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

State regulators, possibly within days, will approve the hiring of a firm to reassess the evaluations of 17,600 residential mortgage-backed securities downgraded by the major credit rating firms, an official said.

A request for proposals to evaluate the securities is being prepared by the National Association of Insurance Commissioners, according to Hampton Finer, a New York deputy insurance commissioner. The NAIC is acting on a request by a life insurer trade group.

The American Council of Life Insurers called for the change in September, arguing to the NAIC that current ratings by Nationally Recognized Statistical Rating Organizations (NRSROs) failed to distinguish between securities with a total loss and those projected for minor losses.

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

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

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

For a few hundred residential mortgage-based securities (RMBS), the national rating agency evaluations will be used, and for about 50 RMBS the NAIC five-star rating system will be employed. Under that system, the insurer certifies that documentation for a full credit analysis of the security does not exist, that it is current on all interest and principal payments, and that the insurer has an actual expectation the interest and principal will be repaid.

During the teleconference, one life insurance representative said his firm had concerns what assumptions would be used in setting the new criteria.

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

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

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

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

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

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NAIC Moves To Reevaluate Some Rating Firm Work

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