Sections 6.2.4 and 6.2.5)

The FASB approach for prospectively adjusting the interest accretion rates onparticipating business for changes in expected future crediting rates appears to result ina more consistent recognition of OCI for invested assets and the insurance liability. TheIASB approach for such contracts, which updates the discount rate used for accretinginterest in pretax income to the current liability discount rates, results in an accountingmismatch.The Group has not developed a recommended solution, but would favor theFASB approach with certain adjustments.

d. Margin or contractual service margin (refer to Sections 6.2.1 and 6.2.2)

One of the segments tested demonstrated that where the Margin (FASB) or ContractualService Margin (CSM) (IASB) represents a large amount in proportion to the totalliability, an accounting mismatch is created in OCI. This is because the margins are notupdated for changes in discount rates, whereas the assets supporting the business aregenerally accounted for as available for sale securities with changes in fair valuereported in OCI. This issue is observed in the Traditional Life Segment – products withlong dated gross cash flows that are backed primarily by long duration fixed incomeassets.The Group has not developed a recommended solution to address this concern.

e. Adjustments to top–down discount rates (refer to Section 6.1.3)

Our field testing also uncovered an issue related to the top-down discount ratedeductions that could further contribute to unwarranted volatility. When using a top-down discount rate, we based the deductions from the asset yields on historicalaverages for the purposes of field testing. When one company in the Group updatedthese assumptions during the financial crisis, this generated volatility in OCI (seeRetirement Segment chart on the previous page). These results indicate that if changesto the top-down discount rate are made each reporting period based on fluctuations inasset spreads, rather than just when there is a reason to believe that the default orother market risk has changed, there would be unwarranted volatility reported eachperiod.We recommend that the deductions for the top-down discount rate useassumptions that are based on historical experience rather than period to periodfluctuations in asset spreads.

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2. Complexity:

The complexity of the proposals makes it difficult to explain results in a meaningful way tomanagement and to users. In addition, without fundamental changes to actuarial models andsystems, the complexity could impact our ability to produce financial statement and relateddisclosure amounts that are certifiable and explainable by management and prepare and fileour quarterly financial statements within reasonable time frames. Given our experience withthis testing, three years is probably not enough time to fully implement the standard. Theprimary areas of complexity are:

a. Insurance contract revenue (refer to Section 6.3)

The proposed standards have a complex definition of insurance contract revenue underthe building block approach, designed to capture the pattern of “earned premium”consistent with the proposed revenue recognition standard. The methodologiesoutlined in the proposed standards are largely untested in practice. Due to thecomplexity involved, we only had time to test this methodology on one product line.Under both the FASB and IASB proposals, the determination of insurance contractrevenue requires tracking of “unearned” premium, which itself requires tracking ofinception-to-date earned premium. Additional complexities involve the tracking ofpaid/incurred claims and expenses, particularly under the FASB model due to thelocked-in margin. In order not to double-count claims and expenses, the FASBapproach also requires tracking, on a year-by-year basis from inception, the reversal ofthe effects of amounts previously recognized in net income when assumptions changed.The removal of the investment component (IASB) or estimated returnable amounts(FASB) seems straightforward in concept, but identification, measurement and“removal” of such amounts is not currently performed for contracts without an explicitaccount balance. To implement this aspect of the proposals would require significantchanges in data requirements and actuarial models to implement in practice.The Group does not believe that the proposed insurance contract revenue models yieldresults that faithfully represent the performance of our business in a given accountingperiod. As such, we do not believe that the complexity of the approach, the costs andefforts involved in calculating the amounts, and, more importantly, explaining theoutcome to users, is commensurate with any additional benefit produced.We are working together with the American Council of Life Insurers (ACLI) toformally present an alternative presentation approach to the Boards to addressthese concerns.

b. Bifurcation of cash flows (refer to Section 6.2.6)

Under the IASB proposal, cash flows that vary directly with certain underlying items butare not contractually linked are treated differently than other cash flows. Due to a varietyof challenges, including complications getting data on a split basis and a lack of clarity

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as to which cash flows would not be directly related to asset returns; we were unable toapply the provisions of the proposed IASB guidance in this area during our testing.We recommend that the requirement to bifurcate cash flows in the IASB model,other than those contractually linked to a fixed percentage of underlying items,be eliminated to conform to the FASB model.

c. Unlocking the contractual service margin (refer to Section 6.2.2)

We had difficulty applying the IASB guidance related to unlocking the CSM, particularlythe various provisions of paragraph B68. A number of partial exceptions to unlockingthe CSM and exceptions to those exceptions contained in B68 were difficult to interpretand appear to require treating related cash flows differently. These complications canbe significantly reduced by refining the definition of cash flows subject to CSMunlocking.We recommend limiting CSM unlocking to changes in future assumptions thatimpact future cash flows, other than changes in credited rates which should beaddressed in OCI, and eliminating the special exceptions in paragraph B68.

d. Separate accounts (refer to Section 6.3)

Policyholder investments in separate accounts are similar in nature to mutual funds, butdue to a small level of expected mortality risk in the base contract, under the proposedmodels the related base fees and expenses would have a very different accountingbasis than a third-party asset management company essentially performing the sameservices. This would be the result of the requirement of the insurance contractproposals (IASB and FASB) for quarterly re-measurement through net income of thepresent value (PV) of all expected future fees and expenses associated with managingpolicyholder investments. While the IASB proposal would record the quarterly re-measurement through the CSM versus pretax income under the FASB proposal, thisonly eliminates volatility in pretax income and equity if there is sufficient CSM to absorbthe impact.In addition, the FASB proposal, contrary to current U.S. GAAP, requires the reporting ofgross investment income and an equal and offsetting gross interest expense when allinvestment performance is completely passed on to the policyholder. The requirementto report the gross amounts on the face of the statement of comprehensive income ismisleading (as the insurer is not a principal, but is effectively acting as an agent) andwould result in increased complexity in production (e.g., producing cash flowinformation).The Group is currently considering possible solutions to the issue related to theasset management fees. The presentation issue can be addressed by retainingthe current U.S. GAAP presentation requirement, where investment income isnetted against amounts credited to policyholders in the statement ofcomprehensive income.

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3. Convergence:

The detailed differences between the International Financial Reporting Standards (IFRS) andU.S. GAAP proposals would result in additional cost to those companies who havesubsidiaries required to report under a different basis than the parent company and divergedpractices could continue to cause confusion in the markets.We recommend that the Boards continue to strive for a standard that is substantiallyconverged. We also stress the importance of a quality standard that has beenappropriately tested. In our view, the Boards should focus on addressing the issuesraised during the re-deliberation process and then address the key differences betweentheir two standards. The following table summarizes some of the more detailedconvergence opportunities highlighted by our testing.

Convergenceopportunity IASB proposal FASB proposal

The Group’srecommendation

Participatingcontracts –bifurcation of cashflows (refer toSections 6.2.5 and6.2.6)

Requires splitting of cashflows between those thatare fixed, those that varyindirectly with returns onunderlying items andthose that vary directlywith returns on underlyingitems.Within contracts withcash flows that arecontractually linked tounderlying items, all cashflows that vary directlywith underlying items,whether or notcontractually linked, aremeasured by reference tothe carrying amount ofthe underlying items.

The FASB model doesnot require splittingcash flows betweenthose that are fixed andthose that vary withreturns on underlyingitems.Only contractuallylinked cash flows thatvary directly withunderlying items aremeasured by referenceto the carrying amountof the underlying items.Does not requiresplitting any other cashflows.

FASB proposal

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Acquisition costpresentation (referto Section 6.2.8)

Included in fulfillmentcash flows.Un-expensed acquisitioncosts included infulfillment cash flows arerecognized as anexpense in pretax incomeusing the same pattern asthe CSM release.

Excluded fromfulfillment cash flows.Recorded as a directadjustment to themargin. The margin isreduced by un-expensed acquisitioncosts and increased byun-paid acquisitioncosts. The un-expensed acquisitioncosts are recognizedas an expense inpretax income usingthe same patterns asthe margin release.

IASB proposal

Margins unlocking(refer to Sections6.2.1 and 6.2.2)

The CSM is adjusted forfavorable andunfavorable changesbetween current andprevious estimates of thepresent value of futurecash flows if they relate tofuture coverage orservices.

The margin is notadjusted for changesbetween current andprevious estimates offuture cash flows.

We recommendunlocking themargin forchanges in futureassumptions thatimpact futurecash flows, otherthan those thatimpact futurecredited rates.

Portfolio definition(refer to Section6.4.3)

The IASB definition ofportfolio refers tocontracts that “aremanaged together as asingle pool”.

The FASB definition ofportfolio refers tocontracts that “areexpected to have asimilar duration andexpected pattern ofrelease from risk”.

We believe thatboth Boardsshould convergeto a principle andnot a restrictivedefinition.

Transition –margin/CSM (referto Section 6.4.1)

“20/20” hindsight indetermining riskadjustment and CSM attransition when fullretrospective method isimpracticable.

“20/20” hindsight notpermitted indetermining margin attransition when fullretrospective method isimpracticable.

IASB proposal

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Transition – financialasset classification(refer to Section6.4.1)

Limited retrospective “re-adoption” of the financialinstrument classificationand measurementstandard upon adoptionof the insurance contractsguidance – only allowedto change to fair valueoption designations if anaccounting mismatch iseliminated or significantlyreduced.

Complete retrospective“re-adoption” of thefinancial instrumentclassification andmeasurement standardupon adoption of theinsurance contractsguidance.

FASB proposal

Additional findings and observations are outlined in Sections 5 and 6 of this document.

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Summary Results by Segment

The following graphs show the pretax income/(loss) and pretax comprehensive income/(loss)for the segments tested. We make the following observations for each:

Traditional Life Segment (Refer to Section 4.2)

a. The updating of cash flow assumptions at each reporting date resulted in volatility in pretaxincome under the proposed FASB standard but less so under the proposed IASB standard,as the unlocking of the CSM mitigated the volatility.

b. The OCI amount related to the insurance contract liability (asset) moved in the samedirection as that of the investment assets because the fulfillment cash flows were in anasset position and no OCI was calculated on the margin/CSM. This is particularly apparentin 2009, 2010 and 2011 results.

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Retirement Segment (Refer to Section 4.3)

a. Liability cash flows on products in this segment extend longer than the available assetsand, therefore, the liabilities were more sensitive to changes in discount rates than theassets backing them. Additionally, carrying values of certain assets backing the liabilitieswere not correlated with discount rates further contributing to disconnect betweeninsurance liabilities and assets backing them.

b. The volatility in OCI was extreme due to changes in discount rates over the studied period.As noted previously, this was driven by our interpretation of the proposals to use a marketobservable discount rate and the approach taken for the field testing to keep the last pointon the observable market yield curve level for the periods beyond the last observable point.

c. The impact of changes in discount rates created volatility in the risk adjustment and,therefore, in pretax income under the IASB proposal.

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Participating Segment (Refer to Section 4.4)

a. During the period tested, dividends and policyholder crediting rates were changed. ForIASB testing purposes we assumed all cash flows vary directly with the underlying assets.As such, pretax income was significantly more volatile under the IASB’s proposal thanunder the FASB’s proposal.

b. Pretax income volatility was also created by the impact of changes in discount rates on theIASB risk adjustment.

c. For reasons similar to the Retirement Segment, total pretax comprehensive income wasvery volatile under both proposals.

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Variable Annuities Segment (Refer to Section 4.5)

a. The insurance liability, which included the base contract fees (i.e., mortality and expensecharges (M&E) and investment management fees) and riders that are accounted for underASC 944 (SOP 03-1) (and not under ASC 815 (FAS 133)) under current U.S. GAAP, wasmore volatile under the proposed EDs than current U.S. GAAP. Under both models incomewas extremely sensitive to movements in equity markets (evident in 2008 and 2009) andinterest rates (evident in 2011).

b. It was a coincidence that the IASB and FASB models produced similar pretax incomeresults in 2008 through 2010. The impact of not unlocking the margin under the FASBmodel was offset by the difference in treatment of changes in discount rates (FASB modelreflects the change in OCI vs. IASB through pretax income).

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2. IntroductionOn 20 June and 27 June 2013, the IASB and the FASB, respectively, released EDs on theaccounting for insurance contracts. The EDs represent proposed changes to current U.S.GAAP and IFRS. Both Boards requested feedback on the proposed standards and results offield testing on or prior to 25 October 2013. The IASB requested focused feedback on specificchanges from the previous ED released by the IASB in 2010 (2010 ED), while the FASBrequested feedback on all areas. This document assumes a base understanding of the Boards’proposals as outlined in their respective EDs and should be read in conjunction with the EDs.Any decisions made by the Boards during re-deliberations after the comment period couldsignificantly change the proposed models, thus reducing the utility of this document.

The Group’s field testing project was a joint effort of four global financial services companieswith leading life insurance operations in the United States, Canada, Asia, Europe and LatinAmerica. Together, the companies in the Group, reported aggregate total assets and equity ofUS$2.3 trillion and US$158 billion, respectively, as of 31 December 2012.2 In the United Statesalone, the Group held US$1.6 trillion of total statutory admitted assets as of 31 December2012, which accounted for about 30% of the total net admitted assets in the United States lifeinsurance industry.3

Together, the Group’s product offerings include individual and group life and health insurance,property and casualty insurance, participating and non-participating contracts, and annuities.Most of the companies in the Group have had experience preparing financial statements underboth U.S. GAAP and IFRS, and the field testing discussed herein addressed the requirementsunder both accounting frameworks.The companies in the Group are fully committed to helping the Boards achieve the goal ofaligned high quality global accounting standards. As a result, we have spent significant timeand effort to complete field testing of both the IASB and FASB proposals within the exposuredraft response period spanning six months and involving the effort of more than 50 individualsin finance, actuarial and other key functions. The extent of resources dedicated to this effortshould be considered when reading this paper, particularly when observations aroundfeasibility and practicality are made.Considering the complexity of our business and the interactive nature of our assets andliabilities, evaluating the effects of the proposed accounting guidance for both financialinstruments and insurance contracts together is the only way to gain an in-depthunderstanding of the impacts of the proposed accounting for insurance contracts on ourbusiness. Due to time and resource limitations, we have not evaluated the impacts of all

2 Based on published 2012 annual reports. MetLife, Inc.; New York Life; and Prudential Financial, Inc. reportconsolidated U.S. GAAP financial statements, while Manulife Financial reports consolidated IFRS financialstatements.

3 Figures calculated from “Top 200 U.S. Life/Health Insurers (Ranked by 2012 admitted assets)” table in A.M.Best Company’s Best’s Review magazine, July 2013 Issue, pages 26-28.

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aspects of the Boards’ proposals related to financial instruments for the purposes of this fieldtest.Nine product lines were selected for our testing, representative of typical products written bylife insurance companies in North America. We then engaged a third-party consultant to collectand review the data necessary to perform the field testing, and to do so in a manner that wouldpreserve the confidentiality of each Group member’s competitive information. All productstested utilized the building block approach, reflecting the long-term nature of most of ourproducts. We tested the results over the December 2007 to December 2012 period andprovided historic U.S. Generally Accepted Accounting Principles (U.S. GAAP) results forcomparative purposes.To replicate the level of aggregation expected for actual financial reporting, and to preserve theconfidentiality of each Group member’s individual product data (both from each other and thepublic), the consultant scaled and combined the data received from the Group members,ultimately presenting it under four operating segments prior to it being released to the Group.Our scope did not include product lines using the premium allocation approach andreinsurance.In order to publish this report on a timely basis we focused our efforts on completing andanalyzing our field test results. As such, the Group (working with the consultant) had to make anumber of simplifying assumptions (highlighted in Sections 3 and 6 of this document).

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3. Methodology and Approach

3.1 Scope

The Group selected nine products for purposes of the field test. The selected products areconsidered to be representative of typical products sold by life insurance companies in NorthAmerica.To understand the impact of the proposed EDs on the financial results over a range of realeconomic scenarios, including the recent financial crisis, we applied the requirements of theproposed EDs to historic U.S. GAAP financial data from 31 December 2007 through 31December 2012 (study period).Each of the companies in the Group provided the consultant with actual historic financialresults and actuarial modeling information for the individual products they were responsible forfield testing. For purposes of presenting the results of our field test in this document, theproduct-level financial results were combined by the consultant into four segments as follows.

Segment Product Product overview

Applicablecurrent U.S.GAAP accounting

Traditional Life Term Term life business withrelated term riders.

ASC 944 (FAS 60)

Whole Life (WL) WL contracts withoutparticipation in returns onunderlying items.

ASC 944 (FAS 60)

Participating Participating WholeLife (Par WL)

Par WL block with ridersincluding paid-up additions(PUAs), options to purchasepaid-up additions (OPPs) andterm riders. Product does notinclude any profit sharing withshareholders.

ASC 944 (FAS 120and SOP 95-1)

Universal Life NoLapse Guarantee(ULSG)

Block of Universal Lifepolicies with secondaryguarantees.

ASC 944 (FAS 97and SOP 03-1)

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Segment Product Product overview

Applicablecurrent U.S.GAAP accounting

Variable Annuity Variable Annuity(two blocks tested)(VA)

Two blocks of VA policies,riders including variations ofguaranteed minimum deathbenefits (GMDBs),guaranteed minimum incomebenefits (GMIBs) andguaranteed minimumwithdrawal benefits(GMWBs).

ASC 944 (FAS 97)for base contractASC 944 (SOP03-1) and ASC815 (FAS 133) forriders

Retirement Single PremiumImmediate Annuity(SPIA)

Non-par payout annuities witha term-certain component.

ASC 944 (FAS60/FAS 97) limitedpay

Retirement Income(RI)

RI product similar to anendowment with benefitpayment at maturity in payoutannuity structure.

ASC 944 (FAS 60)

Long-Term Care(LTC)

LTC block including individualand group long-term care.

ASC 944 (FAS 60)

For purposes of the field testing:1. Transition to the proposed guidance was assumed to occur on 31 December 2007.2. The guidance was applied to:

a. Six statements of financial position as of 31 December 2007 through 2012b. Five statements of pretax income for the years ended 31 December 2008 through

20123. Comparative statements were developed to present current U.S. GAAP, proposed FASB,

and proposed IASB presentation of financial results by segment, including:a. Statement of financial positionb. Statement of pretax income4

c. Roll-forwards of the insurance contract balances5

4. We performed sensitivities to test alternative interpretations, judgments or assumptions toevaluate their impact on the financial information described above.

4 Due to time and data limitations, we were unable to develop insurance revenue presentation for all the products,except one, as required by ASC 834-10-35-12 and 55-172, and used the 2010 ED/Discussion paper marginpresentation with some modifications (e.g., inclusion of interest accretion on cash inflows line item).5 Required by proposed ASC 834-10-50-5 and IASB ED, paragraph 74.

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Time constraints and the extent of differences between the proposals and current U.S. GAAPlimited our testing to products using the Building Block Approach (BBA) methodology, asdescribed by the EDs. We did not test products using the Premium Allocation Approach (PAA)and deemed reinsurance out of scope for field-testing purposes.In this document, the Group explains the determination and use of certain market and non-market assumptions over others (e.g., discount rates). We also describe difficulties andimplications around the application of complex and/or judgmental interpretations of theproposed guidance (e.g., separation of non-insurance components).Due to time and system restrictions associated with the field testing, we were unable to applycertain requirements or perform a comprehensive analysis of systems or data needs forapplying the EDs requirements. In cases where we used simplifying assumptions, these werenoted.

3.2 Key Baseline Modeling Techniques and Assumptions

Certain assumptions were made in order to reflect the requirements of the proposed guidanceor to simplify the requirements of the proposed guidance, as necessary. General assumptionsoutlined below were applicable to most of the products, and the detailed description of ourmethodology and approach for each product is presented in Appendix A.

Topic Key techniques and assumptions

Separation ofcomponents

a. We did not separate any investment componentsb. For variable annuities, we bifurcated certain options and

guarantees as embedded derivatives and valued them under ASC815 (FAS 133) or IFRS 9.6

Portfolio a. For transition, we combined business issued in 2007 and prior intoa single portfolio.

b. We assumed that contracts issued in 2008 and subsequent yearscontained similar risks and were thus grouped into portfolios byissue year for each product.

6 Existing U.S. GAAP and IFRS requirements for unbundling embedded derivatives may currently result indifferent treatment under each framework. For the purposes of field testing, we did not re-evaluate or change thecurrent accounting treatment for unbundling embedded derivatives when presenting our results under theproposals in the EDs.

