PG LIFE INSURANCE COMPANY - American Academy of …actuary.org/files/imce/AcademyPBRBootCamp-Regulatory-NadeemNotmy... · not necessarily cover all requirements of VM-20. ... e. SIGNIFICANT

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IMPORTANT NOTE: This is a sample, hypothetical report and does not necessarily cover all requirements of VM-20. It has been designed as an illustration of the type of information required for documentation of a Principle-Based Reserve Actuarial Report. It does not discuss all items that would be in an actual report.

CONFIDENTIAL

PG LIFE INSURANCE COMPANY PBR ACTUARIAL REPORT ON POLICIES SUBJECT TO PBR VALUATION As of December 31, 2017 Nadeem Notmyfault, MAAA, FSA Qualified Actuary PGIC Insurance Company 100 Accuracy Avenue Littletown, TX 78714 (512) 269-xxxx [email protected] February 28, 2018 American Academy of Actuaries’ June 6-8, 2016 PBR Boot Camp

CONFIDENTIAL PGIC Insurance Company

February 28, 2018

This report is confidential and for the exclusive use of the management and state insurance examiners of the PGIC Insurance Company.


February 28, 2018

Table of Contents I. OVERVIEW .................................................................................................................................................... 1

1. INTRODUCTION ....................................................................................................................................... 1

2. PRODUCT DESCRIPTIONS OF POLICIES SUBJECT TO PBR REQUIREMENTS .............................................. 1

3. Part 1 of the VM-20 Reserve Supplement ............................................................................................... 3

4. Part 2 Section 1 of the VM-20 Reserve Supplement ............................................................................... 5

5. DESCRIPTION OF MATERIAL RISKS FOR PBR CONTRACTS ....................................................................... 6

6. RELIANCES ................................................................................................................................................ 6

7. VALUATION ASSUMPTIONS AND MARGINS ............................................................................................ 6

a. METHODS USED TO DETERMINE RISK FACTORS ............................................................................. 6

b. CHANGES FROM PRIOR YEAR .......................................................................................................... 7

c. KEY REPORTING ITEMS .................................................................................................................... 7

d. METHODS USED TO DETERMINE MARGINS .................................................................................... 7

e. SIGNIFICANT CHANGES IN METHOD TO DETERMINE MARGINS ..................................................... 8

f. METHODS INCONSISTENT WITH RISK ANALYSIS.............................................................................. 8

g. OTHER .............................................................................................................................................. 8

8. ASSETS ...................................................................................................................................................... 8

a. ALLOCATION TO MULTIPLE SEGMENTS ........................................................................................... 8

b. PORTFOLIO DESCRIPTION ................................................................................................................ 8

9. HEDGING ................................................................................................................................................ 10

10. MATERIALITY OF ASSUMPTIONS ......................................................................................................... 10

11. CERTIFICATION ..................................................................................................................................... 10

12. CLOSING PARAGRAPHS ........................................................................................................................ 10

II. PBR LIFE REPORT ........................................................................................................................................ 12

1. SUMMARY OF VALUATION ASSUMPTIONS ....................................................................................... 12

2. CASH FLOW MODEL ........................................................................................................................... 12

a. MODELING SYSTEM USED .............................................................................................................. 12

b. MODEL SEGMENTS ........................................................................................................................ 12

c. GROUPING FOR DETERMINISTIC RESERVES .................................................................................. 13

d. STOCHASIC GROUPING .................................................................................................................. 13

e. VALIDATION OF MODEL ................................................................................................................. 13

f. PROJECTION PERIOD ...................................................................................................................... 13

g. REINSURANCE ................................................................................................................................ 13

3. MORTALITY ........................................................................................................................................ 14

a. DESCRIPTION OF MORTALITY SEGMENTS ..................................................................................... 14


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b. SUBSEGMENTS ............................................................................................................................... 14

c. UNDERWRITING SCORING PROCEDURE ........................................................................................ 14

d. SOURCE OF DATA OTHER THAN OWN COMPANY ......................................................................... 14

e. ADJUSTMENTS TO COMPANY EXPERIENCE ................................................................................... 14

f. LEVEL OF CREDIBILITY .................................................................................................................... 15

g. COMPANY EXPERIENCE MORTALITY .............................................................................................. 15

h. INDUSTRY BASIC MORTALITY USED ............................................................................................... 15

i. MORTALITY IMPROVEMENT .......................................................................................................... 15

j. SUBSTANDARD LIVES ..................................................................................................................... 15

k. ADJUSTMENTS TO COMPANY EXPERIENCE ................................................................................... 15

l. MARGINS........................................................................................................................................ 16

m. ACTUAL TO EXPECTED ANALYSIS ............................................................................................... 16

4. POLICYHOLDER BEHAVIOR ................................................................................................................. 16

a. SOURCE OF DATA ........................................................................................................................... 16

b. WHEN DATA WAS NOT FULLY CREDIBLE ....................................................................................... 16

c. ANTICIPATED EXPERIENCE ............................................................................................................. 16

d. ACTUAL TO EXPECTED ANALYSIS ................................................................................................... 17

e. MARGINS........................................................................................................................................ 17

f. IMPACT OF CHANGES TO NON-GUARANTEED RATES ................................................................... 17

g. SCENARIO DEPENDENT DYNAMIC FORMULA ................................................................................ 17

h. CHANGES SINCE LAST REPORT ....................................................................................................... 17

i. PREMIUM PAYMENT ASSUMPTION ............................................................................................... 18

j. ADJUSTMENTS TO LAPSES AND MORTALITY FOR ANTI-SELECTION .............................................. 18

k. COMPETITOR RATE DEFINITION .................................................................................................... 18

5. EXPENSES ........................................................................................................................................... 18

a. EXPENSE ALLOCATION METHODOLOGY ........................................................................................ 18

b. ALLOCATION TO SEGMENTS .......................................................................................................... 18

c. MARGIN METHODOLOGY .............................................................................................................. 19

6. ASSETS ................................................................................................................................................ 19

a. STARTING ASSETS .......................................................................................................................... 19

b. SELECTING ASSETS ......................................................................................................................... 20

c. MARKET VALUE OF ASSETS ............................................................................................................ 20

d. FOREIGN CURRENCY EXPOSURE .................................................................................................... 20

e. NET SPREAD ADJUSTMENT FACTOR .............................................................................................. 21

f. NET EARNED RATES BY SEGMENT ................................................................................................. 21


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g. INVESTMENT EXPENSES ................................................................................................................. 21

h. PREPAYMENT, CALL AND PUT FUNCTIONS .................................................................................... 21

i. ASSETS IN 2% COLLAR .................................................................................................................... 22

j. DERIVATIVES .................................................................................................................................. 22

k. POLICY LOANS ................................................................................................................................ 22

l. GENERAL ACCOUNT EQUITY INVESTMENTS .................................................................................. 22

m. SEPARATE ACCOUNT FUND GROUPING .................................................................................... 22

n. FUND PERFORMANCE AND STOCHASTIC PATHS ........................................................................... 23

o. MODEL INVESTMENT STRATEGY ................................................................................................... 23

p. NOT LESS THAN ALTERNATIVE INVESTMENT STRATEGY ............................................................... 23

q. NUMBER OF SCENARIOS ................................................................................................................ 23

r. SCENARIO TECHNIQUES ................................................................................................................. 23

7. REVENUE SHARING ASSUMPTIONS ................................................................................................... 23

8. REINSURANCE ASSUMPTIONS ........................................................................................................... 23

a. REINSURANCE AGREEMENTS ......................................................................................................... 23

b. REINSURANCE CASH FLOWS IN MODEL......................................................................................... 24

c. ADDITIONAL ANALYSIS ................................................................................................................... 24

d. MULTIPLE REINSURANCE TREATIES ............................................................................................... 24

e. WHY ADDITIONAL TESTING IS NOT NEEDED ................................................................................. 24

