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Attachment TwoValuation of Securities (E) Task Force

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MEMORANDUM

TO: Stewart Guerin, Chair, Reporting Exceptions Analysis (E) Working Group Members of the Reporting Exceptions Analysis (E) Working Group

FROM: Bob Carcano, Senior Counsel, NAIC Investment Analysis Office

CC: Charles Therriault, Director, NAIC Securities Valuation Office

DATE: September 12, 2016

RE: Recommended Amendments to the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) to Implement Recommendations of the Reporting Exceptions Analysis (E) Working Group to the Valuation of Securities (E) Task Force.

1. Introduction – This memorandum transmits proposed amendments to the P&P Manual that would implement the recommendations of the Reporting Exceptions Analysis (E) Working Group to the Valuation of Securities (E) Task Force.

2. Summary of the Amendments – In the order in which they appear, the proposed amendments:

Modify phraseology used in Part One, Section 2 (a) of the P&P Manual (Directive to Conduct Ongoing SVO Operations) to reflect that SVO would produce NAIC Designation equivalents for filing exempt (FE) securities and for private letter (PL) securities (hereafter defined). The amendment also modernizes some existing text.

Reposition instructions that limit SVO discretion in the use of nationally recognized statistical rating organization (NRSRO) credit ratings in Part One, Section 2 (c) (iv) (Limitations on the Use of NAIC CRP Ratings) to Part Three, so that all instructions related to FE and PL securities are in one location.

Modify the definition of the FE symbol in Part One, Section 3 (Internal Administration) (b) (Definitions of …) (v) Administrative Symbols) and propose a new definition for the symbol PL to be used to identify private letter rating securities; modify the text in the Valuation of Securities Process and Filing Exempt Securities Process descriptions and add a description for PL Securities Process. [The word Process refers to a storage file used to collect and store information about the corresponding population of securities for the compilation process.]

Expand the instructions for the Compilation and Publication of the SVO List of Securities in Part One, Section 3 (k) to clarify that the AVS Plus product is the official source of NAIC Designations; provide for data quality assessment and reporting anomaly resolution processes; clarify that the NAIC would not publish the credit ratings of NRSROs in the AVS Plus product or other NAIC publications to ensure compliance with NRSRO licensing restrictions.

© 2016 National Association of Insurance Commissioners 1


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Modify Part One, Section 4 (NAIC Policy on the Use of Credit Ratings of NRSROS) to identify a new location for the FE rule; redirect NRSRO applicants to the SVO Director; require SVO to report changes in the composition of credit rating providers (CRPs) to the Task Force and identify PL securities; i.e., the private letter rating population.

Relocate the NAIC CRP List and the credit rating to NAIC Designation conversion tables in Part One, Section 7 (d) to Part Three, so that all instructions related to FE and PL securities are in one location.

Edit the definitions in Part Two, Section 1 (General Definitions Used in This Manual), for CRP, Filing Exempt Securities Process, to delete the “Unconfirmed FE” definition and to add a new definition for “PL Securities Process.”

Relocate the FE instructions for converting credit ratings to NAIC Designations in Part Two, Section 4 (d) to Part Three ; retaining the remaining text that applies to Public Common Stock.

Provide for a new “permitted use of 5*/6*” for PL securities in Part Two, Section 5 (i) (Special Reporting Instruction)) (Other Permitted Uses …)

Delete outdated paper-based verification procedures in Section 10 (Reporting Conventions and Required Documents) that would be inconsistent with the SVO process for producing NAIC Designation equivalents for FE securities. [The same text was previously identified for deletion in an unrelated project.]

Amend Part Three, Section 1 (a) (Corporate Bonds and Preferred Stock) to more clearly differentiate the methodology for SVO independent credit quality assessments and modify the Audited Financial Statement requirement to clarify how SVO administers this aspect of quality assessment operations.

Add a new Section b) to Part Three to house procedures and instructions for the production of NAIC Designation equivalents for FE securities and for PL securities. This section contains the filing exemption formerly in Part Two, Section 4 (d). The section proposes to continue current practice that insurers identify securities FE securities. The section houses a new procedure for PL securities. New text points to SVO discretion to ignore an Eligible NAIC CRP Credit Rating when it produces FE and PL securities. [This is not a request for a grant of new authority, but an application of the rule in Part Two, Section 4 (c) (iv) of the P&P Manual (Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations)] and proposes a Task Force review mechanism to constrain the exercise of that discretion. Current instructions for how the FE procedure applies to other population of securities is retained in this section, as is the Table of Equivalents of Eligible NAIC CRP Ratings to NAIC Designations and existing text limiting SVO Use of NAIC CRP Ratings.

