The Valuation of Securities Task Force has worked with an outside firm to develop a set of 5 principles for use in assessing the risk-adjusted value of residential mortgage-backed securities.
The task force, an arm of the National Association of Insurance Commissioners, Kansas City, Mo., has come up with the proposed economic assumptions with help from staffers in the NAIC’s own Securities Valuation Office and consultants at Pacific Investment Management Company L.L.C., Newport Beach, Calif., officials say.
The NAIC hired the PIMCO Advisory arm of PIMCO to help it come up with a new approach to including RMBS in insurers risk-based capital calculations.
In the past, insurers have used ratings from the major rating agencies to adjust values to reflect the risk that an issuer might default.
This year, life insurers have argued that the traditional approach would work poorly, because it would wipe out the entire risk-adjusted value of an RMBS if there had been any kind of default, even if it seemed likely that the issuer would end up paying some, or even most, of what it owed.
PIMCO Advisory plans to work with SVO staffers to develop statistical forecasting “models” that can predict how well the RMBS in life insurers’ portfolios might do for RBC purposes, officials say.
In a discussion draft posted in the securities valuation task force section of the NAIC website, the task force is recommending that:
- The median home price appreciation scenario used in the valuation models would be the PIMCO Advisory standard base case scenario.
- PIMCO Advisory would use its internal model calculate four other home price appreciation path, with two being more conservative and two more aggressive.
- The additional appreciation paths would be set up in such a way that the median case scenario would have a 50% chance of occurring, and the most aggressive and most conservative scenarios each would have a 2.5% chance of occurring.
- The final valuation would be the probability weighed average of the present values of all losses under each home price appreciation scenario.
- All losses would be discounted at the bond’s effective coupon rate.
PIMCO Advisory would apply its own “extensive internal quality control process,” and the SVO and consultants would “conduct quality control checks of the valuation process,” task force officials write in the discussion draft. “These checks will help to ensure that the valuation process is of the quality required.”
In addition, “the SVO has confirmed that PIMCO has appropriate procedures in place to ensure tha the analysis is free from conflicts of interest,” task force officials write.
Comments on the draft are at 5 p.m. Friday.
PIMCO Advisory and staffers gave regulators a more detailed presentation on the model assumptions and related issues Tuesday. The securities valuation task force expects to hold a public meeting Nov. 30 to discuss what was said during the more detailed presentation, task force officials say.