9. NON-GUARANTEED ELEMENTS ......................................................................................................... 24

a. MODELING NGEs ............................................................................................................................ 24

b. MARGIN FOR CONSERVATISM ....................................................................................................... 24

c. PAST MANAGEMENT PRACTICES ................................................................................................... 25

d. CONSISTENCY OF ASSUMPTIONS................................................................................................... 25

e. CONDITIONAL EXCLUSIONS ........................................................................................................... 25

f. DESCRIPTION OF INTEREST CREDITING METHODOLOGY .............................................................. 25

10. DETERMINISTIC AND STOCHASTIC EXCLUSION TESTS ................................................................... 25

a. POLICIES USED IN EXCLUSION TESTS ............................................................................................. 25

b. STOCHASTIC EXCLUSION ................................................................................................................ 25

c. RESULTS OF STOCHASTIC EXCLUSION TEST ................................................................................... 25

d. STOCHASIC RESERVE DEMONSTRATION........................................................................................ 25

e. CERTIFICATION ............................................................................................................................... 25

f. RESULTS OF DETERMINISTIC EXCLUSION TEST .............................................................................. 26

11. OTHER ............................................................................................................................................ 26

a. IMPACT OF MARGINS .................................................................................................................... 26


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b. COMBINED IMPACT ....................................................................................................................... 26

c. IMPACT OF IMPLICIT MARGINS ..................................................................................................... 26

d. SENSITIVITY TESTS .......................................................................................................................... 26

e. RISKS NOT FULLY REFLECTED ......................................................................................................... 26

f. IMPACT OF AGGREGATION ON RESERVES ..................................................................................... 26

g. EARLIER TESTING PERIOD .............................................................................................................. 27

h. APPROXIMATION AND SIMPLIFICATIONS ...................................................................................... 27

12. CERTIFICATIONS ............................................................................................................................. 27

III. PBR ACTUARIAL REPORT REQUIREMENTS FOR VARIABLE ANNUITY CONTRACTS ................................... 28

BASIC RESULTS ............................................................................................................................................... 29

APPENDIX 1 ................................................................................................................................................ 30

RESULTS OF STOCHASIC TESTING FOR ULSG ............................................................................................. 30

APPENDIX B: PREMIUM PATTERN FOR UNIVERSAL LIFE and ULSG ............................................................... 35

APPENDIX C: LAPSE STUDY ............................................................................................................................ 36

APPENDIX D: EXPENSES ................................................................................................................................. 39

APPENDIX E: RELIANCE STATEMENT FROM ASSET OFFFICER........................................................................ 40

APPENDIX F: RELIANCE STATEMENT FROM LIABILITY OFFFICER ................................................................... 41

APPENDIX G: SENIOR MANAGEMENT SIGN-OFF ........................................................................................... 42

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CONFIDENTIAL Report of the PBR Valuations for PGIC February 28, 2018

I. OVERVIEW

1. INTRODUCTION I, Nadeem Notmyfault, MAAA, FSA, am a Vice President and Actuary of PG Life Insurance Company. I am a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. I meet the qualification standards for rendering the opinion and am familiar with the PBR valuation requirements applicable to life and health companies. This report has been prepared on the PG Life Insurance Company (PGIC) in conjunction with the Actuarial Certification on the policies subject to a PBR valuation. This report details all of the disclosure items for a PBR valuation as required by VM-31of the Valuation Manual for PGIC for year-end 2017.

2. PRODUCT DESCRIPTIONS OF POLICIES SUBJECT TO PBR REQUIREMENTS PGIC has been determining the reserves for the products listed below on a PBR basis since January 1, 2017:

Accumulation UL with no secondary guarantees UL with shadow account secondary guarantee UL with a cumulative premium secondary guarantee 20-year level term products Non-participating whole life insurance Participating whole life insurance

It is noted that PGIC does not have variable life or variable annuities.

This report covers these products. The policies and assets examined were those in-force on December 31, 2017. A brief description of each of these products is given below: Accumulation UL with No Secondary Guarantees

The Accumulation Universal Life policies are flexible premium policies. There are two death benefit options: Option 1 pays a death benefit at the Specified Amount plus the increase in the fund value since the last Anniversary Day; Option 2 has a death benefit equal to the Specified

CONFIDENTIAL Report of the PBR Reserves for PGIC

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Amount plus the fund value. The fund value is accumulated as the total of: premiums plus interest credited less premium expense charges less partial surrenders less monthly deductions. The cash value equals the fund value less a fund charge. The fund charge is a percentage of fund value: 10% in the first year, grading down by 1% a year to 0 in years 11 and later. The guaranteed interest rate is 4%. Excess interest may be credited in a manner determined by the Company. Policy loans are made at the credited rate plus two percent. There are monthly deductions for the cost of insurance plus the monthly expense charge. ULSG with a Shadow Account The Universal Life product with Secondary Guarantees is similar to the Accumulation UL product, except that there is a shadow account guarantee. This shadow account guarantee is for the life of the policy. The shadow account guarantees that, as long as the premiums paid plus interest are greater than amounts specified in the policy, the policy will not lapse, even if the fund account were to go to zero. UL with a Cumulative Premium Secondary Guarantee This UL is similar to the Accumulation UL product, but the policy has a cumulative “premium catch-up provision” in which the coverage is guaranteed to remain in-force as long as a stipulated premium is paid each year, and if the insured is paying less than is required to maintain the guarantee, there is an unlimited right to make up past premium deficiencies. 20-Year Term The 20-year term product has level premiums over the 20-year period. After the 20-year period, the premiums are on a YRT basis. There are no cash values on this product. Indexed UL The Company has an existing indexed UL product. It has a 4% minimum interest rate, and has a one year point-to-point guarantee of X% of the S&P 500 index, where X is declared yearly. This product is 100% reinsured. It was determined that this product would not be put on a PBR basis until next year. Non-Participating Whole Life The Company also issues a non-participating level premium whole life insurance product. Participating Whole Life The Company also issues a participating level pay whole life product with dividends.


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3. Part 1 of the VM-20 Reserve Supplement The table below shows the reserves for both PBR and non-PBR business in the Company. All numbers except the number of policies are in $1,000s.

4

Prior Year

1 2 34 5 6 7 8 9 10 11 12 13 14 15

Reported Reserve

Reported Reserve

Deferred Premium Asset

Net Premium Reserve

Deterministic

Reserve

Stochastic Reserve

Number of

Policies

Face Amount

Net Premium Reserve

Deterministic

Reserve

Number of Policies

Face Amount

Net Premium Reserve

Number of

Policies

Face Amount

1. Post-Reinsurance-Ceded Reserve1.1. Term Life Insurance 0 2,600 100 1,200 2,500 125,000 2,500,0001.2. Universal Life With Secondary Guarantee 0 325,000 1,000 225,000 275,000 325,000 25,000 2,500,0001.3. Non-participating Whole Life 0 300,000 1,500 300,000 25,000 2,500,0001.4. Participating Whole Life 0 40,000 150 40,000 2,000 450,0001.5. Universal Life Without Secondary Guarantee 0 200,500 500 175,000 200,000 62,500 11,250,0001.6. Variable Universal Life1.7. Variable Life1.8. Indexed Life1.9. Aggregate Write-ins for Other Products

2. Total Post-Reinsurance-Ceded Reserve(Sum of Lines 1.1 through 1.9)3. Pre-Reinsurance-Ceded Reserve

3.1. Term Life Insurance 0 13,000 1,000 12,000 25,000 125,000 25,000,0003.2. Universal Life With Secondary Guarantee 0 375,000 1,000 275,000 325,000 375,000 25,000 3,000,0003.3. Non-participating Whole Life 0 350,000 1,500 350,000 25,000 3,000,0003.4. Participating Whole Life 0 45,000 150 45,000 2,000 500,0003.5. Universal Life Without Secondary Guarantee 0 225,500 500 225,000 250,000 62,500 12,500,0003.6. Variable Universal Life3.7. Variable Life3.8. Indexed Life3.9. Aggregate Write-ins for Other Products

4. Total Pre-Reinsurance-Ceded Reserve(Sum of Lines 3.1 through 3.9)5. Total Reserves Ceded (Line 4 minus Line 2) - 140,400 900 50,000 50,000 50,000 - 500,000 60,800 72,500 - 23,750,000 55,000 - 550,000

DETAILS OF WRITE-INS1.901. . 1.902. 1.903. 1.998. Summary of remaining write-ins for Line 1.9 from overflow page 1.999 Totals (Lines 1.901 through 1.903 plus 1.998) (Line 1.9 above).3.901 . 3.902. 3.903. 3.998. Summary of remaining write-ins for Line 3.9 from overflow page 3.999 Totals (Lines 3.901 through 3.903 plus 3.998) (Line 3.9 above).

