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

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