ACLI to NAIC: Some Asset-Backed Securities are Different from Others

The NAIC has been looking into the idea of “recalibrating” the NAIC’s treatment of rating agencies’ ratings on assets, including ABS, in light of how those assets have performed since the financial crisis began. Some at the NAIC have talked about replacing rating agency ratings on ABS with NAIC-generated ABS ratings.

The NAIC has defined “ABS” to include securities backed by auto loans and leases, credit card receivables, manufactured housing, student loans, equipment leases and loan, aircraft leases and loans, other types of collateral.

The NAIC originally proposed lumping all non-mortgage ABS together. The ACLI objected to that approach, and it has persuaded the NAIC staff to work with it on developing an alternative.

The ACLI noted that the insurance company investment default rate differs by asset class. Corporate bonds may be either more likely or less likely to default than their ratings would suggest, and ratings on municipal bonds appear to overstate the default risk, the NAIC consultants say.

Non-mortgage ABS backed by health care receivables, mutual fund fees, franchise loans, manufactured housing and aircraft leasing have done poorly but the default rate on ABS backed by auto loans, student loans, credit cards and equipment leases has been “immeasurably low,” the ACLI says.

Actual overall loss rates for investment-grade, non-mortgage ABS have been just 0.38% over the past 5 years, compared with 0.57% for investment-grade corporate bonds, the ACLI says.

Over the period starting in 1993 and ending 2009, about 62% of health care receivables ABS and 20% to 40% of aircraft lease, manufacturered home, franchise loan and and mutual fund fee ABS became impaired, but the percentage of auto loan, student loan and credit card ABS that became impaired was under 1%, the ACLI says.

The original NAIC staff proposal would have had the effect of cutting the effective NAIC rating for all non-mortgage ABS by 1 notch, even though most of the ABS that life insurers hold are the kind with low default rates, the ACLI says.

The ACLI has proposed splitting ABS into a category of ABS that have been strong performers, including student loan ABS and credit card ABS; a category of ABS that have done worse than their ratings have implied; and a category of ABS with performance that has been in line with ratings.

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