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1 Rating Agency (E) Working Group of the Financial Conditions (E) Committee A Public Hearing – The Role of Ratings in Insurance Regulation September 24,

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Presentation on theme: "1 Rating Agency (E) Working Group of the Financial Conditions (E) Committee A Public Hearing – The Role of Ratings in Insurance Regulation September 24,"— Presentation transcript:

1 1 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 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 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 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 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 1 st 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 6 SVO Designations and NRSRO Rating Equivalents External RatingNAIC Designation AAA to A-1 BBB+ to BBB-2 BB+ to BB-3 B+ to B-4 CCC+ to CCC-5 CC+ to D6

7 7 Risk Based Capital Reserve Requirements (Percent) ClassLifeP/C Tax-Adjusted % Difference NAIC 10.4%0.3%0% NAIC 21.3%1.0%0% NAIC 34.6%2.0%70% NAIC 410.0%4.5%64% NAIC 523.0%10.0%70% NAIC 630.0% -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 8 Distribution Of Issuers by Designation Filing Exempts (FEs) - All 12/31/200712/31/ vs DesignationTotal Change 1FE90.8%82.3%-9.7% 2FE5.1%11.6%125.9% 3FE1.6%1.9%14.6% 4FE1.3%1.5%10.1% 5FE0.7%1.2%61.2% 6FE0.4%1.6%290.4% Overall Totals100% -0.4%

9 9 Distribution Of Issuers by Designation Filing Exempts (FEs) – Municipals Excluded 12/31/200712/31/ vs DesignationTotal Change 1FE73.8%64.8%- 11.3% 2FE13.5%15.7%17.0% 3FE5.0%5.7%15.2% 4FE4.3%4.8%11.1% 5FE2.0%3.8%91.6% 6FE1.3%5.3%312.4% Overall Totals100% 1.0%

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

11 11 Insurers’ Securities Held Year- End 2008 Value of Securities Rated by NRSROs –Filing Exempt (FE) Industry Corporate MunicipalStructured Total $ Millions: Life $1,090,414.4 $ 37,432.6$336,198.2 $1,464,045.3 P&C $ 292,981.7 $ 375,723.3$ 63,362.8 $ 732,067.7 F,H&T $ 60,508.8 $ 14,335.8$ 12,803.8 $ 87,668.0 FE Total: $1,443,904.9 $ 427,491.7$412,364.8 $2,283,781.0 Value of Securities Rated by NAIC/SVO – VOS Corporate MunicipalStructured Total Life $ 350,979.2 $ 728.5$ 9,815.7 $ 361,523.5 P&C $ 96,462.5 $ 4,398.0$ 63,362.8 $ 101,584.6 F,H&T $ 16,914.6 $ 82.8$ 12,803.8 $ 29,801.2 SVO Total: $ 464,356.3 $ 5,208.7$412,364.8 $ 480,388.8

12 12 Percentage of Insurer Fixed Income Assets Rated by NRSROs NRSROTotal Securities NRSRO Only Rated Issues & Issuer Exposure NRSRO Only %Rating Total / Sole Rater Moody’s183,18233,272/7,998$66.4 Billion77.4% /14.1% S&P154,78813,503/5,441$88.0 Billion65.4% / 5.7% Fitch100,5734,526/1,408$19.1 Billion42.5% / 1.9% DBRS8,4511,317/287$5.6 Billion3.6% / 0.5%

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

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

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

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

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

18 18

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


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