Amounts are in $1,000s

27,000 3,500,000 3,000,000 237,000 275,000 187,500 37,500,000 395,000 375,000 25,000

25,000 2,500,000 176,200

- 1,008,500 4,150 275,000 325,000

Current Year

SECTION A SECTION B SECTION C

- 868,100 3,250 225,000 275,000 325,000 340,000 27,000 2,950,000 202,500 187,500 13,750,000

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4. Part 2 Section 1 of the VM-20 Reserve Supplement

1 2 3 4 5 6

Gross Reserve

Net Reserve

Gross Reserve

Net Reserve

Number of

Policies

Face Amount

1. Life Insurance Reserves1.1. Term Life 1.2. Universal Life With Secondary Guarantee 1.3. Non-participating Whole Life 1.4. Participating Whole Life 1.5. Universal Life Without Secondary Guarantee 1.6. Variable Universal Life 1.7. Variable Life 1.8. Indexed Life 40,000 0 1,000 200,0001.9. Aggregate Write-ins for Other Products2. Total Life Insurance Reserves (Sum of Lines 1.1 through 1.9)DETAILS OF WRITE-INS

1.901 . 1.902. 1.903. 1.998. Summary of remaining write-ins for Line 1.9 from overflow page 1.999 Totals (Lines 1.901 through 1.903 plus 1.998) (Line 1.9 above).

Three Year Transition PeriodPrior Year Current Year


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5. DESCRIPTION OF MATERIAL RISKS FOR PBR CONTRACTS PGIC only has life insurance policies which are covered under PBR. A material risk to these contracts is mortality. Lapse is also an important risk, especially for the universal life contracts with guarantees. Lapses can depend on what the rate credited is compared to the market rate, so the dynamic lapse factor and the interest crediting methodology are also explained. Interest rates are also important. Premium payment patterns on universal life insurance can be significant. To a lesser extent, expenses can impact results. There is also some reliance on the reinsurance of these PBR contracts.

6. RELIANCES

a. I relied upon asset data prepared under the direction of Ay Set, Chief Investment Officer as certified in the attached statement. I relied on the liability data prepared under the direction of Li Ability, Vice President & Actuary - Corporate Actuarial, as certified in the attached statement.

b. I evaluated that data for reasonableness and consistency. I also reconciled that data to Schedules A, B and D, Page 3, Exhibits 5 - 8 and Pages 28 and 29 (IMR & AVR) of the company's current annual statement.

In other respects my examination included such review of the actuarial assumptions and actuarial methods and such tests of the actuarial calculations as I considered necessary.

7. VALUATION ASSUMPTIONS AND MARGINS

a. METHODS USED TO DETERMINE RISK FACTORS In determining risk factors, Company experience was used to the extent credible. For mortality, Company experience was blended with industry experience to develop the factors used.


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The base lapse rates were developed using Company data where credible. Where the data was partial or not credible, industry data was used, as well as some actuarial judgment based on data of similar products. For items related to the lapse factors, such as the dynamic lapse factors and the market rates, studies of industry data were done. The assumed interest crediting spreads were based on pricing spreads, which management has adhered to in the past. Expenses are based on a Company study. Premium persistency is based on a Company study.

b. CHANGES FROM PRIOR YEAR This was the first year PBR was done, so there are no changes in PBR assumptions.

c. KEY REPORTING ITEMS The key reporting items which are tracked on a policy level basis include lapses, mortality, and premium persistency. On a Company basis, expenses are tracked.

d. METHODS USED TO DETERMINE MARGINS Margins are based on the credibility and volatility of data. For mortality, factors were added consistent with those in VM-20. The mortality used was a blend of the Company mortality and the 2015 Valuation Basic Mortality Table. For lapses, a study was done to determine whether higher or lower lapses were more conservative, and a margin was added based on this study. The margin was higher for universal life with secondary guarantees (lowering the assumed lapses) because the experience was not credible. Also, in years where the experience was less credible, margins were added for conservatism. For expenses, a flat 5% margin was added. This is based on actuarial judgment, looking at the variation in expense factors over the last 10 years. For premium persistency, only slight margins were added, since the rates have been relatively stable. Interest rates were tested by using a variety of scenarios.


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Reinsurance counter party risk was reviewed by reviewing the ratings of each counterparty, ensuring that each reinsurer had at least an “A” rating from 2 major rating agencies.

e. SIGNIFICANT CHANGES IN METHOD TO DETERMINE MARGINS There were no significant changes made from the prior year to determine margins.

f. METHODS INCONSISTENT WITH RISK ANALYSIS All assumptions used in the PBR testing are generally consistent with the risk analysis and management techniques used by the Company. There are two exceptions:

a) Mortality improvement is typically included when reviewing results for management, while mortality improvement was not included when analyzing mortality for PBR Valuation.

b) Actual investments would average an A rating as opposed to the requirement that the reinvestment assumption be 50% AA and 50% A rated bonds.

g. OTHER This is only the first year of PBR. The Company generally used methodology similar to those used for asset adequacy testing. The only exceptions were where VM-20 specifies a methodology. The Accumulation UL and the UL with a shadow account credits interest above the minimum at a rate declared by the company. The goal is to earn a spread of 180 basis points over the portfolio rate. This is the Company’s current spreads, and the Company expects to maintain this in the future. There is no explicit margin in this spread. This factor will be examined at least once a year.

8. ASSETS

a. ALLOCATION TO MULTIPLE SEGMENTS In support of the Asset/Liability Management Process, PGIC has segmented its investment portfolio. There is a segment specifically for the PBR products. This action, along with continued refinements of the segments, should facilitate the management of investment risks associated with the various lines of business. However, it should be understood that all assets of the company back all liabilities of the company.

b. PORTFOLIO DESCRIPTION The majority of invested assets backing PBR valuation in PGIC are investment grade corporate bonds, both public and private placements. The portfolio also includes a substantial holding in CMOs and other mortgage backed securities. The majority of the CMOs are government or agency


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backed. The portfolio is rounded out with commercial mortgages and residential mortgages. The table at the end of this section lists assets by type and by product. The assets backing the general account segments used for the PBR products are given below: ASSETS BACKING PBR PRODUCTS Total Bonds 700,000 75.9% Commercial Mortgage Loans 100,000 10.8% Residential Mortgage Loans 70,000 7.6% Cash & Short Term 50,000 5.4% Policy Loans 2,000 0.2% Total 922,000

RATING OF ASSETS HELD All commercial and residential mortgage loans are very high quality: they are in the NAIC 1 category. The breakdown of the rating of the bonds in the PBR segment is given below: Long Term Bonds

Amount

% of Total

Exempt Obligations

50,000

7.1% NAIC 1

350,000

50.0%

NAIC 2

250,000

35.7% NAIC 3

50,000

7.1%

NAIC 4

0 0.0% NAIC 5

0

0.0%

NAIC 6

0

0.0% Bond Total

700,000

100.0%

DURATION OF ASSETS The duration of the commercial mortgages are all 5-10 years. The duration of the residential mortgages are all 10-20 years. Long Term Bonds Amount % of Total 1-5 years 25,000 3.6% 5-10 years 100,000 14.3% 10-20 years 300,000 42.9%


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20+ years 275,000 39.3% TOTAL 700,000 100.0% 9. HEDGING There are no specific hedging programs in place to hedge the PBR portfolio.

10. MATERIALITY OF ASSUMPTIONS PGIC defines materiality with respect to the PBR portfolio as items that could have an impact of 2.5% or more on the reserves being set up for PBR. At year-end 2017, the total PBR valuation was $870 million. These reserves were roughly 10% of the total reserves of the Company. The surplus of PGIC at yearend 2017 was $300,000,000. We therefore believe a 2.5% of the PBR valuation number is reasonable and conservative.

11. CERTIFICATION I certify that the PBR valuation calculation:

a. Was calculated in accordance with VM-05 and VM-20; and b. The assumption and margins used in the testing were prudent estimates.

12. CLOSING PARAGRAPHS The PBR valuation and related items, when considered in light of the assets held by the Company with respect to such reserves and related actuarial items including, but not limited to, the investment earnings on such assets, and the considerations anticipated to be received and retained under such policies and contracts, make adequate provision, according to presently accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the company. The actuarial methods, considerations and analyses used in forming my opinion conform to the appropriate Actuarial Standards of Practice (ASOPs) as promulgated by the Actuarial Standards Board (ASB), which standards form the basis of this statement of opinion. This opinion is updated annually as required by statute. To the best of my knowledge, there have been no material changes from the applicable date of the annual statement to the date of the rendering of this opinion which should be considered in reviewing this opinion. The impact of unanticipated events subsequent to the date of this opinion is beyond the scope of this opinion. The analysis of PBR valuation portion of this opinion should be viewed recognizing that the company's future experience will not follow all the assumptions used in the analysis.


