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FOR IMMEDIATE RELEASE

RATING REFORM BENEFITS BOND MARKET


SAN FRANCISCO (June 1, 2008) - Members of the National Association of Insurance
Commissioners (NAIC) moved forward today with a regulatory response that will help the
municipal bond market by reducing pressure on insurance companies to sell bonds insured by
downgraded bond insurers. The reform, which takes effect July 1, will permit substituting a credit
rating from the NAIC Securities Valuation Office (SVO) for the rating from a credit rating agency.
"We know that many municipal bond credit ratings are no longer accurate because they are based on
the downgraded rating of the bond insurer, not of the municipal issuer. So we are stepping in to
make sure that insurance companies have accurate ratings. The SVO has the tools to fairly rate
municipal issuers," said Wisconsin Insurance Commissioner Sean Dilweg, who made the proposal.
"Removing the current restrictions on our rating unit will permit insurance companies to submit
downgraded municipal securities to it. The unit, where appropriate, will now be able to assign the
correct rating to those municipal bonds. That will benefit both insurance companies and municipal
issuers," said New York State Insurance Superintendent Eric Dinallo, who chairs the NAIC
Valuation of Securities Task Force.
Currently, when a bond insurer is downgraded, the municipal bonds it insures receive the same
lower rating. That lower rating can result in the new rating for the bond being below the actual
creditworthiness of the municipal issuer.
The downgrading of bonds they hold can create problems for insurance companies. At a minimum,
companies would have to reserve more capital against the downgraded bonds, because reserves are
determined by the risk of the investment. That reduces their appetite for municipal bonds. If bonds
are downgraded to below investment grade, some insurance companies will no longer want to hold
them. If many companies sell downgraded bonds, they would likely push down the market price and
have to take a loss on the bonds. This could also increase municipalities' cost of raising funds.
To avoid these problems, insurance company investors will be allowed to submit their municipal
bonds to the SVO for credit assessment. Previously, the SVO was not permitted to assign a credit
rating higher than that assigned by a rating agency. The new procedure would allow the SVO to
determine its own rating based on its own analysis of the issuer's financial strength.
This amendment to the Purposes and Procedures Manual of the NAIC Securities Valuation Office
will be effective July 1, 2008. The NAIC will continue to use the resources of the SVO to assist

regulators in dealing with disruptions in the capital markets.


The change is part of a three-pronged regulatory response to recent concerns about the bond
insurance market that (1) addresses the continued availability of AAA-rated bond insurance for
municipalities; (2) deals with distressed companies by working to bolster contingency reserves; and
(3) considers new and/or revised rules and regulations.

About the NAIC


Formed in 1871, the National Association of Insurance Commissioners (NAIC) is a voluntary
organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and
five U.S. territories. The NAIC has three offices: Executive Office, Washington, D.C.; Central
Office, Kansas City, Mo.; and Securities Valuation Office, New York City.
The NAIC serves the needs of consumers and the industry, with an overriding objective of
supporting state insurance regulators as they protect consumers and maintain the financial stability
of the insurance marketplace. For more information, visit www.naic.org.

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For information regarding this service, please contact the NAIC Communications Division, 2301
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NAIC Sets Rating Guidelines For Bonds


January 23, 2008 | Subscribe Now By JAMES CONNOLLY
The National Association of Insurance Commissioners yesterday approved guidelines on how
insurers' bond holdings should be evaluated.