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Topic Key techniques and assumptions

Cash flows For unbiased probability-weighted estimate of future cash flows:a. We projected fulfillment cash flows based on current in-force files,

current models and assumptions that reflected each company’sbest estimates at the time of valuation. Each valuation reflectedinformation known to each company at the valuation date, andactual experience that emerged over the study period wasreflected in the results.

b. We projected fulfillment cash flows based on a single bestestimate for demographic assumptions (e.g., mortality ormorbidity).

c. We used single best estimate assumptions for expenses.d. We used stochastic interest and equity scenarios where indicated

for some products.Refer to Section 3.3 for a description of acquisition cost estimation.

Discount rates used tomeasure theinsurance contractliability (or asset)

We used a top-down approach for discount rate determination. For amajority of the products, the discount rate was based on the returnsof the asset portfolio (or reference asset portfolio) and defined as:a. Future gross investment market yieldb. Less expected defaults (based on historical averages for the

purposes of field testing)c. Less an assumed spread for the risk surrounding expected default

losses (except for products where the risk is shared with thepolicyholders and therefore attributed some of the risk to thepolicyholders)

For subsequent measurements, we updated the discount rate toreflect the economic environment and asset assumptions as of thevaluation date. Given the use of the top-down approach, we basedthe discount rate on the returns of the asset portfolio (or referenceasset portfolio) as defined above. Additionally, we made a baselineassumption that the discount rate tail was set equal to the 30 yearrate for all tenors after year 30 (i.e., the end of the observable period).

Other topics a. We deemed ceded reinsurance out of scope for this project.b. We tested insurance contract revenue and expense presentation

under the FASB model only for a single product, Par WL.

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3.3 Key FASB/IASB-Specific Modeling Techniques and Assumptions

TopicKey FASB-specific techniquesand assumptions

Key IASB-specific techniquesand assumptions

Margin (FASB)/CSM(IASB) – Initialmeasurement

a. If there was a gain at issue, we determined the margin or CSM asthe excess of the PV of cash inflows over the PV of cash outflows,less the risk adjustment for CSM only.

b. For simplicity, we developed the margin at transition based on anaverage ratio of margin on new business from the subsequentyears covered by the study period.i. We determined an average ratio of margin to a product-specific

driver (e.g., the face amount or PV of benefits (depending onthe product)) of new business cohorts in subsequent years foreach product.

ii. We adjusted this ratio where necessary to reflect the fact thatthe transition cohort was no longer in its first year.

iii. We applied the average of the subsequent year factors to thetransition cohort to determine the margin to be established attransition.

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Margin (FASB)/CSM(IASB) – Subsequentmeasurement

a. We released the margin at theportfolio level where possible.Where data limitationsexisted, portfolios weregrouped and the margin wasreleased at the product level.

b. We identified a risk driverbased on each product’spattern of release from risk.

c. At the end of each period, weprospectively revised themargin release pattern forchanges in estimates of futurecash flows.

d. We did not re-measure themargin for changes inestimates of future fulfillmentcash flows.

e. We accreted interest on themargin based on the sameyield curve that was used todiscount the cash flows thatwas locked-in at issue.

a. We released the CSM at theportfolio level where possible.Where data limitationsexisted, portfolios weregrouped and the margin wasreleased at the product level.

b. For simplicity, we assumedthat drivers for most productswere the same as those usedto amortize the FASB margin.

c. At the end of each period, theCSM release pattern wasprospectively revised forchanges in estimates of futurecash flows.

d. We adjusted the CSM toreflect the impact of changesin estimates of futurefulfillment cash flows(prospective unlocking).

e. We accreted interest on theCSM based on the same yieldcurve that was used todiscount the cash flows thatwas locked-in at issue.

Discount rates used toaccrete interest –contracts with nodiscretionaryparticipation features

a. We accreted interest on fulfillment cash flows using interestaccretion rates locked-in at issue for each portfolio.

b. At transition, we estimated a locked-in interest accretion curveintended to represent a blend of historical rates that would havebeen locked-in over time.

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Discount rates used toaccrete interest –contracts withcontractual links toreturns on underlyingitems that the insureris required to hold

a. For contracts with contractuallinks to returns on underlyingitems (i.e., VA), we did notmodel the segregated fundasset or liability, so interestaccretion rates wereestablished at inception andnot adjusted subsequently.

a. For contracts with contractualand direct links to returns onunderlying items that theinsurer is required to hold (i.e.,VA), we were unable to splitcash flows between those thatare fixed and those that varydirectly or indirectly withreturns on underlying assets,so we treated all cash flows asvarying directly withunderlying assets.

b. We used current rates toaccrete interest on fulfillmentcash flows.

Discount rates used toaccrete interest –contracts withdiscretionaryparticipation features

a. For discretionary participatingproducts (i.e., Par WL andULSG), we reset rates used toaccrete interest on fulfillmentcash flows upon changes increditing rates or dividendscales. These rates werereset to recognize theadjustments to crediting ordividend rates on a level-yieldbasis over the remainder ofthe contracts’ life.

a. For discretionary participatingproducts (i.e., Par WL andULSG), due to practicallimitations, we were unable tosplit cash flows between thosethat are fixed and those thatvary directly or indirectly withreturns on underlying assets,so we treated all cash flows asvarying directly withunderlying assets.

b. We used current rates toaccrete interest on fulfillmentcash flows.

Acquisition costs a. We assumed that qualifyingacquisition costs wereconsistent with thosedetermined under current U.S.GAAP.

b. Acquisition costs wereamortized using a patternconsistent with the release ofthe margin.

a. We assumed that acquisitioncosts were consistent withthose determined undercurrent U.S. GAAP for allexcept two products.

b. For the product where wepresented insurance contractrevenue, we used FASBacquisition cost amortizationexpense as a simplifyingassumption.

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Risk adjustment N/A a. Established and re-measuredat a product level. Theproduct-level risk adjustmentwas then allocated toportfolios as necessary basedon a driver relevant to thatproduct.

b. We used a cost-of-capitalapproach to estimate the riskadjustment using eachcompany’s internal capitalmodels.

c. We re-measured the riskadjustment each period basedon updated assumptions atthe time of valuation.

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4. Segment-Level ResultsFor each segment, we present current U.S. GAAP financial information in comparison to thefinancial information determined using the proposed FASB and IASB EDs, including analysisof:a. Pretax income/(loss)b. Other comprehensive income (OCI)c. Pretax comprehensive income/(loss)d. Change in insurance liability, ande. Components of insurance liability.7

Segment results are driven by specific characteristics and features of the products tested aswell as the impact of product aggregation into the segment results. Similar tests on differentproducts could lead to different results.

4.1 Differences between Current U.S. GAAP and the Proposals

Valuing the insurance liability (asset) using the present value of projected cash flows producessubstantially different liabilities than those produced by current U.S. GAAP due to fundamentaldifferences in the models:a. The discount rates under the proposed models are based on the liability characteristics

while the current U.S. GAAP reserves are either not discounted or are discounted withrates that are typically based on asset portfolio yields locked-in at inception of the contract.

b. Provisions for adverse deviations (PADs) on best estimate assumptions are used for someproducts under current U.S. GAAP (ASC 944 (FAS 60)) but not under the proposedguidance in the EDs.

c. The non-economic assumptions are unlocked under the proposed EDs unlike current U.S.GAAP for some products (ASC 944 (FAS 60)).

d. A gross premium valuation approach is applied under the proposed models rather than thenet premium valuation approach (ASC 944 (FAS 60)) or the benefit ratio approach (ASC944 (SOP 03-1)) used under current U.S. GAAP.

e. Deferred acquisition costs are implicitly considered by the proposed models while explicitlyconsidered under current U.S. GAAP (ASC 944 (FAS 60, FAS 97, and SOP 95-1)).

f. Realized gains and losses are the primary driver of volatility in pretax income under currentU.S. GAAP (ASC 944 (FAS 60 and FAS 97)), while changes in assumptions generally drivepretax income volatility under the proposed guidance.

7 All financial information is presented in currency units (CUs).

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4.2 Traditional Life Segment

4.2.1 Key observations

a. The updating of cash flow assumptions at each reporting date resulted in volatility in pretaxincome under the proposed FASB standard but less so under the proposed IASB standard,as the unlocking of the CSM mitigated the volatility.

b. The OCI amount related to the insurance contract liability (asset) moved in the samedirection as that of the investment assets because the fulfillment cash flows were in anasset position and no OCI was calculated on the margin/CSM. This is particularly apparentin 2009, 2010 and 2011 results.

4.2.2 Discussion of results

In 2009 and 2012 significant changes in assumptions drove volatility in pretax income forproposed FASB results. The unlocking of the CSM absorbed the impact of the assumptionupdates in both years, mitigating volatility in IASB pretax income (refer to Exhibit 4.2.2A):a. In 2009, since the FASB margin was locked-in, the positive impact of the assumption

update was recorded in FASB pretax income, while the unlocking of the IASB CSMabsorbed the assumption update and IASB pretax income was not impacted.

b. In 2012, an assumption change impacted pretax income under the FASB model, but again,the IASB CSM absorbed this change, reducing the volatility in IASB pretax income.

As shown in Exhibit 4.2.2A, the IASB pretax income aligned closer with the pattern of currentU.S. GAAP results as the IASB CSM absorbed the impact of assumption changes and they didnot impact pretax income.The FASB/IASB OCI balance prevented pretax income volatility related to the insuranceliability (asset) due to movements in current discount rates, as shown in Exhibit 4.2.2B. In2008, the large increase in the insurance liability, driven by changes in the discount rates, wascaptured in OCI and did not impact pretax income. The reversal of the short-term fluctuation ininterest rates in 2009 and drop in interest rates in 2012 was also captured in OCI.As shown on Exhibit 4.2.2E, the present value of fulfillment cash flows for this segment was inan asset position during the study period which led to the segment being in a net insuranceasset position in 2009, 2010 and 2011 for both the FASB and the IASB as well as 2012 for theIASB only. This resulted in a mismatch in movement of OCI as the changes in the insurancecontracts asset resulting from current discount rate changes and the unrealized gains andlosses on invested assets moved in tandem rather than in opposite directions (see Exhibit4.2.2B).The graphs shown on the following pages support our analysis.

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Exhibit 4.2.2A

Exhibit 4.2.2B

27

Exhibit 4.2.2C

Exhibit 4.2.2D

28

Exhibit 4.2.2E

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4.3 Retirement Segment


a. Liability cash flows on products in this segment extend longer than the available assetsand, therefore, the liabilities were more sensitive to changes in discount rates than theassets backing them. Non-parallel movements between asset and liability discount rates(i.e., the top-down spread is not constant) caused additional volatility in equity under theproposed standard. Carrying values of certain assets backing the insurance liabilities werenot correlated with discount rates (e.g., mortgage loans carried at amortized cost) furthercontributing to the apparent mismatch between insurance liabilities and assets backingthem.

b. The volatility in OCI was extreme due to changes in discount rates over the studied period.As noted previously, this was driven by our interpretation of the proposals to use a marketobservable discount rate and the approach taken for the field testing to keep the last pointon the observable market yield curve level for the periods beyond the last observable point.

c. The impact of changes in discount rates created volatility in the risk adjustment and,therefore, in pretax income under the IASB proposal.


As shown in Exhibit 4.3.2A, the proposed EDs resulted in lower pretax income in all yearsexcept 2011 for the IASB when there was a favorable change in the risk adjustment (Exhibit4.3.2E). Profit emergence was extended over a longer period of time under the proposed EDsprimarily due to the inclusion of the annuitization period within the contract boundary for the RIproduct. Though the impact was small for the years shown, the difference in profit emergencepattern would further develop over time.Reflecting discount rate driven changes in the insurance liability in OCI moved the discountrate related volatility out of pretax income (Exhibit 4.3.2B). The impact of asset/liabilitymismatches reflected in OCI was significant, as the long-term insurance contract liabilities forthis segment are more sensitive to changes in discount rates than the assets supporting them.Additional volatility in OCI was caused by the adjustment for expected and unexpecteddefaults to the top-down discount rate not being constant, which led to variance in movementsof discount rates impacting the change in the insurance liability in OCI. A similar movementwas not observed in the unrealized gain/(loss) on the assets, so the impact on OCI wasgreater in one direction. Furthermore, certain assets backing liabilities in this segment hadcarrying values that were not correlated with movements in the discount rates (e.g., realestate, commercial mortgage loans at amortized cost, etc.), which contributed to the furthermismatch between the AOCI balances for invested assets and insurance liabilities.The graph in Exhibit 4.3.2E shows volatility in the risk adjustment caused by the changes ininterest rates (refer to Section 6.1.4). Unlike the use of OCI for discount rate related changes inpresent value of cash flows, there is no mechanism in the IASB ED for removing from pretaxincome the volatility in the risk adjustment related to discount rates.

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The graphs shown below and on the following pages support our analysis.

Exhibit 4.3.2A

Exhibit 4.3.2B

31

Exhibit 4.3.2C

Exhibit 4.3.2D

32

Exhibit 4.3.2E

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4.4 Participating Segment


a. During the period tested, dividends and policyholder crediting rates were changed. ForIASB testing purposes we assumed all cash flows vary directly with the underlying assets.As such, pretax income was significantly more volatile under the IASB’s proposal thanunder the FASB’s.

b. Pretax income volatility was also created by the impact of changes in discount rates on theIASB risk adjustment.

c. For reasons similar to the retirement segment, total pretax comprehensive income was veryvolatile under both proposals.


For FASB field testing purposes, we reset interest accretion rates for discretionary participatingproducts included in this segment upon changes in expectations of interest crediting rate(ULSG) or expected dividend rates (Par WL). Interest accretion rates were reset to a singlelevel-yield rate8 eliminating any immediate impact of change in discount rate assumptions frompretax income.For purposes of IASB field testing, we assumed all of the cash flows directly varied with theunderlying assets and the entire change in insurance contract liability due to changes indiscount rates, including the impact of changes in crediting/dividend rates, was reflected inpretax income. We made this simplifying assumption due to challenges interpreting the IASBguidance as noted in Section 6.2.5 and since, in our view, the majority of the products’ cashflows were directly dependent on underlying assets. This assumption increased volatility of theIASB pretax income (despite the impact of the CSM unlocking) as compared to current and theproposed FASB results (Exhibit 4.4.2A).The 2011 results highlight the difference between the FASB and IASB field testingmethodologies used. Under the IASB results, the increase in insurance liability driven by alarge decrease in interest rates was immediately reflected in pretax income (Exhibit 4.4.2A),while the same increase in insurance liability was seen in OCI in 2011 FASB results (Exhibit4.4.2B).The use of OCI for the FASB results moved the volatility due to changes in discount rates outof pretax income (Exhibits 4.4.2A and 4.4.2B). The impact of asset/liability mismatchesreflected in OCI was notable, particularly in 2011, as the long-term insurance contract liabilitiesfor this segment are more sensitive to changes in discount rates than the assets that supportthem. Additionally, certain assets backing liabilities in this segment had carrying values thatwere not correlated with movements in the discount rates, which contributed to the mismatchin the OCI changes.

8 Proposed ASC 834-10-35-25.

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The risk adjustment also increased due to changes in discount rates in 2011 (see Exhibit4.4.2E and refer to Section 6.1.4) which created additional volatility in IASB pretax income (seeExhibit 4.4.2A).The graphs shown below and on the following pages support our analysis.Exhibit 4.4.2A

Exhibit 4.4.2B

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Exhibit 4.4.2C

Exhibit 4.4.2D

36

Exhibit 4.4.2E

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4.5 Variable Annuity Segment


a. The insurance liability, which included the base contract fees (i.e., mortality and expensecharges (M&E) and investment management fees) and riders that are accounted for underASC 944 (SOP 03-1) (and not under ASC 815 (FAS 133)) under current U.S. GAAP, wasmore volatile under the proposed EDs than current U.S. GAAP. Under both models incomewas extremely sensitive to movements in equity markets (evident in 2008 and 2009) andinterest rates (evident in 2011).

b. It was a coincidence that the IASB and FASB models produced similar pretax incomeresults in 2008 through 2010. The impact of not unlocking the margin under the FASBmodel was offset by the difference in treatment of changes in discount rates (FASB modelreflects the change in OCI vs. IASB through pretax income).


Pretax income was more volatile under the proposed EDs than current U.S. GAAP as shown inExhibit 4.5.2A. Under the EDs, the large pretax loss in 2008 was caused by an increase in theinsurance liability due to the value of the guarantees shifting as a result of the sharp equitymarket drop and increased implied market volatility. The market recovery in 2009 resulted in adecrease in the insurance liability and a corresponding increase in pretax income (see Exhibit.4.5.2A and E).As shown in Exhibit 4.5.2C and Exhibit 4.5.2E the magnitude of the change in present value ofcash flows was comparable between proposed FASB and IASB results. We noted that whilewe generally would not expect the FASB and IASB proposals to produce similar pretax incomeresults for VAs, similar earning patterns emerged in 2008, 2009 and 2010 (Exhibit 4.5.2A) dueto differences in the models producing offsetting impacts on pretax income, as follows:a. For IASB field testing we determined that all of the cash flows for the VA base contract and

riders vary directly with the underlying assets and as a result, all changes in the insuranceliability related to discount rates were reflected in pretax income.

b. All changes in estimates of future cash flows under the FASB results were recorded inpretax income, whereas changes in estimates related to M&E charges were recordedagainst the CSM under the IASB model. (We interpreted paragraph B68 of the IASB ED toindicate that assumption changes impacting rider reserves were excluded from CSMunlocking.)

c. The impact of changes in estimates of future cash flows reflected in FASB pretax income in2008, 2009 and 2010 was comparable to the total of changes in estimates of cash flows,changes in risk adjustment and changes in discount rates that were recorded directly inIASB pretax income, which led to similar FASB and IASB pretax income results in thoseyears (see Exhibit 4.5.2A).

As pricing assumptions established at the beginning of 2008 did not account for the substantialchanges in equity markets that occurred during the year, business issued in 2008 generatedlosses at issue. As such, no CSM was established on the policies issued in 2008. As market

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conditions subsequently changed, a CSM was established on these contracts in 2009 withoutfirst reversing the loss through pretax income. The level of the CSM was relatively consistent inyears 2010 through 2012, but it was more volatile with the reduction and subsequent additionof CSM in 2008 and 2009 (Exhibit 4.5.2E). Generally, the IASB CSM absorbed pretax incomevolatility because it moved in the opposite direction of the present value of cash flows. Theamortization of the FASB margin was lower in years when the risk profile of the VA policiesincreased (e.g., 2008 and 2011) and higher in years when the risk profile of the VA policiesdecreased, as more margin was being amortized when the entity was being released from risk.Additionally as shown on Exhibit 4.5.2E, the IASB risk adjustment increased at a steady paceduring the study period, driven by new sales and changes in current discount rates.The graphs shown below and on the following pages support this analysis.Exhibit 4.5.2A

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Exhibit 4.5.2B

Exhibit 4.5.2C

40

Exhibit 4.5.2D

Exhibit 4.5.2E

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5. Key Observations on Discount Rate ImpactsThe business model of life insurance companies involves matching of assets and liabilities, byduration and cash flow, and the ALM process is a fundamental component of the operations ofany life insurer. The results presented in Section 4 emphasize the importance of establishing ayield curve to discount fulfillment cash flows that accurately reflects the economics of such abusiness model. In certain circumstances, intentional or unavoidable mismatches in theamount or duration of cash flows have real economic consequences for an entity. Both Boardshave acknowledged that an ideal accounting model accurately reflects these economicmismatches, but removes or minimizes accounting impacts that are not reflective of actualeconomics.We observed two areas of our field testing, in particular, that appeared to produce accountingresults that we did not believe to be reflective of underlying economics, each of which isdiscussed in detail below. Sections 6.1.2 and 6.1.3 include additional findings andobservations from our field testing with respect to discount rates.

5.1 Observations on Discounting Longer-Duration Cash Flows

The fulfillment cash flows of many insurance contracts are projected to occur many years intothe future and, in certain cases, the length of time between contract inception and claim orbenefit payment can exceed 20–30 years. In particular, the majority of cash outflows for payoutannuity, retirement and long-term care products are often projected to occur 30–60 years aftercontract inception. As such, tenors on the yield curve used to discount these fulfillment cashflows must be determined, even though there may be no such points on observable yieldcurves currently available.For our baseline testing we set all tenors on the yield curve beyond the last observable pointequal to that point. This was partly for simplicity and consistency, but also in recognition thatother methodologies may have been inconsistent with each other and with the Boards’ statedobjective that the discount rate reflects only the characteristics of the insurance contractfulfillment cash flows.To determine the quantum of the impact that these long-dated points on the yield curve canhave, we performed a sensitivity test on the Retirement segment. We adjusted points on thediscount rate curve beyond 20 and 30 years for an upward parallel shift of 50 basis points. Thetable on the following page presents these impacts on the present value of fulfillment cashflows at 31 December 2012, which would appear to be more than inconsequential.