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Nadeem Notmyfault, MAAA, FSA Vice President and Actuary PGIC Insurance Company 100 Accuracy Avenue Littletown, TX 78714 (512) 269-xxxx [email protected] February 28, 2018


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II. PBR LIFE REPORT

1. SUMMARY OF VALUATION ASSUMPTIONS The following summarizes the valuation assumptions and margins used for the major risk factors: Mortality: The mortality assumptions were based on a blend of Company and industry experience using the Limited Fluctuation Method and the margins provided in VM-20. Lapse: Lapses were loaded about 30% from best estimate based on Company experience for most products. For lapses for the 20-year term product, since the Company experience was lacking, we used data from the SOA’s “Report on the Lapse and Mortality Experience of Post-Level Premium Period Term Plans (2014).” Although this data concentrated on 10- and 15-year term products, there is relevant data that could be applied to a 20-year product as well. Expenses: Expenses were loaded 5% from best estimate based on Company experience. Premium Payment Pattern Assumptions: The premium payment patterns for UL were based on best estimate based on Company experience, with a slight bias toward the more conservative (e.g., the patterns producing the higher possible reserves.) There are separate premium payment patterns assumed for the ULSG products. This is the first year that PBR valuation was calculated, so there are no changes since the last PBR report. It is noted that all methodology was similar to those used in asset adequacy testing. One assumption that was revised this year was expenses: although the total expenses did not change significantly, there was a revision to how the company allocated expenses between per policy and per $1000 expenses. The result was an increase in the per-policy expenses and a decrease in the per-$1000 expenses. These new expenses were used in the reserving, which resulted in a slight increase in overall expenses for UL insurance, and a decrease in expenses for term insurance (less than $10,000).

2. CASH FLOW MODEL

a. MODELING SYSTEM USED PGIC uses the SuperPBA version 1.2 modeling system, a commercial software system owned by Whynot, for determining reserves. This system models both assets and liabilities. This is the same system that is being used for asset adequacy analysis at PGIC. There were a few modifications that PGIC made to the model in order to capture all the risks of their contracts for PBR reserving, such as reflecting different potential premium payments for UL and ULSG insurance. These changes have also been incorporated into the asset adequacy testing model.

b. MODEL SEGMENTS


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PGIC has one portfolio model segment for PBR products, since it was felt that the asset needs of the products are similar. This includes term products, universal life products without secondary guarantees and universal life products with secondary guarantees.

c. GROUPING FOR DETERMINISTIC RESERVES For cash flow testing, each of the product lines are modeled separately, with a pro-rata portion of the assets, based on the reserve amounts, assigned to each segment. The assets were modeled on a seriatim basis. With respect to modeling the liabilities, the same grouping was used as is used in asset adequacy testing. This bands the policies by issue quarter, sex, 5-year age groups, underwriting class, and, for the UL policies, premium payment pattern. As a test, for year-end 2017, a seriatim calculation of reserves was also done, to ensure that the policy groupings did not produce reserves materially higher than the reserve amounts calculated using a grouped liability model.

d. STOCHASTIC GROUPING The grouping for stochastic testing is the same policy groupings as described above for deterministic reserves.

e. VALIDATION OF MODEL The result of this grouping is compared to the actual net premium reserves held for the policies, which are done on a seriatim basis, and are within 0.25% of these amounts.

f. PROJECTION PERIOD The projection period used in the modeling is 30 years, at which time less than 5% of the business is assumed to remain in-force.

g. REINSURANCE Depending on the type of reinsurance, reinsurance could impact the results for PBR. For universal life, PGIC is only using YRT reinsurance. There were several reinsurance treaties in effect at the end of 2017 on universal life. These treaties were all for amounts of insurance in excess of the retention limit and are reinsured on a YRT basis. The overall effect of reinsurance is to reduce the volatility of future benefit payment amounts by replacing the reinsured risk with a reinsurance premium. For conservatism, PGIC assumed that the reinsurance premiums would be equal to the mortality assumed in the modeling times a factor of 10%, which were added to the expenses in the modeling. The 20-year term product was 90% coinsured with VerySafe Reinsurer. The reserves were calculated assuming 10% of the premiums and benefits for the “net of reinsurance” calculations. For


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the gross of reinsurance calculations, it was assumed that the same type of assets back the reinsured business, so the results of the term business was increased by 1/9 to get the results gross of reinsurance. There is no financial reinsurance.

3. MORTALITY

a. DESCRIPTION OF MORTALITY SEGMENTS All life insurance products are in a segment together. These plans were sold to the same type of policyholders, and have the same underwriting standards. The average size and age of these plans are similar.

b. SUBSEGMENTS Company experience is done by issue year and shown in Appendix A. When running certain models, 5-year age bands are used. PGIC did a test to show that the weighted segments together produce the total number of expected claims which is greater than the company experience for the aggregate claims.

c. UNDERWRITING SCORING PROCEDURE In computing the mortality, the first step was to determine the underwriting score by applying the Underwriting Criteria algorithm to our current underwriting rules. This resulted in a score of 70. However, in reviewing the results, it appears that the underwriting rules were not always adhered to. Therefore, the assumption was made that the RR80 Table was more representative of PGIC’s underwriting.

d. SOURCE OF DATA OTHER THAN OWN COMPANY The sources of mortality data was PGIC’s company experience, which was blended with the SOA 2015 RR80 VBT. [Note: if other data is used, one must explain the source, the similarities of products, adjustments made to account for differences, and the number of deaths and death claim amounts].

e. ADJUSTMENTS TO COMPANY EXPERIENCE The Company has a manual with all the underwriting rules spelled out, and the underwriters are supposed to follow this. As stated previously, it does not appear that the underwriting rules were always strictly adhered to. Therefore, although the Underwriting Scoring mechanism would justify the use of a RR70 Table, the Company used the RR80 table as a basis instead. As stated in VM-20, margins were also added to the underlying mortality rates. [Note: if other exceptions are made, the Company needs to explain the rationale for the adjustments, the summary of studies to support exceptions, documentation of the mathematics used to support the adjustments, and summary of any other relevant information.]


February 28, 2018

15

f. LEVEL OF CREDIBILITY PGIC does not have full credibility for mortality. It was assumed that 1,537 deaths were needed for full credibility. The actual number of deaths were 123, so the Total Credibility Factor was 0.28 (the square root of 123 divided by 1,537). Since all policies issued have essentially the same face amount, the company has excluded the effect of the variance in face amount when calculating the Total Credibility Factor. Credibility was assigned to subsegments using the Normalized Credibility Methodology. This methodology was recommended in the American Academy of Actuaries Life Practice Note on VM-20.

A summary of the mortality for insurance is found in Appendix A.

g. COMPANY EXPERIENCE MORTALITY Appendix A shows a sample of the actual company mortality.

h. INDUSTRY BASIC MORTALITY USED Where industry data was used, it was based on the 2015 VBT. The factors are based on the Underwriting Criteria Scores.

i. MORTALITY IMPROVEMENT For conservatism, no mortality improvement factors were used to bring the industry mortality factors up to the valuation date.

j. SUBSTANDARD LIVES All substandard lives used mortality factors consistent with the Table rating; e.g., 125% of baseline for Table A, 150% for Table B, etc.

k. ADJUSTMENTS TO COMPANY EXPERIENCE

i. Company experience was graded to 100% of industry tables at the earlier of age 95 or 18 years after policy underwriting. This is done using a straight line grade in of the blended percentages, with the grading starting 10 years after issue.

ii. The basic table used was the 2015 VBT, RR80

iii. Tables were smoothed using the Jenkins modified fifth difference oscillatory interpolation formula.

iv. All rates were checked to ensure consistency. No adjustments were needed.


February 28, 2018

16

v. The anticipated experience used for the reserve mortality assumption is

conservative. When the mortality factors used for the reserve calculation are compared to the actual experience, there is a margin.

l. MARGINS

The margins used for mortality were those listed in the VM-20, Section 9.C.4.b.iii for the Limited Fluctuation margins.

m. ACTUAL TO EXPECTED ANALYSIS The Company performs actual to expected analysis each year. Sample results are included in Appendix A for mortality, Appendix B for premium payment patterns, and Appendix C for lapses.

