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

The Valuation of Securities (E) Task Force of the Financial Conditions (E) Committee met on Tuesday, Sept. 22, 2009 in Maryland Ballroom A. During this meeting, the Task Force:

• Adopted minutes of interim meetings held by the Task Force on July 7, July 30 and August 27. During the July 7 conference call the Task Force adopted charges for 2010; discussed whether the NAIC should purchase credit ratings for commercial mortgage backed securities (CMBS) from RealPoint and requested the SVO to conduct a comparability analysis of RealPoint methodology to that of other AROs. During the July 30 conference call the Task Force received and released for comments a plan outline for regulating risks other than credit developed by the Invested Asset (E) Working Group (IAWG); discussed an ACLI proposal to more accurately measure the severity of loss implied by credit ratings of residential mortgage backed securities (RMBS) as part of an improved process to set risk based capital; heard an SVO report on comparability of RealPoint CMBS ratings to those of other AROs and discussed a concept of having the SVO calculate the NAIC Designation equivalent of credit ratings and make these available to insurers. During the August 27, conference call the Task Force received an updated draft of the newly formatted Purposes and Procedures Manual and released it for a short comment period so it could be adopted at this meeting.

• Adopted the plan outline for regulating risks other than credit developed by the Invested Asset Working Group released for comments during July 30 conference call of the Task Force. The plan has three components: a disclosure component that would formally incorporate investment risks other than credit associated with fixed income securities into the regulatory framework, a tools component which would formally direct the SVO to develop additional analytical tools and systems and a monitoring component which would charge the IAWG to work more closely with the SVO to identify risks that need to be brought before the regulatory community.

• Heard the report of the IAWG and adopted minutes of an interim meeting held July 23 at which the Working Group adopted a plan outline on how to regulate risks other than credit.

• Discussed a proposal submitted by the ACLI requesting a review of the impact that NRSRO rating downgrades have had on risk based capital charges (RBC) 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 ARO, the insurer assigns a Designation in accordance with an equivalency formula published in the Purposes and Procedures Manual of theNAIC Securities Valuation Office. The ACLI has requested that the NAIC permit an increase in the NAIC Designation equivalent of the NAIC ARO rating by reference to a notching process. This ACLI proposal was discussed over several meetings and modified by the ACLI. At this meeting, the ACLI formally suggested that the better approach would be to instruct the SVO to contract with a vendor of analytical services to provide values for RMBS securities owned by insurers that could be mapped backed into an appropriate NAIC Designation. The proposal would apply to all RMBS securities, and the process may result in either better or worse NAIC designation of any RMBS security. The Task Force discussed this revised ACLI proposal.

• Determined that the NAIC should purchase the credit ratings for CMBS securities of RealPoint LLC. RealPoint is a subscriber based NRSRO that specializes in default assessment of CMBS. It conducts post sale analysis of securitizations using a methodology that is widely comparable to that of other rating organizations. However its business model calls for frequent reassessments of the quality of these instruments. The Task Force heard testimony from industry which indicated that this more frequent review resulted in a much better assessment of credit quality that that provided by the three major rating organizations which only conducted reviews annually. An analysis conducted by the SVO concluded that mapping RealPoint definitions and ratings to the ratings of other AROs and NAIC Designations would not be a problem and that systems changes to incorporate RealPoint into the NAIC database could be done by year-end.

• Discussed a concern expressed by the CDS (Ex) Working Group whether additional disclosure was necessary for mortgage loan concentration exposure. The Task Force referred this issue to the IAWG for further study. The Task Force also discussed whether increased disclosure was necessary for expected duration of life insurer liabilities under different scenarios. It concluded that this item has been on the agenda of the SAPWG, LHATF and FAWG. The Task Force directed the staff to draft a memorandum expressing the interest of the Task Force in the issue and offering its assistance in a resolution of the technical issues.

• Adopted a proposed reorganized format for the Purposes and Procedures Manual and determined that the revised format should be published beginning with the December 31, 2009 publication. The revised format was a staff project to reorganize the text of the Purposes and Procedures Manual from 36 different sets of guidance and instructions into 6. The Task Force received the proposed prototype and released it for a 60-day comment period during the Summer National meeting. The staff incorporated the comments it received into a revised draft which was again released for comments. No further comments were received to this draft.

• The Task Force discussed a proposal to have the staff create a process that would permit insurance companies that want to obtain an NAIC Designation for a security rated by an NRSRO to purchase it from the NAIC. At the current time, insurers obtain rating services from all of the AROs in order to calculate the appropriate NAIC Designation. Many insurers have complained of the cost associated with this process as the NAIC ARO List has grown. The proposed administrative change in NAIC procedure acknowledges that the NAIC already conducts the calculation for its own purposes and can make that information available to insurers.

• The Task Force instructed the staff to study first lien mortgage securitizations to determine what percentage of second lien mortgages should be permitted before reporting instructions require the insurer to report as a “defined mortgage-backed security” in order to comply with the requirements of the annual statement.