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Table 5.1A

Impact on present value offulfillment cash flows

Tenor Impacted FASB IASB30+ years -5.1% -5.5%20+ years -8.3% -8.9%

Cash flows associated with insurance contracts utilizing the building block approach can bedivided into the following three general categories, based on duration:a. Those cash flows that can be reasonably matched with cash flows from invested assets or

derivatives, where recognition in OCI of a mismatch is appropriate;b. Those cash flows that cannot be reasonably matched due to lack of readily available

assets/derivatives in the market, but where there are observable rates (i.e. an inactive orless active market); and,

c. Those cash flows that cannot be matched with cash flows from invested assets orderivatives (i.e. beyond the period where interest rates are observable).

Most of the volatility that we observed in OCI for certain segments is emanating fromcategories (b) and (c) above (refer to Exhibit 5.1A). We have interpreted the guidance asrequiring the discount rates for these periods as being either current observable rates or anextrapolation of such rates. While these rates may be appropriate in a fair value measurementmodel, they may be less relevant in a fulfillment cash flow model, as current indication ofmarket rates well into the future, may not be an accurate indication of actual interest rates inthose future periods.Current practice under U.S. GAAP (loss recognition testing) and current Canadian actuarialstandards utilize expected long term rates which are more consistent with long term averages.Both Boards have acknowledged the challenge of establishing points on the yield curve forlonger-duration cash flows, stating that:

“When observable market variables are not available or do not separately identify therelevant factors, an entity uses estimation techniques to determine the appropriate discountrates taking into account other observable inputs, where available. For example, the entitymay need to determine the discount rates applied to cash flows that are expected beyondthe period for which observable market data are available using the current, observablemarket yield curve for shorter durations.”9

Both Boards also write in the Basis for Conclusions for their respective EDs:“for points on the yield curve in which there are no observable market prices, an entityshould use an estimate that is consistent with U.S. GAAP guidance on fair valuemeasurement, particularly for Level 3 fair value measurement… because forecasts ofunobservable inputs tend to put more weight on longer term estimates than on short-term

9 ASC 834-10-55-96 and IASB ED paragraph B71.

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fluctuations, that would counteract concerns that current period fluctuations in discountrates exaggerate the volatility of very long-term liabilities”10.

We performed a second sensitivity to quantify the impact that an alternative approach wouldhave on the measurement of the insurance contract liability for the Retirement segment.Instead of setting all later tenors equal to the last observable point on the yield curve (i.e., 30years), we selected a longer-term assumption (6% used for illustrative purposes) and gradedto that point over years 16–30 and separately from years 31–40.Our decision to grade to longer-term assumptions from years 16 – 30 or 31 - 40 was based onfair value measurement guidance. The fair value hierarchy gives priority to Level 1 inputs, thenLevel 2 inputs before allowing for Level 3 inputs, but acknowledges that “Unobservable inputsshall be used to measure fair value to the extent that relevant observable inputs are notavailable, thereby allowing for situations in which there is little, if any, market activity for theasset or liability at the measurement date.”11

The result of our sensitivity testing is provided in the graph below.Exhibit 5.1A

* Note, in addition to assets held as Available-For-Sale (AFS), assets are also recorded at fairvalue with changes recorded in pretax income and at amortized cost.

As demonstrated by the graph above, the volatility that was being caused by our baselineapproach is mitigated by the sensitivities we performed. This would appear to support an

10 FASB ED BC151 and IASB ED paragraph BCA81.11 ASC 820-10-35-53.

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approach similar to the sensitivity that we performed, though we note that the methodologyand inputs used may need to be refined to improve their consistency and reliability across allproducts and entities.

5.2 Observations on Potential Accounting Mismatches

The Boards attempted to respond to the concerns of the preparers and users of the financialstatements of life insurance entities by introducing concepts described earlier in this documentas (a) the top-down approach to determining a discount rate and (b) the OCI solution formitigating pretax income volatility due to changes in discount rates. The Boards’ efforts on thisfront are welcome, but certain aspects of the proposals in the EDs may still result in accountingmismatches.In theory, even if an insurer held an asset portfolio whose cash flows were perfectly matchedwith the insurance contract fulfillment cash flows in terms of currency, amount, and timing, anaccounting mismatch would result in the current measurement model. As noted above, theBoards understand and have acknowledged this point and have taken steps in the proposalsto mitigate the accounting mismatch but have not removed it altogether. We acknowledge thatthe Boards rejected the use of asset-based rates due to their stated objective that a discountrate reflect only the characteristics of the liability, but the mismatch that results from de-coupling the asset returns from the liability discount rate still produces an accounting mismatchthat impacts the financial results and position of insurers.We believe that the Boards’ stated objective was based on the notion that the valuation of aninsurance contract liability (asset) should be independent of the varying investment strategiesemployed by different entities to avoid inconsistency between entities’ reported results. Wealso believe that a methodology could be established that does not reduce consistencybetween entities’ results, while also recognizing the very real linkage between the assets aninsurer holds and the liabilities it issues. Any other methodology introduces accountingmismatches that could inaccurately represent the economics of the business.When entities use derivative instruments to hedge movements in insurance contract liabilities,for fair value hedges, current U.S. GAAP requires measuring the hedging instruments at fairvalue with movements recorded in pretax income, while for cash flow hedges, movements inthe hedging instrument are recorded in OCI until the hedged transaction occurs (or does notoccur). Certain aspects of the proposed measurement model prohibit recognition ofmovements due to market factors (particularly interest rates) in income, which is inconsistentwith the treatment of fair value hedge derivatives. This relationship could be considered furtherby the Boards.

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6. Findings and ObservationsThis section sets out the key findings and observations from our field testing. In the course ofthe project, we gained an improved understanding of the impacts of the proposed standardsand an understanding of the practicability and feasibility of the requirements of the proposals inthe EDs.We do not provide comments on all aspects of the EDs but instead we focus on our keyfindings and observations in areas where we encountered uncertainty interpreting theguidance, challenges applying it, or outcomes that were not reflective of our expectations orthe underlying economics of the business.We have divided this section into subsections based on the following four aspects of the EDs:6.1 Initial and subsequent measurement of the insurance liability (asset)6.2 Recognition of insurance contract revenues, expenses and other comprehensive

income (subsequent measurement)6.3 Insurance contract revenue and expense presentation6.4 Other specific topicsEach section is separated further into specific issues and includes references to relevantsections of the EDs, a description of our approach to applying the guidance, any simplifyingassumptions or judgments made during testing and observations we noted as a result of thetesting. We describe certain challenges faced in interpreting and/or applying the guidance,financial outcomes that were inconsistent with our expectations and potential alternatives ourfield-testing approach considered, either qualitatively or through a quantitative sensitivity test.Throughout this section, language from the FASB ED is used when the requirements betweenthe FASB and the IASB are the same. References to the location of guidance are included forboth the FASB and IASB EDs. Where there are significant differences in substance (asopposed to simply terminology), those differences and their impacts are explicitly commentedon within the relevant subsections.

6.1 Initial and Subsequent Measurement of the Insurance Liability (Asset)

6.1.1 Expected future cash flows

GuidanceCash flows used in the measurement of the insurance contract liability shall represent “thepresent value of the unbiased, probability-weighted estimate of future cash inflows andoutflows that will arise as the entity fulfills the insurance contract.” Estimates of cash flowsshould “(a) reflect the perspective of the entity but, for market variables, be consistent withobservable market prices, (b) incorporate, in an unbiased way, all available current informationabout the amount, timing, and uncertainty of all cash flows that will arise as the entity fulfills the

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insurance contract, and (c) include only those cash flows that arise within the boundary ofexisting contracts (that is, all cash inflows and all related cash outflows that the entity will incurdirectly in fulfilling a portfolio of insurance contracts).”12

Approach and simplifying assumption

In all cases, for practical purposes, we used currently available cash flow projection models forthe portfolios of products that were tested.For simplicity, the field-testing results did not adjust expense cash flows for impacts ofoverhead allocations.ObservationsOur experience indicates that, upon actual application of the proposed guidance, most, if notall, of the actuarial models that were currently available would require fundamental changes to(among other things):a. Modify them to meet the measurement requirements of the EDs, including the objective of

a probability-weighted mean (this includes stochastic modeling for situations wherestochastic scenarios are required);

b. Allow for anticipated expansion of inputs, whether for additional policyholder data and/orattributes or for economic or non-economic assumptions;

c. Incorporate the processing power and data-storage capacity that would be required toperform multiple runs for every portfolio to produce financial results and earningsattributions at each reporting date; and,

d. Incorporate the required level of processes, procedures and controls to produce financialstatement and related disclosure amounts that are certifiable and explainable bymanagement and auditable within reasonable time frames for timely and accurate internaland external financial reporting.

Where a consolidated entity reports under U.S. GAAP and its subsidiaries are required toreport under IFRS (or vice versa), the upgrades or changes described above would have to bebuilt considering the fundamental differences between the models that are presently proposedby the FASB and IASB (e.g., treatment of overhead expenses, acquisition costs and portfoliodefinitions, etc.).Among other things, system upgrades would need to take into account the implications of anychanges in definitions of portfolios, contract boundaries, estimated returnable amounts (FASB)or non-distinct investment components (IASB). Such system upgrades are possible if the timeand resources are available to implement them, but the extent of resources and time requiredto do so should not be underestimated.Proposals related to acquisition costs, separation of non-insurance components, contractboundary and portfolio could have significant impacts on cash flows and cash flow models.These topics are covered separately later in this document.

12 Proposed ASC 834-10-30-2 to 4 and IASB ED, paragraph 22.

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6.1.2 Current discount rates

This section provides additional detail on our approaches and findings related to the discountrates used at inception of an insurance contract and subsequently for balance sheet andcomprehensive income purposes.

Interest rates and corporate bond spreads moved significantly throughout the five year period.The impact of the change in the yield curve on the segment results is discussed in Section 4.

Table 6.1.2A

Rates at 31 December (%) 2007 2008 2009 2010 2011 2012 30 Sep2013*

U.S. Treasuries13:10 year 4.03 2.21 3.84 3.30 1.88 1.76 2.6230 year 4.45 2.68 4.64 4.34 2.90 2.95 3.69

U.S. Corporate A13:

10 year 5.78 6.32 5.45 4.86 4.08 3.01 3.88

30 year 6.40 6.75 6.18 5.90 4.94 4.25 4.89

* Note that 30 September 2013 rates were not used for our field testing, but have beenincluded for reference as they increased from 2012 to be between 2010 and 2012 rates.

Guidance

The EDs require that the measurement of the cash flows reflect the time value of money usingthe discount rates that reflect the characteristics of the insurance contract liability and are both:

a. “Consistent with observable current market prices for instruments with cash flows whosecharacteristics reflect those of the insurance contract liability in terms of, for example,timing, currency and liquidity”

b. Exclusive of “any factors that influence the observed rates but are not relevant to the cashflows of the insurance contract”14

While the EDs do not prescribe a method for determining discount rates, two methodologiesare discussed:

a. Top-down – A yield curve that reflects current market rates of returns either for the actualportfolio of assets the entity holds or for a reference portfolio of assets with characteristicssimilar to those of the insurance contract liability adjusted to remove market risk premiumsfor the assets included in the portfolio and differences in timing of cash flows

13 Interest rate data obtained from Bloomberg.14 Proposed ASC 834-10-30-11 and IASB ED paragraph 25.

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b. Bottom-up – A risk-free yield curve adjusted for differences in liquidity characteristicsbetween the reference assets used to obtain the risk-free rates and insurance contractliability15

The EDs state that:

“When observable market variables are not available, an entity uses estimation techniquesto determine the appropriate discount rates, taking into account other observable inputs,where available. For example, the entity may need to determine the discount rates appliedto cash flows that are expected beyond the period for which observable market data areavailable using the current, observable market yield curve for shorter durations.”16

In their basis for conclusions, the Boards also note that:“for points on the yield curve in which there are no observable market prices (especially forliabilities that are expected to be settled many years from the reporting date), an entityshould use an estimate that is consistent with existing U.S. GAAP guidance on fair valuemeasurement, particularly for Level 3 fair value measurement.”17

The EDs also require entities to “maximize the use of current observable market prices ofinstruments with similar cash flows”.18

ApproachWe used the top-down methodology for every product tested.a. We developed yield curves for each product line using either an actual or reference asset

portfolio held to back the insurance liabilities consisting primarily of fixed income securitiesbut also including equities and alternative asset classes.

b. We determined market yields at various tenors on a yield curve produced for a portfolio ofassets by referencing the asset allocation assumed when pricing the product or a targetallocation developed by the investment department of the entity.

c. If there were tenors on the yield curve of the asset portfolio (actual or reference) that werenot available in the observable period, then we interpolated market spreads for theadditional tenors as appropriate.

d. No explicit adjustments for timing differences of the manner of those in the ED examplewere made to the top-down yield curves, nor could we think of a situation in which it wouldbe necessary to do so.

e. We held the last point on the observable market yield curve level for periods beyond thelast observable point. As the last observable rate was updated each period, the rate usedon all cash flows in the unobservable period was updated by the same amount. Afterinternal discussion of potential alternatives, we determined that this approach wasconsistent with the language in the EDs.

15 Proposed ASC 834-10-55-94 to 95 and IASB ED paragraph B70.16 Proposed ASC 834-10-55-96 and IASB ED paragraph B71.17 Proposed ASC 834 BC151 and IASB ED paragraph BCA81.18 Proposed ASC 834-10-55-93 and IASB ED paragraph B69.

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f. Where equities or other alternative assets were included in the asset portfolio, we usedlong term rates of return as the starting point and adjusted to remove risk marginsunrelated to the liability.

g. For VA products, because the segregated funds were not modeled, we used the risk-freerate without adjustment for the discount rate as a proxy for the top-down approachassuming risk-neutral returns.

Observations – implementation issues

In performing our field testing we identified the following practical and conceptual challengesfor initial implementation:a. Determining the yield curve to the last observable tenor for an actual (or reference) asset

portfolio (methodology and data limitation);b. Extrapolating points on the yield curve beyond the period where rates are observable in the

market (methodology limitation); and,c. Estimating market risk premiums to be removed from a top-down yield curve, even in

periods where overall market rates are observable, e.g., expected and unexpected defaultrisk premiums (methodology limitation).

The degree of effort required for actual implementation would be substantial and could impactan entities’ ability to meet the anticipated effective dates of the proposed guidance.Observations – comparability of actual (or reference) yield curvesIn all years except 2008, the top-down yield curves produced were relatively consistentbetween entities and products. While the market dislocation experienced during the secondhalf of 2008 was an unusual event, such events could occur again in the future, resulting indifferent liability measurements of similar products issued by different entities. Thepracticalities of providing comparable information under these conditions might be overcomethrough disclosures.While noting that small differences in yield curves can have a significant impact onmeasurement (particularly for very long duration liabilities), some variability between entitiesand, even, products will always exist due to the complex and judgmental nature of measuringmarket risks.The following graphs show the top-down yield curves used in 2007, 2008 and 2012 asindependently derived by the companies in the Group. The letters A–F in these graphs refer toindividual products in no particular order.19

19 There are only six curves presented as two products used the same curve and VAs are not included due to theuse of risk-free rates.

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Exhibit 6.1.2A

Exhibit 6.1.2B

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Exhibit 6.1.2C

Observations – impact of changes in interest rates on cash flows more than 20 years out

The results observed in Section 4 that indicated the noticeable impact of longer-dated pointson the yield curve on the measurement of fulfillment cash flows, we tested the sensitivity ofboth the liability and total comprehensive income of a change in the discount rate assumptionused to discount cash flows beyond the point where observable rates are the best indicator ofmarket assumptions. To do this, we calculated the fulfillment cash flows for one segment(Retirement) at 31 December 2012 assuming a 50 basis point increase in rates after all tenorsgreater than 30 years and after 20 years. We assumed that the asset OCI was unchanged.The impact on the fulfillment cash flows is presented in the table below.

Table 6.1.2D

Impact on present value offulfillment cash flows

Tenor Impacted FASB IASB30+ years -5.1% -5.5%20+ years -8.3% -8.9%

The sensitivity test demonstrates the significance that even a relatively small change indiscount rates in periods far into the future can have a material impact on the present value offulfillment cash flows if the duration of the insurance liabilities is very long.

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Given the potential lack of correlation between current market rates and what will actuallyhappen 20 or 30 years from now, an alternative measure could be the incorporation of long-term historical averages, supported by disclosure of the sensitivity of OCI to current rates.Observations – adjustments for differences in timing of cash flows

When applying the top-down methodology, the ED requires adjustments for the differencesbetween the timing of the cash flows of the assets in the portfolio and the timing of thefulfillment cash flows.20 The FASB ED provides an example of how adjustments for timingdifferences might be made by substituting certain instruments with others that result in anasset portfolio with cash flows exactly matched in terms of timing.21 This approach would onlybe possible if points on the yield curve of the asset portfolio where no input was observed canbe supplemented with an input from the yield curve of an asset that was observable, but notpreviously included in the asset portfolio.Our interpretation of this requirement was that such an adjustment would only be required ifdiscounting was based on a single discount rate rather than a yield curve or an actual portfoliowithout sufficient investments to provide all observable points. Although the ED only explicitlyrequires this adjustment for top-down discount rates, we believe that it would be applicable tobottom-up rates as well.Observations – other

As drafted, the margins established would be heavily dependent on the prevailing interest rateenvironment at inception. If historical levels of interest rate volatility persist, long durationpolicies written a few quarters apart, with identical terms and risks, would have significantlydifferent margins at inception. However, the ultimate profit on the policies would be very similaras the policies share the same interest rate experience over the several decades they are in-force. Separate disclosure of margin revenue and interest income and expense would presentthis inconsistency on the face of the statement of comprehensive income.Use of a discount rate that better reflects management’s expectations of returns in the longerend of the curve would result in a closer representation in the margin of the expected profit atissue to which performance should be measured against.

6.1.3 Market risk premiums (adjustments for expected and unexpected defaults)

Guidance

When applying the top-down methodology, the EDs require that:“Entities remove factors that are not relevant to the insurance contract liability, such asmarket risk premiums for the assets included in the portfolio. Depending on thecharacteristics of the liability, market risk premiums might include compensation forexpected credit risk losses, or unexpected credit risk losses (the risk of losses exceeding

20 Proposed ASC 834-10-55-94c and IASB ED paragraph B70(a)(ii).21 Proposed ASC 834-55-98 to 102.

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the expected value) and other investment risks taken by the entity, unless those risks canreduce the cash flows passed to the policyholder.”22

The EDs also require that entities:“maximize the use of observable market prices,” and “when observable market variablesare not available or do not separately identify the relevant factors, an entity should useestimation techniques to determine the appropriate discount rates taking into account otherobservable inputs, where available. [and that] market prices for credit derivatives mayintroduce factors that are not relevant to determine credit risk meaning that an entity mayneed to establish its own method to determine the credit risk component”.23

Though not explicitly included in the EDs or in the bases for conclusions (although arguablyimplied by IASB ED paragraph BCA 81), the Boards indicated that “historical default data willbe a key component in determining expected credit losses, but this needs to be adjusted toreflect current conditions if applicable.”24

The EDs also require that “to the extent that the amount, timing or uncertainty of cash flowsarising from an insurance contract depends wholly or partly on the performance of specificassets, the discount rates used in measurement of the insurance contract liability shall reflectthat dependence.”25

Approach and simplifying assumptions

We utilized historical averages of actual default data to calculate expected default riskpremiums and, in one case, to remove historical prepayment risk present in the asset portfolio.Because the data used for quantifying expected default risk premiums resulted in a constantspread as opposed to a term structure, we utilized that rate for every tenor on the curve.Some companies in the Group held this spread fixed in all calendar years tested, while otherstemporarily adjusted expected default risk during the 2008 – 09 financial crisis, reversing theadjustment after the crisis. We agreed that each approach had merits, but that each companyin the Group could apply judgment in selecting the approach deemed most reflective of thecharacteristics of the insurance cash flows.For practical purposes, we set the risk premium for unexpected defaults to be 20 basis pointsas an approximation.Because there is no established, consistent and reliable methodology for reflecting cash flowdependencies in discount rates, a proxy was used to adjust unexpected default premiums forapplicable products based on an indicative level of risk-sharing between insurer andpolicyholder.Observations

In general, the approach used reflected changes in the price of liquidity, particularly during thefinancial crisis. When observable market asset yields rose and then fell during the most recent

22 Proposed ASC 834-10-55-94b and IASB ED, paragraph B70(a)(i).23 Proposed ASC 834-10-55-96 and IASB ED, paragraph B71.24 Joint Board Meeting Papers 5A/63A, dated 11 April 2011.25 Proposed ASC 834-10-30-12 and IASB ED, paragraph 26(a).