4. POLICYHOLDER BEHAVIOR

a. SOURCE OF DATA The Company uses its own experience on the products for the experience assumptions of lapse. There was only 10 years of credible information on lapses for term insurance, so, as mentioned previously, we used data from the SOA’s “Report on the Lapse and Mortality Experience of Post-Level Premium Period Term Plans (2014).” Although this data concentrated on 10- and 15-year term products, there is relevant data that could be applied to a 20-year product as well. It is noted that the SOA study showed shock lapse rates of 80-85% when the premium after the shock lapse period increased to 7x the original premium. Since PGIC premium increases averaged 7x the original premium, an assumption of 90% shock lapses was used. For premium payment patterns, company experience was used. The premium payment data for UL and ULSG products were determined separately. These are shown in Appendix B. The lapse experience of all UL and ULSG products were studied separately. Sample lapse studies are shown in Appendix C.

b. WHEN DATA WAS NOT FULLY CREDIBLE When actual data was not available, pricing assumptions were used as a baseline, with margins added for conservatism. Pricing assumptions are typically based on company experience where applicable, or industry data, such as a lapse study done by the SOA for the term lapse data was used.

c. ANTICIPATED EXPERIENCE Anticipated experience was calculated based on actual data, with margins for conservatism as explained above.


February 28, 2018

17

d. ACTUAL TO EXPECTED ANALYSIS A study of actual to expected analysis is done annually. The mortality study is shown in Appendix A, premium payment patterns are shown in Appendix B. The lapse experience is shown in Appendix C.

e. MARGINS When data was not fully credible, a margin for conservatism was added. Sensitivity tests were done to develop the direction of the margins for lapses. For the UL products, it was determined that lower lapses were conservative, so the assumed lapse rates were reduced by 30%. For the term and whole life insurances, the products were marginally worse off with higher, so 30% higher than expected lapses was used as a baseline. For UL, the lapse study breaks out the study by age, duration and premium payment pattern. The study is done separately for UL and UL with secondary guarantees.

f. IMPACT OF CHANGES TO NON-GUARANTEED RATES The 20-year level term product is fully guaranteed to be level for the 20-year period and increase each year thereafter. The non-participating life insurance product is fully guaranteed. The premiums on the participating whole life product were guaranteed; dividends were assumed to be based on a 3-factor formula (A/E mortality, interest and expenses). The Accumulation UL and the ULSG credit interest above the minimum at a rate declared by the Company. The goal is to earn a spread of 180 basis points over the portfolio rate. It is anticipated that the lapse rates for the General Account UL business would be dynamic based on the credited rate versus the market rate.

g. SCENARIO DEPENDENT DYNAMIC FORMULA For General Account Universal Life, the excess lapses were assumed to be triggered off of the following formula: (Competitor rate-credited rate)*1.75. There were no dynamic lapses assumed for the 20-year term business.

h. CHANGES SINCE LAST REPORT This is the first PBR report so there have been no changes to policyholder assumptions since the last report.


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18

i. PREMIUM PAYMENT ASSUMPTION The UL products may continue without a premium payment each period. The results differ depending on which premium assumption is used. Appendix B shows the actual premium payment patterns and the assumptions used in the modeling. The results using different premium payment patterns are in Appendix 1.

j. ADJUSTMENTS TO LAPSES AND MORTALITY FOR ANTI-SELECTION For the 20-year term product, it was assumed that there would be a 90% shock lapse at the end of the period. It was also assumed that the post-shock mortality would be 400% of the mortality assumed during the term period. This number was based on information in the Report on the Lapse and Mortality Experience of Post-Level Premium Period Term Plans (2014). For the whole life and UL products, there is not expected to be any anti-selection due to lapses, so no adjustments have been made.

k. COMPETITOR RATE DEFINITION For testing UL excess lapses, it was assumed that the competitor rate was assumed to be equal to the 5-year Treasury rate in any given scenario less 25 basis points. This formula was based on a comparison of interest rates of our competitors over the last 10 years. We will continue to examine this formula at least annually. Point 4.g. above shows how this impacts the assumed lapse rates.

5. EXPENSES

a. EXPENSE ALLOCATION METHODOLOGY Expenses are allocated to policy segments based on an annual companywide study; these are divided into per policy and per $1000 costs. The same methodology is used for PBR and non-PBR policies. Note that although the total expenses did not change significantly, there was a revision to how the company allocated expenses between per policy and per $1000 expenses. The result was an increase in the per-policy expenses and a decrease in the per-$1000 expenses. These new expenses were used in the reserving, which resulted in a slight increase in overall expenses for UL insurance, and a decrease in expenses for term insurance (less than $10,000). Appendix D shows the expenses used, tied back to the Annual Statement numbers.

b. ALLOCATION TO SEGMENTS Expenses are expressed per policy and per $1000, and are allocated to segments based on the number of policies and face amount in each segment.


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c. MARGIN METHODOLOGY Expenses were loaded 5% from the best estimate assumptions. There is little variation in expenses each year; the 5% factor would more than cover the variations seen in expenses in the last 10 years. In addition, per policy inflation factor equal to the 90-day T-bill rate, with a minimum of 2%, was used in the modeling.

6. ASSETS

a. STARTING ASSETS Assets are assigned to the PBR segment based on the quarterly projection of reserves. For modeling purposes, the starting assets are based on an estimate developed from the pricing model as to the reserves needed. This is run through the model; the assets are adjusted to hit the target of being within 2% of the reserves. The majority of invested assets backing PBR valuation in PGIC are investment grade corporate bonds, both public and private placements. The portfolio also includes a substantial holding in CMOs and other mortgage backed securities. The majority of the CMOs are government or agency backed. The portfolio is rounded out with commercial mortgages and residential mortgages. The table at the end of this section lists assets by type and by product. The assets are modeled on a seriatim basis. The assets backing the general account segments used for PBR are given below: ASSETS BACKING PBR PRODUCTS Total Bonds 550,000 71.2% Commercial Mortgage Loans 100,000 13.0% Residential Mortgage Loans 70,000 9.1% Cash & Short Term 50,000 6.5% Policy Loans 2,000 0.3% Total 772,000

RATING OF BONDS HELD Long Term Bonds

Amount

% of Total

Exempt Obligations

50,000

9.1% NAIC 1

250,000

45.5%

NAIC 2

200,000

36.4% NAIC 3

50,000

9.1%

NAIC 4

0 0.0% NAIC 5

0

0.0%

NAIC 6

0

0.0%


February 28, 2018

20

Bond Total

550,000

100.0% All commercial and residential mortgage loans are very high quality: they are in the NAIC 1 category. As the chart above shows, most of the assets are in investment grade corporate bonds. The investment philosophy for the PBR segment is to invest in assets with a maturity of 10-20 years. The chart below shows the actual assets in this portfolio at year-end 2017: DURATION OF ASSETS The duration of the commercial mortgages are all 5-10 years. The duration of the residential mortgages are all 10-20 years. Long Term Bonds Amount % of Total 1-5 years 25,000 4.5% 5-10 years 100,000 18.2% 10-20 years 300,000 54.5% 20+ years 125,000 22.7% TOTAL 550,000 100.0%

b. SELECTING ASSETS The PBR segment is a separate segment which contains all the assets expected to be needed for reserves. A pro-rata portion of these assets are used for the modeling.

c. MARKET VALUE OF ASSETS The market values of assets are based on assumed spreads to Treasuries of various assets. The spreads and default rates assumed are derived from the factors published by the NAIC, specifically the 9/2016 Investment Spread Data. It is required in VM-20 that the investment assumption be based on 50% AA rated bonds and 50% A rated bonds, which is more conservative than the actual investments of the Company. Therefore, in the modeling, it is assumed that all cash will be invested in 10 year non-call bonds: 50% AA-rated and 50% A-rated.

d. FOREIGN CURRENCY EXPOSURE The PBR segment has no assets denominated in foreign currency, so has no foreign currency exposure.