3. Proposed Amendments (Showing text if all proposed amendments are adopted.)

Part One - Purposes, General Policies and Instructions to the SVO

Section 2. Policies Defining the SVO Staff Function

a) Directive to Conduct Ongoing SVO Operations

To support the implementation of the standards specified in the NAIC Financial Conditions Framework, the SVO shall conduct the following ongoing operations:

(i) Produce NAIC Designations in accordance with the various methodologies, procedures and criteria established by the Valuation of Securities (E) Task Force in this Manual.

(ii) Determine values, in the form of a Unit Price, for insurer owned securities as and when required to do so and in accordance with the procedures specified in this Manual.



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(iii) Identify and analyze securities that contain other non-payment risk (as defined in this Manual) and communicate the result of the analysis by assignment of an appropriate NAIC Designation and the subscript that identifies that the security is subject to this methodology.

(iv) Such other analytical assignments as may be requested by the Valuation of Securities (E) Task Force; another NAIC regulator group or members of the NAIC; in accordance with the directives, procedures and general methodologies described in this Manual.

(v) Compile and publish the SVO List of Securities in the AVS+ products and conduct any and all ancillary processes to ensure an accurate publication; including the periodic assessment of data quality and the resolution of reporting anomalies in the data associated with securities reported as owned by insurers in accordance with the instructions provided in this Manual …

c) Special Instructions to the SVO …

Section 3. Internal Administration …

(b) Definitions of NAIC Designation Categories, Valuation Indicators, Administrative Symbols and Conventions …

(v) SVO Administrative Symbols …

(A) SVO analytical department symbols (except for the SVO SCA Companies Group) …

FE means exempt from filing with the SVO and is used by an insurance company to identify an exempt security. NAIC Designation for FE securities are assigned by the SVO pursuant to the instructions and procedures in Part Three Section 1 (b) of this Manual. The NAIC Designation determined by the SVO is disseminated in the SVO List of Securities compiled and published pursuant to the SVO’s compilation function as described in Section 3 (k) of this Part One. The administrative symbol FE is used with an NAIC 1 through 6 Designation, and in the case of preferred stock, in combination with the P and RP Valuation Indicators …

PL stands for a private letter rating and refers to an insurer owned security that has been assigned a private rating by an NAIC CRP which rating is not publicly disseminated in the CRP’s data-feeds but is instead published in a letter provided by the CRP to the issuer of the security and to the insurer as an investor or that has subsequently been obtained by the insurer and submitted to the SVO under the procedures specified in Part Three, Section 1 (b) of this Manual. The administrative symbol PL is assigned to the security by the insurer in conjunction with reporting instructions to identify such securities. The administrative symbol PL is used with an NAIC 1 through 6 Designation, and in the case of preferred stock, in combination with the P and RP Valuation Indicators …

e) Valuation of Securities Process

Upon determination of either component of an Association Value, (i.e., the NAIC Designation or Unit Price), and of a classification, as the case may be, for an Investment Security, (defined in Part Two, Section 2 (a) of this Manual), the SVO shall enter such NAIC Designation, Unit Price and classification in the NAIC's Valuation of Securities Process. The Valuation of Securities Process is used to store NAIC Designations produced by the SVO on the basis of an independent analysis under the analytical methodology in Part Three, Section 1 (a) of this Manual; or such other methodologies or procedures specified in this Manual for the population of securities.

The SVO shall not add a Regulatory Transaction, as defined in Part Three, Section 2 (e) of this Manual, to the VOS Process …

g) Filing Exempt Securities Process

A filing exempt (FE) security is an Investment Security, as defined in Part Two, Section 2 (a) of this Manual, that is exempt from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual and is subject to the



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procedure specified in Part Three, Section 1 (b) of this Manual. Insurance companies report FE securities to the NAIC as part of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list of such securities and information about them in the Filing Exempt Securities Process. SVO produces and assigns NAIC Designations to FE securities using a computer process that applies the procedure specified in Part Three, Section 1 (b) of this Manual. The SVO shall not add an FE security that is a Regulatory Transactions, (defined in Part Three, Section 2 (e) of this Manual), to the Filing Exempt Securities Process.