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financial crisis, the top-down approach attributed most of the change in rates to liquiditypremiums, and so was incorporated when deriving the top-down liability discount rates. In mostcases, this mitigated the additional volatility in income and/or equity that would have resultedhad the changes in interest rates applied to assets alone. In the case of the company in theGroup that adjusted expected default risk premiums during the financial crisis (2008 – 2009),the adjustment resulted in increased volatility in OCI and equity.

6.1.4 Risk adjustment (IASB)

Guidance

The IASB ED requires an entity to apply a risk adjustment to the expected present value ofcash flows used.26 The objective of the risk adjustment is to measure “the compensation thatthe entity would require to make the entity indifferent between (a) fulfilling an insurancecontract liability that has a range of possible outcomes; and (b) fulfilling a liability that willgenerate fixed cash flows with the same expected present value as the insurance contract.”27

The IASB EDs’ basis for conclusions specifically notes that, since the objective refers to the“compensation that an entity would require,” the risk adjustment incorporates both the degreeof diversification of the entity and the entity’s aversion to risk, which could, in principle, result indivergence in practice and inconsistency in reporting.While the IASB ED does not restrict the methodologies that can be used to estimate a riskadjustment, the basis for conclusions still identifies three techniques that could be used.Approach and simplifying assumptions

For purposes of field testing, we used a cost of capital (CoC) method for calculating the riskadjustment for all products. This approach measures the risk adjustment by determining thelevel of capital an entity would need to hold in order to fulfill its obligations. Although thecalculations varied from product to product based on available information, they wereperformed using a cost of capital rate of 6% on estimated required capital. For simplicity, weused the same cost of capital rate for all products.The risk adjustments calculated did not take into account any diversification benefits acrossproducts or segments as required by the IASB ED.We did not translate the results of the risk adjustment calculations determined based on a CoCapproach into a confidence level as is required by the IASB28 because, short of re-calculatingthe risk adjustment using a confidence-level approach, we did not know how to perform thisconversion.

26 IASB ED, paragraph 27.27 IASB ED, paragraph B76.28 IASB ED, paragraph 84.

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Observations

Exhibit 6.1.4A

Exhibit 6.1.4A shows risk adjustments by product for each year as a percent of the PV of cashoutflows. For all products A-G, the risk adjustments were small relative to the total PV of cashoutflows. Additionally, the risk adjustments calculated may have been overestimated becausewe did not take into account diversification as allowed by the Boards. For some of theseproducts, the risk adjustments, although small, were volatile. We also noted that movements incurrent discount rates had an impact on the risk adjustment from period to period. For mostproducts, movements in discount rates would likely be the primary driver of changes in the riskadjustment.Products H-I represent the VA products tested. The risk adjustments for these products aresomewhat more significant compared with the PV of cash outflows than for the other productsand are much more volatile.

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6.2 Recognition of Insurance Contract Revenues, Expenses and OtherComprehensive Income (Subsequent Measurement)

6.2.1 FASB margin

6.2.1.1 Driver for release

Guidance

The FASB ED requires that:“an entity shall recognize the margin determined at initial recognition as revenue in netincome over the coverage and settlement periods as the entity satisfies its performanceobligation to stand ready to compensate the policyholder on occurrence of a specifiedevent that adversely affects the policyholder.”29 The FASB ED goes on to say that “an entitysatisfies its performance obligation as it is released from exposure to risk as evidenced bya reduction in the variability of cash flows of a portfolio of insurance contracts.”30

The FASB ED requires that;“[An] entity shall consider changes in actual and expected cash flows of a portfolio ofcontracts in determining its release from risk, which may affect the pattern in which themargin is recognized, but shall not adjust the margin for those changes unless the changesare deemed to be a contract modification.”31

ApproachWe selected a single driver for each product that was considered to be reflective of the riskinherent in the insurance contract that was characteristic of the performance obligation of theinsurer for that particular product. Drivers selected varied by product. For example, for theterm-life product selected for testing, the primary risk was considered to be mortality risk andthe driver selected was the face amount of contracts in force.For certain drivers, in order to take into account the simple impact of the passage of time; weused a present value measure as opposed to undiscounted movements in the selected driverfor recognition of the margin. While we selected certain drivers for field testing, these driversmay change with more experience in this area.ObservationsThe selection process and practical application of the driver reflecting an entity’s release fromrisk are judgmental and more complex than they may first appear. For example, in choosing abasis for amortization, consideration was given toward determining whether it would be moreappropriate to use the change in a given metric versus the balance of the metric itself. Withoutthe need to quantitatively test alternatives, we observed that the driver used to recognize

29 Proposed ASC 934-10-35-18.30 Proposed ASC 934-10-35-19.31 Proposed ASC 934-10-35-20.

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margin in the statement of comprehensive income has a significant impact on the financialresults of an entity under the proposed requirements, and different drivers could producematerially different outcomes to an entity’s profitability and earnings profile.We observed that the factors for determination of a driver require some degree ofinterpretation based on complexities noted during our field testing. In particular, references toreduction in face value or net amount at risk might overlook specific practical applications. Forexample, the substantial “shock lapse” at the end of a level term-life insurance product mightotherwise result in deferral of nearly all margin recognition until the end of the level term periodand release it all due to a non-insurance event. We attempted to reduce the degree of marginrecognized in income resulting from non-insurance coverage events, such as lapses and otherchanges in previous estimates, and added more weight to periods where insurance coveragewas provided (e.g., as the entity stands ready to compensate the policyholder).We also noted that using policy counts as a driver of the release from risk would assume ahighly homogenous portfolio, which may not often be the case, either at inception of theportfolio or later, as the composition changes over time and thus would make a poor driver forthe release of the margin for a heterogeneous group of policies.

6.2.1.2 Adjusting the FASB margin

Guidance

The margin can be increased as a result of a non-substantial contract modification. This occurswhen “the parties to the contract approve a change in the terms of a contract.”32 Formodifications that are not substantial but entitle the policyholder to additional benefits,additional margin can be added to the original margin using the same discount and interestaccretion rates33.Approach and simplifying assumption

Due to data and timing restrictions, we did not specifically identify additional premiumsreceived in exchange for increases in future coverage or services as opposed to additionalpremiums paid due to unexpected experience (e.g., policyholder longevity). Thus, we treatedchanges in premiums and related coverage after the inception of a contract as changes incash flows with no effect on the FASB margin.No contract modifications were assumed to occur for any of the products during the periodtested.Observations

Our initial interpretation of “change in the terms of a contract” was that this must involve analteration to the wording of the contract, agreed upon by both parties. Upon subsequentconsideration, we believe that the use of the word “terms” might result in varyinginterpretations of what represents a “change in terms.” For example, paid-up additions might

32 Proposed ASC 834-10-40-4.33 Proposed ASC 834-10-40-6.

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be considered a change in terms due to the change in premium and face amount without anyalteration to the written “terms” of the contract. As noted above, we did not test the impact thatthis would have on the products tested.

6.2.2 IASB contractual service margin and unlocking

6.2.2.1 Driver for release

Guidance

The IASB ED states that “an entity shall recognize the remaining contractual service margin inprofit or loss over the coverage period in the systematic way that best reflects the remainingtransfer of services that are provided under the contract.”34 In the basis for conclusions, theIASB comments that the service provided would mainly be insurance coverage, but can alsoinclude asset management and other services.Approach

For products primarily impacted by insurance risk (e.g., Term, LTC and SPIA), we used thesame drivers for the release of the IASB contractual service margin as the FASB’s margin. Forproducts impacted by changes in underlying assets (e.g., VAs), different drivers may berequired. For VAs, the service to be provided was deemed to be the management of the VAassets. We used policy count as a driver because the level of service of managing assets wasconsidered to be the same for each policy.ObservationsWe noted that the inclusion of a risk adjustment in the IASB model would appear to capture atleast some, if not all, of the FASB principle that the margin be recognized as the variability inexpected future cash flows is reduced. The driver for the FASB explicitly refers to the conceptsdefined as insurance risk, while the IASB refers only to services, which can be interpreted toinclude more than just insurance risk or even exclude insurance risk.For products where services are solely coverage of insurance risk, the two drivers (FASB andIASB) could be similar; but for products where services are more than solely coverage ofinsurance risk, the two drivers (FASB and IASB) are unlikely to be the same, and whencombined with the risk adjustment, may result in significantly different profit profiles. Due to thefundamental difference between the locked-in FASB margin and the unlocked IASB CSM, acomparison of the two was not possible.

34 IASB ED, paragraph 32.

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6.2.2.2 Unlocking the contractual service margin

Guidance

The IASB ED states that the contractual service margin should be adjusted for favorable (orunfavorable) “differences between the current and previous estimates of the present value offuture cash flows, if those future cash flows relate to future coverage and other futureservices.”Increases in the margin are allowed for favorable changes in expected future cash flows (to theextent those future cash flows relate to future coverage and other future services), whileunfavorable changes decrease the contractual service margin only to the extent that it doesnot become negative, in which case a loss is recognized immediately (refer to 6.2.7 Loss-making contracts). The IASB ED provided application guidance for unlocking the contractualservice margin in paragraph B68, which states that “the contractual service margin:a. is not adjusted for changes in estimates of incurred claims, because these claims relate to

past coverage ...b. is adjusted for experience differences that relate to future coverage; for example, if they

relate to premiums for future coverage ...c. is not adjusted for a delay or acceleration of repayments of investment components if the

change in timing did not affect the cash flows relating to future services. For example, if anentity estimates that there will be a lower repayment in one period because of acorresponding higher repayment in a future period, the change in timing does not affect thecash flows relating to future periods. The contractual service margin is adjusted only for anynet effect on the contractual service margin of the delay or acceleration …

d. is not adjusted for changes in estimates of cash flows that depend on investment returns ifthose changes arise as a result of changes in the value of the underlying items …

e. is adjusted for changes in estimates of cash flows that are expected to vary directly withreturns on underlying items only if those cash flows relate to future services under theinsurance contract. For example, changes in cash flows relating to asset managementservices that are provided under a contract relate to future services under the insurancecontract. Gains or losses on the underlying items do not relate to unearned profit fromfuture services from the insurance contract and are recognized in accordance with theStandards relevant to the underlying items.”

Approach

Applying the guidance in paragraph B68 requires models that can split changes in estimates ofthe present value of future cash flows between:a. claims that have been incurred and those that will occur in the future (B68a)b. impacts of assumption changes and differences in the composition of the portfolio

compared to prior expectations and current period experience differences (B68b and B68c)c. changes in the value of underlying items and other changes for cash flows that depend on

investment returns (B68d)

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d. those that relate to future services and those that do not for cash flows that vary directlywith returns on underlying items (B68e)

Currently available models are unable to consistently and reliably perform the splitting ofimpacts of changes in estimates of future cash flows as conceived by the IASB, so we wereunable to apply the guidance exactly as it was written. We attempted to apply the guidance inB68d and B68e as we interpreted it, but were unable to make any adjustments for paragraphsB68a, B68b or B68c.The guidance in B68d and B68e was considered relevant to Par WL, ULSG and VA productssince they include cash flows that depend on investment returns and/or cash flows that varydirectly with returns on underlying items. We encountered some difficulty in determining theintent of the IASB ED with respect to these two items and ultimately considered them inconjunction.For Par WL and ULSG, we specifically considered the treatment of impacts of changes ininterest credits or dividend rates to policyholders. We ultimately determined that the effect ofchanges in future cash flows due to changes in interest credits or dividend rates would notimpact the CSM.For VAs, changes in estimates of VA M&E charges were considered to vary directly withreturns on underlying items and we therefore adjusted the CSM for changes in estimates offuture M&E charges. Since options and guarantees issued related to the VAs vary indirectlywith returns on underlying items, in our baseline scenario, we did not adjust the CSM forchanges in estimates of VA options and guarantees. Since B68e also specifically states thatunrealized gains or losses on the underlying assets should not impact the CSM, no adjustmentwas made for those movements.We also performed sensitivity for VAs by adjusting the CSM for changes in options andguarantees that resulted from actuarial assumptions or in-force updates, but not for changes inthe interest rates or equity or fixed income markets. The results of this sensitivity are providedin Exhibit 6.2.2.2B.Observations

Notwithstanding the challenges noted in this section with respect to how to unlock the CSM,we observed that the unlocking of the CSM produced a pattern of earnings morerepresentative of current performance. This prevented the recognition of “day 2” or later gainsor losses on the basis of changes in estimates. For the Traditional Life Segment, in particular,it was clear that changes in assumptions resulted in an increase or decrease in future profits tobe earned as opposed to an immediate gain or loss.With respect to each component of paragraph B68, we have the following observations:B68a — separate actuarial model runs would be required to differentiate the changes inestimates of the present value of future cash flows for policies that are “on claim” and thosethat are not to meet the requirement of this guidance. As noted, for the purposes of this fieldtesting, we did not perform this calculation. For nearly all life insurance products, application ofthis criteria is expected to result in relatively small impacts since the time between when aclaim is incurred and paid is typically short for most life insurance products. For certainproducts, including LTC or long-term disability, the time between a policyholder incurring a

61

claim (e.g., going into care) and future payments may exceed five, ten or even twenty yearsand impacts of changes in estimates during that time could be material.

B68b — differences between the expected in-force policies and the actual population wereconsidered to always represent future coverage and the impact of the “in-force true-up” onestimates of future cash flows impacted the CSM. For example, if more term life policyholdersare in force at the end of a particular reporting period than expected due to lower thanexpected mortality, it was considered an assumption change. The ED is unclear as to how thistype of change in expectations should be treated, but is clear that experience differences (e.g.,benefits paid in the current period that were expected in a future period) should not impact theCSM. Irrespective of the conceptual need to consistently record such impacts, currentlyavailable models were not available for us to calculate them.B68c — the guidance provided in B68c only applies to products that are determined to havean investment component that is not separated from the insurance component (e.g., Par WL,ULSG and VA). Conceptually, we interpreted this guidance as requiring that the impact ofexperience differences related to more or less lapses in the current period should be removedfrom any impact to the CSM from changes in future cash flows. Similar to B68b, currentlyavailable models are not able to quantify this impact, so we did not perform this calculation.B68d and e — this guidance references “changes in cash flows that depend on investmentreturns [due to] changes in the value of the underlying items” and “changes in estimates ofcash flows that are expected to vary directly with returns on underlying items [that] relate tofuture services”. This language is somewhat inconsistent with the main body of the IASB ED,which caused us some confusion in attempting to apply it.For example, cash flows for Par WL and ULSG products depend on investment returns, butthat dependence is typically unrelated to the changes in the value of the underlying items.Similarly, the present value of cash flows related to options and guarantees on VA contractsmight be considered as impacted directly (or indirectly) by the value of underlying items, butnot necessarily returns on underlying items. Also, it is unclear whether the performance relatedto the option or guarantee would be a future service. Specifically related to our consideration ofthe VA options and guarantees, we performed a sensitivity to exclude the impact of marketmovements on VA measurement from the unlocking of the CSM. Exhibit 6.2.2.2B belowcompares the IASB total liability under baseline scenario and this sensitivity test.

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Exhibit 6.2.2.2B

The IASB total liability is more volatile under this sensitivity test than the baseline scenariobecause the CSM does not absorb the market impact on the present value of fulfillment cashflows. In principle, the movement in market interest rates might be offset by the movement inthe discount rate used to present value the fulfillment cash flows. Equity and other marketmovements would not be offset in this way so this would result in volatility as indicated abovebeing reflected in the statement of comprehensive income.

6.2.3 Changes in discount rates — non-asset-impacted cash flows (OCI)

GuidanceThe EDs state that:

“interest expense to reflect accretion on the insurance-related balances shall be reflectedin net income based on the interest accretion rates, which are the same as the discountrates that were initially applied at inception of the contract.”35 In addition, “entities mustrecognize changes in the present value of cash flows due to changes in the discount ratesin other comprehensive income and recognize in accumulated other comprehensiveincome the difference between the insurance contract liability recognized in the statementof financial position and the amount the insurance contract liability would be if it weredetermined at the interest accretion rates.”36

35 Proposed ASC 834-10-35-24 and IASB ED, paragraph 30(a).36 Proposed ASC 834-10-35-5 and IASB ED, paragraph 64.

63

We noted that the EDs specifically refer to the term “rates,” implying that the interest accretionrates should have a term structure (i.e., yield curve). The FASB ED provides simple examplesof accreting interest,37 but each of these examples uses a single discount rate for simplicityand does not provide any guidance as to the mechanics of accreting interest using a locked-inyield curve.Approach

We accreted interest using the locked-in forward spot rates implied by the discount yield curveat inception (or reset for certain contracts with participating features), except for certainproducts for which, due to data limitations, we utilized a single rate. Accreting interest using theimplied forward spot rates effectively results in discounting cash flows in future periods usingthe spot curve that was locked-in at inception (or reset subsequently).Observations

Accounting for available-for-sale investment assets under current and proposed requirements(fair value through OCI), utilizes a single effective yield to accrete interest. As a result, even ifasset and fulfillment cash flows were perfectly matched in timing and amount, the differentmethodologies (i.e., use of a single effective yield versus a locked-in curve and interest incomeon assets presented in OCI versus interest expense on the insurance liability presented in netincome) will result in a different amount recorded in OCI.

6.2.4 Changes in discount rates — unlocking the interest accretion rate (FASB)

Guidance

The FASB ED requires that:“An entity adjusts the interest accretion rates upon any change in expectations of thecrediting rates on the affected policies that will impact the measurement of the insurancecontract liability. The adjustment to the interest accretion rates shall result in the recognitionof interest expense on a level-yield basis over the remaining life of the portfolio of contracts.The degree to which the interest accretion rates for the portfolio are adjusted shall reflectthe relative value of the account balances to be credited and the extent to which thechange in expected interest crediting rates for the portfolio related to the changes inexpected asset returns to that portfolio affects the present value of expected cash flows onthose account balances.”38

ApproachWe unlocked the interest accretion rate to produce a single effective interest rate that wasused to accrete interest in pretax income after a change in expectations of future crediting ordividend cash flows.

37 Proposed ASC 834-10-55-112 to 123.38 Proposed ASC 834-10-35-25.

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ObservationsThe ED states that the adjustment to the interest accretion rate should result in interest beingrecognized on a level-yield basis over the remainder of the contract. This was interpreted toimply that a single effective yield must be used to accrete interest in the future. As shown inthe Results section of this document and in the table below, the results of field testing indicatedthat unlocking the interest accretion rate helped to reduce volatility in pretax income byaffecting the amount recognized in OCI.However, by using a level interest accretion rate, the rates over time are inconsistent with thecredited rates that generate the actual contract cash flows. This appears to cause somelumpiness in net income, even when the spread between asset yields and credited ratesremains relatively stable.

Exhibit 6.2.4A

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6.2.5 Changes in discount rates — cash flows impacted by returns on assets the entity is notrequired to hold (IASB)

GuidanceThe IASB ED requires that for “cash flows that are expected to vary directly with returns onunderlying items, the entity shall update [the interest accretion rates] when it expects anychanges in those returns to affect the amount of those cash flows.”39

Approach and simplifying assumptionsThis guidance would apply to the participating segment (ULSG and Par WL products) testedas part of this field testing. We interpreted that virtually all the cash flows in these contracts tovary directly with returns on underlying items, since all of the cash flows depend on thecontract remaining in force, which depends on the cash value remaining positive, which in turn,depends on dividends and credits. Therefore, for products with discretionary participatingfeatures, we reset the interest accretion rate for all cash flows. We were unable to split thecash flows under alternative interpretations of which cash flows vary directly with returns onunderlying items.Observations

As shown in Exhibit 6.2.4A in the previous section, the IASB methodology results in volatility inpretax income for the participating segment as compared with the FASB results. Mechanically,the reset FASB interest accretion rate defers the gain or loss on changes in crediting ordividend rates to future periods. Meanwhile, due partly to our approach to resetting interestaccretion rates and partly to the fact that not all movements in interest rates are passed on topolicyholders, the IASB methodology may exaggerate the impact of the interest rate changes.By resetting the discount rate to current market rates, AOCI is entirely eliminated for thosecash flows to which the reset applies.

In addition, we encountered difficulty in categorizing cash flows impacted by returns onunderlying items as directly or indirectly impacted. Had we split the cash flows, we noted thatthe IASB ED does not explicitly state whether the interest accretion rate for indirectly impactedcash flows is reset and this is inconsistent with prior decisions made by the IASB.