February 28, 2018

21

e. NET SPREAD ADJUSTMENT FACTOR The net spreads for each asset are based on those in VM-20. (Note: May want to quote the VM-20 adjustment factor steps). The option adjusted spreads for each asset are based on PBRberg, the nationally recognized software to determine the option adjusted spreads in accordance to the PBR methodology.

f. NET EARNED RATES BY SEGMENT The net asset earned rates for the PBR segment was 4.75%, or 50 basis points above the 10 year Treasury rate as of December 31, 2017.

g. INVESTMENT EXPENSES Investment expenses in the model are assumed to be 10 basis points. This number is consistent with the investment expenses of the last 10 years.

h. PREPAYMENT, CALL, AND PUT FUNCTIONS

PREPAYMENTS For in-force CMO assets, the prepayments for MBSs backing the CMOs were developed using the OUTEX model's prepayment rates based on the Office of Thrift Supervision model. These were spot checked using the formula below, based on market consensus PSA (Public Security Association Standard Prepayment Model) rate, as obtained from the NYMayor model. The spot checks showed reasonably consistent results. Additional prepayments are assumed when the coupon rate that would be used for newly issued mortgages in a particular economic environment was lower than the rate on in-force mortgages. For residential mortgages which were not on the OUTEX data base and for assumed new purchases, the following assumptions were used: The prepayment function is a prepayment factor multiplied by the PSA rates, where the prepayment functions is calculated using the following function: P(r) = min + (max-min)[1-e-a(Parameter-MPV)*B], where Parameter = mortgage rate - market rate MPV = Maximum Parameter Value, above which the PSA factor values

monotonically increase as the Prepayment Parameter value increases (e.g. -0.01) min = minimum prepayment factor to be used (e.g. 0.75) max = maximum prepayment factor to be used (e.g. 10) a = a calculated value, based on the MPV value and the user specified value at

which prepayments equal (min PSA + max PSA)/2 (e.g. min+max PSA/2 = 0.03) B = The curvature of the prepayment factor curve (e.g. 2) Mortgages were modeled with different factors. These factors were chosen to approximate the actual prepayments where applicable.


February 28, 2018

22

An example of how the above calculation would work is as follows: given a 30-year MBS issued in 2006, with a 6% coupon rate, the 100% PSA would equal 6%. This is the prepayment rate that would be expected in a level interest rate environment. If interest rates were to fall 3%, the above formula would be a factor of 5.375 x PSA, or 32% prepayments expected if rates drop to 3%.

CALLS Call schedules and call premiums were entered on a seriatim basis for all bonds noted as callable. Calls are determined by using "call input parameters" and a hypothetical parameter equal to ratio of the theoretical market value to the call price. The first call input parameter is the maximum value of the market value/call value ratio where the call rate is assumed to be zero where the call value is the value the bond holder would receive, e.g., it includes any premium at call. The assumption used for modeling was 1.02. The second call input parameter is the minimum market value/call value ratio where the call rate is assumed to be 100%. This assumption is 1.06, i.e., when the market value of the bond is more than 6% above the value a bondholder would receive if it gets called, 100% of the bonds will be called. The call rate is linearly interpolated between these two values.

PUTS PGIC has no putable bonds.

i. ASSETS IN 2% COLLAR As required in VM-20, the aggregate starting value of assets in the modeling was not less than 98% or greater than 102% of the final aggregate minimum reserve.

j. DERIVATIVES PGIC does not have any derivatives in its PBR segment.

k. POLICY LOANS Policy loans were included with the policies they are associated with. Since policy loans are charges at the credited rate plus two percent for the affected policies, policy loans do not have a large impact on these products.

l. GENERAL ACCOUNT EQUITY INVESTMENTS The General Account backing the PBR segment has no equity investments.

m. SEPARATE ACCOUNT FUND GROUPING There were no separate accounts in the PBR segment.


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23

n. FUND PERFORMANCE AND STOCHASTIC PATHS Since there were no separate accounts in the PBR segment, there was no fund performance to comment on.

o. MODEL INVESTMENT STRATEGY The Company would typically invest in assets in the A/BBB range, which is expected to produce higher returns. This strategy was modeled as a sensitivity test. However, for conservatism, the alternative investment strategy of 50% in credit quality A2/A and 50% in credit rating As2/AA mentioned in VM-20 was used as the basic investment strategy.

p. NOT LESS THAN ALTERNATIVE INVESTMENT STRATEGY As stated in 6.o above, for conservatism, the alternative investment strategy of 50% in credit quality A2/A and 50% in credit rating As2/AA mentioned in VM-20 was used as the basic investment strategy.

q. NUMBER OF SCENARIOS For stochastic testing 1000 scenarios were used. As a test, another 1000 scenarios were run, and the answers were within 0.1% of those on the base scenario.

r. SCENARIO TECHNIQUES No scenario reduction techniques were used for the 2017 testing.

7. REVENUE SHARING ASSUMPTIONS The Company has no separate accounts, so the revenue sharing agreement section is not applicable.

8. REINSURANCE ASSUMPTIONS

a. REINSURANCE AGREEMENTS There were several reinsurance treaties in effect at the end of 2017 on universal life and whole life. These treaties were all for amounts of insurance in excess of the retention limit and are reinsured on a YRT basis. At year-end 2017, there was a treaty with BreeRe for $34 million in reserves, BerlinRe for $34 million in reserves, and with NonBermudaRe for $33 million in reserves. The agreements comply with the requirements for credit for reinsurance under the terms of the Accounting Practices and Procedures Manual.


February 28, 2018

24

The 20-year term product was 90% coinsured with VerySafe Reinsurer. At year-end 2017, this reinsurance reserve credit was $10.8 million. This agreement also complies with the requirements for credit for reinsurance under the terms of the Accounting Practices and Procedures Manual. There is no financial reinsurance. The overall effect of reinsurance is to reduce the volatility of future benefit payment amounts by replacing the reinsured risk with a reinsurance premium.

b. REINSURANCE CASH FLOWS IN MODEL The reinsurance premiums and payments were included in the model.

c. ADDITIONAL ANALYSIS Since all the reinsurers were rated at least A+ by A.M. Best, no additional analysis was done.

d. MULTIPLE REINSURANCE TREATIES The UL and whole life products are covered on by the three reinsurers for over-retention. Each reinsurance gets their proportional share of the pool.

e. WHY ADDITIONAL TESTING IS NOT NEEDED PGIC does not believe additional testing is needed with regard to reinsurance. On UL, the reinsurance is minimal, and the net cost is only slightly higher than the expected reinsurance payments. For term insurance, the block showed that the deterministic test was passed on a net basis; there is no reason to believe that testing the business gross of reinsurance would change that outcome.

9. NON-GUARANTEED ELEMENTS

a. MODELING NGEs Term and whole life insurance have no non-guaranteed elements. The non-guaranteed elements, specifically the credited rate, is based on management’s decision to credit 180 basis points less than the portfolio earned rate, subject to the minimum interest rate guarantees. Although the COI surrender charges can be increased, management has not taken this action in the past, so this was not modeled in any of the scenarios tested.

b. MARGIN FOR CONSERVATISM Since the spread for the interest rates are specified, no margin was added for conservatism.


February 28, 2018

25

c. PAST MANAGEMENT PRACTICES As specified above, management practice has been consistent in crediting the 180 basis points less than portfolio rate spread.

d. CONSISTENCY OF ASSUMPTIONS

i. The modeled non-guaranteed elements are consistent with experience.

ii. It is assumed that policyholder behavior will change if the credited rates are below market rates. These adjustments are made via the dynamic lapse formula.

e. CONDITIONAL EXCLUSIONS No conditional exclusions were assumed in the modeling.

f. DESCRIPTION OF INTEREST CREDITING METHODOLOGY The interest crediting methodology is to credit 180 points less than the portfolio earned rate, subject to the minimum interest rates in the contract.

10. DETERMINISTIC AND STOCHASTIC EXCLUSION TESTS

a. POLICIES USED IN EXCLUSION TESTS The three segments modeled were the term product, the Accumulation UL, and the ULSG.

b. STOCHASTIC EXCLUSION Term insurance and Accumulation UL passed the stochastic exclusion test so therefore are using the deterministic reserving methodology.

c. RESULTS OF STOCHASTIC EXCLUSION TEST (In a real memo, these results would be shown in an Appendix).

d. STOCHASTIC RESERVE DEMONSTRATION (In a real memo, results would be shown. These would include if the business remains consistent from year to year, the reserves held are conservative, and the residual risk to covered by, e.g., reinsurance).

e. CERTIFICATION PGIC did not use a certification method for excluding any business.


February 28, 2018

26

f. RESULTS OF DETERMINISTIC EXCLUSION TEST (In a real memo, results would be shown.)

