Minutes of PPiA Summer Membership Meeting – Chicago, Illinois – June 8 – 9, 2016

Attendee List under Separate Cover

1.  Day 1. The Summer Meeting of the PPIA was opened by the President, John Petchler at 1 pm on June 8, 2016. John Petchler delivered some opening remarks and welcomed three new member institutions, the State of Wisconsin Investment Board, Conning, and Woodmen Life. Chip Fisher, counsel to PPIA, delivered a caution to the members that under the anti-trust laws, members should not discuss anything regarding pricing or fees. Mr. Petchler outlined the general agenda of the meeting – in particular the need to address significant changes in insurance investment regulations in process of being discussed by various NAIC working groups and the SVO. These include the filing exempt/private letter rating process and potential changes in RBC categories and charges. Additionally, he discussed the need to continue to define Best Practices and to promote the asset class.

2.  Members brought up several topics to be added to discussion during the meetings. Sasha Kamper of Principal Life brought up the continuing time compression on new deals allowing less time for effective underwriting and the need to address this issue to the sell side. Mark Dunn of Aegon brought up time compression between circle and paper closes which precede actual fundings as an issue. Ned Ferguson of NY Life re-iterated the need to continue utilizing the PPIA’s Best Practice process for amendments.

3.  The PPIA heard a presentation on the Society of Actuaries (“SOA”) 2003-2012 Private Placement Experience Study from Jim Stoltzfus of the Private Placement Study Committee of the SOA, and Jerry Holman, consulting actuary to the SOA. They outlined the process for gathering and analyzing private placement default and loss experience over the study period, the definition for credit risk events used, the need to expand the universe of contributors, and the intent to update the study in three year intervals, starting with 2013 – 2015. Key takeaways from the study were that the three highest incident years were 2008 and 2009 as would be expected, but also 2003 which is a bit of an anomaly. Economic loss over the study period averaged 0.15% and was highest in 2003, 2004, 2009, and 2008 in that order. Relative to public bond incidence, loss severity, and economic loss (utilizing a private placement exposure weighting by rating closes) incidence was very similar with publics at .59% and privates at .62%; loss severity was much greater for publics at 55.7% vs. 37.2% for privates; and economic loss was 10 bps better for privates than publics (21 bps better for privates when using a public bond exposure weighting). Questions from the group centered around the decision to use the sale of a private at 70 cents or lower as a credit event characteristic and the relatively low participation rate from private investors (15 institutions representing ~22% of total outstanding private placement assets).

4.  This presentation was followed by a regulatory session. Dave Patch of AIG reported to the group that after a period of relative quiet, the NAIC RBC working group has started to move more quickly under the leadership of Kevin Fry of Illinois to address the issue of the number of RBC categories. Mr. Patch noted that the consensus among the NAIC representatives appeared to be to move from the 6 categories we now have to a more granular series of RBC categories, most like 20. (the 6 categories would remain for purposes of the statutory blanks, etc. to eliminate undue administrative burden on companies). Steve Collins of Prudential reported that the SVO has now approved Italian GAAP for filing for NAIC ratings, and is currently considering Belgian GAAP. At this point, the SVO now accepts UK, Australian, German, French, Dutch, and Italian GAAP, with Belgium to be added soon. Mr. Collins noted he had been contacted by Barclays Bank suggesting that Norwegian GAAP might be the next to apply for acceptance. Group consensus was that this might not be the best use of time given the relatively low level of unrated issuance expected from Norway.

5.  Steve Collins noted that the Prudential and the SVO were in discussions around ratings for renewable project deal, with the SVO indicating that single site wind and solar transactions could not be investment grade; additionally, the SVO is requiring more conservative coverages and weighs construction risk as being greater in these deals.