h) PL Securities Process

A security subject to private letter rating, i.e., a PL security is an Investment Security, as defined in Part Two, Section 2 (a) of this Manual, that is exempt from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual, and is subject to the procedure specified in Part Three, Section 1 (b) of this Manual. Insurance companies report PL securities to the NAIC as part of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list of such securities and information about them in the PL Securities Process. SVO produces and assigns NAIC Designations to FE securities using a computer process that applies the procedure specified in Part Three, Section 1 (b) of this Manual. The SVO shall not add an PL security that is a Regulatory Transactions, (defined in Part Three, Section 2 (e) of this Manual), to the Filing Exempt Securities Process …

l) Compilation and Publication of the SVO List of Securities

(i) Status

Until such time as the Valuation of Securities (E) Task Force shall instruct the SVO to publish the SVO List of Securities (discussed in this sub-section) in a different location, the SVO shall publish the List of Securities only in the AVS Plus product. The AVS Product is identified as the sole official source of NAIC Designations.

(ii) Data Quality Assessment Procedure

In any given year, prior to the publication of the first quarterly SVO List of Securities, the SVO shall obtain the latest NAIC year-end reporting data on insurer owned securities, assess the accuracy of the data presented and resolve reporting anomalies in the reported data as specified in this sub-section.

As used herein, a reporting anomaly means that an Investment Security, defined in Part Two Section 2 (a) of this Manual, was not filed with the NAIC for assignment of an NAIC Designation in accordance with the applicable methodology or procedure specified in this Manual; or that the security was reported as having been designated by the SVO when it was not; or that the security is a Regulatory Transaction and not eligible for treatment as an Investment Security; or that the security is a form of indebtedness not subject to assignment of an NAIC Designation or that some other reporting inconsistency exists – which if not corrected would make the data inaccurate.

The SVO shall develop and maintain procedures to identify and resolve reporting anomalies for Investment Securities that are consistent with the methodology or procedure by which NAIC Designations are assigned to the securities and the specific Process where data from that category of securities is maintained. The SVO shall:

Compile sub-lists of reporting anomalies corresponding to the specific Process and provide a preliminary assessment of the cause or source of the anomalies;

Compile the sub-lists into a report;

Identify the top ten (or more or less) companies that own the securities and the state(s) of domicile corresponding to those companies;

The resulting report shall be a confidential report and may not be publicly disseminated. The SVO shall then schedule, in accordance with the NAIC Open Meetings Policy, a regulator to regulator session of the Valuation of Securities (E) Task Force to discuss the report;

Deliver the SVO report to the Valuation of Securities (E) Task Force.



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The Valuation of Securities (E) Task Force shall hear and review the SVO report, provide comments or instructions to the SVO relative to its subject matter and appoint one or more of its members to represent the Task Force and work with the SVO Director to communicate with other NAIC regulator groups and the specific state insurance department officials to resolve the reporting anomalies.

(iii) Compilation and Publication of the SVO List of Securities

On a quarterly basis, the SVO shall:

1) Compile, or cause to be compiled, a list of Investment Securities from each of the VOS Process, Filing Exempt Securities Process, PL Securities Process; RMBS/CMBS Modeled Securities Process, U.S. Treasury Process and the Exempt U.S. Government Securities Process (each an SVO Sub-List bearing the name of the corresponding Process).

When compiling or publishing the SVO List of Securities the NAIC shall not publicly show, display or disseminate the credit ratings of NRSROs in the AVS Plus product or in any other NAIC publication associated with the operations of the Valuation of Securities (E) Task Force.

2) Aggregate the content of each SVO Sub-List into a single SVO List of Investment Securities (hereafter, the SVO List of Securities) identifying each Investment Security by name and other pertinent information and showing the NAIC Designation and/or Unit Price assigned to them by the SVO or pursuant to such other methodology or procedure specified in this Manual.

3) Compile, or cause to be compiled, sub-lists from the informational content of the Derivative Counterparties Process, Exchange Rates Process, Ex-Dividend Process, Letter of Credit Process, Money Market and Exchange Traded Fund Process and Surplus Notes Processes (each an SVO Sub-List bearing the name of the corresponding Process and collectively the “Other Information”).

4) Publish, or cause the SVO List of Securities and the Other Information to be published, by being incorporated into the NAIC’s AVS + product. …

Section 4. NAIC Policy on the Use of Credit Ratings of NRSROS

a) Providing Credit Rating Services to the NAIC

The NAIC uses credit ratings for a number of regulatory purposes, including, but not limited to, those associated with the filing exempt rule, discussed in Part Three, Section 1 (b) of this Manual. …

b) Procedure to Become an NAIC Credit Rating Provider

An NRSRO that wishes to provide Credit Rating Services to the NAIC may indicate its interest by sending a letter to the Director of the SVO in which it:

Indicates an interest in providing Credit Rating Services to the NAIC;

Confirms that it is currently an NRSRO subject to regulation by the SEC;

Provides a chart, in the format shown in Part Three, Section 1 (b) of this Manual, relating its credit rating symbols to NAIC Designations; and

Indicates that the NRSRO agrees to enter into a legally binding agreement under which the NRSRO will:

Provide Credit Rating Services to the NAIC at no cost;

Reimburse the NAIC for all costs associated with: integration of it data feed into NAIC systems, subsequent changes to NAIC systems to accommodate changes in the NRSRO’s systems and changes to NAIC systems as a result of the termination of Credit Rating Services by the NRSRO;



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Give written notice 6 month prior to terminating Credit Rating Services; and

Agree not to claim in marketing literature that the provision of Credit Rating Services indicates NAIC approval or endorsement of the NRSRO, its products or services.

The SVO Director shall coordinate the contractual and other arrangements with the NRSRO applicant consistent with this policy and with NAIC internal administrative procedures related to contracts. The SVO shall thereafter administer the NAIC CRP List.

c) Adding the NRSRO to the NAIC Credit Rating Provider List

When directed to do so by the VOS/TF, the SVO shall add the name of the NRSRO (hereafter described as a Credit Rating Provider (CRP)) to the NAIC Credit Rating Provider List in the publication of this Manual after the execution of an agreement between the NAIC and the NRSRO and the completion of any other internal administrative issues.

(i) Impact on the Filing Exempt Rule

Adding the name of an NRSRO to the Credit Rating Provider List means that the SVO will use the Eligible NAIC Credit Ratings assigned by that NRSRO, if any, as a component rating when it determines the NAIC Designation equivalent for FE securities and for PL securities. The SVO determines an NAIC Designation for FE securities and for PL securities, respectively, to develop the Filing Exempt Securities Process and the PL Securities Process components of the SVO List of Securities as more fully discussed in Part One, Section 3 (l) and Part Three Section 1 (b) of this Manual.

The SVO shall advise the Valuation of Securities (E) Task Force of the decision of NRSROs to no longer participate as NAIC CRPs and of any other significant changes in the credit rating industry that may impact the regulatory operations of the Task Force.

Securities that have been assigned ratings that are not Eligible NAIC Credit Ratings are not eligible for filing exemption and are filed with the SVO for an independent quality assessment as specified in Part Three, Section 1 (a) of this Manual or in any other section that specifies a different quality assessment methodology or procedure.

(ii) Clarification on PL Securities

PL securities are subject to the filing exemption identified in Part One, Section 4 of this Manual. Please refer to Part Three, Section 1 (b) for a discussion of the process by which the SVO assigns an NAIC Designation to PL securities.

(iii) Definition - Credit Ratings Eligible for Translation to NAIC Designations

The credit rating of the CRP to which this Section and the NAIC Credit Rating Provider List refers, is the 1) credit rating assigned by the CRP, 2) by application of its long term obligation ratings scale and methodology to 3) securities. Credit ratings of a CRP that meet this definition are entitled to a presumption of convertibility to the equivalent NAIC Designation published in the NAIC Credit Rating Provider List, in Part Three, Section 1 (b) of this Manual, except that the presumption of convertibility is subject to the following limitations:

(A) Those rating activities or markets in which the entity has CRP status;

(B) Securities with monitored CRP ratings that:

1) Are monitored at least annually by the CRP that issued the rating, 2) Are assigned to a specific issue that must be specifically identified,3) Apply to securities where the issuer promises to repay principal and interest or dividends; 4) (X) Convey an opinion as to the likelihood of payment of both principal and interest/dividends due from the issuer to the holders of the security, or



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(Y) those structured to pay only principal or only interest/dividends, if the monitored CRP rating addresses the likelihood of payment of either the principal, in the case of a security structured to pay only principal or the interest/dividends, in the case of security structured to pay only interest/dividends, (an “Eligible NAIC CRP Rating”; and (C) The NAIC may determine that the rated security or investment is of a type that is not eligible to be reported on Schedule D of the NAIC Financial Statement Blank or that the NAIC determines is not appropriate for NRSRO credit ratings to be used to determine the regulatory treatment of a specific asset class.

(iv) Special Rating Systems

Unless otherwise specifically approved by the VOS/TF and published in Part Three, Section 1 (a) of this Manual, , special rating systems of any CRP, rating agency or rating organization shall not be entitled to a presumption of convertibility. Nevertheless, an SVO analyst assessing a security that has been assigned such a rating by any rating organization, including a CRP, may consider the information imparted by that rating or a related research report under the authority provided in Section 2 (c) (i) of this Part, as one factor in determining an NAIC Designation.

