Broadway Boogie Woogie Piet Mondrian NAIC Developments and Initiatives

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1 2011 ANNUAL MEETING AND EDUCATION CONFERENCE American College of Investment Counsel New York, NY Broadway Boogie Woogie Piet Mondrian NAIC Developments and Initiatives Friday, October 21, :30 a.m. 9:30 a.m. Edward L. Toy National Association of Insurance Commissioners (Moderator) Michael J. Moriarty Stroock & Stroock & Lavan LLP Stuart Shepetin Genworth Financial, Inc.

2 American College of Investment Counsel 2011 Annual Meeting and Education Conference October 21,

3 Edward L. Toy Panel Director, NAIC Capital Markets Bureau Michael J. Moriarty Insurance Finance Consultant (A Non-Lawyer Professional) Stroock & Stroock & Lavan LLP Stuart Shepetin Managing Director, Private Placements Genworth 2

4 The NAIC Investment Agenda Loan-Backed and Structured Securities What is structured SSAP 43R versus SSAP 26 Modified FE Impact of Carrying Value on NAIC Desigations/RBC Credit Tenant Loans Equipment Trust Certificates 3

5 Impact of Modified FE on RBC LBaSS MFE Book Price Grid Becomes --> NAIC 1 NAIC 2 NAIC 3 NAIC 4 NAIC 5 NAIC 6 NAIC 2 < > NAIC 3 < > NAIC 4 < > NAIC 5 < > A bond with a Book Value in the given range is re-categorized to the NAIC category at the top of that column. For example, an NAIC 2 rated bond purchased at a price of $ would be re-categorized to NAIC 3. Alternatively, an NAIC 4 bond purchased at a price of $85.00 would be re-categorized to NAIC 2. NAIC Rating RBC Factor 1 0.4% 2 1.3% 3 4.6% % % % 4

6 The NAIC Investment Agenda (Cont d) C1 Factor Review Subgroup Calibration Granularity Correlation among asset classes 5

7 Distinguishing ABS Performance Moody s Data The table below shows Moody s impairment data for different ABS Asset Classes over the 1993 to 2009 time frame There is an unquestionable difference in performance between ABS categories Auto Loans, Student Loans,, Credit Cards, and Equip Leases are the top performers Manufactured Housing; Mutual Fund Fees, and Health Care Receivables are some of the worst Impairment rates (by volume) of the highest-quality asset classes are immeasurably low Source: Moody s Default & Loss Rates of Structured Finance Securities

8 Distinguishing ABS Performance -- S&P Data The table below shows Standard and Poor s ratings stability rates over time for various ABS Asset classes Stability Rates reflect the percentage of transactions within a given asset class that have been upgraded, maintained their rating, or been paid in full. 1 Stability Rates for AAA through BBB Auto Loans, Credit Cards, Equipment and FFELP Student loans are well above 95% over the 1983 to April 2011 period Only manufactured housing showed poor performance during this period 1. S&P Structured Finance Research U.S. Asset-Backed Securities Have Maintained High Credit Stability And Low Default Rates Since Publication date May 27, 2011

9 Insurance Industry Recommendation The ACLI recommended multiple NAIC ratings classifications to differentiate between ABS asset classes Category one would include strong performers such as credit card, student loans, auto loans, and equipment leases with higher NAIC classifications Category two would include weak performers such as manufactured housing and health care receivables with lower NAIC classifications A final category should be reserved for collateral types that have performed as their ratings would imply. New ABS categories and esoteric assets would also be placed in this category until performance history warrants inclusion in a different group. This group would have unchanged NAIC classifications

10 The NAIC Investment Agenda (Cont d) Risks Other Than Credit Liquidity Event Call Extension Deferral Currency Leverage 9

11 The NAIC Investment Agenda (Cont d) Municipal Bonds Foreign Exposure Commercial Mortgage Loans 10

12 Perspectives on Regulatory Changes Solvency II Basel III Dodd-Frank Wall Street Reform and Consumer Protection Act 11

13 NAIC Solvency Modernization Initiative Critically Review the U.S. Regulatory Solvency Framework Principles and Whys of U.S. System International Developments IAIS Insurance Core Principles Financial Crisis 12

14 What is SMI Looking At? Capital Requirements Governance & Risk Management SMI Group Supervision Statutory Accounting & Financial Reporting Reinsurance

15 All Important Areas (& Complicated Ones) Capital Requirements Need to Assess Models Governance and Risk Management Needs to be Tailored to Company No Playbook Group Supervision Have Come a Long Way in Coordination, but What Happens in Stress Situations Statutory Accounting and Financial Reporting Is the U.S. Prepared to Abandon Stat Accounting for International Accounting Standards? Reinsurance Most Reinsurance Capacity is Non-U.S.

16 Dodd-Frank and Wall Street Reform Potential Impact on Insurers Investments Systemically Risky Financial Institutions Federal Insurance Office Regulatory Reliance on Rating Agencies Derivatives Volker Rule Insurers with Affiliated Broker- Dealers/Standard of Care 15

17 RMBS and CMBS Modeling Ratings Volatility ( ) Transparency Consistency in the Analysis Regulatory Control What are assumptions employed When are models run What is expected recovery Compared to Carrying Value First Dollar of Loss? 16

18 RMBS and CMBS Modeling Request for Proposal Vendor Selection Determining Assumptions Running the Model Quality Assurance 17

19 RMBS and CMBS Modeling Single Source or Multiple Modelers Internal or Outside Source Conflicts of Interest Transparency of Process Proper Use of the Results Dispute Resolution 18

20 Contacts Edward L. Toy Director, NAIC Capital Markets Bureau Michael J. Moriarty Insurance Finance Consultant (A Non-Lawyer Professional) Stroock & Stroock & Lavan LLP Stuart Shepetin Managing Director, Private Placement Genworth 19