NAIC Modeling question

[VeronikaK-BCSIC]

Hi,

We have noticed within our bond portfolio that certain structured securities were modeled at NAIC rating 1 or 2 that are valued at lower of amortized cost or fair value.

Does BOOKE have an example of such a security going through the modeling steps that we can review to gain a better understanding?


Thank you!
Veronika

[Lisa]

Veronika,

If the initial designation for a mortgage-backed security is 6, then a Step Two process is used to determine the book adjusted carrying value (BACV) by using the lower of amortized cost or fair value. If amortized cost is lower, it remains the BACV and you report the initial designation as the final designation along with the FM administrative symbol. If fair value is lower, you recognized a realized loss and the fair value becomes your new BACV. You then apply the security?s new BACV (fair value) to the breakpoint values assigned to the six NAIC designations to obtain the final designation. An insurer will report the final designation with the FM administrative symbol attached.

If you have a copy of our life annual statement handbook, chapter 17.2 has a discussion on LBaSS valuations. Here is an example.

Example - Assume Following Security Values
? Amortized cost - $114.47
? Fair value - $90.22

Example Breakpoint Table
Maximum price for each NAIC designation

NAIC 1 - 92.99
NAIC 2 - 93.83
NAIC 3 - 95.56
NAIC 4 - 99.52
NAIC 5 - 112.14

• The initial designation would be a 6 since the amortized cost of this security is $114.47 and that is beyond the breakpoint table.
• Since the initial valuation is a 6 you need to value the security at the lower of amortized cost or fair value.
• Since fair value is lower than amortized cost you would write down the security to $90.22 and that would become your new cost basis.
• Now you compare the new cost basis (BACV) to the breakpoint table and the final NAIC designation would be a 1.

Thanks
Lisa Mullen