6.2.6 Splitting fixed and variable cash flows (IASB)

Guidance

The IASB’s ED indicates that “when an insurance contract a) requires the entity to holdunderlying items such as specified assets and liabilities, an underlying pool of insurancecontracts, or if the underlying item specified in the contract is the assets and liabilities of theentity as a whole; and b) specifies a link between the payments to the policyholder and thereturns on those underlying items,”40 measurement of the cash flows that vary directly with the

39 IASB ED, paragraph 60h.40 IASB ED, paragraphs 33 and 34.

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underlying item should be based on the underlying item, whereas cash flows that do notshould be measured according to the general cash flow guidance.ApproachDue to a variety of challenges, including complications getting data on a split basis and a lackof clarity of which cash flows would not be directly related to asset returns, we were unable toapply the IASB approach to splitting cash flows, therefore we did not separate the cash flowsof insurance contracts that are impacted by returns on underlying items (i.e., Par WL, ULSG,VA).ObservationsThe ED provides an example of how to split cash flows.41 We noted that this example iscomplex and difficult to apply to typical products in North America, where the cash flows thatare impacted may be discretionary. We believe that the simple example works only for veryspecific products that, among other criteria, have directly varying cash flows which remain afixed percentage of the underlying at all times. For example, this example does not addressissues with a VA contract, where the directly varying cash flows are affected by assetmanagement fees that accumulate over time. We also experienced difficulties in splitting thecash flows and thus used our judgment when applying the guidance for purposes of fieldtesting (refer to Appendix A).

We do not believe that the requirements of the IASB ED to split cash flows, particularly asdemonstrated by the illustrative example, can be applied in practice.

6.2.7 Loss-making contracts

Guidance

Within the Subsequent Measurement section of the EDs, the Boards require that “if theexpected cash outflows (including expected qualifying acquisition costs) of a portfolio ofinsurance contracts exceed the expected cash inflows, an entity shall recognize the remainingmargin as revenue in net income.”42 In order to apply this guidance, we recognized the need totrack the actual historic cash inflows and outflows in order to evaluate the net cash inflow (oroutflow) for the entire contract, not just the unexpired coverage, which adds additionalcomplexity, particularly for portfolios that incepted prior to the first period presented attransition for which this level of cash flow data may not be available.Once the margin of a portfolio of insurance contracts has been fully released, if future periods’cash flow assumptions change and result in a contract whose expected cash inflows exceedthe expected cash outflows, re-establishment of a margin may be required. No explicitguidance is provided by the FASB on this topic, but we assumed that the margin should not bere-established for purposes of testing the proposed FASB guidance. The margin may be re-

41 IASB ED, illustrative example 11.42 Proposed ASC 834-10-35-22 and IASB ED, paragraph 15.

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established under the IASB model, but no guidance is provided as to whether gains equal topreviously recorded losses must first be recovered.ApproachFor one product, we assumed that the contract became loss making in 2008 and released thefull FASB margin in that period. As expected, this release reduced the amount of the loss inthat one period.Where relevant, for the purposes of testing the proposed IASB guidance, we re-established themargin immediately, rather than first reversing previous losses through pretax income. Wenote that this results in an asymmetry that may distort consistency of results among reportingperiods when contracts become loss making and the periods when the value was recovered,as was shown in the results of our sensitivity performed. ObservationsFor the VA segment, market conditions in 2008 led to the 2008 portfolio (new business writtenin 2008) to be deemed onerous. As a sensitivity test, we developed a set of projectionsassuming that the market conditions in 2008 were sufficiently depressed causing all of the VAcontracts in force at the end of 2008 to become onerous, resulting in a release of all margin(i.e., margin on the transition block) on the VA block in 2008.As demonstrated in Exhibits 6.2.7A and B, a one-time release of margin when a contractbecomes loss-making results in a gain (or reduced loss) in the period of the assumptionchange that might inaccurately reflect the economics of the contracts in the period of theassumption change. In comparing the charts below, the loss in the year of the change wouldhave been far worse had the contract not become loss-making.

Exhibit 6.2.7A

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010 2011 2012

CU

Variable Annuity SegmentImpact of Assumed Onerous Contracts in 2008 on Proposed

FASB Liability

Proposed FASB - Baseline Proposed FASB - Onerous test

68

The total FASB insurance liability is smaller in this sensitivity test than in the baseline scenariofrom 2008 to 2012 because the entire margin is written off in the sensitivity test at the end of2008.

Exhibit 6.2.7B

Release of the remaining margin as revenue in the FASB model at the moment expected cashoutflows exceed expected cash inflows could result in substantial volatility that is notnecessarily indicative of any substantial change in the economics of the contract. Recognitionof a large gain (or reduced loss) at the time the contract is recognized as loss making would becounterintuitive and likely confusing to users. We believe that this one-time, large recognitionof the margin would also be counter to the FASB’s general approach of having a locked-inmargin. An unlocked margin might mitigate the issues noted above.

6.2.8 Acquisition costs

GuidanceFASB and IASB have different definitions of acquisition costs that could have materialconsequences when applied. Under both definitions, direct costs of obtaining new or renewalcontracts are considered to be acquisition costs. Under the FASB’s approach, only costs thatare directly related to contracts that were successfully obtained are included (i.e., acquisitioncosts that did not result in a new or renewal insurance contract are excluded). Under theIASB’s guidance, all directly attributable costs related to these efforts, including those that arenot directly attributable to contracts successfully acquired, are included.

(6,000)

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

2008 2009 2010 2011 2012

CU

Variable Annuity SegmentImpact of Assumed Onerous Contracts in 2008 on Proposed

FASB Pretax Income/(loss)

Proposed FASB - Baseline Proposed FASB - Onerous test

69

The present value of qualifying acquisition costs is determined at initial and subsequentmeasurement dates. Under the FASB’s approach, at each measurement date, the amount ofqualifying acquisition costs is included in the margin as:a. The present value of expected acquisition costs to be incurred (i.e., those costs that will be

paid in the future); andb. Less the present value of acquisition costs not yet recognized as an expense (i.e., the

amount remaining after the cumulative effect of amortization).Under the IASB’s approach, directly attributable acquisition costs are included within the cashflows for determining the present value of cash flows and initial CSM. The IASB ED requiresthat directly attributable acquisition costs be allocated and expensed over the coverage periodwith an amount included in revenue that equals the portion of the premium that relates torecovering those costs. Although acquisition costs are not reported separately from all othercash flows, they would still need to be tracked in a similar manner as that required by theFASB’s proposed guidance (e.g., in a notional account).Approach and simplifying assumptionsActual historic U.S. GAAP acquisition costs were used for FASB and IASB purposes for allproducts except two. As a practical expedient, we set IASB acquisition costs as presented inpretax income equal to FASB amounts.Upon initial measurement (assuming that the contract is profitable), the net impact on themargin is zero if no amortization has been expensed or any cash paid (i.e., none of the costshave been incurred). At each subsequent measurement date, the margin is increased for theamortization of qualifying acquisition costs (using the same pattern of recognition as themargin) and decreased when those costs are incurred (i.e., paid or accrued).Observations

Assuming that the cumulative qualifying acquisition costs incurred (i.e., paid) exceed thecumulative amortization, the calculations above produced a net “contra margin” equal to theamount of costs paid, less amortization at each reporting date, similar in nature to currentdeferred acquisition costs, but that the amortization includes costs that will be paid in thefuture, not just those already incurred.Because estimates of acquisition costs to be incurred are updated at each reporting date andincluded in the margin, assumption changes would impact the margin. Also, becauseacquisition costs are measured at their present value, changes in discount rates may impactthe margin and would therefore be recognized in OCI. There is no explicit guidance in theFASB ED about how to treat these impacts (e.g., exclude them from the statement ofcomprehensive income), so we did not reverse them.While both Boards have included a requirement in their EDs to present the amortization ofacquisition costs as an expense in the statement of comprehensive income and acorresponding amount in revenue, the differing methods of presentation result in practical andconceptual differences arising due to the FASB’s decision to include the acquisition costs inthe margin. Both EDs require that acquisition costs be expensed using the same pattern as themargin, and the EDs result in different drivers for the release of margin, accordingly acquisitioncosts would differ under actual application of the IASB guidance versus that of the FASB.

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The existence of differing principles for determining which acquisition costs are qualifying andthe mechanics of tracking and presenting qualifying acquisition costs under the BBAmeasurement model would result in significant operational complexity and differences infinancial results for entities that are required to produce both U.S. GAAP and IFRS financialstatements.

6.3 Insurance Contracts Revenue and Expense Presentation

Both the FASB and IASB ED require the presentation of insurance contract revenue on an“earned” basis. The FASB ED refers to a pattern “in proportion to the value of coverage andany other services that the insurer has provided” and the IASB ED to “the transfer of promisedservices arising from the insurance contract.” 43 Significant differences between the detailedguidance of the two EDs are covered separately in the subsections below.

6.3.1 FASB earned premium

GuidanceThe FASB ED requires that an entity recognize revenue:

“Over the coverage period in proportion to the value of coverage and any other servicesthat the insurer has provided ... to determine the amount of revenue to be recognized, ateach reporting date an entity shall estimate the cash flows attributable to the insurancecomponent based on current assumptions utilized in the measurement of the insurancecontract liability. Any effect of this re-estimation … shall be included prospectively inrevenue recognized from the beginning of the period in which the re-estimation occurs.”44

The FASB also provides Example 20 – building block – determination of insurance contractrevenue recognized in a reporting period (proposed ASC 834-10-55-162 to 169) as anexample of how revenue should be calculated in accordance with the guidance in the ED. Thisexample provides a table in paragraph 164 that appears to calculate insurance contractrevenue as the sum of expected insurance benefits, the release of margin for the period andany amounts charged to recover maintenance and benefit expenses in the cash flows.Additionally, revenue recognition must still be consistent with related expenses. Because themargin is locked in at inception, changes in future cash flows must impact pretax income in theperiod that the assumption is changed. Also, per the FASB ED, “an entity shall recognizeclaims, benefits and contract-related expenses when the claim is incurred and non-claimscosts when those costs are incurred.”45

Since an expense equal to the entire change in future claims or expenses expected isrecognized when the assumption change is made, it would double-count the impact of thechange if no adjustment were made to the future expected claims when they are actually

43 Proposed ASC 834-10-35-12 and IASB ED, paragraph 56.44 Proposed ASC 834-10-35-12 to 15.45 Proposed ASC 834-10-35-13.

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incurred. To avoid this double-counting, the amount of the future claims charged in the periodmust be “unwound” in future periods back to the amount originally assumed, and, to align withthe recognition of revenue, this unwind is adjusted prospectively to match the pattern of futureinsurance benefits. That is, unrecognized premium is adjusted up or down for changes ininsurance-related coverage, and the pattern of future recognition is matched to the latestestimate of the pattern of future insurance benefits.Insurers must also remove “estimated returnable amounts” from the total revenue to berecognized. Estimated returnable amounts are amounts that an insurance contract requires anentity to pay to policyholders “regardless of whether an insured event occurs.”46 Estimatedreturnable amounts are considered deposits received that are subsequently repaid to thepolicyholder and are therefore removed from both revenue and expenses.Approach

Due to the complexity of the insurance contract revenue presentation, particularly the unwinddiscussed above, our test was performed on the Par WL product only. Refer to Appendix C forthe earned premium presentation. Note that the first table in Appendix C shows the earnedpremium presentation as required by the FASB whereas the second table includes all otherinputs that would be required in order to determine each amount as expressed in the first table.Observations

The methodology established by the FASB and described above is complex and untested inpractice. Although many of the inputs can be obtained from insurance contract roll-forwards,the ability to separate component cash flows (e.g., returnable amounts) with actuarial modelsor data that currently exist would require significant time and resources to develop, test andimplement. This activity should not be underestimated when considering the cost-benefit of theinsurance contract revenue described above. Further, since the revenue recognition approachrelies on the tracking (and disclosure) of unrecognized revenue, which itself requires trackingof previously recognized revenue including the effects of previous assumption changes, thepractical expedient provided by the Boards would likely be applied at transition. Entities wouldface challenges in applying this requirement on a fully retrospective basis.The concept of estimated returnable amounts is simple to understand, but identification,measurement and removal of such amounts is not currently performed for all contracts andwould require changes in data requirements and actuarial models to implement in practice.

6.3.2 IASB earned premium

GuidanceThe IASB ED states that the “insurance contract revenue can also be expressed as the sum ofa) the latest estimates of the expected claims and expenses relating to coverage for thecurrent period, excluding those recognized immediately in profit or loss …, b) the change in therisk adjustment, c) the amount of the contractual service margin recognized in profit or loss in

46 Proposed ASC 834-10-35-14.

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the period and d) an allocation of the portion of the premium that relates to recovering directlyattributable acquisition costs …”47

Similar to the FASB ED, the IASB ED requires that “insurance contract revenue and incurredclaims presented in the statement of profit or loss and other comprehensive income shallexclude any investment components that … have not been separated.”48

Approach

We did not test the IASB guidance due to time and resource constraints, relying instead uponthe FASB testing to provide observations.ObservationsDue to the unlocking of the IASB ED’s CSM, determining earned premium for profitablecontracts should be simpler than under the FASB ED. The CSM is simply unlocked forchanges in future cash flows due to assumption changes and earned based on the transfer ofservices that are provided under the contract. There is no need to prospectively adjust theinsurance contract revenue or unwind changes in assumptions previously recorded in pretaxincome. This is a significant simplification.IASB ED paragraph B90 would appear to address the complexity acknowledged by the FASBin its basis for conclusions when changes in cash flows due to changes in assumptions impactpretax income, but it does not provide guidance for how to remove any resulting double-counting. A simple example is provided in Example 7 – presentation of insurance contractrevenue and expenses in the statement of profit or loss and other comprehensive income, inthe Illustrative Examples addendum. This example unwinds the assumption change in theperiod in which the claim is ultimately incurred, which differs from the approach taken by theFASB.

6.3.3 Observations concerning both approaches

We understand that the earned premium models developed by the Boards were attempts toproduce a revenue metric for contracts measured using the BBA methodology that is alignedwith the proposals developed under the joint Revenue Recognition project. The complexity ofthe approach requires us to consider whether there is commensurate additional benefitproduced.

47 IASB ED, paragraph B90.48 IASB ED, paragraph 58.

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6.4 Other Specific Topics

6.4.1 Transition

GuidanceThe EDs require that the proposed guidance be applied by full retrospective application upontransition.49 Practical expedients are provided for establishing the margin and the interestaccretion rates (and for the IASB risk adjustment). For purposes of this field testing exercise,we selected year-end 2007 as the date of transition. Due to the inherent difficulty of fullretrospective application and the limited time frame we were working under, we madesignificant simplifying assumptions in determining these aspects upon transition.Approach and simplifying assumptions

Details on how we determined the cash flows, margin, un-expensed acquisition costs anddiscount rates at transition are provided in Appendix A.For purposes of this exercise and, primarily, for simplicity, we also ignored any effects of priorbusiness combinations.ObservationsSince we took such a simplified approach to transition, we did not test the Boards’ proposal ina real way. In the course of our work, we did notice several issues that would make transition achallenge. This section mentions them briefly.Of course, the single most challenging aspect of full retrospective application of the transitionrequirements would be collecting the policy data needed to produce projections of cash flowsfrom inception dates in the 1980s, or even earlier for certain products. In some cases, the datamay not exist in the format needed to produce the cash flow models, and in others, the datamay not have been collected. It is clear that a substantial cost and effort would be required tostrictly apply the proposal for full retrospective application. Even for contracts issued prior tothe period for which retrospective application is considered practicable, the time and effortrequired to estimate cash flows based on best available information should not beunderestimated.Similarly, the un-expensed qualifying acquisition costs of a portfolio would require calculationat inception for contracts issued earlier than the transition date, which may require substantialeffort to reliably calculate or approximate. We have experience with this from the FASB’srecent changes in this area.While determination of yield curves for issue dates prior to transition may be somewhat lessonerous operationally, particularly for countries with long histories of deep investment markets,such as North America, the challenge and complexity of approximating top-down or bottom-updiscount rates in periods well before transition would be significant.

49 Proposed ASC 834-10-65-1 and IASB ED, paragraph C4.

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6.4.2 Separation of non-insurance components

Guidance

The EDs state that:“Some insurance contracts contain one or more components that would be within the scopeof other Topics if the entity accounted for those components as if they were separatecontracts (that is, they would not meet the definition of an insurance contract on a stand-alone basis) …. Those contracts may be partially within the scope of this Topic and partiallywithin the scope of other Topics.”50

They further require that three types of components shall be separated and accounted forunder other relevant guidance:a. Embedded derivatives in accordance with embedded derivatives guidance;b. Distinct investment components in accordance with deposit or other applicable financial

instrument guidance; andc. Distinct performance obligations to provide goods or services in accordance with revenue

recognition guidance51.Approach and simplifying assumptions

Under current guidance, certain VA options and guarantees are bifurcated as embeddedderivatives. For the purposes of our field testing, we assumed that these riders would continueto be accounted for in accordance with ASC 815 (FAS 133), and the ASC 815 (FAS 133)values were maintained.Most of the products tested were determined not to contain any other components that wouldrequire separation from the base insurance contract. The threshold of being “distinct” forinvestment components and performance obligations and the additional guidance for each aresuch that we believe contracts meeting the separation criteria as distinct investment or goodsand services components would be uncommon.For purposes of this exercise, fund management fees charged to VA policyholders and fundmanagement expenses incurred were not unbundled in the base scenario.Observations

The IASB’s ED provides Example 1 – separating components from a life insurance contractwith account balance, which shows the separation of asset management fees as a distinctperformance obligation, but we noted that the guidance in the body of the ED, when readalone, could be interpreted such that asset management fees should not be separated.Paragraph B33 of the ED states that “performance obligations do not include activities that anentity must undertake to fulfill a contract unless the entity transfers a good or service to thepolicyholder as those activities occur.”

50 Proposed ASC 834-10-25-1 and IASB ED, paragraph 9.51 Proposed ASC 834-10-25-2 and IASB ED, paragraph 10.

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Additionally, paragraph B34 lays out two criteria that would indicate that a performanceobligation is distinct: one is that the entity or another entity regularly sells the good or service inthe same market or jurisdiction, and the other is that the policyholder can benefit from the goodor service either on its own or together with other readily available resources. We believe thatasset management fees would not meet either of these criteria and, instead, represent anactivity that an entity must undertake in order to fulfill such contracts with account balances.As a sensitivity test, we unbundled asset management fees/expenses and related revenueamounts (AMF) to determine (1) whether such treatment could be reliably performed, and (2)to understand the impact it would have on financial results. We also assumed the acquisitioncosts related to mutual fund to be 1% of account value and reduced the total acquisition costsby that amount. Exhibit 6.4.2A compares the FASB total liability under the baseline scenarioand this sensitivity test.

Exhibit 6.4.2A

The total insurance liability is consistently higher under this sensitivity test. This is because thepresent value of fund management spread (i.e., fund management charges net of expenses) ishigher than the acquisition costs related to mutual fund.

6.4.3 Portfolio

GuidanceThe FASB and IASB EDs define a portfolio of insurance contracts differently. Under theFASB’s definition, a portfolio is “a group of insurance contracts that both: (a) are subject tosimilar risks and priced similarly relative to the risk assumed and (b) have similar duration and

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007 2008 2009 2010 2011

CU

Variable Annuity SegmentImpact of Separation of Fees/Expenses on FASB Liability

Proposed FASB - Baseline Proposed FASB - AMF

76

similar expected patterns of release from risk, that is, reduction in variability in cash flows.”52

The IASB’s definition states that a portfolio is “a group of insurance contracts that: (a) providecoverage for similar risks and that are priced similarly relative to the risk taken on and (b) aremanaged together as a single pool.”53 (emphasis added)Approach and simplifying assumptionsAll in-force and new business in 2007 were combined into a single transition portfolio. Product-level contracts issued in 2008 and subsequent years were assumed to contain similar risksand were thus grouped into portfolios by issue year.ObservationsIf we had tried to specifically implement the requirement to separate contracts by duration orsimilar pricing, we would have had many portfolios for each issue year. We think our approachis more consistent with the Boards’ intent.

6.4.4 Contract boundary

Guidance

The EDs require that “upon recognition of an insurance contract, its measurement shall includeexpected cash flows … through the contract boundary.”54 Further, “the contract boundary is thepoint at which the entity no longer had a substantive obligation to provide the policyholder withcoverage.”55

Approach and simplifying assumptionsAll available cash flow information was assumed to be within the contract boundary.ObservationsWe did not experience any significant difficulties in applying the definition of the contractboundary. For some products, such as some long-duration retirement-type products, we notedthat this definition results in substantially more cash flows included in the measurement of theinsurance contract liability than what are included under current U.S. GAAP.In particular, current U.S. GAAP requires the separation of an annuity contract between itsaccumulation and payout phases, while no similar requirement is carried forward in the FASBED, which results in a later contract boundary for the whole contract. For such products, therecognition of the margin (or CSM) would be impacted due to the spreading of the recognitionof profits into later periods than current reporting.

