Valuation of Securities (E) Task Force
Valuation of Securities (E) Task Force Page
Joint Executive (EX) / Plenary Committee Summary Report
Summer 2009 Meeting Summaries Index

The Valuation of Securities (E) Task Force of the Financial Condition (E) Committee met June 14, 2009.

• During this meeting, the Task Force:

• Adopted an amendment to the Purposes and Procedures Manual of the NAIC Securities Valuation Office. The amendment conforms the filing exempt rule, as it applies to common stock, to the valuation rules that became effective Jan. 1, 2009. Under the filing exempt rule, only common stock traded on named exchanges are exempt from filing with the SVO. The new valuation rules, however, permit insurers to report a value derived from any exchange without a pre-approval requirement. The amendment deletes the requirement for an approved exchange in the filing exempt rule.

• Adopted an amendment to Section 14 of the Appendix of the Purposes and Procedures Manual of the NAIC Securities Valuation Office. Section 14 is concerned with investment criteria for the mutual funds that issue shares eligible to receive bond-like treatment instead of treatment as common stock. The amendment deletes a list that identifies combinations of government issuers and securities that are considered to be entitled to the full faith and credit of the United States and replaces it with a reference to the same combination of government issuers and securities mentioned in Sections 16-18 of the Appendix. These latter Sections are used in conjunction for reporting of securities considered to be U.S. government, government backed, or equal thereto, for statutory accounting purposes.

• Discussed a proposal submitted by the ACLI requesting a review of the impact that Nationally Recognized Statistical Rating Organization (NRSRO) rating downgrades have had on risk-based capital (RBC) charges for residential mortgage-backed securities (RMBS). RBC charges are determined by reference to the NAIC Designation assigned to the security. When a security is rated by an NAIC, the insurer assigns a Designation in accordance with an equivalency formula published in the Purposes and Procedures Manual of the NAIC Securities Valuation Office. The ACLI has requested that the NAIC permit an increase in the NAIC Designation equivalent to the NAIC ARO rating by reference to a notching process that could increase the quality designation by as much as six NAIC ARO notches. Nationwide and Jackson National Life submitted comment letters supporting the ACLI proposal. At this meeting, the ACLI modified its request and asked for time to develop a more comprehensive empirical explanation in support of their position that NAIC ARO ratings overstate the risk exposure of RMBS securities. The Task Force agreed to provide this opportunity and emphasized that the regulatory community would be especially interested in a process that would permit the SVO to review and quantify risk exposure for specific securities. This recognizes that while RMBS securities are similar in general structure. they are supported by different mortgage pools and therefore could differ significantly from one another in terms of risk.

• Reported that the NAIC is considering developing an interpretation of statutory accounting guidance to provide more explicit guidance to insurers that may be considering entering into a Re-REMIC transaction. A Re-REMIC pools mortgage- or asset-backed securities that have experienced losses, transfers those pools to a trust at the REMIC level, and has the trust issue new securities that restructure the cash flows from the pool of mortgages or securities into two or more tranches. The objective of the process it to create securities of greater and lesser quality, which would likely result in a total RBC charge lower than that of the original security.

• Received the report, and adopted three sets of interim meeting minutes, of the Invested Assets Working Group. The Working Group is working on restructuring the way the NAIC regulates investment risks in fixed income securities.

• Adopted a proposed status report to the Financial Condition Committee and instructed staff to forward the report to the Committee. The memorandum reports progress by the Task Force on eight of 12 recommendations to strengthen financial regulation made by the Credit Default Swap (EX) Working Group, adopted by Executive (EX) Committee and referred by the Financial Condition Committee to the Task Force.

• Discussed the four remaining recommendations to strengthen financial regulation that had been made by the Credit Default Swap (EX) Working Group, and adopted by Executive Committee and referred by the Financial Conditions (E) Committee to the Task Force. The Task Force instructed staff to continue to work on recommendations to respond to these four recommendations and to report to the Task Force at the Fall National Meeting.

• Heard staff reports on:

• System and other issues related to the implementation of the new valuation procedures.

• The NRSRO credit rating status of monoline (financial guarantor) insurers and the related issue of insurance company filings of municipal securities insured by the monolines with the SVO for a re-rating. The result of NRSRO downgrades of financial guarantors is that the NAIC ARO rating of guaranteed municipal securities were also downgraded, despite the fact that the standalone credit quality of the municipal issuer is often higher than the new NAIC ARO rating assigned to the monoline insurer. The SVO was given authority to evaluate the municipality’s credit quality and, where appropriate, to assign a corresponding NAIC Designation, even if the Designation is higher than the Designation derived by reference to the monoline’s NAIC ARO financial strength rating. The SVO reported that it has only received 24 requests for such reevaluations to date.

• The performance of hybrid securities and the valuation issue it represents. The SVO reported that the value of hybrids has dropped by as much as 44%.

• A staff project to reorganize the text of the Purposes and Procedures Manual of the NAIC Securities Valuation Office. The reorganization would reduce 36 different sets of guidance and instructions into six. The Task Force received the proposed prototype and released it for a 60-day comment period. Staff was instructed to continue to work with NASVA and other interested parties to finalize a new draft of the Manual, with the overall objective that the Task Force would adopt the new version of the Manual by the Winter National Meeting.

• Heard a report related to the work being done by the Invested Assets Working Group on improving the utility and transparency of Schedule D investment categories, including an observation that many companies fail to some extent to comply with the current annual statement instructions for filing structured securities.

Action Items: