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Panel 1 – NAIC Use of Ratings In Regulation

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1 Panel 1 – NAIC Use of Ratings In Regulation
Rating Agency (E) Working Group of the Financial Conditions (E) Committee A Public Hearing – The Role of Ratings in Insurance Regulation September 24, 2009 Panel 1 – NAIC Use of Ratings In Regulation Chris Evangel, Managing Director, SVO

2 The Securities Valuation Office (SVO)
Is the professional staff of the VOS Task Force Does the day-to-day work of analyzing, classifying, and pricing securities Insurers are required to report all securities not rated by an NRSRO Conducts Investment Research Investment experts for State Insurance Regulators Located at 48 Wall Street, NYC Provides a number of services to state insurance regulators.

3 Staffing FTE 2008 – 48 Average Tenured SVO Analyst
Work Experience: 25+ years Financial Services Experience: 20+ Years Example of Prior work experience: Standard & Poor’s, Moody’s, FitchRatings, Citibank, JP Morgan Chase, Merrill Lynch, Credit Suisse, NY State Department of Insurance

4 Purposes and Procedures Manual of the NAIC SVO
Instructions of the Task Force to the SVO and the Industry Administrative Instructions of SVO to Industry Explains analytical methodologies Official NAIC communication

5 Operational Comparison of Transparency NRSRO and SVO Existing Business Model
NRSROs Capital market pre-purchase focus Capital allocation function Global/national coverage Credit ratings only Obtains information from the issuer Structures trans. w issuer advisors Sells subscriber services Monitors all markets & developments Regulatory objectives do not inflect analysis Benefits from federal securities laws exemption Enjoys 1st Amendment privileges – shields from tort liability Regulatory framework in transition SVO Regulatory post-purchase focus Limited state insurance financial solvency role Ratings, classification, valuations, portfolio analysis, other Information provided by insurer – including its own analysis Distribution to NAIC community No monitoring of capital markets State regulatory objectives are relevant to and inflect analytics Never positioned and not structured as financial newspaper Not in legal relationship with insurer

6 SVO Designations and NRSRO Rating Equivalents
External Rating NAIC Designation AAA to A- 1 BBB+ to BBB- 2 BB+ to BB- 3 B+ to B- 4 CCC+ to CCC- 5 CC+ to D 6

7 Risk Based Capital Reserve Requirements (Percent)
Class Life P/C Tax-Adjusted % Difference NAIC 1 0.4% 0.3% 0% NAIC 2 1.3% 1.0% NAIC 3 4.6% 2.0% 70% NAIC 4 10.0% 4.5% 64% NAIC 5 23.0% NAIC 6 30.0% -27% Source: NAIC Life Risk Based Capital Report: Overview and Instructions for Companies, 11/8/2007; NAIC Property/Casualty Risk Based Capital Report: Overview and Instructions for Companies, 11/8/2007

8 Distribution Of Issuers by Designation Filing Exempts (FEs) - All
12/31/2007 12/31/2008 2007 vs. 2008 Designation Total Change 1FE 90.8% 82.3% -9.7% 2FE 5.1% 11.6% 125.9% 3FE 1.6% 1.9% 14.6% 4FE 1.3% 1.5% 10.1% 5FE 0.7% 1.2% 61.2% 6FE 0.4% 290.4% Overall Totals 100% -0.4%

9 Distribution Of Issuers by Designation Filing Exempts (FEs) – Municipals Excluded
12/31/2007 12/31/2008 2007 vs. 2008 Designation Total Change 1FE 73.8% 64.8% - 11.3% 2FE 13.5% 15.7% 17.0% 3FE 5.0% 5.7% 15.2% 4FE 4.3% 4.8% 11.1% 5FE 2.0% 3.8% 91.6% 6FE 1.3% 5.3% 312.4% Overall Totals 100% 1.0%

10 Default Rate Assumptions of Risk-Based Capital
Excluded Stress Test Captures Increased Present vs. Past Corporate Default Rates Source: Corporate Default and Recovery Rates, 1920 – 2007, Moody’s, February 2008 Stress Test Does Not Capture Structured Finance Default Rates Excluded Source: Default and Loss Rates of Structured Finance Securities, 1993 – 2007, Moody’s, July 2008

11 Insurers’ Securities Held Year-End 2008
Value of Securities Rated by NRSROs –Filing Exempt (FE) Industry Corporate Municipal Structured Total $ Millions: Life $1,090, $ 37,432.6 $336, $1,464,045.3 P&C $ 292, $ 375,723.3 $ 63, $ 732,067.7 F,H&T $ 60, $ 14,335.8 $ 12, $ ,668.0 FE Total: $1,443, $ 427,491.7 $412, $2,283,781.0 Value of Securities Rated by NAIC/SVO – VOS Corporate Municipal Structured Total Life $ 350, $ $ 9, $ 361,523.5 P&C $ 96, $ 4,398.0 $ 63, $ 101,584.6 F,H&T $ 16, $ $ 12, $ ,801.2 SVO Total: $ 464, $ 5,208.7 $412, $ 480,388.8

12 Percentage of Insurer Fixed Income Assets Rated by NRSROs
Total Securities NRSRO Only Rated Issues & Issuer Exposure NRSRO Only %Rating Total / Sole Rater Moody’s 183,182 33,272/7,998 $66.4 Billion 77.4% /14.1% S&P 154,788 13,503/5,441 $88.0 Billion 65.4% / 5.7% Fitch 100,573 4,526/1,408 $19.1 Billion 42.5% / 1.9% DBRS 8,451 1,317/287 $5.6 Billion 3.6% / 0.5%

13 Surveillance Report on Rating Migration
Changes from YE 2007 to YE 2008 Corporate Industrial Bonds

14 Surveillance Report on Rating Migration
Changes from YE 2007 to YE 2008 Structured Securities

15 Surveillance Report on Rating Migration
Changes from YE 2007 to YE 2008 Corporate Industrial Bonds Structured Securities

16 Surveillance Report on Rating Migration
Changes from YE 2007 to YE 2008 Corporate Industrial Bonds Structured Securities

17 Report on Rating Migration
Structured Securities YE ‘’08 to September ‘09

18

19 2005-2007 Industrial Median Averages (NAIC rated vs. S&P Rated)


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