1 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group Tax Lunch & Learn Capital Gains & Losses April.

1CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited © CUNA Mutual Group

Tax Lunch & LearnCapital Gains & Losses

April 29, 2010

2

DRAFT

Objectives

Financial Statement Impact

Strategies

Partnering

I

III

IV

V

Tax BackgroundII

3

DRAFTObjectivesI

Manage & Reduce Valuation Allowance Risk On Deferred Tax Assets1

Minimize Cash Taxes On 2010 Gains Taking Strategy2

Increase Surplus By Reducing Non-Admitted Deferred Tax Assets3

Utilize Capital Loss Carryovers 4

Goal: Maximize Financial Statement & Economic Returns To CUNA Mutual

4

DRAFT

General Rules

II Tax Capital Gains & Losses

Relevance

Need Sale Or Exchange To Trigger Tax Event – Exception For Certain Worthless Investments

Assets Are “Capital” Unless Explicitly Excluded– Most Investments Are Capital– Exceptions: Certain Tax “Hedges”, Partial Worthlessness, Foreign Exchange

Capital Gains Offset “Ordinary” Losses; Capital Losses Do Not Offset “Ordinary” Income– “Ordinary” Means Business Income– Net Capital Losses Need To Match Capital Gains In Other Periods

More Restrictive Carryover Rules For Capital Losses– Back 3, Forward 5 Years; Versus 3/15 For Ordinary Life Losses In Lifecos (2/20 For Nonlife)– Life / Nonlife Crossover Rules

Unused Losses (Including Unrealized) Are Carried On The Balance Sheet

5

DRAFTDeferred TaxesII

Book Basis > Tax Basis– Future Tax Losses > Book– Future Tax Gains < Book– Examples

• Accelerated Tax Depreciation In Leases

• Market Value > Tax Basis

Deferred Tax Liabilities (DTL)

Non-Interest Bearing– Increase

Condition

Implication

Tax Basis > Book Basis– Future Tax Losses > Book– Future Tax Gains < Book– Examples

• Impairments Not Currently Allowed For Tax

• Decreases In Market Value• Unused Capital Loss

Carryforwards

Deferred Tax Assets (DTA)

Non-Earning– Monetize– Sustain

6

DRAFT

As of 3/31/2010

GAAP

GAAP TAX GAAP-TAX DTA/(DTL)

Fixed Income 6,553 6,901 (348) 122Equities 198 215 (17) 6Derivatives 22 11 11 (4)Limited partnerships 360 435 (75) 26Mortgage loans 718 718 0 0Other 7 0 7 (2)Capital loss C/F 6 (6) 2

7,858 8,286 (428) 150

Asset Class

Total

Deferred Tax Position

III

Interest Rate Risk – Estimate $20-30 Change In Portfolio Value Per 10 bps– 1% Upward Shift Could Create $70-105 Additional DTA

Impairment Risk

$ Millions, Unless Noted

7

DRAFTValuation Allowance

Capital Gains Strategies Reduce Risks

Valuation Allowance Required Unless Utilization >50% Likely–Cannot Assume Credit Losses Will Recover

Valuation Allowance Risks–Additional Impairments–Planning Strategies–Rising Rates

III

Acceptable Proof For Recoverability–Recovery Via Holding To Maturity–Capital Loss Carryback, If Any–Future Capital Gains That Can Be Scheduled To Cover Losses–Technically Sound Strategies (“Prudent and Feasible”, Execution Not Necessary)

Recoverability Demonstrated At 4Q 2009 And 1Q 2010–Extension Losses Covered By Assertion That We Will Hold To Maturity

8

DRAFT“The Calculation”III

Step Action

GAAP View 4Q2010 1Q2010 4Q2009 4/1/2009 1Q2009

Aggregate Unrealized Tax Losses In Portfolio – If Losses < 0, Then Stop1

Unrealized Tax Losses (591) (649) (741) (1258) (1258)1

4Q 2010 Amounts Are Illustrative Only

– Could Be In Income Or Equity5 Record Valuation Allowance

Valuation Allowance (@35%) 0 0 0 29 445

Adjust (Self-Reversing Items, Ordinary, etc.) – If Gains > Losses, Then Stop2

Adjustments 340 340 382 778 734

Unrealized Capital Losses (251) (309) (359) (507) (551)2

Unrealized Capital Gains 226 226 198 98 98

Identify Existing Unrealized Capital Gains – If Gains > Losses, Then Stop3

Remaining Capital Losses (25) (83) (161) (409) (453)

3

Planning Strategies 220 220 220 326 326

Identify Planning Strategies – If Losses > Gains, Then Valuation Allowance4

Excess (Deficiency) 195 137 59 (83) (127)4

$ Millions

(428)

9

DRAFTKey ElementsIII

Restricted List

Partial Worthlessness On Eligible Investments

Unrealized Capital Gains

Planning Strategies

2

2

3

4

10

DRAFTPartial Worthlessness

Cumulative Ordinary Tax Deductions = ~385 (~135 Benefit To Capital DTA)

III

“Ordinary” Deduction Allowed For Certain Assets–Non-Corporate Issuers (e.g. Regular REMIC Interests)–High Certainty (Default Not Required)–To Extent Of Principal Loss (Extension Loss Not Deductible)

Other Considerations–IRS Industry Issue

Character and Timing Benefits–Ordinary Versus Capital–Carryovers–No Need To Be Completely Worthless To Take Tax Writeoff