6.  Brian Keating of Guardian Life outlined the changes being discussed by the SVO and the NAIC related to filing exempt securities and private letter ratings. He related that Charles Therriault of the SVO had flagged to the NAIC that private letter ratings were not being received by the SVO and cited this as a reason for a number of exceptions in the Jumpstart (SVO filing data base). In March 2016, Mr. Therriault proposed that the NAIC require companies to submit or cause to be submitted, private letter ratings to the SVO for filing. The NAIC approved this proposal in early April, 2016, giving the industry 30 days for comment. Comment letters were sent in by the PPiA Board, the ACLI and NASVA jointly, and by AIG among others. Mr. Keating attended the NASVA meeting in early June 2016 and noted that the response of Mr. Fry, the chair of the NAIC task force seemed to be accepting of the SVO’s argument, not the industry’s. Mr. Keating noted that NASVA is strongly opposed to the proposal. A potential line of compromise may be for companies to fill out interrogatories for the SVO listing the private letter ratings held. It was also suggested that the PPiA Best Practices committee look into creating a model private letter rating, outlining that the rating is cusip specific, backed by analysis and monitored – not point in time.

7.  Day 2. Mark Dunn of Aegon, Annette Teders of Ohio National, Allen Stoltman of Thrivent, and Paul Aronson of Voya led a discussion on the annual PPIA Investment Survey. Feedback from members at the last meeting suggested that the annual survey was becoming too cumbersome and perhaps did not need to be collected annually. Feedback at the session was that most members found the survey useful but cumbersome. Several members indicated that they used the survey for portfolio allocation and supporting analyst coverage (need for more analysts) requests internally. Those who worked on the survey found it difficult to parcel out the work of compiling the information. The group came to consensus around three ideas: 1. Authorizing the Board or a subset of the Board or Membership working on the Survey to investigate utilizing a third party to compile survey information (ex. Survey Monkey); 2. Change the timing of the data call to earlier in the year so there is adequate time to publish before the summer meeting; and 3. Publishing a smaller annual survey and then do a more comprehensive survey every three years. It was also suggested that the annual survey include topical questions regarding current issues facing the private placement community.

8.  Matt Levene of Pacific Life led the California Carbon Initiative session. The California Insurance commissioner launched a two pronged initiative which requests that California licensed insurers voluntarily divest from thermal coal enterprises and requires financial disclosure of insurance companies’ investments in fossil fuel enterprises. The rationale presented was “…to make sure that insurance companies address potential financial risk to insurance companies investing in coal and the carbon economy.” The California initiative is positioned as a company solvency issue rather than as a social issue, wherein the concern is that insurance company investment portfolios address the issue of transition away from a carbon based economy. Two companies present, Pacific Life and Guardian, indicated that their companies “politely declined” the request to divest. Members from AllianceBernstein (AXA) indicated that their CEO had indicated they would not buy companies which generated more than 50% from coal. Allianz indicated they would move to a “no new investment” posture. Concerns were raised by others in the group around the vagueness of the data request and there were varying degrees of disclosure as related to secondary types of exposure to carbon (e.g. railroads, convenience stores). The concern was raised that differing degrees of compliance by companies could inadvertently create adverse consequences in the public’s eye for those companies taking a more conservative position in reporting. It was also noted that an advocacy group called CERES has compiled a survey of insurance company investments in carbon.

9.  Treasurer’s report – Dawn Crunden of HIMCO (Treasurer) indicated PPiA now has 45 members of which 35 had paid dues. Ten (10) companies had not paid of which 7 are in process and 3 are waiting for status update. All filings are current. Ed Ohannessian of Phoenix Insurance is now installed as Assistant Treasurer and has been authorized to access the PPIA bank account. The Directors and Officers insurance policy has also been paid. Ms. Crunden reported the current bank balance at 6/6/16 as $26,487.54 and projected year-end balance to be $26,167.54. A discussion on possible uses for funds followed and included ideas such as enhancements to the website, potential outsourcing of secretary/treasurer tasks, travel for PPiA representative to NASVA conferences, outsourcing the annual survey data compilation, or reduced annual fees. Board to take these ideas under advisement.