Regulators unanimously adopted guidance in a Jan. 14 memo issued by Mike Moriarty, Valuation of
Securities (VOS) Task Force chair and a New York regulator, during a conference call discussion.
NAIC through its Securities Valuation Office (SVO) in New York rates the securities holdings of
carriers to ensure they are operating on a sound financial basis.
The memo provides guidance for both 2007 filing requirements and guidelines for 2008. Guidance
for how to classify these bonds in 2007 is considered important because filing must be completed by
March.
For both life and property-casualty insurers, the possibility of a bond's SVO rating being dropped to
an NAIC-5 rating is a big consideration. An NAIC-1 rating is considered the highest rating by the
SVO.
Bond insurers' recent rating declines and threats of downgrades by rating agencies as a result of the
ongoing mortgage market crisis have concerned insurers who have part of their portfolios
guaranteed by these bond carriers. As a result, they turned to state insurance regulators for guidance
on how they should rate the bonds they hold in their portfolios.
Chris Anderson, a representative with Merrill Lynch, New York, thanked regulators on behalf of
insurers for their quick action in approving the memo.
For 2007 year-end reporting, the memo addresses all ACA bonds rated 'CCC' by Standard and Poor's,
the equivalent of an NAIC-5 rating.
During the call it was noted that the S&P underlying rating was being used as a reference to
underlying ratings available through all rating agencies.
Alan Close, who represented the American Council of Life Insurers, Washington, during the
discussion, said that how large an impact there is on insurers is difficult to determine because there
is really no analysis of the extent of the holdings of these guaranteed bonds in insurers' portfolios.
However, he said that in many cases, these bonds are not publicly traded. Still, Mr. Close said the
issue remains one of credit risk more than liquidity.
The impact is potentially different for life insurers and property-casualty insurers, according to Mr.
Close. Property-casualty insurers could be required to measure a bond at fair value, but for life
insurers, it would not necessarily result in marking the security to fair value, he explained. However,
for life insurers, Mr. Close continued, it could result in a change in risk-based capital requirements.
He compared the inability of a guarantee from a bond insurer to maintain the rating of a bond to a
reinsurer going into default and creating a loss of reinsurance coverage to the ceding company.
However, Mr. Close noted that the debt issuer is still liable for payments on the security.
He said the decision by regulators to approve the memo "gives companies some clarity regarding
reporting for 2007" as well as guidance for 2008.

The memo offers the following reporting instructions:


o Bonds insured by ACA and rated only by S&P should report an NAIC-5 designation for those
bonds, while those rated by more than one NAIC-approved rating organization should report the
second lowest of the two or more ratings.
o However, if the credit quality of specific bonds is higher than NAIC 5, as measured by a SPUR
(Standard & Poor's underlying rating) or other underlying rating, the insurer may translate the S&P
SPUR rating into its equivalent NAIC designation and report that designation.
o Insurers can also opt to file the ACA guaranteed bonds with the SVO for a rating and apply the
rating that is received for the 2007 annual statement filing.
For 2008, the memo offers the following guidance:
o Noting that S&P has withdrawn ratings on ACA guaranteed bonds, the memo said that to the
extent another rating is not available, ACA insured bonds will no longer be eligible for an SVO filing
exemption. These bonds will have to be filed with the SVO for credit quality assessment.
o Bonds with SPUR ratings will report an NAIC-3 designation until assigned a designation by the
SVO.
o But, if the issuer of a bond with a SPUR converts the SPUR into an S&P rating, the security is again
eligible for a filing exemption.

NAIC to Issue Own Ratings


Tuesday, June 3, 2008

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WASHINGTON - A group of state insurance regulators next month will begin providing substitute credit ratings for
some of the municipal bonds held by insurers, to prevent a possible sell-off of those bonds due to the credit
crunch.