Cumulative GAAP Impairment: $835M

11

DRAFTStrategiesIV

Potential Transactions–RE-REMIC–Coupon Stripping–Lend Zero Coupon Bonds–Selling Assets In Gain Position–Other

Idea Generation

12

DRAFTMCA/Finance Success

- 2009 CDO SalesV

Conditions

Held 1851 In Impaired CDOs – Tax Benefit For Losses Not In SAP Surplus– Pre-Tax Loss (185) Had Reduced Surplus– Tax Benefit (65) Did Not Increase Surplus Due To Surplus Limit

Appetite To Recognize Capital Gains

1 Cumulative Impairment2 Gain Amount

3 Prior Impairment, Illustration Only - Actual Sale Was 83

Transactions

Results

Sold 703 In Impaired CDOs

Sold 702 In Securities

Cash: No Tax Payment (Gains Offset Losses)

GAAP: 45 After –Tax Gain

SAP: 25 Surplus Increase

Amounts Are Illustrative Only

Accounting Sign Format Sec CDO TotalIncome Statement

Realized Gain 70 0 70Tax (Exp) Benefit (25) 25 0Net Loss Before IMR 45 25 70Transfer To IMR (45) 0 (45)Net Income To 2009 A/S 0 25 25

Balance SheetNet Assets (Cash - Investment) 70 70Increase to IMR Liability

Gain (70) (70)Tax 25 25

Current Tax Payable (25) (25)Tax Receivable 25 25Change To Surplus At 12/31/09 0 25 25

SAP Impact - 2009 CDO/Securities Trade

$ Millions

13

DRAFT2010 PartneringV

Target 2010 Capital Gain/Loss Plan (For Illustration Only)Tax

GAAP Capital Ordinary

Through 1QTrading Gains 20 20 0Derivative Gains 9 0 9Impairments (14) 0 0Subtotal 15 20 9

Forecast 2Q - 4QTrading Gains 20 20 0Derivative Gains 0 0 9Impairments (141) 0 0Subtotal (121) 20 9

OpportunitiesCDO Sales 0 (13) 0

Total (106) 27 18Capital Loss C/F Absorbed (27)Total After C/F 0

$ Millions

Maximize Outcomes– Evaluate & Quantify Potential Strategies– Measured Gains Taking – CDO Dispositions

Better Data

Align Measurement Systems

14

DRAFT

Appendix

15

DRAFTRE-REMIC

Issue Debt (Regular And Residual Interests) Backed By MBS Collateral

Sell Senior Tranche To External Party

Follow Ups–Surplus/Required Capital Impact –Regulatory View–Rating Agency View

IV

Example–Pool MBS

– Worth $100, Book Basis $120, Tax Basis $250 And Par $500

–Issue Debt– Senior $10 2 Year Tranche And Other Tranches– Sell Senior Tranche To 3rd Party

–Tax Impact– Capital Loss – Based On Proportion Of Debt Sold = (100 – 250) * 10% = (15)– Ordinary Deduction – Recognized Proportionately To Retained Debt = (150) – (15) = (135)– Other Considerations

16

DRAFTRE-REMICIV

Assumptions Results - RE-REMIC Results - Sell Assets

Collateral Book Book

Tax Basis 250 Realized Loss -20Book Basis 120Market Value 100

Transaction Near-Term Tax Results Tax

% Financed 10% Realized Capital Loss (Immed.) -15 Realized Capital Loss -150

$ Borrowed 10Ordinary Deductions (Over life of debt) -135

Interest Rate TBDTransaction Costs TBD Future Tax Results

If Retained & Held to MaturityOrdinary Income 150

Depends On Whether Financing Treatment Is Available

17

DRAFTCoupon Stripping

Example–Assume 15 Year Bond, $100 Principal, 3% Semi-Annual Coupon

– Could Create $3 Capital Gain Per $100 Face Amount

–Strip 6-Month Coupon And Sell For $3– Remaining Tax Basis Is $97 (Equals Value)

–In 6 Months The Bond’s Value Accretes to $100–Tax Basis Remains $97 Provided Stripped Coupon Is De Minimis

– De Minimis If Stripped Coupon Is Less Than ¼% Times Years To Maturity

Strip Upcoming Coupon From Long Duration Bonds

Amount Stripped Creates Potential Capital Gains

Follow Ups–Capacity To Strip Bonds–Impact On Ability To Pledge Stripped Bonds As Collateral

Accelerates Cash Recognition

IV

18

DRAFTLend Zero Coupon Bonds

Example–Purchase $100 Zero Coupon Bond For $70–Loan The Bond–Basis Remains $70 During Term Of Security Loan

– No OID To Securities Lender– Purchaser From Securities Lender Accrues The OID

–Accretion Creates Capital Gain Upon Closing The Loan– Capital Gain = Principal * Interest Rate

Acquire And Lend Zero Coupon Bonds

Potential Capital Gains = Accretion While On Loan

Follow Ups–Market Availability Of High-Yielding Zeros–Asset/Liability Matching–Lending Appetite (Internal And External)

IV

19

DRAFTOther Strategies

Sell Appreciated Securities And Repurchase Similar Securities

IV

Partnerships

Sell Other Assets (Mortgage Loans, Subsidiaries, Etc.)

Follow Ups–Identify Appreciated Assets–Determine & Optimize GAAP & SAP Impact (NII, DAC Recoverability, Cash Flow Testing, etc.)–Drill Down On Partnerships–Quantify Other Opportunities

New Rules