52 Proposed ASC 834-10 Glossary.53 IASB ED Appendix A – Defined terms.54 Proposed ASC 834-10-25-13 and IASB ED, paragraph 22(e).55 Proposed ASC 834-10-25-14 and IASB ED, paragraph 23.

77

Appendix A – Detailed Methodology and ApproachTraditional life segment

Topic Whole life Term

Key actuarialassumptionsapplicable toproduct

Current best-estimate assumptionsat time of valuation for mortality,lapse, etc.FASB – Acquisition costs asdefined by ASU 2010-26IASB – Acquisition costs consistentwith FASB definition

Current best-estimate assumptionsat time of valuation for mortality,lapse, etc.FASB – Acquisition costs asdefined by ASU 2010-26IASB – Qualifying acquisition costsas defined by the IASB’s ED

Cash flowsContract boundary Contract boundary was defined as

the total coverage period (i.e., forlife of the policyholder). Thevaluation models were able toproject all material cash flows, andno adjustment was required.

Contract boundary was defined asthe total coverage period (i.e., forlife of the policyholder). Thevaluation models were able toproject all material cash flows, andno adjustment was required.

Cash flowprojectionmethodology

N/A – There are no interest-sensitive cash flows.

N/A – There are no interest-sensitive cash flows.

Splitting IASBinterest cash flows

N/A – There are no cash flows thatare directly linked to the return onassets.

N/A – There are no cash flows thatare directly linked to the return onassets.

Discounting

Discountingapproach (top-down vs. bottom-up) and startingpoint

Top-down approach is based onreference asset portfolio yields.

Top-down approach is based onactual asset portfolio yields.

78

Traditional life segment


Discount rate Term structure of discount rate wasdeveloped based on asset yieldsby duration and the risk-free yieldcurve.Spreads over the risk-free ratewere interpolated when assetyields by duration were notavailable for specific tenors.The discount rate was held level atthe current year 30 rate for eachduration point thereafter at the timeof valuation due to unobservablemarket data.

Term structure of discount rate wasdeveloped based on asset yieldsby duration and the risk-free yieldcurve.Spreads over the risk-free ratewere interpolated when assetyields by duration were notavailable for specific tenors.The discount rate was held level atthe current year 30 rate for eachduration point thereafter at the timeof valuation due to unobservablemarket data.

Margin and risk adjustmentRisk adjustment CoC approach is based on internal

capital model. The risk adjustmentwas calculated using a 6% CoCrate applied to projected capital fornon-hedgeable insurance risk.

CoC approach is based on internalcapital model. The risk adjustmentwas calculated using a 6% CoCrate applied to projected capital tocover non-hedgeable insurancerisk.

Determiningmargin/ contractualservice margin attransition

Calibrated to level of marginobserved on new business at issueas a ratio of present value ofbenefits

Calibrated to new businessmargins and adjusted to reflect theage of the in-force business

Determiningrelease of themargin (FASBonly)

Margin released based on theactual face amount in force at theend of the year


Determiningrelease ofcontractual servicemargin (IASB only)

CSM released based on the actualface amount in force at the end ofthe year


79

Traditional life segment


Unlockingcontractual servicemargin (IASB only)

CSM is unlocked for assumptionupdates and in-force true-ups.Experience adjustments orchanges in the PV of fulfillmentcash flows due to interest rates donot trigger a CSM unlocking.

CSM is unlocked for assumptionupdates and in-force true-ups.Experience adjustments orchanges in the PV of fulfillmentcash flows due to interest rates donot trigger a CSM unlocking.

Interest accretion(FASB only)

Interest accretion rate is based onportfolio-specific, locked-in curve atissue.

Interest accretion rate is based ona blended rate since cash flows atan issue year cohort were notavailable.

Reset of interestaccretion rate(FASB only)

N/A – There are no discretionaryparticipation features.

N/A – There are no discretionaryparticipation features.

SensitivitiesSensitivitiesperformed

None None

80

Retirement segment

Topic Retirement income LTC SPIA


Current best-estimateassumptions at time ofvaluation for mortality,lapse, etc.FASB – Acquisitioncosts as defined byASU 2010-26IASB – Acquisitioncosts consistent withFASB definition



Cash flowsContract boundary Contract boundary was

defined as the totalcoverage period (i.e.,the accumulation andpayout phase). Thevaluation models wereable to project allmaterial cash flows,and no adjustment wasrequired.

Contract boundary wasdefined as the totalcoverage period (i.e.,the active life anddisabled life phases ofthe contract). Thevaluation models wereable to project allmaterial cash flows,and no adjustment wasrequired.

Contract boundary wasdefined as the totalannuitization period(i.e., for life of thepolicyholder). Thevaluation models wereable to project allmaterial cash flows,and no adjustment wasrequired.


N/A – There are nointerest-sensitive cashflows.



Splitting fixed andvariable cashflows (IASB only)

N/A – There are nocash flows that aredirectly linked to thereturn on assets.



DiscountingDiscountingapproach (top-down vs. bottom-up) and startingpoint

Top-down approach isbased on referenceasset portfolio yields.

Top-down approach isbased on referenceasset portfolio yields.

Top-down approach isbased on actual assetportfolio yields.

81

Retirement segment


Discount rate Term structure ofdiscount rate wasdeveloped based onasset yields byduration and the risk-free yield curve.Spreads over the risk-free rate wereinterpolated whenasset yields byduration were notavailable for specifictenors.The discount rate washeld level at thecurrent year 30 rate foreach duration pointthereafter at the timeof valuation due tounobservable marketdata.

Term structure ofdiscount rate wasdeveloped based onasset yields byduration and the risk-free yield curve.Spreads over the risk-free rate wereinterpolated whenasset yields byduration were notavailable for specifictenors.The discount rate washeld level at thecurrent year 30 rate foreach duration pointthereafter at the timeof valuation due tounobservable marketdata.

Term structure ofdiscount rate wasdeveloped based onasset yields byduration and the risk-free yield curve.A single spread overthe risk-free rate wasapplied for all tenors.The discount rate washeld level at thecurrent year 30 rate foreach duration pointthereafter at the timeof valuation due tounobservable marketdata.

Margin and risk adjustmentRisk adjustment(IASB only)

CoC approach isbased on internalcapital model. The riskadjustment wascalculated using a 6%CoC rate applied toprojected capital fornon-hedgeableinsurance risk.



Determiningmargin/contractual servicemargin attransition

Calibrated to level ofmargin observed onnew business at issueas a ratio of presentvalue of benefits



82

Retirement segment



Margin released basedon the actual benefitspaid

Margin released basedon the actual benefitspaid

Margin is releasedbased on expectedbenefits paid plus anin-force true-up. In-force true-up is basedon differences in actualvs. expected PV ofremaining benefits.


CSM released basedon the actual benefitspaid

CSM released basedon the actual benefitspaid

CSM is releasedbased on expectedbenefits paid plus anin-force true-up. In-force true-up is basedon differences in actualvs. expected PV ofremaining benefits.


CSM is unlocked forassumption updatesand in-force true-ups.Experienceadjustments orchanges in the PV offulfillment cash flowsdue to interest rates donot trigger a CSMunlocking.

CSM is unlocked forassumption updatesand in-force true-ups.Experienceadjustments orchanges in the PV offulfillment cash flowsdue to interest rates donot trigger a CSMunlocking.

CSM is unlocked forassumption updatesand in-force true-upsfor both active life anddisabled life policies.Experienceadjustments orchanges in the PV offulfillment cash flowsdue to interest rates donot trigger a CSMunlocking.

Interest accretion Interest accretion rateis based on portfolio-specific, locked-incurve at issue.

Interest accretion rateis based on a blendedrate since cash flowsat an issue year cohortwere not available.

Interest accretion rateis based on portfolio-specific, locked-incurve at issue.


N/A – There are nodiscretionaryparticipation features.



83

Retirement segment

Topic Retirement income LTC SPIASensitivitiesSensitivitiesperformed

Increase in discountrates in years 20+ and30+ by 50bpsScaled discount ratesup to a long-termaverage over theperiod from year 15 –30 and held constantfor all periods beyond30 years and from year30 – 40 and heldconstant for all periodsbeyond 40 years.



84

Participating segment

Topic ULSG Par whole life

Key actuarialassumptionsapplicable to product

Current best estimate assumptionsat time of valuation for mortality,lapse, crediting rates, etc.FASB – Acquisition costs asdefined by ASU 2010-26IASB – Acquisition costsconsistent with FASB definition

Current best-estimateassumptions at time of valuationfor mortality, lapse, dividend scale,etc.FASB – Acquisition costs asdefined by ASU 2010-26IASB – Qualifying acquisition costsas defined by the IASB ED

Cash flowsContract boundary Contract boundary was defined as

the total coverage period (i.e., forlife of the policyholder). Thevaluation models were able toproject all material cash flows, andno adjustment was required.

Contract boundary was defined asthe total coverage period (i.e., forlife of the policyholder). Thevaluation models were able toproject all material cash flows, andno adjustment was required.

Cash flow projectionmethodology

Valuation using unbiasedstochastic interest rate scenarios

Single deterministic scenario usedbecause dividend scales adjust toreflect experience deviations andcurrent economic environment

Splitting IASBinterest cash flows(IASB only)

All cash flows were assumed to beasset dependent. Changes inliability due to changes in discountrates flow through income.

All cash flows were assumed to beasset dependent. Changes inliability due to changes in discountrates flow through income.

DiscountingDiscountingapproach (top-downvs. bottom-up) andstarting point

Top-down approach is based onactual asset portfolio yields usingscenario- specific risk-free rates.

Top-down approach is based onactual asset portfolio yields.

85



Discount rate Term structure of discount ratewas developed based on assetyields by duration and the risk-freeyield curve.A single spread over the risk-freerate was applied for all tenors.The discount rate was held level atthe current year 30 rate for eachduration point thereafter at thetime of valuation due tounobservable market data.

Term structure of discount ratewas developed based on assetyields by duration and the risk-freeyield curve.Spreads over the risk-free ratewere interpolated when assetyields by duration were notavailable for specific tenors.The discount rate was held level atthe current year 30 rate for eachduration point thereafter at thetime of valuation due tounobservable market data.

Margin and risk adjustmentRisk adjustment(IASB only)

CoC approach is based on internalcapital model. The risk adjustmentwas calculated using a 6% CoCrate applied to projected capital fornon-hedgeable insurance risk.

CoC approach is based on internalcapital model. The risk adjustmentwas calculated using a 6% CoCrate applied to projected capital tocover non-hedgeable insurancerisk.

Determining margin/contractual servicemargin at transition

Calibrated to level of marginobserved on new business atissue as a ratio of present value ofbenefits

Calibrated to new businessmargins and adjusted to reflect theage of the in-force business

Determining releaseof the margin (FASBonly)

Margin released based on theactual reduction in face amount


Determining releaseof contractualservice margin(IASB only)

CSM released based on the actualreduction in face amount


Interest accretion(FASB only)

Interest accretion rate is based ona blended level yield since cashflows at a portfolio level were notavailable.

Interest accretion rate is based ona blended rate since cash flows atan issue year cohort were notavailable.

86




Interest accretion rate was resetfor changes in credited ratesbased on a level yield basis, suchthat there was no book valueimpact on the liability for changesin credited rates.

Interest accretion rate was resetfor changes in dividend scalesbased on a level yield basis, suchthat there was no book valueimpact on the liability for changesin dividend scales.


None Earned premium presentation(FASB only)

87

Variable annuity segment

Topic Variable annuities


Current best-estimate assumptions at time of valuation for mortality,lapse, etc.FASB – Acquisition costs as defined by ASU 2010-26IASB – Acquisition costs consistent with FASB definition

Cash flowsContract boundary Given VA has minimal renewal premiums, the boundary of the insurance

contract is defined as the maximum projection length in the availablemodels, which is when the entire block of business runs off.


Projected separate account growth under stochastically generated risk-neutral scenarios

Splitting IASBinterest cash flows

All cash flows were assumed to be asset dependent. Changes in liabilitydue to changes in discount rates flow through income.

DiscountingDiscountingapproach (top-down vs. bottom-up) and startingpoint

Swap rate with no liquidity adjustment for the baseline discount rate as aproxy for the top-down approach, assuming risk-neutral returns

Discount rate Term structure of discount rate was developed based on the swap curve.The discount rate was held level at the current year 30 rate for eachduration point thereafter at the time of valuation due to unobservablemarket data.

Margin and risk adjustmentRisk adjustment CoC approach is based on internal capital model. The risk adjustment

was calculated using a 6% CoC rate applied to projected capital for non-hedgeable insurance risk.

Determiningmargin/ contractualservice margin attransition

Estimated based on profitability and level of margin observed on newbusiness at issue as a ratio of present value of benefits

88

Variable annuity segment

Topic Variable annuities


Margin released based on release of present value of projected claims


CSM released based on the actual reduction policy count


CSM unlocked for assumption updates and in-force true-ups of the basecontract. Assumption changes related to options and guarantees wererecorded in the statement of comprehensive income and did not impactthe CSM.

Interest accretion Interest accretion rate is based on portfolio-specific, locked-in curve atissue.

Reset of interestaccretion rate

N/A – There are no discretionary participation features.


a. (IASB) CSM was unlocked for actuarial assumption update and in-force true-ups of both base contract and riders.

b. (FASB) Onerous contract test failed at year-end 2008, which led to therelease of entire margin at that time.

c. (FASB) Unbundled asset management fee/expense and acquisitioncost are associated with the mutual fund from the insurance contractframework.

89

Appendix B – Detailed ResultsEach member of the Group has independently provided data to a third-party consultant under strict confidentialityprotocols for the purpose of aggregation and simulation to provide field testing of the Exposure Drafts on theAccounting for Insurance Contacts published by the FASB and IASB. The field testing results are not financialinformation relating to any individual company or the companies in aggregate and should not be relied uponseparately or in conjunction with information filed by the companies in any jurisdiction under securitiesregulation or for any other purpose.

FASB and IASB roll-forwards of the insurance liability/(asset) and FASB roll-forwards of the margin presented inthis appendix for each segment relate to balances produced using FASB and IASB ED proposals. These exhibitsare presented on a stand-alone basis and are not intended to be reconciled to Pretax Income/(Loss) or PretaxComprehensive Income/(Loss) graphs presented within the body of this paper.

Totals may not foot or cross-foot due to rounding.

90

Traditional Life SegmentFASB Roll-forward of Insurance Liability (Asset)

31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 31 Dec 2012

Carrying amount beginning of period (29,918) (25,185) (49,978) (59,518) (68,194)- - - - -

Contracts written in current period (PV of all future Prem, Benefits, and non-acq exp on NB) - - - - -Expected Premiums / Fees (17,501) (24,380) (29,832) (34,975) (33,967)Expected Benefits & Non-Acq Expenses 8,503 12,522 15,606 18,210 19,620

Total contracts written in current period (8,998) (11,858) (14,226) (16,765) (14,347)- - - - -

Changes in assumptions (including in force update) (1,481) (9,646) (2,264) 756 15,991- - - - -

Actual Premium / Fee Payments Received 12,241 13,351 14,605 16,406 18,162 - - - - -

Actual Benefit Payments (maturities/deaths/non-acq costs) (3,253) (5,076) (3,999) (5,187) (5,645)- - - - -

Actual Surrenders (143) (387) (529) (397) (381)- - - - -

Experience Adjustments - - - - -Premium / Fees 3,218 3,128 3,063 4,086 4,588Benefits & Non acquisition expenses (2,679) (1,391) (3,074) (3,498) (4,059)

Experience adjustments 538 1,737 (11) 587 529- - - - -

Accretion of interest (interest accretion rate) - - - - -Cash inflows (5,153) (7,672) (9,518) (16,536) (14,151)Cash outflows 3,827 5,443 7,154 11,849 10,541

Total Accretion of interest (1,327) (2,229) (2,364) (4,686) (3,609)- - - - -

Impact of discount rates in OCI (Current discount rate) 7,154 (10,685) (753) 611 4,624- - - - -

Carrying amount end of period (25,185) (49,978) (59,518) (68,194) (52,870)

Traditional Life SegmentRollforward of Insurance Liability (Asset) - FASB Presentation

Expected present value of fulfillment cash flows(CU)

91

Traditional Life Segment

FASB Roll-forward of Margin

GrossMargin

AcquisitionCosts not

yetrecognized(amt beingamortized)

ExpectedAcquisitionCosts (to be

paid) * TotalGrossMargin




paid) * Total

Carrying amount beginning of period 50,685 (14,838) 864 36,710 52,411 (15,571) 905 37,745

Expected margin on contracts written in the current period 8,998 - - 8,998 11,858 - - 11,858

Acquisition Costs on contracts written in the current period - (2,930) 2,930 - - (3,412) 3,412 -

Acquisition costsChange in assumptions - - (6) (6) - - 26 26Experience adjustment - - 983 983 - - 1,001 1,001Cash paid for acquisition costs - - (3,905) (3,905) - - (4,410) (4,410)

Total Acquisition costs - - (2,929) (2,929) - - (3,383) (3,383)

Margin release (10,075) - - (10,075) (9,359) - - (9,359)Amortization of acquisition costs - 3,032 - 3,032 - 2,775 - 2,775

Accretion of interest (interest accretion rate)Margin 2,804 - - 2,804 2,894 - - 2,894Acquisition costs - (834) 43 (791) - (855) 41 (815)

Total Accretion of interest 2,804 (834) 43 2,013 2,894 (855) 41 2,080

Impact of discount rates in OCI (Current discount rate) - acquisition costs - - (4) (4) - - 12 12

Carrying amount end of period 52,411 (15,571) 905 37,745 57,804 (17,063) 987 41,728

* For purposes of the field test we assumed that changes in estimates of expected acquisition costs are reflected in pretax income, while changes related to changes in discount rate are reflected in AOCI.

Traditional Life SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 2008 31 Dec 2009

92


FASB Roll-forward of Margin (continued)

GrossMargin












paid) * Total

Carrying amount beginning of period 57,804 (17,063) 987 41,728 65,280 (18,660) 1,160 47,781 74,672 (20,390) 1,296 55,578

Expected margin on contracts written in the current period 14,226 - - 14,226 16,765 - - 16,765 14,347 - - 14,347

Acquisition Costs on contracts written in the current period - (3,524) 3,524 - - (3,715) 3,715 - - (3,814) 3,814 -

Acquisition costsChange in assumptions - - (0) (0) - - 2 2 - - 3 3Experience adjustment - - 1,149 1,149 - - 1,449 1,449 - - 264 264Cash paid for acquisition costs - - (4,543) (4,543) - - (5,068) (5,068) - - (4,003) (4,003)

Total Acquisition costs - - (3,394) (3,394) - - (3,617) (3,617) - - (3,737) (3,737)

Margin release (10,220) - - (10,220) (11,577) - - (11,577) (12,266) - - (12,266)Amortization of acquisition costs - 2,920 - 2,920 - 3,128 - 3,128 - 3,280 - 3,280

Accretion of interest (interest accretion rate)Margin 3,470 - - 3,470 4,204 - - 4,204 4,366 - - 4,366Acquisition costs - (992) 36 (956) - (1,143) 35 (1,107) - (1,179) 35 (1,144)

Total Accretion of interest 3,470 (992) 36 2,515 4,204 (1,143) 35 3,097 4,366 (1,179) 35 3,222

Impact of discount rates in OCI (Current discount rate) - acquisition costs - - 7 7 - - 2 2 - - 7 7

Carrying amount end of period 65,280 (18,660) 1,160 47,781 74,672 (20,390) 1,296 55,578 81,119 (22,104) 1,415 60,430


31 Dec 2012

Traditional Life SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 2010 31 Dec 2011

93


IASB Roll-forward of Insurance Contracts Liability (Asset)

Expectedpresentvalue of

fulfillmentcash flows

Riskadjustment

ContractualServiceMargin

Totalinsurancecontractliability



Riskadjustment



Carrying amount beginning of period (28,856) 2,544 30,810 4,498 (24,070) 2,514 32,700 11,144

Changes recognized in profit or lossRelease (including inforce update) - (244) (6,116) (6,360) - 684 (5,843) (5,159)Experience adjustment 517 - - 517 1,574 - - 1,574Changes in assumptions (including inforce update) (1,464) - 1,464 - (9,627) - 9,627 -Accretion of interest (1,273) - 1,674 401 (2,177) - 1,792 (385)

Total changes recognized in profit or loss (2,220) (244) (2,977) (5,441) (10,231) 684 5,577 (3,970)

Changes recognized in OCIChanges in discount rate 7,148 - - 7,148 (10,670) - - (10,670)

New contractsExpected premiums (17,501) - - (17,501) (24,380) - - (24,380)Expected acquisition costs 3,916 - - 3,916 4,590 - - 4,590Expected claims and margins 8,503 214 4,868 13,585 12,522 261 7,007 19,790

Total new contracts (5,082) 214 4,868 - (7,268) 261 7,007 -

Cash flowsPremiums received/paid 12,241 - - 12,241 13,351 - - 13,351Claims paid/reimbursed (3,253) - - (3,253) (5,076) - - (5,076)Actual surrenders (143) - - (143) (387) - - (387)Acquisition costs paid (3,905) - - (3,905) (4,410) - - (4,410)

Total cash flows 4,940 - - 4,940 3,478 - - 3,478

Carrying amount end of period (24,070) 2,514 32,700 11,144 (48,761) 3,459 45,284 (18)

Traditional Life SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

31 Dec 2008 31 Dec 2009

94


IASB Roll-forward of Insurance Contracts Liability (Asset) (continued)



Riskadjustment





Riskadjustment





Riskadjustment



Carrying amount beginning of period (48,761) 3,459 45,284 (18) (58,077) 4,098 51,300 (2,680) (66,589) 4,010 56,067 (6,512)

Changes recognized in profit or lossRelease (including inforce update) - 325 (8,031) (7,706) - (416) (9,234) (9,650) - 456 (9,286) (8,829)Experience adjustment (74) - - (74) 850 - - 850 (443) - - (443)Changes in assumptions (including inforce update) (2,207) - 2,207 (0) 738 - (738) (0) 16,008 - (16,008) (0)Accretion of interest (2,318) - 2,645 327 (4,641) - 3,240 (1,401) (3,564) - 3,191 (373)

Total changes recognized in profit or loss (4,598) 325 (3,179) (7,453) (3,053) (416) (6,732) (10,201) 12,000 456 (22,102) (9,646)

Changes recognized in OCIChanges in discount rate (742) - - (742) 615 - - 615 4,633 - - 4,633

New contractsExpected premiums (29,832) - - (29,832) (34,975) - - (34,975) (33,967) - - (33,967)Expected acquisition costs 4,717 - - 4,717 4,937 - - 4,937 5,056 - - 5,056Expected claims and margins 15,606 314 9,195 25,115 18,210 328 11,499 30,038 19,620 435 8,855 28,911

Total new contracts (9,509) 314 9,195 - (11,827) 328 11,499 - (9,291) 435 8,855 -

Cash flowsPremiums received/paid 14,605 - - 14,605 16,406 - - 16,406 18,162 - - 18,162Claims paid/reimbursed (3,999) - - (3,999) (5,187) - - (5,187) (5,645) - - (5,645)Actual surrenders (529) - - (529) (397) - - (397) (381) - - (381)Acquisition costs paid (4,543) - - (4,543) (5,068) - - (5,068) (4,003) - - (4,003)

Total cash flows 5,533 - - 5,533 5,754 - - 5,754 8,133 - - 8,133

Carrying amount end of period (58,077) 4,098 51,300 (2,680) (66,589) 4,010 56,067 (6,512) (51,113) 4,902 42,820 (3,391)

Traditional Life SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

31 Dec 201231 Dec 2010 31 Dec 2011

95

Retirement Segment

FASB Roll-forward of Insurance Liability (Asset)


Carrying amount beginning of period 14,833 21,354 18,525 22,142 39,912

Contracts written in current period (PV of all future Prem, Benefits, and non-acq exp on NB)Expected Premiums / Fees (8,270) (9,879) (11,394) (13,039) (16,542)Expected Benefits & Non-Acq Expenses 5,690 7,073 7,972 9,349 13,212

Total contracts written in current period (2,580) (2,806) (3,422) (3,690) (3,331)

Changes in assumptions (including in force update) 720 350 225 219 1,525

Actual Premium / Fee Payments Received 6,510 7,392 7,598 8,297 9,759

Actual Benefit Payments (maturities/deaths/surrenders/non-acq costs) (2,923) (3,209) (3,434) (3,642) (3,997)

Experience adjustments (214) (190) (234) (515) (774)

Accretion of interest (interest accretion rate)Cash inflows (1,744) (1,928) (2,103) (2,545) (2,740)Cash outflows 2,463 2,795 3,125 3,716 4,105

Total Accretion of interest 718 868 1,021 1,171 1,365

Impact of discount rates in OCI (Current discount rate) 4,289 (5,235) 1,863 15,929 1,182

Carrying amount end of period 21,354 18,525 22,142 39,912 45,641

Retirement SegmentRollforward of Insurance Liability (Asset) - FASB Presentation


96

Retirement Segment


GrossMargin








paid) * Total

Carrying amount beginning of period 16,669 (6,018) 1,172 11,823 19,926 (7,091) 1,103 13,938


Acquisition Costs on contracts written in the current period - (822) 822 - - (974) 974 -

Acquisition costsChange in assumptions - - 2 2 - - 14 14Experience adjustment - - 92 92 - - 66 66Cash paid for acquisition costs - - (1,012) (1,012) - - (1,029) (1,029)

Total Acquisition costs - - (918) (918) - - (949) (949)

Margin release (430) - - (430) (467) - - (467)Amortization of acquisition costs - 147 - 147 - 167 - 167

Accretion of interest (interest accretion rate)Margin 1,108 - - 1,108 1,200 - - 1,200Acquisition costs - (398) 58 (340) - (433) 55 (378)

Total Accretion of interest 1,108 (398) 58 767 1,200 (433) 55 823

Impact of discount rates in OCI (Current discount rate) - acquisition costs - - (31) (31) - - 59 59

Carrying amount end of period 19,926 (7,091) 1,103 13,938 23,465 (8,331) 1,242 16,377


Retirement SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 2008 31 Dec 2009

97

Retirement Segment


GrossMargin












paid) * Total

Carrying amount beginning of period 23,465 (8,331) 1,242 16,377 27,771 (9,778) 1,381 19,375 32,548 (11,432) 1,514 22,630

Expected margin on contracts written in the current period 3,422 - - 3,422 3,690 - - 3,690 3,331 - - 3,331

Acquisition Costs on contracts written in the current period - (1,126) 1,126 - - (1,267) 1,267 - - (1,506) 1,506 -

Acquisition costsChange in assumptions - - 15 15 - - (10) (10) - - (31) (31)Experience adjustment - - 41 41 - - 15 15 - - 61 61Cash paid for acquisition costs - - (1,116) (1,116) - - (1,240) (1,240) - - (1,519) (1,519)

Total Acquisition costs - - (1,060) (1,060) - - (1,235) (1,235) - - (1,489) (1,489)

Margin release (509) - - (509) (562) - - (562) (703) - - (703)Amortization of acquisition costs - 180 - 180 - 203 - 203 - 257 - 257

Accretion of interest (interest accretion rate)Margin 1,393 - - 1,393 1,649 - - 1,649 1,904 - - 1,904Acquisition costs - (501) 53 (448) - (591) 55 (535) - (683) 53 (629)

Total Accretion of interest 1,393 (501) 53 945 1,649 (591) 55 1,113 1,904 (683) 53 1,275


Carrying amount end of period 27,771 (9,778) 1,381 19,375 32,548 (11,432) 1,514 22,630 37,079 (13,364) 1,586 25,301


31 Dec 2012

Retirement SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 2010 31 Dec 2011

98

Retirement Segment




Riskadjustment





Riskadjustment



Carrying amount beginning of period 16,005 2,337 7,916 26,258 22,457 2,246 9,132 33,835 - - - - - -

Changes recognized in profit or loss - - - - - -Release (including inforce update) - (342) (155) (497) - 322 (173) 149Experience adjustment (130) - - (130) (134) - - (134)Changes in assumptions (including inforce update) 731 - (731) (1) 374 - (364) 10Accretion of interest 776 - 537 1,313 923 - 539 1,462

Total changes recognized in profit or loss 1,377 (342) (349) 685 1,163 322 2 1,486 - - - - - -

Changes recognized in OCI - - - - - -Changes in discount rate 4,259 - - 4,259 (5,175) - - (5,175)

New contractsExpected premiums (8,270) - - (8,270) (9,879) - - (9,879)Expected acquisition costs 822 - - 822 974 - - 974Expected claims and margins 5,690 251 1,565 7,506 7,073 395 1,438 8,906

Total new contracts (1,758) 251 1,565 58 (1,832) 395 1,438 - - - - - - -

Cash flows - - - - - -Premiums received/paid 6,510 - - 6,510 7,392 - - 7,392Claims paid/reimbursed (2,892) - - (2,892) (3,165) - - (3,165)Actual surrenders (32) - - (32) (43) - - (43)Acquisition costs paid (1,012) - - (1,012) (1,029) - - (1,029)

Total cash flows 2,575 - - 2,575 3,155 - - 3,155 - - - - - -

Carrying amount end of period 22,457 2,246 9,132 33,835 19,767 2,962 10,571 33,301

Retirement SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

31 Dec 2008 31 Dec 2009

99

Retirement Segment




Riskadjustment



Expectedpresent valueof fulfillmentcash flows

Riskadjustment




Riskadjustment



Carrying amount beginning of period 19,767 2,962 10,571 33,301 23,523 3,468 12,644 39,635 41,426 2,843 15,188 59,457 - - - - - - - - -

Changes recognized in profit or loss - - - - - - - - -Release (including inforce update) - 87 (187) (100) - (865) (211) (1,076) - (163) (288) (451)Experience adjustment (204) - - (204) (514) - - (514) (733) - - (733)Changes in assumptions (including inforce update) 250 - (235) 15 224 - (204) 19 1,513 - (1,483) 30Accretion of interest 1,075 - 618 1,693 1,227 - 740 1,966 1,419 - 861 2,280

Total changes recognized in profit or loss 1,121 87 196 1,403 936 (865) 324 395 2,199 (163) (910) 1,126 - - - - - - - - -

Changes recognized in OCI - - - - - - - - -Changes in discount rate 1,883 - - 1,883 15,975 - - 15,975 1,183 - - 1,183

New contractsExpected premiums (11,394) - - (11,394) (13,039) - - (13,039) (16,542) - - (16,542)Expected acquisition costs 1,126 - - 1,126 1,267 - - 1,267 1,506 - - 1,506Expected claims and margins 7,972 419 1,877 10,268 9,349 240 2,220 11,808 13,212 277 1,580 15,068

Total new contracts (2,296) 419 1,877 - (2,424) 240 2,220 36 (1,825) 277 1,580 32 - - - - - - - - -

Cash flows - - - - - - - - -Premiums received/paid 7,598 - - 7,598 8,297 - - 8,297 9,759 - - 9,759Claims paid/reimbursed (3,389) - - (3,389) (3,602) - - (3,602) (3,944) - - (3,944)Actual surrenders (45) - - (45) (40) - - (40) (53) - - (53)Acquisition costs paid (1,116) - - (1,116) (1,240) - - (1,240) (1,519) - - (1,519)

Total cash flows 3,048 - - 3,048 3,416 - - 3,416 4,244 - - 4,244 - - - - - - - - -

Carrying amount end of period 23,523 3,468 12,644 39,635 41,426 2,843 15,188 59,457 47,227 2,957 15,857 66,042

Retirement SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

31 Dec 201231 Dec 2010 31 Dec 2011

100

Participating Segment



Carrying amount beginning of period 20,079 27,341 30,271 34,061 63,411- - - - -

Contracts written in current period (PV of all future Prem, Benefits, and non-acq exp on NB) - - - - -Expected Premiums / Fees (10,470) (9,468) (10,626) (13,022) (8,948)Expected Benefits & Non-Acq Expenses 9,301 7,728 10,679 15,014 8,962

Total contracts written in current period (1,169) (1,741) 54 1,993 14- - - - -

Changes in assumptions (including in force update) (91) 2,835 (3,826) 133 (1,789)- - - - -

Actual Premium / Fee Payments Received 6,467 7,193 7,625 9,088 8,175 - - - - -

Actual Benefit Payments (maturities/deaths/non-acq costs) (1,713) (1,792) (2,217) (2,154) (2,534)- - - - -

Actual Surrenders (926) (1,078) (1,087) (1,107) (1,139)- - - - -

Experience adjustments (78) (15) (32) (368) (1,223)- - - - -

Accretion of interest (interest accretion rate) - - - - -Cash inflows (2,589) (3,308) (3,395) (3,638) (3,166)Cash outflows 3,684 4,859 5,229 5,700 5,336

Total Accretion of interest 1,095 1,552 1,835 2,062 2,170- - - - -

Impact of discount rates in OCI (Current discount rate) 3,677 (4,024) 1,439 19,703 827- - - - -

Carrying amount end of period 27,341 30,271 34,061 63,411 67,913

Participating SegmentRollforward of Insurance Liability (Asset) - FASB Presentation


101



GrossMargin








paid) * Total



Acquisition Costs on contracts written in the current period - (885) 937 52 - (844) 844 -

Acquisition costsChange in assumptions - - (0) (0) - - (191) (191)Experience adjustment - - 179 179 - - 376 376Cash paid for acquisition costs - - (1,135) (1,135) - - (1,139) (1,139)

Total Acquisition costs - - (956) (956) - - (954) (954)

Margin release (663) - - (663) (735) - - (735)Amortization of acquisition costs - 223 - 223 - 270 - 270

Accretion of interest (interest accretion rate)Margin 321 - - 321 400 - - 400Acquisition costs - (129) 44 (86) - (179) 45 (134)

Total Accretion of interest 321 (129) 44 235 400 (179) 45 266

Impact of discount rates in OCI (Current discount rate) - acquisition costs - - 40 40 - - (11) (11)



Participating SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 2008 31 Dec 2009

102



GrossMargin












paid) * Total

Carrying amount beginning of period 8,028 (3,622) 773 5,180 8,143 (3,717) 649 5,075 7,963 (3,718) 1,096 5,341

Expected margin on contracts written in the current period 376 - - 376 42 - - 42 325 - - 325

Acquisition Costs on contracts written in the current period - (151) 909 759 - (42) 1,029 988 - (189) 762 574

Acquisition costsChange in assumptions - - (177) (177) - - 264 264 - - (51) (51)Experience adjustment - - 384 384 - - 464 464 - - 291 291Cash paid for acquisition costs - - (1,290) (1,290) - - (1,424) (1,424) - - (1,084) (1,084)

Total Acquisition costs - - (1,083) (1,083) - - (696) (696) - - (844) (844)

Margin release (757) - - (757) (690) - - (690) (681) - - (681)Amortization of acquisition costs - 282 - 282 - 261 - 261 - 264 - 264

Accretion of interest (interest accretion rate)Margin 495 - - 495 469 - - 469 480 - - 480Acquisition costs - (226) 45 (181) - (221) 34 (186) - (227) 50 (176)

Total Accretion of interest 495 (226) 45 315 469 (221) 34 283 480 (227) 50 303


Carrying amount end of period 8,143 (3,717) 649 5,075 7,963 (3,718) 1,096 5,341 8,087 (3,870) 1,068 5,286


31 Dec 2012

Participating SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 2010 31 Dec 2011

103





Riskadjustment





Riskadjustment



Carrying amount beginning of period 20,927 2,815 2,081 25,823 28,250 3,881 2,102 34,232

Changes recognized in profit or loss -Release (including inforce update) - 360 (255) 106 - (470) (258) (729)Experience adjustment 539 - - 539 1,031 - - 1,031Changes in assumptions (including inforce update) 1,147 - (71) 1,076 2,612 - 129 2,740Accretion of interest 952 - 111 1,063 721 - 114 835

Total changes recognized in profit or loss 2,638 360 (215) 2,783 4,364 (470) (16) 3,877

Changes due to crediting rate/dividend scale updates 2,179 - - 2,179 (3,839) - - (3,839)

New contractsExpected premiums (10,470) - - (10,470) (9,468) - - (9,468)Expected acquisition costs 981 - - 981 891 - - 891Expected claims and margins 9,301 705 237 10,243 7,728 615 235 8,577

Total new contracts (188) 705 237 754 (850) 615 235 -

Cash flows -Premiums received/paid 6,467 - - 6,467 7,193 - - 7,193Claims paid/reimbursed (1,713) - - (1,713) (1,792) - - (1,792)Actual surrenders (926) - - (926) (1,078) - - (1,078)Acquisition costs paid (1,135) - - (1,135) (1,139) - - (1,139)

Total cash flows 2,693 - - 2,693 3,185 - - 3,185

Carrying amount end of period 28,250 3,881 2,102 34,232 31,110 4,026 2,321 37,456

Participating SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

31 Dec 2008 31 Dec 2009

104





Riskadjustment





Riskadjustment





Riskadjustment



Carrying amount beginning of period 31,110 4,026 2,321 37,456 34,780 4,962 5,680 45,422 64,587 6,769 5,904 77,259

Changes recognized in profit or lossRelease (including inforce update) - 259 (281) (22) - 796 (401) 396 - (570) (293) (863)Experience adjustment (522) - - (522) (436) - - (436) (1,319) - - (1,319)Changes in assumptions (including inforce update) (3,331) - 3,331 - (292) - 292 - (2,175) - 2,175 -Accretion of interest 571 - 137 708 913 - 332 1,245 2,059 - 335 2,393

Total changes recognized in profit or loss (3,282) 259 3,188 165 184 796 223 1,204 (1,436) (570) 2,217 211

Changes due to crediting rate/dividend scale updates 2,907 - - 2,907 22,139 - - 22,139 1,659 - - 1,659

New contractsExpected premiums (10,626) - - (10,626) (13,022) - - (13,022) (8,948) - - (8,948)Expected acquisition costs 960 - - 960 1,088 - - 1,088 826 - - 826Expected claims and margins 10,679 678 172 11,529 15,014 1,011 - 16,025 8,962 561 69 9,592

Total new contracts 1,014 678 172 1,864 3,081 1,011 - 4,092 840 561 69 1,470

Cash flowsPremiums received/paid 7,625 - - 7,625 9,088 - - 9,088 8,175 - - 8,175Claims paid/reimbursed (2,217) - - (2,217) (2,154) - - (2,154) (2,534) - - (2,534)Actual surrenders (1,087) - - (1,087) (1,107) - - (1,107) (1,139) - - (1,139)Acquisition costs paid (1,290) - - (1,290) (1,424) - - (1,424) (1,084) - - (1,084)

Total cash flows 3,031 - - 3,031 4,403 - - 4,403 3,418 - - 3,418

Carrying amount end of period 34,780 4,962 5,680 45,422 64,587 6,769 5,904 77,259 69,069 6,760 8,189 84,018

Participating SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

31 Dec 201231 Dec 2010 31 Dec 2011

105

Variable Annuities Segment



Carrying amount beginning of period (3,547) 3,089 (2,166) (2,332) 1,535

Contracts written in current period (PV of all future Prem, Benefits, and non-acq exp on NB)Expected Premiums / Fees (1,138) (1,439) (1,143) (1,619) (857)Expected Benefits & Non-Acq Expenses 1,949 772 491 1,227 539

Total contracts written in current period 810 (667) (652) (391) (318)

Total change in assumptions (including in force) 4,395 (4,192) (356) 1,964 (810)

Actual Premium / Fee Payments Received 1,076 1,045 1,311 1,476 1,591

Actual Benefit Payments (maturities/deaths/non-acq costs) (332) (343) (287) (356) (398)

Actual Surrenders - - - - -

Experience AdjustmentsPremium / Fees (34) (308) (292) (266) (353)Benefits & Non acquisition expenses 120 73 76 136 134

Total Experience adjustments 86 (235) (215) (130) (220)

Accretion of interest (interest accretion rate)Cash inflows (231) (139) (202) (230) (229)Cash outflows 121 231 168 197 293

Total Accretion of interest (110) 92 (34) (33) 64

Impact of discount rates in OCI (Current discount rate) 711 (956) 67 1,338 (62)

Carrying amount end of period 3,089 (2,166) (2,332) 1,535 1,382

Variable Annuity SegmentRollforward of Insurance Liability (Asset) - FASB Presentation


106



GrossMargin

AcquisitionCosts not yetrecognized(amt beingamortized)





paid) * Total


Expected margin on contracts written in the current period - - 667 667

Acquisition Costs on contracts written in the current period - 665 665 (532) 532 -

Acquisition costsChange in assumptions (273) (273) 298 298Experience adjustment (94) (94) (81) (81)Cash paid for acquisition costs (571) (571) (447) (447)

Total Acquisition costs (938) (938) (229) (229)

Margin release (133) - - (133) (282) - - (282)

Acquisition costs - 73 - 73 - 152 - 152

Accretion of interest (interest accretion rate)Margin 136 136 142 142Acquisition costs (76) 28 (48) (80) 17 (63)

Total Accretion of interest 136 (76) 28 88 142 (80) 17 79

Impact of discount rates in OCI (Current discount rate) 45 45 (22) (22)