(iv) Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations

The presumption of convertibility accorded to a credit rating of a CRP should not be interpreted to indicate that NAIC Designations and CRP credit ratings are produced using identical methodologies or that they are intended to communicate the same information. SVO quality assessment is conducted in support of those NAIC standards and purposes specified in the NAIC Financial Conditions Framework that use NAIC Designations as a tool to identify a given regulatory treatment for the security and may therefore include considerations or address concerns unique to the regulatory community. Accordingly, the SVO staff has discretion to ignore the rating of any given CRP if and when it is called upon to consider how to translate a credit rating issued by a CRP into an NAIC Designation.

Before an SVO analyst converts a credit rating assigned by a CRP into an NAIC Designation, he or she must first conclude that the analytical issues associated with the security and structure are adequately addressed by the CRP and that the SVO has an approved methodology for evaluating such a security under Section 2(d) of this Part …

Part Two- Filing with the SVO Section 1. General Definitions Used In This Manual

The following definitions are intended to have relevance only for this Manual. No suggestion is intended that these definitions have any relevance to any other NAIC publication. …

CRP stands for Credit Rating Provider and refers to the NRSROs on the NAIC Credit Rating Provider List discussed in Part Three, Section 1 (a) of this Manual …

Filing Exempt Securities Process refers to an electronic file within NAIC electronic computer systems used by the SVO to store the names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with the SVO because they are assigned credit ratings by NAIC CRPs (FE securities). The SVO produces NAIC Designations for FE securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results in the AVS+ products …

PL Securities Process refers to an electronic file within NAIC electronic computer systems used by the SVO to store the names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with the SVO because they are assigned private letter ratings by CRPs (PL securities). The SVO produces NAIC Designations for PL securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results in the AVS+ products.

VOS Process means the Valuation of Securities Process and refers to a process within NAIC electronic computer systems used to store the names and descriptions of securities owned by state-regulated insurance companies, and the NAIC Designation categories and/or Unit Price assigned to them by the SVO after independent quality assessment and that is used in connection with the publication of the AVS+ products …

Section 4. Reporting Exemptions …



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d) Filing Exemption for Public Common Stock

Insurers must report values for all securities on their NAIC Financial Statement Blank including for FE securities as defined in Part Three, Section 1 (b) of this Manual. Refer to Part Five, Section 1 of this Manual for valuation instructions. Documentation requirements for securities filed with the SVO are set forth in Part Two, Sections 10 and Part Two, Section 11. These documentation requirements apply when a security must be filed with the SVO.

Section 5. Special Reporting Instruction …

i) Other Permitted Uses of the Principal and Interest Certification Form and the NAIC 5* and 6* Designation

… (viii) PL Securities

The Principal and Interest Certification Form and the NAIC 5* Designation may be used in connection with the designation of PL securities not rated by an CRP when the documentation necessary for the SVO to assign an NAIC Designation based on its independent assessment of quality is not available. Please see Part Three, Section 1 (b) of this Manual for related guidance. …

Section 10. Reporting Conventions and Required Documents …

c) Reporting Conventions and Required Documents

Specific reporting conventions for initial reports that all reporting insurance companies should follow are described below.

(i) Corporate Issues

(A) RatedPlease refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP.

(B) Unrated

In the case of a corporate issue not rated by an NAIC CRP, the reporting insurance company shall complete an SAR and shall attach the issue's public offering statement or private placement memorandum, as the case may be, the insurance company's internal credit committee memorandum and the Audited Financial Statement of the issuer for the last three consecutive years. If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such rating. The SVO will contact the reporting insurance company if additional information is required. If none of these documents are available, the reporting insurance company must obtain and complete the SVO's VIM form and submit it with the required documents and attachments. Insurance companies reporting bonds of not-for-profit entities shall follow the same filing conventions applicable to bonds of profit-making entities.

(C) Rated Medium Term Notes

Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP. …

(E) Investments in Certified Capital Companies …

(3) Procedure for Reporting and Filing with the SVO

The insurance company should first determine the reporting for CAPCOs indicated by the statutory accounting guidance. This is done by establishing the character of the investment and then applying the appropriate accounting and reporting guidance and to the extent necessary the related procedures in this Manual for Schedule D or BA assets. If the SVO disagrees with the insurance company characterization of the investment, it will so inform the insurance company and provide rationale



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why the SVO believes the company has misapplied or misinterpreted the guidance of INT 06-02 and request a re-filing if necessary.