The ratings, to be issued by the securities valuation office of the National Association of Insurance Commissioners,
could be used as a substitute for the ratings provided by credit rating agencies on bonds backed by downgraded
insurers, to determine so-called risk capital assessments. These assessments determine how much capital insurers
must set aside based on the risk associated with each of their investments.
NAIC is taking action because many of the insured bonds held by insurance companies had their ratings withdrawn
after the bond insurer guaranteeing the security was downgraded to junk status and had no underlying rating to
fall back on. So far, only three insurers - Financial Guaranty Insurance Co., CIFG Assurance NA, and ACA Financial
GuarantyCorp. - have had at least one of their ratings downgraded to junk status, but NAIC is concerned that more
bond insurers could follow suit.
"This change puts us in a position to address proactively any issues if there is further degeneration in the overall
bond insurance market," said Wisconsin state insurance commissioner Sean Dilweg, who introduced the proposal.
Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management LLC, said
the NAIC's proposal is "very significant" for insurance companies who have investment-grade standards for their
holdings. When the bond insurers were downgraded, it left many insurers who own munis in a "very exposed place"
because of the expectation that they may have to post additional capital, he said.
"Rather than be forced to allocate capital at levels that might not reflect their true credit quality, they're going to
step in and provide a substitute rating," he said.
Collectively, the insurance industry holds about $420 billion of municipal bonds, about $145 billion of which are
wrapped by insurance, according to the NAIC. The biggest holders of munis are life and casualty insurance
companies, which are taxed at rates that make munis favorable investments for them.
An analyst at an insurance company that is one of the largest purchasers of municipal bonds in the industry said
that munis are popular tools used to offset more risky investments in an insurers' portfolio. The analyst, who did
not want to be identified, said munis provide the best after-tax, risk-adjusted return for the credit quality the
insurance companies take on when they purchase them.
The NAIC has provided numerical "designations" for muni bonds for insurers for about a century, but previously was
unable to provide designations that were higher than the ratings provided by a credit rating agency. Essentially,
the proposal, which the NAIC plans to implement before final approval it in September, will "decouple" the NAIC
rating from the rating agency process, said Michael Moriarty, deputy superintendant in the New York State
Insurance Department. And instead of rating the security for insurers, NAIC will be assessing the creditworthiness
of the municipality or authority that issued the debt, he said.
Under the proposal, the NAIC will provide numerical ratings on a scale of 1 to 6. Munis rated "1" or "2" will be
considered investment grade, with "1" equivalent to A-minus, A3, or better, while "2" will be equivalent to triple-B.
Meanwhile, ratings 3 through 6 will be considered below investment grade, with a "6" being considered a "near
default bond," according to Mikaela Reck, public information officer for Dilweg.

Moriarty said that the NAIC's securities valuation office will review public records and financial statements to come
up with a rating in about a week's time, depending on the size of the municipality or authority, stressing that it will
not be as in depth as a review by a credit rating agency.
"It would be kind of a 'light' rating agency type of review, but we feel it would give a fairly accurate assessment of
the creditworthiness for the calculation of the risk-based capital that the company is required to hold," he said.
Market participants said yesterday that the NAIC's proposal was a step in the right direction.
But the analyst at the insurance company had mixed feelings about the proposal. He said many research analysts
have been laid off in recent years as the market has come to rely more heavily on ratings from the nationally
recognized credit rating agencies and fewer buy-side firms are performing their own analysis of underlying muni
credits, he said.
"NAIC needed to do something and they'll probably do an okay job, but the bottom line is the marketplace needs to
step up and begin to evaluate assets again," he said

NAIC Calls Ratings Firms To Defend Their


Work
September 10, 2009 | Subscribe Now By DANIEL HAYS
NU Online News Service, Sept. 10, 3:50 p.m. EDT
State insurance commissioners plan to grill the top credit rating agencies as to why the
commissioners shouldn't seek other guidance in evaluating insurers' securities holdings, a key
regulator said.
"The commissioners are going in with an open mind, but there's been a lot of criticism out there,"
said Hampton Finer, deputy superintendent and chief economist with the New York Insurance
Department.
Mr. Finer spoke in advance of a hearing set for Sept. 24 by a unit of the National Association of
Insurance Commissioners, to which the Nationally Recognized Statistical Rating Organizations
(NRSROs) have all been invited.