Variable Annuity SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 2008 31 Dec 2009

107



GrossMargin









paid) * Total

Carrying amount beginning of period 3,857 (2,339) 867 2,385 4,467 (2,749) 909 2,626 4,828 (3,126) 850 2,552

Expected margin on contracts written in the current period 652 652 391 391 318 318

Acquisition Costs on contracts written in the current period (432) 432 - (391) 561 170 (314) 325 11

Acquisition costsChange in assumptions 68 68 (17) (17) 63 63Experience adjustment (119) (119) (137) (137) (136) (136)Cash paid for acquisition costs (402) (402) (534) (534) (314) (314)

Total Acquisition costs (453) (453) (688) (688) (388) (388)

Margin release (191) - - (191) (196) - - (196) (254) - - (254)

Acquisition costs - 111 - 111 - 114 - 114 - 152 - 152

Accretion of interest (interest accretion rate)Margin 149 149 165 165 182 182Acquisition costs (90) 25 (64) (100) 26 (74) (115) 24 (91)

Total Accretion of interest 149 (90) 25 85 165 (100) 26 91 182 (115) 24 91

Impact of discount rates in OCI (Current discount rate) 37 37 42 42 4 4

Carrying amount end of period 4,467 (2,749) 909 2,626 4,828 (3,126) 850 2,552 5,074 (3,404) 816 2,485


Variable Annuity SegmentRollforward of Margin - FASB Presentation

(CU)

31 Dec 201231 Dec 2010 31 Dec 2011

108



Expectedpresent valueof fulfilmentcash flows

Riskadjustment




Riskadjustment



Carrying amount beginning of period (3,058) 719 719 (1,620) 3,942 1,098 - 5,039

Changes recognized in profit or lossRelease - 116 (94) 23 - (196) - (196)Experience adjustment 13 - - 13 (209) - - (209)Changes in assumptions (including inforce update) 4,292 - (656) 3,636 (4,645) - 1,103 (3,542)Accretion of interest (94) - 31 (63) 65 - - 65

Total changes recognized in profit or loss 4,211 116 (719) 3,608 (4,790) (196) 1,103 (3,882)

Changes in discount rateChanges in discount rate 1,078 - - 1,078 (801) - - (801)

New contractsExpected premiums (1,226) - - (1,226) (1,462) - - (1,462)Expected acquisition costs 665 - - 665 532 - - 532Expected claims and margins 2,074 263 - 2,336 784 161 24 969

Total new contracts 1,512 263 - 1,775 (147) 161 24 38

Cash flowsPremiums received/paid 1,076 - - 1,076 1,046 - - 1,046Claims paid/reimbursed (303) - - (303) (283) - - (283)Actual surrenders - - - - - - - -Acquisition costs paid (575) - - (575) (506) - - (506)

Total cash flows 198 - - 198 258 - - 258

Carrying amount end of period 3,942 1,098 - 5,039 (1,538) 1,063 1,127 652

31 Dec 2008 31 Dec 2009

Variable Annuity SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

109




Riskadjustment




Riskadjustment




Riskadjustment



Carrying amount beginning of period (1,538) 1,063 1,127 652 (1,659) 1,373 1,345 1,060 2,497 1,501 888 4,887

Changes recognized in profit or lossRelease - 211 (75) 135 - (59) (99) (158) - 95 (70) 25Experience adjustment (130) - - (130) (78) - - (78) (117) - - (117)Changes in assumptions (including inforce update) (378) - 145 (232) 2,183 - (365) 1,817 (964) - 1,022 57Accretion of interest (8) - 10 1 (5) - 7 2 23 - 6 29

Total changes recognized in profit or loss (516) 211 80 (225) 2,100 (59) (457) 1,584 (1,058) 95 957 (6)

Changes in discount rateChanges in discount rate 101 - - 101 1,385 - - 1,385 2 - - 2

New contractsExpected premiums (1,143) - - (1,143) (1,619) - - (1,619) (857) - - (857)Expected acquisition costs 432 - - 432 561 - - 561 325 - - 325Expected claims and margins 493 100 138 731 1,230 187 - 1,417 541 61 - 602

Total new contracts (218) 100 138 20 173 187 - 360 8 61 - 69

Cash flowsPremiums received/paid 1,312 - - 1,312 1,476 - - 1,476 1,584 - - 1,584Claims paid/reimbursed (288) - - (288) (303) - - (303) (378) - - (378)Actual surrenders - - - - - - - - - - - -Acquisition costs paid (513) - - (513) (675) - - (675) (460) - - (460)

Total cash flows 511 - - 511 498 - - 498 746 - - 746

Carrying amount end of period (1,659) 1,373 1,345 1,060 2,497 1,501 888 4,887 2,195 1,657 1,846 5,698

31 Dec 201231 Dec 201131 Dec 2010

Variable Annuity SegmentRollforward of Insurance Contracts Liability - IASB Basis

(CU)

110

Appendix C – Earned Premium PresentationAs noted in section 3.2, we tested insurance contract revenue and expense presentation for a single product, ParWL. To preserve confidentiality, figures are not included in the tables below. Instead we present: a. the line itemswe developed based on our understanding of FASB's proposals; and, b. items used on the detailed schedulesthat supported the determination of insurance contract revenue and expense for periods presented.

111

112

Appendix D – GlossaryTerms used in this paper

2010 ED – The Insurance Contracts Exposure Draft issued by the IASB in July 2010

ALM – Asset liability matching processes

AMF – Asset management fees

AOCI – Accumulated other comprehensive income

ASC 944 – Topic 944 of the FASB’s Accounting Standards Codification, Financial Services -Insurance

ASC 815 – Topic 815 of the FASB’s Accounting Standards Codification, Derivatives andHedging

BBA – The building block approach as outlined in the FASB and IASB EDs

Boards – The FASB and the IASB

Bps – Basis points

CoC – Cost of capital

CSM – Contractual service margin

CU – Currency unit

DAC – Deferred acquisition costs

EDs – Refers to the two Insurance Contracts Exposure Drafts issued separately by the FASBand the IASB in June 2013

FAS 60 – Financial Accounting Standard No. 60, Accounting and Reporting by InsuranceEnterprises, codified in FASB ASC Topic 944

FAS 97 – Financial Accounting Standard No. 97, Accounting and Reporting by InsuranceEnterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from theSale of Investments, codified in FASB ASC Topic 944

FAS 120 – Financial Accounting Standard No. 120, Accounting and Reporting by Mutual LifeInsurance Enterprises and by Insurance Enterprises for Certain Long-Duration ParticipatingContracts – an amendment of FASB Statements 60, 97, and 113 and Interpretation No. 40,codified in FASB ASC Topic 944

113

FAS 133 – Financial Accounting Standard No. 133, Accounting for Derivative Instruments andHedging Activities, codified in FASB ASC Topic 815

FASB – Financial Accounting Standards Board

GMDB – Guaranteed minimum death benefit

GMIB – Guaranteed minimum income benefit

GMWB – Guaranteed minimum withdrawal benefit

Group (or “we”) – Manulife Financial, MetLife Inc., New York Life and Prudential FinancialInc.

IASB – International Accounting Standards Board

IFRS – International Financial Reporting Standards

IFRS 9 – International Financial Reporting Standard 9, Financial Instruments

LTC – Long-term care contracts

M&E charges – Mortality and expense charges

OCI – Other comprehensive income

OPP – Option to purchase paid-up additions

PAA – The premium allocation approach as outlined in the FASB and IASB EDs

PAD – Provision for adverse deviations

PUA – Paid-up addition

PV – Present value

RI – Retirement Income contracts

SOP 03-1 – AICPA Statement of Position 03-1, Accounting and Reporting by InsuranceEnterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts,codified in FASB ASC Topic 944, Financial Services – Insurance

SOP 95-1 – AICPA Statement of Position 95-1, Accounting for Certain Insurance Activities ofMutual Life Insurance Enterprises, codified in FASB ASC Topic 944, Financial Services -Insurance

SPIA – Single premium immediate annuity contracts

114

Study period – The period from 31 December 2007 through 31 December 2012 for which theGroup performed this field testing

Tenor – The amount of time left for the repayment of a loan or fixed income security or theinitial term length. Tenor can be expressed in years, months or days.

Term – Term life contracts

U.S. GAAP – U.S. Generally Accepted Accounting Principles

ULSG – Universal life contracts with secondary guarantees

VA – Variable annuity contracts

WL – Whole of life contract, can be participating (par) or non-participating (non-par)

115

FASB Glossary from ED

Acquisition Costs – Costs that are related to the acquisition of new or renewal insurancecontracts

Annuitization – The process of converting an annuity into a series of periodic payments

Carrying Amount – The amount of an item as displayed in the financial statements

Ceding Entity (Cedant) – The party in a reinsurance contract that acquires insurancecoverage on its underlying insurance contracts. The ceding entity compensates the reinsurerfor insurance risk transferred to the reinsurer. The ceding entity receives the right toreimbursement from the reinsurer under the terms of the reinsurance contract.

Claim – A demand for payment of a policy benefit because of the occurrence of an insuredevent

Claim Adjustment Expenses – The amount to provide for the estimated cost required toinvestigate and settle claims relating to insured events

Closed Block – A defined, limited group of policies and a defined set of assets governed by aset of operating rules

Commutation – An agreement between two parties, such as a cedant and a reinsurer thatterminates all rights and obligations between the parties under a particular insurance orreinsurance contract

Coverage – An entity’s exposure to loss. The concept of coverage would typically includepolicy limits, deductible, insured, and covered property or insured event.

Coverage Period – Commonly referred to as the period that the contract is in force, theperiod over which insured events that occur are covered by an insurance contract. It is definedby the contract boundary.

Demutualization – The conversion of a mutual insurance entity to a stock insurance entity

Estimated Returnable Amount – The estimate of the component of an insurance contractthat the entity is required to repay the policyholder or the beneficiary that does not depend onwhether an insured event occurs

Fair Value – The price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date

Financial Risk – The risk of a possible future change in one or more of a specified interestrate, financial instrument price, commodity price, foreign exchange rate, index of prices orrates, credit rating or credit index, or other variable

Frequency – The number of insured events that occur

116

Fulfillment Cash Flows – The present value of the unbiased, probability-weighted estimate ofthe future cash flows that will arise as an entity fulfills the insurance contract.

Incurred-but-Not-Reported Claims – Claims relating to insured events that have occurredbut have not yet been reported to the entity as of the date of the financial statements

In Force – Insurance contracts written and recognized on the books of an entity that areunexpired as of a given date

Insurance Contract – A contract under which one party (the issuing entity) accepts significantinsurance risk from another party (the policyholder) by agreeing to compensate thepolicyholder or its designated beneficiary if a specified uncertain future event (the insuredevent) adversely affects the policyholder

Insurance Contract Asset – An entity’s net expected contractual rights less obligations underan insurance contract, if the rights exceed the obligations as of the reporting date

Insurance Contract Liability – An entity’s net expected contractual obligations less rightsunder an insurance contract, if the obligations exceed the rights as of the reporting date

Insurance Contract Premium – The amount charged to a policyholder for an insurancecontract (that is, the total consideration provided by the policyholder under the terms of thecontract)

Insurance Contract Revenue – Inflows or other enhancements of assets of an entity orsettlements of its liabilities (or a combination of both) from providing insurance coverage. Thisexcludes from insurance contract premium any estimated returnable amounts.

Insurance Risk – The risk arising from uncertainties about underwriting risk as opposed tofinancial risk. Insurance risk is fortuitous; the possibility of adverse events occurring is outsidethe control of the insured.

Insured Event – An uncertain future event that is covered by an insurance contract andcreates insurance risk

Investment Component – A component included in an insurance contract that containsfinancial risk and no significant insurance risk

Lapse Rate – The rate at which insurance contracts terminate through failure of thepolicyholders to continue required premium payments. The lapse rate also may be considereda rate of non-persistence.

Liability for Incurred Claims – In the premium allocation approach, the amount needed toprovide for the estimated cost of settling claims relating to insured events that have occurredon or before a particular date (ordinarily, the reporting date); includes the liability for incurredbut-not-reported claims and claim adjustment expenses

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Liability for Remaining Coverage – In the premium allocation approach, an entity’s stand-ready obligation to provide coverage for future insured events that arise under existingcontracts (that is, the obligation that relates to the unexpired portion of coverage)

Loss Sensitive Feature – A provision within a contract that causes the premium, insured lossor benefit, or commission to vary based on the loss experience of that contract. Examplesinclude reinstatement premium provisions, retrospective premium adjustments, profitcommissions, and sliding scale commissions, all of which limit the risk for an entity and rewardthe policyholder based on favorable loss experience and/or penalize the policyholder forunfavorable loss experience.

Maintenance Costs – Costs associated with maintaining records relating to insurancecontracts and with the processing of premium collections and commissions

Margin – The excess of the expected present value of the cash inflows over the expectedpresent value of the cash outflows to fulfill an insurance contract at the initial recognition of aportfolio of insurance contracts, less any amounts recognized in net income over time

Morbidity – The relative incidence of disability due to disease or physical impairment

Mortality – The relative incidence of death in a given time

Mortality Risk – The risk arising from uncertainties about the obligation to make paymentsthat are contingent upon the death or continued survival of a specific individual or group.

Net Amount at Risk – That portion of the amount insured that exceeds the amount retainedby an entity for the policyholder; sometimes referred to as the face value of a contract less theaccumulated policyholder account value or premiums received

Onerous Contract – A contract in which the present value of the future costs of fulfilling theunexpired portion of coverage (that is, the liability for remaining coverage) and the expectedqualifying acquisition costs are expected to exceed the carrying amount of the liability relatedto the unexpired portion of coverage

Participating Insurance – Insurance in which the policyholder is entitled to participate ineither of the following:

a. The earnings or surplus of the insurance entity

b. The performance of an underlying item.

Performance Obligation – A promise in a contract with a customer to transfer a distinct goodor service to the customer

Persistency – As the complement of the lapse rate, refers to the number of policyholders thatkeep their insurance coverage in force during a period. Persistency varies by plan ofinsurance, age at issue, year of issue, frequency of premium payment, and other factors.

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Policyholder – A party that has a right to compensation under an insurance contract if aninsured event occurs. The policyholder may elect that a beneficiary receive claim or benefitpayments under the contract.

Policyholder Dividends – Amount of dividends to policyholders, representing thepolicyholders’ share of divisible surplus

Portfolio of Insurance Contracts – A group of insurance contracts that both:

a. Are subject to similar risks and priced similarly relative to the risk assumed

b. Have similar duration and similar expected patterns of release from risk, that is, reduction invariability in cash flows

Portfolio Transfer – The transfer of an entity’s entire liability for in-force insurance contractsor outstanding losses, or both, of a portfolio or portfolios of the entity’s business to anotherentity

Prospective Reinsurance – Reinsurance in which an assuming entity agrees to reimburse aceding entity (cedant) for losses that may be incurred as a result of future insurable eventscovered under contracts subject to the reinsurance.

Qualifying Acquisition Costs – Costs that are related directly to the successful acquisition ofnew or renewal insurance contracts

Reinsurance – A transaction in which a reinsurer (assuming entity) assumes all or part ofinsurance risk undertaken originally by another entity (ceding entity or cedant) in exchange forcompensation. For indemnity reinsurance, the legal rights of the policyholder are not affectedby the reinsurance transaction, and the entity issuing the underlying insurance contractremains liable to the policyholder for payment of policy benefits.

Reinsurance Asset (Reinsurance Recoverable) – A ceding entity’s net contractual rightsunder a reinsurance contract, including amounts recoverable from a reinsurer for paid andunpaid claims and/or benefits and claim settlement expenses, including claims incurred but notreported

Reinsurer – The assuming entity in a reinsurance transaction

Retroactive Reinsurance – Reinsurance in which an assuming entity agrees to reimburse aceding entity (cedant) for liabilities incurred as a result of past insurable events covered undercontracts subject to the reinsurance

Salvage – The amount received by an entity from the sale of property (usually damaged) onwhich the entity has paid a claim to the policyholder and has obtained title to the property

Segregated Account – A separate investment account (that is, portfolio of assets) establishedand maintained by an entity to which funds have been allocated for certain contracts of theentity

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Segregated Fund Arrangement – A participation feature within an insurance contract that iscontractually linked to a segregated account and that meets both of the following conditionsas a result of contractual, statutory, or regulatory requirements:

a. The entity must invest the policyholder’s funds directed by the policyholder in designatedinvestment alternatives or in accordance with specific investment objectives or policies.

b. All investment performance, net of contract fees and assessments, must be passedthrough to the individual policyholder.

Settlement Period – The estimated period over which claims or benefits are paid; forreinsurance contracts, the estimated period over which a ceding entity (cedant) expects torecover substantially all amounts due from the reinsurer under the terms of the reinsurancecontract

Severity – The amount of the claim to be paid under an insurance contract

Statutory Accounting Practices – Accounting principles required by statute, regulation, orrule, or permitted by specific approval, that an insurance entity must follow when reporting toan insurance regulator

Subrogation – The right of an entity to pursue any course of recovery of damages, in its nameor in the name of the policyholder, against a third-party who is liable for costs relating to aninsured event that have been paid by the entity

Surrender Charges – Amounts expected to be assessed against policyholder balances atcontract redemption, whole or partial, regardless of how the charges are labeled, such ascontingent deferred sales charges

Timing Risk – The risk arising from uncertainties about the timing of the receipt and paymentsof the net cash flows from premiums, commissions, claims, and claim settlement expensespaid under a contract

Underwriting Risk – The risk arising from uncertainties about the amount of net cash flowsfrom premiums, commissions, claims, and claim settlement expenses paid under a contract

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IASB Defined Terms from ED

Acquisition Costs – The costs of selling, underwriting and initiating an insurance contract

Contractual Service Margin – A component of the measurement of the insurance contractrepresenting the unearned profit that the entity recognizes as it provides services under theinsurance contract

Coverage Period – The period during which the entity provides coverage for insured events.That period includes the coverage that relates to all premiums within the boundary of theinsurance contract.

Financial Risk – The risk of a possible future change in one or more of a specified interestrate, financial instrument price, commodity price, foreign exchange rate, index of prices orrates, credit rating or credit index, or other variable, provided in the case of a non-financialvariable that the variable is not specific to a party to the contract

Fulfillment Cash Flows – An explicit, unbiased, and probability-weighted estimate(i.e., expected value) of the present value of the future cash outflows less the present value ofthe future cash inflows that will arise as the entity fulfills the insurance contract, including arisk adjustment

Insurance Contract – A contract under which one party (the issuer) accepts significantinsurance risk from another party (the policyholder) by agreeing to compensate thepolicyholder if a specified uncertain future event (the insured event) adversely affects thepolicyholder

Insurance risk – Risk other than financial risk, transferred from the holder of a contract to theissuer.

Insured Event – An uncertain future event that is covered by an insurance contract and thatcreates insurance risk

Investment Component – The amounts that an insurance contract requires the entity torepay to a policyholder even if an insured event does not occur

Investment Contract with a Discretionary Participation Feature – A financial instrumentthat provides a particular investor with the contractual right to receive, as a supplement to anamount that is not subject to the discretion of the issuer, additional amounts:a. That are likely to be a significant portion of the total contractual benefitsb. Whose amount or timing is contractually at the discretion of the issuerc. That are contractually based on:

o The returns from a specified pool of insurance contracts or a specified type of insurancecontract

o Realized and/or unrealized investment returns on a specified pool of assets held by theissuer

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o The profit or loss of the entity or fund that issues the contract.

Liability for Incurred Claims – The obligation that an entity has to investigate, and pay claimsfor, insured events that have already occurred, including incurred claims for events that haveoccurred but for which claims have not been reported

Liability for the Remaining Coverage – An entity’s obligation to pay valid claims that ariseunder existing insurance contracts for insured events that have not yet occurred (e.g., theobligation that relates to the unexpired portion of the coverage period)

Policyholder – A party that has a right to compensation under an insurance contract if aninsured event occurs

Portfolio of Insurance Contracts – A group of insurance contracts that:

a. Provide coverage for similar risks and that are priced similarly relative to the risk taken onb. Are managed together as a single pool

Pre-coverage Cash Flows – Cash flows paid or received before the insurance contract isrecognized that relate directly to the acquisition or the fulfillment of the portfolio of insurancecontracts that will contain the insurance contract

Reinsurance Contract – An insurance contract issued by one entity (the reinsurer) tocompensate another entity (the cedant) for claims arising from one or more insurancecontracts that are issued by the cedant

Risk Adjustment – The compensation that an entity requires for bearing the uncertainty aboutthe amount and timing of the cash flows that arise as the entity fulfills the insurance contract

Documents

FASBIASB Field testing white paper 11 October 2013