PART VM-22: Maximum Statutory Valuation Interest Rates For Income Annuities of Contents Section 1. Background Section 2. Purpose and Scope Section 3. Selection of the Statutory Maximum Valuation Interest Rate Appendix 1: Re-determination of Weights Appendix 2: Re-determination of Default Appendix 3: Re-determination of Spreads Appendix 4: Re-determination of Reference Rates Appendix 5: Re-determination of Daily and Average Daily Corporate Rates Appendix 6: Calculation of Statutory Maximum Valuation Interest Rates Section 1: Background Over time, the NAIC intends for VM-22 to contain the valuation requirements for all annuity contracts not covered by VM-21. For now, the purpose of VM-22 is limited to prescribing the valuation interest rates, but not the valuation methodology, to be used for some, but not all, of the contracts that are within the intended scope of VM-22. All reserve requirements for non-variable annuities that are not within the defined scope of VM-22 (Section 2 below) are contained in Appendices VM-A and VM-C. The requirements of this Part are not intended to affect the reserve requirements for deferred annuities in the accumulation phase, except as provided in Section 2.C. The VM-22 statutory maximum valuation interest are published by the NAIC. The process of calculating the rates involves a set of spreads, a set of weights, a set of default costs, a set of corporate bond rates and a set of average US Treasury rates. The process of selecting the appropriate rate from the published rates is described in Section 3. The processes for re-determining the weights, default costs, spreads, reference rates and daily corporate rates are described and sample calculations illustrated, in Appendices 1, 2, 3, 4 and 5, respectively. The process of calculating the statutory maximum valuation interest rates is described in Appendix 6. Information that is downloaded, published or illustrated must of necessity be rounded. Users who wish to perform the calculations illustrated herein should note that, when calculating a daily or quarterly valuation rate, no rounding should occur before the final step. Section 2. Purpose and
Weights for each cash flow time period group within a valuation rate bucket are calculated by dividing the duration-weighted present value of the cash flow by the sum of the duration-weighted present value of cash flow for each valuation rate bucket. Guidance Note: The weights, are illustrated in Tables A1-1, A1-2, A1-3 and A1-4, are based on duration and asset-liability-cash-flow-matching analysis for representative annuities within each valuation rate bucket, as described above. Section A1-2: Sample Calculation of Table A1-1 Weights for Bucket B The example below shows the calculation of 2018 Table A1-1 weights for valuation rate bucket B, following the steps in Appendix 1, Section A1-1. 1. Bucket B products defined in Appendix 1.1.b as follows: Bucket B: Single Life Annuity age 80 and 85 with 0, 5, and 10-year certain periods 10-year certain only Note: The following cash flows are based on a $5,000 payment and 2012 IAR Mortality Table Male for a person age x in year 2018. Annual cash flows are projected assuming annuity payments are made at the end of each year. These cash flows are averaged for each valuation rate bucket across the annuity forms for that bucket using the statutory valuation mortality table in effect for the following calendar year for individual annuities for males. Note: Color bars show time period groups used in subsequent steps. Table A1-5: Bucket B Annuity Calculation The average of the daily rates in the third quarter for the 2-yr, 5-yr, 10-yr and 30-yr US Treasuries are downloaded from https://fred.stlouisfed.org as input to calculate the present values in Step 4. Table A1-6: Previous Year 3Q Average Treasury (%) 2 Year 5 Year 10 Year 30 Year 1.36 1.81 2.24 2.82 The average cash are summed into four time period groups: years 1-3, years 4-7, years 8-15 and years 16-30. (Note: the present value of cash flows beyond year 30 is included in the years 16-30 bucket. This present value is based on the lower of 3% and the 30-year Treasury rate input in Step 3.)