(4) Required Documentation

(a) Rated — Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP.

(b) Unrated — A CAPCO issue that is not rated by an NAIC CRP, is filed with the SVO and assigned an NAIC Designation as discussed in Part Three, Section 1 (b) of this Manual. The reporting insurance company shall complete an SAR and shall attach the issuer’s public offering statement or private placement memorandum, as the case may be, the insurance company's internal credit committee memorandum and the Audited Financial Statement of the issuer for the last three consecutive years. If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such rating. If none of these documents are available, the reporting insurance company must obtain and complete the SVO's VIM form and submit it with the required documents and attachments.

For CAPCO issues that are not FE securities follow the procedures in Section 11(e)(i) of this Part below (Corporate Issues not Filing Exempt) to file a subsequent report with the SVO.

(5) Applicable Methodology

Subject to the directive contained in Part One, Section 2 (f) of this Manual, the SVO shall have discretion to apply any quality assessment methodology or any combination of assessment methodologies detailed in Part Three of this Manual to assess the quality or credit quality; Part One, Section 3 (b) (ii) of this Manual to assess asset classification of a CAPCO security or other applicable procedure specified in this Manual.

(ii) Municipal Issues

(A) Rated

Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP …

(iii) Structured Issues(A) Rated

Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP.

(B) Unrated(1) Credit Tenant Loan (CTL) … (2) Specific Filing Conventions (i) Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP … (ii) Municipal Issues not Filing Exempt (A) Rated (1) General RuleA Subsequent Report is required on all rated municipal issues …

Part Three – Credit Assessment

Section 1. Corporate Bonds and Preferred Stock

a) Methodology for Independent Credit Quality Assessments



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Corporate bonds defined as the Obligations of domestic and foreign corporations, and preferred stock shall be distinguished on the basis of the categories discussed below. The creditworthiness of the issuer of any particular category of Obligation shall be assessed by reference to the general, and any special, rating methodology discussed in this Part, unless the Valuation of Securities (E) Task Force has specified the use of a different methodology in this Manual. …

(ii) Financial Analysis

(A) Audited Financial Statement Required

As a first step in the independent assessment, the analyst shall conduct an independent financial analysis of the issuer based on the financial information presented in the Audited Financial Statement, as defined in this Manual.

The SVO shall base it’s financial analysis on at least three years of historical audited financial information and a minimum of one year of projected financial information (if available) when the issuer has an operating history of three years or more.

However, the SVO may assign an NAIC Designation based on less than three years of financial information in circumstances where the issue’s operating history is less than three years or because the issuer’s legal identify has been subsumed as a result of a merger into a new entity or due to other documentable business circumstances. Where three years of financial information is not available, the analyst shall review such information as is available, and shall determine if the time period for which information is available is sufficient to produce a professionally sound opinion.

b) Procedure Applicable to Filing Exempt (FE) Securities and to Private Letter (PL) Rating Securities

(i) Filing Exemption

Bonds, (excluding RMBS and CMBS) and Preferred Stock that have been assigned an Eligible NAIC CRP Rating, as described in Part One, Section 4 (c) (ii) (B) of this Manual, are exempt from filing with the SVO (FE securities).

(ii) Identification of FE Securities

Insurance companies identify FE securities to the NAIC as part of the NAIC’s Financial Statement Blank reporting process. The SVO subsequently collects the securities insurers have identified as FE securities by identifying securities reported using the Administrative Symbol FE when it conducts the quarterly compilation of the SVO List of Securities. SVO then performs the procedures discussed in sub-section (iii) below to produce the most accurate NAIC Designation equivalent for purposes of the NAIC Financial Condition Framework. Please refer to Part One, Section 3 (l) of this Manual for a discussion of the compilation process.

(iv) Direction and Procedure

The SVO shall produce NAIC Designations for FE securities by applying the following procedure in conjunction with the List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations, shown below.

A Bond that has been assigned an Eligible NAIC CRP Rating will be assigned the equivalent NAIC Designation.

If two Eligible NAIC CRP Ratings have been assigned, then the lowest credit rating will be used to assign the equivalent NAIC Designation.

In case of a Bond that has been assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for the Bond will be ordered according to their NAIC equivalents and the credit rating falling second lowest will be used to determine the equivalent NAIC Designation, even if that rating is equal to that of the first lowest.

