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Rating Agency (E) Working Group of the Financial Conditions (E) Committee

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 CEvangel@naic.org 212 386-1920.

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Rating Agency (E) Working Group of the Financial Conditions (E) Committee

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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, 2009 Panel 1 – NAIC Use of Ratings In Regulation Chris Evangel, Managing Director, SVO CEvangel@naic.org 212 386-1920

  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. 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 Operational Comparison of Transparency NRSRO and SVO Existing Business Model

  6. SVO Designations and NRSRO Rating Equivalents

  7. Risk Based Capital Reserve Requirements (Percent) 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

  9. Distribution Of Issuers by Designation Filing Exempts (FEs) – Municipals Excluded

  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 CorporateMunicipalStructured 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 • CorporateMunicipalStructured 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. Percentage of Insurer Fixed Income Assets Rated by NRSROs

  13. Surveillance Report on Rating Migration Changes from YE 2007 to YE 2008

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

  15. Surveillance Report on Rating Migration Changes from YE 2007 to YE 2008

  16. Surveillance Report on Rating Migration Changes from YE 2007 to YE 2008

  17. Report on Rating Migration

  18. 2005-2007 Industrial Median Averages (NAIC rated vs. S&P Rated)

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