NAIC evaluates the holdings of insurers, and based on how the NRSROs rate the carriers' securities,
the NAIC sets a minimum required amount of capital reserves that the insurer most hold against
possible equity losses, Mr. Finer said.
Mr. Finer said there was a "view that there's been an overreliance on rating agencies," mentioning
recommendations by the U.S. Treasury and the Group of 20 Finance Ministers and Central Bank
Governors.
He said the NAIC Rating Agency Working Group, which has invited insurance companies, pension
funds and others to testify on the NAIC reliance on NRSRO ratings, will among other things ask
about ratings of "structured securities where there's been a problem."
As an example, he mentioned residential- mortgage backed securities that plunged in value after
receiving satisfactory ratings from the NRSROs.
Mr. Finer said the Working Group has sent the NRSROs questionnaires and have received
"voluminous responses that were quite helpful," but he said the NAIC wants clarification of some
questions that were not answered completely.
NAIC, he said, does not believe the NRSROs have a monopoly on good rating models for securities,
and the organization may perhaps use "another vendor to do some calculations and use those to
develop and appropriate capital charge" for insurers.
The organization wants to "see if anybody else has a better mousetrap that can provide better
warnings and more transparency," noting that there "are a lot of folks that have very advanced
models that are quite state of the art.
He mentioned Black Rock, Risk Metrics and Andrew Davidson among other firms.
Rating firms that were contacted had no immediate comment.
In its announcement of the hearing, which will be held at Gaylord Convention Center in National
Harbor Md., the NAIC noted that insurance companies hold nearly $3 trillion in rated bonds, and
the insurance industry constitutes the largest sector of the financial services industry to rely on credit
ratings to supervise capital asset adequacy.
Insurance regulators, it noted, currently mandate the use of credit ratings to determine capital
reserves and other regulatory requirements for insurance companies.
The Working Group is co-chaired by Acting New York Insurance Superintendent James J. Wrynn
and Illinois Insurance Director Michael T. McRaith.
According to the announcement, the hearing will examine the historical reliance of insurance
regulators on ratings and the impact of this reliance.

Issues concerning ratings, particularly related to structured securities and municipal bonds, recent
systemic remedies or procedural changes enacted by NRSROs, recommendations and alternatives to
NRSROs for prudential regulation, will also be looked at.
Following the hearing, the Working Group said it will develop and present a final report
documenting the findings and any recommendations for corrective action available to the NAIC and
its members, as well as recommendations to the federal government on NRSRO regulation.

NAIC to hold Public Hearings on Credit Rating Agencies this week


Monday, September 21, 2009

Washington, D.C., September 2009 The National Association of Insurance Commissioners


(NAIC) will hold a public hearing on September 24 to discuss the past and future roles of Nationally
Recognized Statistical Ratings Organizations (NRSRO). The hearing will examine the role of these
credit rating agencies in the insurance regulatory system and what changes may be needed in light of
the financial crisis. Representatives of credit rating agencies, insurance companies and pension funds
will be invited to testify, as will regulators, consumer representatives, leading academics and industry
experts.
Insurance companies hold nearly $3 trillion in rated bonds and the insurance industry constitutes the
largest sector of the financial services industry to rely on credit ratings to supervise capital asset
adequacy. Insurance regulators currently mandate the use of credit ratings to determine capital
reserves and other regulatory requirements for insurance companies.
In February this year, the NAIC created a Rating Agency (E) Working Group charged with conducting a
comprehensive evaluation of the reliance on NRSRO ratings by state insurance regulators and the
NAIC, the insurance industry and the insurance marketplace. The Working Group, co-chaired by
Acting New York Insurance Superintendent James J. Wrynn and Illinois Insurance Director Michael T.
McRaith, will hold this hearing as part of that evaluation process.
During the hearing, the Working Group will gather information from panels addressing:
The historical reliance of insurance regulators on ratings and the impact of this reliance;
Issues concerning ratings, particularly related to structured securities and municipal bonds;
Recent systemic remedies or procedural changes enacted by NRSROs;
Recommendations and alternatives to NRSROs for prudential regulation.
Following the hearing, the Working Group will develop and present a final report documenting the
findings and any recommendations for corrective action available to the NAIC and its members, as
well as recommendations to the federal government on NRSRO regulation.
The public hearing will take place during the NAIC Fall National Meeting on September 24, from 8:30
a.m. 5:00 p.m. ET at the Gaylord Convention Center in National Harbor, MD.
About the NAIC
Formed in 1871, the National Association of Insurance Commissioners (NAIC) is a voluntary

organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and five
U.S. territories. The NAIC has three offices: Executive Office, Washington, D.C.; Central Office,
Kansas City, Mo.; and Securities Valuation Office, New York City. The NAIC serves the needs of
consumers and the industry, with an overriding objective of supporting state insurance regulators as
they protect consumers and maintain the financial stability of the insurance marketplace. For more
information, visit www.naic.org.