The SVO shall not in any manner whatsoever, show, display or disseminate the credit ratings of NRSROs as part of the compilation or publication of the SVO List of Securities in the AVS Plus product or in any other NAIC publication associated with the operations of the Valuation of Securities (E) Task Force.

(v) PL Securities



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The SVO shall produce NAIC Designations for securities subject to private letter ratings as follows:

The insurance company shall file a copy of the private rating letter with the SVO.

The SVO shall evaluate the private letter to determine whether the security has been assigned an Eligible NAIC CRP Rating.

If the SVO verifies that the security has been assigned an Eligible NAIC CRP Rating, it assigns an NAIC Designation in accordance with the policy and procedure specified in sub-paragraphs (i) and (ii) above. The assumption in the application of this step of the procedure is that PL securities are typically assigned a credit rating by only one NAIC CRP. However, if this assumption is inaccurate for any PL security, the SVO applies the same procedure specified for FE securities above.

If the SVO verifies that the security:o Has been assigned a credit rating but that the credit rating is not an Eligible NAIC CRP Credit Rating; or

o Has not been rated by an NAIC CRP; or

o Is no longer subject to a private letter rating;

SVO shall notify the company that the security is not eligible for filing exemption. The insurance company shall then either file that security and necessary documentation with the SVO for an independent credit assessment per Section 1 (a) of this Part or assign an NAIC 5* Regulatory Designation to the security.

(vi) Discretion to Ignore an Eligible NAIC CRP Credit Rating

Consistent with the policy adopted by the Valuation of Securities (E) Task Force expressed in Part Two, Section 4 (c) (iv) of this Manual (Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations) when the SVO applies the procedures in sub-section (ii) and (iii) above, the SVO is charged with an affirmative exercise of discretion to ignore any Eligible NAIC CRP Rating when it determines that the credit rating produces a result inconsistent with NAIC financial solvency objectives.

For purposes of illustration and not for purposes of limiting how SVO exercises this discretion; it would be an appropriate exercise of discretion if the SVO ignores an Eligible NAIC CRP Rating that is significantly lower or significantly higher than those issued by the other CRPs: or, if in the case when only one CRP has assigned an Eligible NAIC CRP Rating, the SVO reads the CRP’s research report for the issuer and security and determines there is insufficient information or rating rationale to explain the CRP’s decision or evaluate the relationship of that credit rating to NAIC financial solvency standards such as risk-based capital or statutory accounting objectives.

In those circumstances when the SVO exercises its discretion, it shall inform the insurance company that filed the security of its decision and rationale. If the insurance company vehemently disagrees with the SVO’s determination, the SVO shall immediately bring the matter to the attention of the Chair of the Valuation of Securities (E) Task Force for discussion and a preliminary decision whether the SVO decision appears to be consistent with the scope and purpose that underlies the grant of discretion. The decision of the Chair will be communicated to the insurance company provided that the Chair may direct the SVO to convene a regulator to regulator session of the Task Force to present the issue to the full Task Force. (vii) Application of the FE Procedure to Specific Populations

The filing exemption procedure does not apply to investments required to be filed pursuant to Part Five, Section 2 of this Manual.

Catastrophe-Linked Bonds are filing exempt provided the credit rating assigned to them by a CRP was derived in a specified manner. Please refer to Part Four, Section 4 of this Manual.

(viii) List of NAIC CRPs



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The CRPs that provide Credit Rating Services to the NAIC are: Moody's Investor's Service, Standard and Poor's, Fitch Ratings, Dominion Bond Rating Service (DBRS), A.M. Best Company (A.M. Best) Morningstar Credit Ratings, LLC (for All Structured Finance Securities) Kroll Bond Rating Agency and Egan Jones Rating Company.

(ix) Table of Equivalents of Eligible NAIC CRP Ratings to NAIC Designations

(A) Moody’s Investor’s ServiceCorporate, Government Counterparty and Municipal Ratings SVOAaa; Aa 1, 2, 3; A 1, 2, 3 1Baa 1, 2, 3 2Ba 1, 2, 3 3B 1, 2, 3 4Caa, 1, 2, 3 5Ca, C 6

Commercial Paper and Short Term Counterparty Ratings SVOP 1 1P 2 2P 3 3N P (Not prime) 6

Preferred Stock SVOAaa; Aa 1, 2, 3; A 1, 2, 3 1Baa 1, 2, 3 2Ba 1, 2, 3 3B 1, 2, 3 4Caa 5Ca, C 6

(B) Standard and Poor’sCorporate Counterparty and Municipal Ratings -- Public Bonds

SVO

AAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

Commercial Paper (Standard & Poor’s continued) SVOA, A 1 1A 2 2A 3 2B 4C 5D 6

Preferred Stock SVO



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AAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC 5CC, C, D 6

(C) Fitch RatingsFixed Income and Counterparty Ratings SVOAAApre 1*AAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC, 5CC, C, DDD, DD, D 6* This rating is assigned to pre-refunded municipal debt.

