NU Online News Service, Nov. 25, 11:57 a.m.EST

The National Association of Insurance Commissioners has posted adiscussion draft outlining the economic assumptions regulators willuse to reevaluate residential mortgage backed securities.

NAIC's draft summarizes a presentation made by PIMCO and theNAIC Securities Valuation Office to the Valuation of SecuritiesTask Force.

PIMCO was selected by NAIC Nov. 17 as a third party financialmodeler to assist state regulators as they establish a newmethodology that will ultimately determine the risk-based capital(RBC) requirements for more than 18,000 RMBS securities owned byU.S. insurers at the end of 2009.

NAIC moved for a reassessment of RMBS values after life insurerscomplained that the major nationally recognized securities ratingsfirms put too low a value on their holdings requiring them tomaintain excessive capital reserves.

The financial details of PIMCO's winning bid was not disclosedby the NAIC, nor were the other bidders, although the NAIC said itreceived more than 20 responses to its RFP.

A New York State Insurance Department representative said onOct. 8 that BlackRock, Inc. was one of the firms.

PIMCO's new model, the NAIC said, will calculate expectedcarrying value for each RMBS security held by insurers. Insurerswill be able to map these values to the appropriate NAICdesignation and accompanying risk-based capital (RBC)requirements.

The draft released today, according to the NAIC, "presents theanalytical framework and economic assumptions for use in PIMCO'smodels for the new designation process for RMBS."

It discusses the use of home price appreciation (HPA) andprojected interest rates as key variables. The NAIC said it willevaluate each security using a set of HPA projections representingmoderate (or base), aggressive and conservative expectations.

According to the draft, "Valuations are calculated undermultiple scenarios because many bonds are highly non-linear and mayhave low or zero losses under the median scenario but suffer largelosses under a more stressful scenario."

The draft states that the planned "multiple scenario approach"calculates the present value of losses under each HPA scenario(aggressive, moderate and conservative). The final valuation, whichwill be used to map securities to the current RBC process, will bethe probability weighted average of the present values of lossesunder each projection, notes the draft.

"This is a critical step in developing the new designationmethodology," said Roger Sevigny, NAIC president and New HampshireInsurance Commissioner. "We are acting carefully to make sureinsurers hold adequate capital to meet their obligations toconsumers, while moving quickly and openly to address an issue atthe core of the financial meltdown."

The NAIC Valuation of Securities Task Force will discuss thedraft during a conference call, open to the public, on Nov. 30, at11:00 a.m. The draft may be viewed athttp://www.naic.org/documents/committees_e_vos_rmbsassumptions.pdf.

The NAIC said regulators plan to finalize designations and RBCprice ranges by year-end. Companies will be able to report their2009 annual statement results due March 1, 2010, using theappropriate, new designations.