The mortgage assumptions used to derive risk-based capital (RBC) charges under the new 'RMBS Initiative' approach are similar to those used in Fitch Ratings' U.S. RMBS Recovery Rating (RR) analysis, according to a study by Fitch's Insurance and RMBS groups of the National Association of Insurance Commissioners' (NAIC) RMBS Initiative' results.
Fitch said as a result it would need to make significant adjustments to insurers' reported RBC amounts as part of its insurance company rating analysis.
The analysis follows the implementation of the NAIC's new approach which is effective for year-end 2009 statutory reporting purposes. The new approach employs a financial model developed by PIMCO Advisory to calculate RBC amounts for RMBS bonds. The new methodology, referred to by the NAIC as the RMBS Initiative, utilizes an expected bond loss approach and factors in the statutory carrying value of the bond.
"A key component of Fitch's analysis of insurance companies is a consideration of capital levels,' said managing director Doug Meyer. "Working in conjunction with the RMBS rating team, Fitch was able to simulate the results of the NAIC's new RMBS RBC calculation methodology using analysis Fitch currently employs in assigning Recovery Ratings to distressed RMBS bonds."
Fitch analyzed 2,639 Fitch and non-Fitch rated RMBS bonds held by life insurance companies which had been recently assigned a RBC designation based on the new methodology. The par amount of the sample was $19.8 billion and was a little over 10% of total insurance company RMBS holdings.