10.  A session on PPiA’s Committees, Goals, Tasks and Resources was led by Board members Allen Stoltman, MaryBeth Cadle of Nationwide, and Jeff Attwood of State Farm. Members were asked to consider the tasks and membership for six different committees or groups: Regulatory, Best Practices, Promotion of the Asset Class, Administrative Functions, Legal, and Survey. Some of the tasks or functions members wanted considered was ongoing interaction with the IIR relating to the January conference, the need to promote greater use of the website, the compression of underwriting time frames for new deals, and greater foreign competition from the Schultschien market and the Euro PP market. Members then broke out into the six different functional areas to address upcoming tasks, committee membership, and committee leadership. The groups then reported back to the general membership as follows:

a.  Regulatory – attended by John Petchler, Dave Patch, Brian Keating, Steve Collins, and Sasha Kamper of Principal – Tasks to pursue are to continue monitoring and commenting on the ongoing NAIC/SVO proposals for risk based capital and FE/private letter ratings; create a quarterly call with the SVO to remain abreast of developments with same. Brian Keating to be committee chair but with substantial assistance from Dave Patch and Steve Collins.

  1. Best Practices – attended by Vic Weber of Assurity and T.J. Flanagan of Guggenheim Investors - Tasks include: (i) refresh best practices standards memo and re-distribute to the agent community, (ii) work with Regulatory Committee in delivering to agents desired standardized private letter rating format, (iii) address timing compression of deal syndications. Committee chair role to be determined in the following weeks.
  2. Promotion of the Asset Class – attended by Mary Beth Cadle, Brad Ritter of Delaware Investments, Chris Gudmastad of Advantus, Jim Jackson of USAA, and Donna Ennis of Federated Insurance - Tasks to be pursued – potential attendance at the European Private Conference, review of the competitive landscape; working with the IIR on the Private Placement conference with assistance from John Petchler. The group requested additional members to join, preferably someone who could act as chairperson.
  3. Administration – attended by Lawrence Halliday of Allianz Life, Luke Stifflear of PPM Amercia, Jeff Attwood, Matt Levene , Jason Micks of CUNA Mutual, Dawn Crunden – The Group will have a high level of interaction with other committees and main objectives were defined as: Marketing & Publicity, Communications, Education and Administration. Main functions include treasurer duties, website maintenance, and facilities management for meetings. Discussed website enhancement and will evaluate cost/benefit analysis with potential to hire a consultant to facilitate administrative functionality and improve publicity/marketing. Discussed securing a new domain name of “globalppia.com” to replace “usppia.com” for the website (which was followed by approval by the membership). The Group will breakout more detail surrounding the main objectives and tasks with areas of responsibilities more clearly defined. Matt Levene and Lawrence Halliday to work on website, Luke Stifflear on facilities, and Jason Micks on Publicity/Marketing. Dawn Crunden will continue to chair the committee and continue Treasurer function with Ed Ohannessian as Assistant Treasurer.
  4. Legal – attended by Stu Shepetin (Genworth), Joe Mick (Ameritas) , Lenny Mazlish (Cigna), Justin Kavan (Mutual of Omaha), Jeff Fossel (American Equity), Lora Brons (American Equity) - Tasks to be pursued include: Continue effort to develop more formal relationship with the ACIC; assessment of standardized swap indemnification language; assessment of how changes in accounting treatment of capital versus operating leases might affect NPAs or covenant calculations; and assessment of Change of Control language given certain recent deal experience where interpretation was not entirely clear. Stu Shepetin to continue as chair.
  5. Survey – attended by Paul Aronson, Jim Vander Meer (SWIB), Chris Prestigiacomo (SWIB), Annette Teders and Allen Stoltman – Tasks to be pursued include looking for a third party vendor and the creation of a draft of a short form survey. No chair determined.

11.  The conference closed at 11:45 am on June 9, 2016 with thanks expressed to Luke Stifflear and the PPM America staff for hosting the meeting.

By:______

Dave Patch, Secretary

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