The National Association of Insurance Commissioners Valuation of Securities Task Force has adopted economic assumptions regulators will use to reevaluate residential mortgage-backed securities.

The assumptions were released in a discussion draft on Nov. 25 and voted on Dec. 2 in a conference call.

The assumptions summarize a presentation made by Pacific Investment Management Co. LLC (PIMCO) and the NAIC Securities Valuation Office to the Valuation of Securities Task Force.

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

NAIC moved for a reassessment of RMBS values after insurers complained that the major nationally recognized securities ratings firms put too low a value on their holdings, requiring them to maintain excessive capital reserves.

The draft, adopted on Dec. 2, “presents the analytical framework and economic assumptions for use in PIMCO's models for the new designation process for RMBS,” the NAIC said when the draft was originally released.

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

The draft states, “The final valuation will be the probability weighted average of the present values of all losses under each HPA scenario.”

According to the original draft, “Valuations are calculated under multiple scenarios because many bonds are highly non-linear and may have low or zero losses under the median scenario but suffer large losses under a more stressful scenario.”

The NAIC said regulators plan to finalize designations and RBC price ranges by year-end. Companies will be able to report their 2009 annual statement results due March 1, 2010 using the appropriate new designations.

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