Valuation of Securities (E) Task Force
September 30, 2007

The Valuation of Securities (E) Task Force met on Sunday, Sept.30, 2007. During this meeting, the Task Force:

• Received and adopted the minutes of an interim Task Force meeting held on July 18, 2007.

• Received the report of the Derivatives Market Study Working Group and adopted a recommendation that:

1. The Capital Adequacy Task Force consider implementing a credit for effective derivatives hedging, referring the recommendation to the Capital Adequacy Task Force for its consideration;
2. The Financial Examiner Handbook Technical Group develop language for interrogatories to identify derivatives risks assumed by insurance companies outside Schedule DB, referring the recommendation to that Financial Examiners Handbook Technical Group. (The Derivatives Market Study Working Group agreed to work with the Technical Group to draft appropriate interrogatory language.)

The Task Force also adopted the minutes of an interim meeting of the Derivatives Market Study Working Group held on Sept. 5, 2007.

• Received the report of the Invested Asset Working Group which discussed the projects it is considering in connection with its review of existing NAIC procedures for determining regulatory treatment for new investments. The Task Force also received and adopted the minutes of the interim Working Group meeting held on August 29, 2007.

• Confirmed that there are no securities currently subject to the NR*/Z* process identified in the Purposes and Procedures Manual for year-end 2007 and that insurance companies should continue to report hybrid securities in accordance with the “short-term” solution implemented for year end 2006 by the Hybrid RBC Working Group.

• Adopted charges for 2008.

• Received and released for a 30-day comment period the proposed agenda of the SVO Research Units for 2008.

• Adopted an amendment to the Purposes and Procedures Manual to clarify that as part of the routine discharge of assigned duties, the SVO will direct insurance companies on the proper schedule on which to report a transaction.

• Adopted an amendment to the Purposes and Procedures Manual to permit issuers and or their investment bank representatives to request an SVO analysis of probable regulatory treatment of new securities without insurance company sponsorship of the request. The Task Force also adopted amendments to the Purposes and Procedures Manual to:

1. Clarify instructions to and expectations of SVO relative to classification of securities;
2. Expand and thereby disclose references to the classification process;
3. Disclose the role of the SVO in assisting NAIC members to assess investment risk in new securities and develop appropriate recommendations as to an NAIC regulatory response.
4. Authorize NAIC and SVO staff to develop a proposal for a comprehensive pre-packaged but temporary reporting framework for securities under regulatory review; and
5. Specify the relationship of the filing exempt rule to the classification of securities.

• Adopted a joint New York and SVO proposal to reorganize the SVO valuation of securities function. The proposal permits insurance companies to self-report values from a number of identified sources, including the SVO, but requires that insurers identify the source of the value in a new annual statement blank column. The SVO will continue to provide valuations to serve as benchmarks for regulator comparison of reported values and NAIC staff will develop systems to identify when insurers report different values for the same securities.

• Heard a report from interested parties and the SVO concluding that insurance companies do not issue financial instruments with characteristics of liabilities and equity and instructed the SVO to prepare a memorandum from the Task Force to the Statutory Accounting Principles Working Group relaying this finding in response to the latter’s request for research on this topic.

• Received and released for a 30-day comment period a request from the Statutory Accounting Principles Working Group for an opinion whether it should adopt a request from AIG that the market valuation option for subsidiary, controlled and affiliated (SCA) investments be expanded to permit the use of values reported on any stock exchange. The SVO was instructed to work with staff of the Statutory Accounting Principles Working Group to study and report back on the issue.