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NAIC Advances RMBS Modeling Process

Source: NAIC

Posted on 25 Nov 2009

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The National Association of Insurance Commissioners (NAIC) will expose a discussion draft today, outlining the economic assumptions regulators will use to evaluate residential mortgage backed securities (RMBS). The document will be made available on the Valuation of Securities Task Force page of the NAIC website.

"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 draft presents the analytical framework and economic assumptions for use in PIMCO's models for the new designation process for RMBS. Specifically, it will discuss the use of home price appreciation (HPA) and projected interest rates as key variables. The NAIC will evaluate each security using a set of HPA projections representing moderate (or base), aggressive and conservative expectations.

The task force will discuss the draft during a conference call (open to the public) on November 30, at 11:00 a.m. EST. In addition, an overview of the proposal and process is scheduled for December 7, during the NAIC Winter National Meeting in San Francisco (see NAIC Meetings Web page for details).

On November 17, the NAIC selected PIMCO 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. The new model 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 RBC requirements.

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.