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NAIC Selects PIMCO to Model Residential Mortgage-Backed Securities

Source: NAIC

Posted on 18 Nov 2009

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Members of the National Association of Insurance Commissioners (NAIC) selected PIMCO as a third- party financial modeler that will assist state regulators to ultimately determine the risk based capital (RBC) requirements for residential mortgage-backed securities (RMBS). For approximately 18,000 RMBS securities owned by U.S. insurers at the end of 2009, the new model will produce expected losses at the RMBS security level for insurers to map their holdings to the appropriate NAIC designation and accompanying RBC requirements.

The selection of PIMCO to perform this assessment was conducted in an accelerated timeframe that was designed to be extremely thorough. Defined objective criteria were used to evaluate more than 20 RFP responses and to develop a short list of 11 vendors. A deep-dive was performed on each short-listed vendor by NAIC staff and independent financial consulting firm Oliver Wyman. The short list was then further reduced to four firms with additional questions posed and analytical reviews with several companies on individual Committee on Uniform Security Identification Procedures (CUSIP) assessments. The NAIC's objective was to identify a vendor with a sound assessment methodology, proven ability to process a large amount of transactions in a very short timeframe and processes and procedures in place to address potential conflicts of interest — all at a cost-effective price.

“Creating this new assessment process is an important step toward providing more transparency about these complex securities,” said Roger Sevigny, NAIC President and New Hampshire Insurance Commissioner. “This unique treatment of residential mortgage-backed securities distinguishes the NAIC as the only regulator to analyze these securities and require capital based upon the expected loss amount for a particular company.”

PIMCO will work with regulators to develop a set of price ranges for designations one through six to be used by insurers in their statutory financial statements and to calculate the risk-based capital charges for each specific security they own. These designations will apply only to year-end 2009 reporting.

A Valuation of Securities Task Force call (open to the public) is scheduled to take place on November 30 to discuss the model assumptions, which is a critical component of the new methodology. There will also be a task force briefing at the NAIC Winter National Meeting on December 7 in San Francisco. The objective is to finalize designations and price ranges by year-end so companies can begin reporting under the appropriate designation in early 2010. The NAIC will continue to look at this process going forward.