Insurance News

NAIC Releases RMBS Evaluation Draft

Posted on: December 5, 2009

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The National Association of Insurance Commissioners has posted a discussion draft outlining the economic assumptions regulators will use to reevaluate residential mortgage backed securities.

NAIC?s draft summarizes a presentation made by PIMCO and the NAIC Securities Valuation Office to the Valuation of Securities Task Force.

PIMCO was selected by NAIC Nov. 17 as a third party financial modeler to assist state regulators as they establish a new methodology that will ultimately determine the risk-based capital (RBC) requirements for more than 18,000 RMBS securities owned by U.S. insurers at the end of 2009.

NAIC moved for a reassessment of RMBS values after life insurers complained that the major nationally recognized securities ratings firms put too low a value on their holdings requiring them to maintain excessive capital reserves.

The financial details of PIMCO?s winning bid was not disclosed by the NAIC, nor were the other bidders, although the NAIC said it received more than 20 responses to its RFP.

A New York State Insurance Department representative said on Oct. 8 that BlackRock, Inc. was one of the firms.

PIMCO?s new model, the NAIC said, will calculate expected carrying value for each RMBS security held by insurers. Insurers will be able to map these values to the appropriate NAIC designation and accompanying risk-based capital (RBC) requirements.

The draft released today, according to the NAIC, ?presents the analytical framework and economic assumptions for use in PIMCO’s models for the new designation process for RMBS.?

It discusses the use of home price appreciation (HPA) and projected interest rates as key variables. The NAIC said it will evaluate each security using a set of HPA projections representing moderate (or base), aggressive and conservative expectations.

According to the draft, ?Valuations are calculated under multiple scenarios because many bonds are highly non-linear and may have low or zero losses under the median scenario but suffer large losses under a more stressful scenario.?

The draft states that the planned ?multiple scenario approach? calculates the present value of losses under each HPA scenario (aggressive, moderate and conservative). The final valuation, which will be used to map securities to the current RBC process, will be the probability weighted average of the present values of losses under each projection, notes the draft.

?This is a critical step in developing the new designation methodology,? said Roger Sevigny, NAIC president and New Hampshire Insurance Commissioner. ?We are acting carefully to make sure insurers hold adequate capital to meet their obligations to consumers, while moving quickly and openly to address an issue at the core of the financial meltdown.?

The NAIC Valuation of Securities Task Force will discuss the draft during a conference call, open to the public, on Nov. 30, at 11:00 a.m. The draft may be viewed at

The NAIC said regulators plan to finalize designations and RBC price ranges by year-end. Companies will be able to report their 2009 annual statement results due March 1, 2010, using the appropriate, new designations.

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