11. OTHER

a. IMPACT OF MARGINS For this section, one has to run a bunch of scenarios to produce a chart as follows: Accumulation UL Impact of mortality margin Impact of lapse margin Impact of expense margin Etc.

b. COMBINED IMPACT For this section, one has to add up all the margins from 11 (a) above.

c. IMPACT OF IMPLICIT MARGINS For this section, the Company can elect to calculate,

i. The implicit margins in experience, e.g., not using mortality improvement. ii. The impact of prescribed assumptions, e.g., net spreads, versus company

anticipated experience.

d. SENSITIVITY TESTS Sensitivity tests were done on the impact of the premium payment pattern on UL. The results were shown in the Appendix 1. There was little variation in the results, so it was elected to use the best estimate of the premium payment patterns in the modeling.

e. RISKS NOT FULLY REFLECTED The model will not mirror reality. The actual combination of mortality/lapse/premiums/expenses cannot be predicted. However, a good faith effort has been made to model the significant risks considered at this time. Margins were added to take into account some uncertainties in results. (Note: if one has an alternative view, VM-31 states one should describe the factors considered, the approach the company used to consider them, and whether each factor was considered separately or by group.)

f. IMPACT OF AGGREGATION ON RESERVES PGIC elected to aggregate ULSG and whole life products for PBR for stochastic testing. This had the net effect of reducing the ULSG reserves by $100 million.


February 28, 2018

27

g. EARLIER TESTING PERIOD PGIC used September 30, 2017 data for its stochastic ULSG testing. It was updated to 12/31 using a comparison of the 12/31 deterministic reserves to the 9/30 deterministic reserves, using the following information: Reported Reserve for Universal Life with Secondary Guarantees 1. Take the greater of the DR and SR as of 9/30. 2. Adjust the result of step 1 to reflect changes from 9/30 to 12/31 using the ratio of the DR as of 12/31 and 9/30. Results: Deterministic Reserve, 9/30: 197,000 Stochastic Reserve, 9/30*: 233,000 Reported Reserve, 9/30: 233,000 Deterministic Reserve, 12/31: 275,000 Stochastic Reserve* 12/31: 325,000 = 275* (233/197) *Note: This is the stochastic reserve prior to aggregation Since the fourth quarter business was consistent with the business issued to this point, it was felt that the above methodology to bring the results up to December 31 was reasonable. For all other products, 12/31/17 calculations were done.

h. APPROXIMATION AND SIMPLIFICATIONS As stated previously, the modeling did use some grouping to decrease run time. The groupings were reviewed to ensure that there was no inherent liberalism in the simplifications.

12. CERTIFICATIONS

a. The certification from the investment officer is attached as Appendix E (NOTE VM-31 Section 3 D 12 does NOT mention the liability officer certification.)

b. The certification from senior management, as required by VM-G, is attached as

Appendix G.

c. Certification of stochastic exclusion test (should be included.)


February 28, 2018

28

III. PBR ACTUARIAL REPORT REQUIREMENTS FOR VARIABLE ANNUITY CONTRACTS PGIC does not have any variable annuity contracts, so this section is not applicable.


February 28, 2018

29

BASIC RESULTS

The 20-year term and Accumulation UL were tested on a deterministic basis only. The Scenario Reserves for the UL for Shadow Account products are given in the tables below.

SENSITIVITY TESTS

The sensitivity of the ULSG to different premium patterns is also given below.

1. Minimum premium scenario 2. No further premium payment scenario 3. Pre-payment of premiums – Single premium scenario 4. Pre-payment of premiums – Level premium scenario.

CONFIDENTIAL Report on PBR Reserves for PGIC

February 28, 2018

30

APPENDIX 1

RESULTS OF STOCHASTIC TESTING FOR ULSG Scenario Reserves

Reserves Needed (Results in $1,000,000s)

0

50

100

150

200

250

300

350

400

1 36 71 106

141

176

211

246

281

316

351

386

421

456

491

526

561

596

631

666

701

736

771

806

841

876

911

946

981

Overall ULSG Reserves Needed


February 28, 2018

31

Results for UL for Shadow Accounts Various Premium Payment Patterns Amounts in $1,000,000s

0

50

100

150

200

250

300

350

400

450

500

1 36 71 106

141

176

211

246

281

316

351

386

421

456

491

526

561

596

631

666

701

736

771

806

841

876

911

946

981

ULSG mininal funding

0

50

100

150

200

250

300

350

400

450

500

1 36 71 106

141

176

211

246

281

316

351

386

421

456

491

526

561

596

631

666

701

736

771

806

841

876

911

946

981

ULSG Single Premium


February 28, 2018

32

Results for UL for Shadow Accounts Various Premium Payment Patterns Amounts in $1,000,000s

0

50

100

150

200

250

300

350

400

450

500

1 36 71 106

141

176

211

246

281

316

351

386

421

456

491

526

561

596

631

666

701

736

771

806

841

876

911

946

981

ULSG - No further premiums paid


February 28, 2018

33

0

50

100

150

200

250

300

350

400

450

500

1 36 71 106

141

176

211

246

281

316

351

386

421

456

491

526

561

596

631

666

701

736

771

806

841

876

911

946

981

ULSG Level Premium


February 28, 2018

34

APPENDIX A: MORTALITY FACTORS 2011-2016 Mortality Study SAMPLES: Male Non-Smoker

ISSUE AGE 45

ISSUE AGE 65

Lives Actual Expected Expected

Lives Actual Expected Expected Dur Expos Deaths Q/1000 Deaths A/E

Dur Expos Deaths Q/1000 Deaths A/E

0 15,000 4 0.27 4.05 0.99 0

7,000 8 1.40 9.8 0.82

1 9,000 3 0.36 3.24 0.93 1

4,000 9 2.28 9.12 0.99

2 8,000 2 0.47 3.76 0.53 2

3,000 10 2.77 8.31 1.20

3 7,000 3 0.58 4.06 0.74 3

2,500 8 3.47 8.675 0.92

4 3,000 4 0.63 1.89 2.12 4

2,000 12 4.48 8.96 1.34

5 3,000 3 0.71 2.13 1.41 5

2,000 11 5.24 10.48 1.05

6 2,000 2 0.83 1.66 1.20 6

2,000 13 6.17 12.34 1.05

7 2,000 2 0.98 1.96 1.02 7

2,000 13 7.42 14.84 0.88

8 1,000 1 1.12 1.12 0.89 8

1,000 10 9.04 9.04 1.11

9 1,000 2 1.26 1.26 1.59 9

1,000 12 10.89 10.89 1.10

51,000 26

25.13 1.03

26,500 106 102.455 1.03

Expected Deaths are based on the 2015 VBT, RR80 Table. NOTE: The entire mortality study would be included here.


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APPENDIX B: PREMIUM PATTERN FOR UNIVERSAL LIFE AND ULSG

Actual UL

Assumed in

Modeling No further premiums paid 5.3%

5.0%

Minimum Premium 19.5%

20.0% Single Premium 10.0%

10.0%

Payment of level premiums 65.2%

65.0% TOTAL 100.0%

!00%

Actual ULSG

Assumed in

Modeling No further premiums paid 2.0%

2.0%

Minimum Premium 35.7%

35.0% Single Premium 9.6%

10.0%

Payment of level premiums 52.7%

53.0%

100.0%

Note: Actual premium payment patterns were based on a study on the premium payment patterns of all universal life products. Study included years 2005-2015.

36

APPENDIX C: LAPSE STUDY PGIC 2017 Lapse Study (NOTE: The ENTIRE Lapse Study would be included here.)

Lapse Study used for 20-year term product Term Lapses

SOA Study

Actual PGIC

10-year Product

15-year Product

Assumed for PBA

1 10.6% 12.0% 2 5.5% 7.0% 3 3.2% 6.0% 4 4.6% 5.0% 5 2.0% 4.0% 6 1.0% 6.7% 4.0% 7 4.0% 6.4% 4.0% 8 2.5% 6.4% 4.0% 9 3.0% 7.0% 4.0% 10 2.0% 76.4% 4.0% 11

47.1% 3.5%

4.0%

12

19.7% 3.6%

4.0% 13

14.3% 4.1%

4.0%

14

13.4% 5.0%

4.0% 15

11.9% 67.6%

4.0%

16

11.6% 39.8%

4.0% 17

11.6% 12.6%

4.0%

18

11.6% 10.8%

4.0% 19

11.6% 10.4%

4.0%

20

11.6% 10.4%

80.0% 21

11.6% 10.4%

50.0%

22+

11.6% 10.4%

12.0% Average 3.8%

Actual PGIC numbers based on study of 2007-2016

The SOA study is from the "Report on the Lapse and Mortality Experience of Post-Level Premium Period Term Plans (2O14),”done by RGA.

