NU Online News Service, Oct. 15, 12:32 p.m.EDT

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State regulators, possibly within days, will approve the hiringof a firm to reassess the evaluations of 17,600 residentialmortgage-backed securities downgraded by the major credit ratingfirms, an official said.

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A request for proposals to evaluate the securities is beingprepared by the National Association of Insurance Commissioners,according to Hampton Finer, a New York deputy insurancecommissioner. The NAIC is acting on a request by a life insurertrade group.

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The American Council of Life Insurers called for the change inSeptember, arguing to the NAIC that current ratings by NationallyRecognized Statistical Rating Organizations (NRSROs) failed todistinguish between securities with a total loss and thoseprojected for minor losses.

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ACLI contended the NAIC, in relying on those ratings, has setexcessive capital reserve requirements for the carriers, and due todowngrades the risk-based capital requirement for the life andhealth insurance sector had increased by $11 billion.

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Yesterday, after a joint teleconference by the NAIC's ValuationSecurities Task Force and Financial Conditions Committee,regulators agreed to have the NAIC's Securities Valuation Office goahead with the hiring of a third-party firm to model losses of RMBSsecurities.

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Conceivably the move could set the stage for further use ofnon-NRSRO firms by NAIC, but Michael Moriarty, a New York deputyinsurance commissioner, said at the meeting that "this is a 2009year-end proposal only."

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For a few hundred residential mortgage-based securities (RMBS),the national rating agency evaluations will be used, and for about50 RMBS the NAIC five-star rating system will be employed. Underthat system, the insurer certifies that documentation for a fullcredit analysis of the security does not exist, that it is currenton all interest and principal payments, and that the insurer has anactual expectation the interest and principal will be repaid.

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During the teleconference, one life insurance representativesaid his firm had concerns what assumptions would be used insetting the new criteria.

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A consumer representative said that by singling out only theresidential mortgage-based securities, the NAIC was providingcapital relief to life insurers, which would be permitted "to holdless capital than is the current rule." He urged the NAIC to"figure out a long-term strategy. Otherwise it appears to becapital relief for insurers."

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A representative of American International Group countered thatthe NAIC action did not mean the insurance industry would have anymore or less capital, "just that their exposure to this class ofsecurity would be measured more accurately."

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The action by the NAIC units yesterday is expected be followedby a vote by the full NAIC Executive Committee and a plenarysession. Mr. Finer said this could be done by teleconference andtake place in a matter of a few "weeks or days."

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Mr. Moriarty added that firms the NAIC has spoken with said theycould come up with loss models for RMBS to set risk-based capitalrequirements before the end of the year.

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The NAIC has been examining its use of ratings by thenationally-recognized firms–including Fitch, Moody's and Standard& Poor's–since the turnabout in the home mortgage marketresulted in a sudden drop in ratings for securities that hadpreviously been top-ranked.

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