Drafting Note: The version below was retained for testing Alternative 1 pursuant to amendment VM-20_100325_029. Purchase spreads over Treasuries on reinvestment assets are prescribed as an amount that is already net of default costs. Therefore, the annual default cost factors for these assets are zero. Alternative 2 Drafting Note: The version below was added for testing Alternative 2 pursuant to amendment VM-20_100325_029. The sets of annual default cost factors for reinvestment fixed income assets are determined following the same process as for starting fixed income assets except that subsection 9.F.c does not apply to reinvestment assets. 7.
Amount of Assumed Default Costs The assumed default costs in the cash flow model for a projection interval shall be the sum over all fixed income assets of the result of the total annual default cost factor for each asset, adjusted appropriately for the length of the projection interval, multiplied by the appropriate credit exposure for each asset.
Drafting Note: The following subsection 8 and 9 were added for testing Alternative 2 pursuant to amendment VM20_100325_029. 8.
Procedure for Setting Prescribed Gross Asset Spreads by Projection Year for Certain Asset Transactions and Operations in the Cash Flow Model a.
Gross asset spreads over Treasuries for public non-callable corporate bonds purchased in projection year one shall be the current market benchmark spreads published by the NAIC consistent with the PBR credit rating and WAL of assets purchased.
Gross asset spreads over Treasuries for public non-callable corporate bonds purchased in projection years four and after shall be the most current available long-term benchmark spreads published by the NAIC consistent with the PBR credit rating and WAL of assets purchased.
The prescribed gross asset spreads for these asset types shall grade linearly between year one and year four in yearly steps.
Interest rate swap spreads over Treasuries shall be prescribed by the NAIC for use throughout the cash flow model wherever appropriate for transactions and operations including but not limited to purchase, sale, settlement, and cash flows of derivative positions, and reset of floating rate investments. A current and long-term swap spread curve shall be prescribed for year one and years four and after, respectively, with yearly grading in between. The 3-month and 6-month points on the swap spread curves represent the corresponding LIBOR spreads over Treasuries.
Basis of NAIC Long-Term Benchmark Spreads
Drafting Note: The detailed methodology and data source used to create the initial long-term benchmark spread table is described in Appendix 2 of this section VM-20. Until a different table is published by the NAIC, Table H of Appendix 2 shall be the NAIC table for this purpose. This subsection spells out the principles to be used by the NAIC to apply to any particular data source for developing future tables. It is expected that the current table would be reviewed annually. The prescribed long-term benchmark spread table established by the NAIC shall to the extent practicable: a.
Reflect recent historical market data based on actual daily trading activity.
Reflect an expanding observation period that uses the most recent reported data, with a minimum observation period of seven years expanding to a maximum observation period of 15fifteen years.
ÂŠ 2010 National Association of Insurance Commissioners
Published on Apr 10, 2012
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