The SOA numbers shown are the median lapse rates for 10 and 15-yr term products

37

LAPSES on UNIVERSAL LIFE PRODUCTS

Accumulation UL

Dur Age 45 Age 65 Age 45 Age 65 Agre 44 Age 65 Age 45 Age 65 Age 65 Age 65 Age 45 Age 65

1 8.5% 6.5% 9.0% 7.0% 11.7% 9.1% 30.0% 25.0% 10.0% 10.0% 3.0% 2.0%

2 9.5% 6.8% 9.0% 7.0% 11.7% 9.1% 35.0% 35.0% 15.0% 15.0% 2.0% 1.0%

3 3.5% 5.2% 5.0% 5.0% 6.5% 6.5% 50.0% 50.0% 20.0% 15.0% 2.0% 1.0%

4 6.3% 4.3% 5.0% 5.0% 6.5% 6.5% 100.0% 100.0% 20.0% 15.0% 2.0% 1.0%

5 6.6% 5.6% 5.0% 5.0% 6.5% 6.5% 25.0% 20.0% 1.0% 1.0%

6 4.3% 3.9% 5.0% 4.0% 6.5% 5.2% 25.0% 20.0% 1.0% 1.0%

7 5.6% 3.8% 5.0% 4.0% 6.5% 5.2% 25.0% 20.0% 1.0% 1.0%

8 1.2% 4.2% 4.0% 4.0% 5.2% 5.2% 25.0% 20.0% 1.0% 1.0%

9 2.8% 3.2% 4.0% 4.0% 5.2% 5.2% 25.0% 20.0% 1.0% 1.0%

10 5.3% 4.8% 4.0% 4.0% 5.2% 5.2% 25.0% 20.0% 1.0% 1.0%

11+ 4.0% 4.0% 5.2% 5.2% 25.0% 20.0% 1.0% 1.0%

ULSG

Dur Age 45 Age 65 Age 45 Age 65 Age 45 Age 65 Age 45 Age 65 Age 45 Age 65 Age 45 Age 65

1 7.3% 5.4% 5.0% 3.0% 3.5% 2.1% 25.0% 25.0% 5.0% 3.0% 2.0% 2.0%2 4.5% 3.7% 3.0% 2.0% 2.1% 1.4% 30.0% 30.0% 4.0% 2.0% 1.0% 1.0%3 3.0% 1.8% 3.0% 2.0% 2.1% 1.4% 40.0% 35.0% 3.0% 2.0% 1.0% 1.0%4 2.5% 1.2% 2.0% 1.0% 1.4% 0.7% 40.0% 40.0% 3.0% 1.0% 1.0% 1.0%5 1.8% 1.0% 1.0% 1.0% 0.7% 0.7% 60.0% 50.0% 3.0% 1.0% 1.0% 1.0%

6+ 1.0% 1.0% 0.7% 0.7% 100.0% 100.0% 2.0% 1.0% 1.0% 1.0%

Minimum Prem Single Pay

Actual Lapses Assumed Baselines Level Premium No More Prem Minimum Prem Single Pay

Actual Lapses Assumed Baselines Level Premium No More Prem

38

Whole Life Lapses

Duration Actual PGIC Lapse

Assumed Lapses

1 12.0%

12.5% 2 4.3%

5.0%

3 4.0%

4.8% 4 3.7%

4.7%

5 6.2%

4.6% 6 4.3%

4.5%

7 4.1%

4.5% 8 2.1%

4.5%

9 4.9%

4.8% 10 5.7%

5.0%

11+ 4.7%

5.0%

Average 5.1%

5.4%


February 28, 2018

39

APPENDIX D: EXPENSES

Expenses Prior Year Actual Current Year Actual

Current Year Modeled *

(1) Exhibit 2 – General Expenses 4,000,000 4,100,000 (2) Exhibit 3 – T, L & F’s 200,000 220,000 (3) Expenses from Plans and Policies Not Covered in Model included in (1) & (2)

3,280,000 3,278,000

(4) Nonrecurring Expenses That Have Occurred Prior to Valuation included in (1) & (2)

90,000 110,000

(5) Acquisition Expenses That Have Occurred Prior to Valuation included in (1) & (2)

500,000 600,000

(6) Acquisition Expenses and Significant Non-recurring Expenses that are Expected to Occur after the valuation

50,000 100,000

(7) Equals (1) + (2) – (3) – (4) – (5) + (6) 380,000 432,000 454,000 Commissions

(8) Commissions (Direct and Assumed Business)

1,000,000 1,100,000

(9) Reinsurance Expenses in Ex. 1, Part 2 that are not included elsewhere

30,000 35,000

(10) Commissions from Plans and Policies Not Modeled included in (8) & (9)

500,000 450,000

(11) Commissions from Model Plans that are Paid Prior to Valuation included in (8) & (9)

300,000 350,000

(12) Equals (8) +(9)– (10) – (11) 230,000 335,000 352,000


February 28, 2018

40

APPENDIX E: RELIANCE STATEMENT FROM ASSET OFFICER I, Ay Set, Chief Investment Officer of PGIC Insurance Company, hereby affirm that the listings and summaries related to data prepared for and submitted to Nadeem Notmyfault in support of the asset-oriented aspects of the PBR opinion were prepared under my direction and, to the best of my knowledge and belief, are substantially accurate and complete. Ay Set Chief Investment Officer PGIC Insurance Company 100 Accuracy Avenue Littletown, TX 78714 Address of Officer (512) 269-xxxx Telephone Number

[email protected] E-mail

1/25/18 Date


February 28, 2018

41

APPENDIX F: RELIANCE STATEMENT FROM LIABILITY OFFICER I, Li Ability, FSA, M.A.A.A., Vice President and Actuary of PGIC Insurance Company, hereby affirm that the listings and summaries of PBR policies and contracts in force as of September 30 and December 31, 2017, and other liabilities prepared for and submitted to Nadeem Notmyfault were prepared under my direction and, to the best of my knowledge and belief, are substantially accurate and complete.

Li Ability, MAAA, FSA Vice President and Actuary PGIC Insurance Company 100 Accuracy Avenue Littletown, TX 78714 Address of Officer (512) 269-xxxx Telephone [email protected] E-mail 1/24/18 Date


February 28, 2018

42

APPENDIX G: SENIOR MANAGEMENT SIGN-OFF

I, Donna R. Claire, President of PGIC Insurance Company, hereby affirm that, for PBR, 1. Resources are adequate to carry out the modeling function with skill and competence; 2. A process exists that ensures that models and procedures produce appropriate

results relative to principle-based valuation objectives (such process to provide reasonable assurance that the principle-based modeling does not produce a bias toward underestimation of such reserves, and that principle-based reserves are reasonable and adequate under the circumstances);

3. A process exists that validates data for determination of model input assumptions, other than input assumptions that are prescribed in law, regulation, or the Valuation Manual for use in determining principle-based reserves;

4. A process exists that is appropriately designed to ensure that model input is appropriate given the experience of the insurance company or group of insurance companies, other than model inputs that are prescribed in law, regulation, or the Valuation Manual for use in determining principle-based reserves;

5. A process exists that reviews principle-based reserve valuations to find and limit material errors and material weaknesses (such process (a) to provide a credible ongoing effort to improve model performance where material errors and weaknesses exist, and (b) to include a regular cycle of model validation that includes monitoring of model performance and stability, review of model relationships and testing of model outputs against outcomes); and

6. A review procedure and basis for reliance on principle-based reserve valuation processes has been established that includes consideration of reporting on the adequacy of principle-based reserves, the implementation of policies, reporting and internal controls, and the work of the appointed actuary.

Donna R. Claire President PGIC Insurance Company 100 Accuracy Avenue Littletown, TX 78714 Address of Officer (512) 269-xxxx Telephone Number

[email protected] E-mail

1/25/18 Date

Documents

PG LIFE INSURANCE COMPANY - American Academy of …actuary.org/files/imce/AcademyPBRBootCamp-Regulatory-NadeemNotmy... · not necessarily cover all requirements of VM-20. ... e. SIGNIFICANT