Commercial Paper SVOF 1+, F 1 1F 2 2F 3 2B 4C 5D 6

Preferred Stock SVO

AAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC 5CC, C 6

(D) Dominion Bond Rating Service

Bond and Long Term Debt SVOAAA, AA (high), AA, AA (low), A (high), A, A (low) 1BBB (high), BBB, BBB (low) 2BB (high), BB, BB (low) 3B (high), B, B (low) 4CCC (high 5CC, C (low), D 6

Preferred Stock SVOPfd-1 (high), Pfd-1, Pfd 1 (low) 1Pfd-2 (high), Pfd-2, Pfd-2 (low) 2Pfd-3 (high), Pfd-3, Pfd-3 (low) 3Pfd-4 (high), Pfd-4, Pfd-4 (low) 4Pfd-5 (high), 5Pfd-5, Pfd-5 (low), D 6



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Commercial Paper and Short Term Debt SVOR 1 (high), R-1 (middle), R-1 (low) 1R 2 (high), R-2 (middle), R-2 (low) 2R-3 3R-4 5R-5, D 6

(E) A.M. Best Company Bond, Long Term Debt and Preferred SVOaaa, aa+, aa, aa-, a+, a, a- 1bbb+, bbb, bbb- 2bb+, bb, bb- 3b+, b, b- 4ccc+, ccc, ccc- 5cc, c, d 6

Commercial Paper and Short Term Debt SVOAMB-1+, AMB-1 1AMB-2 2AMB-3 3AMB –4 6

(F) Morningstar Credit Ratings, LLC for All Structured Finance Securities SVOAAA, AA, A 1BBB 2BB 3B 4CCC, CC, C* 6D 6

* Morningstar defines CCC, CC, C as "likely to default" which we here equate to the NAIC 6 definitional concept of a security "in or near default." Morningstar's D, defined as "in default" is also equated to an NAIC 6.

(G) Kroll Bond Rating AgencyLong-Term Corporate, Counterparty and Municipal Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

Short-Term and Commercial Paper Ratings SVOK1+, K1 1K2 2K3 3B 4C 5D 6

Preferred Stock Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2



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BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

(H) Egan Jones Rating Company Corporate Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

Commercial Paper SVOA, A1, A1+ 1A2 2A3 2B 4C 5D 6

Preferred Stock SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC 5CC, C, D 6

(x) Securities no longer Assigned an Eligible NAIC CRP Credit Rating

Any Bond or Preferred Stock that at one time was assigned an Eligible NAIC CRP Credit Rating by an NAIC CRP but is no longer rated must be filed with the SVO within 120 days of the loss of the credit rating, as if the security had never been filing exempt.

(xi) Limitations on Use of NAIC CRP Ratings

(A) NAIC Designation Is Capped To Highest NAIC CRP RatingThe SVO shall not assign an NAIC Designation for a rated security that reflects an opinion of credit quality greater than that indicated by the rating assigned by an NAIC CRP, except as provided in Paragraph (B) below, and except that the SVO may assign the NAIC Designation it deems appropriate to:(1) Municipal bonds and;(2) Military housing bonds or securities as defined in Part Four, Section 5(b) of this Manual.

(B) Split Ratings For filing exempt securities as defined in Part Two, Section 4 (d) of this Manual, the NAIC Designation assigned will be the NAIC Designation equivalent that results from the application of the filing exemption process described in Part Two, Section 4 (d) of this Manual. This rule will also apply to replication transactions defined in Part Four, Section 2(a) of this Manual and other instances where NAIC CRP ratings are used by the SVO.

(C) Unrated Transaction of Issuer with NAIC CRP Rated DebtWhen presented with an unrated security of an issuer that has another issue rated by an NAIC CRP, the staff may consider the rated issue and its position in the capital structure of the issuer to arrive at an NAIC Designation for the unrated security,



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provided that the staff shall first consult with the rating agency and independently consider the terms of the unrated security and its impact on payment risk …

4. Proposed Amendments (Showing strike-through from current P&P Manual text) -

Part One - Purposes, General Policies and Instructions to the SVO

Section 2. Policies Defining the SVO Staff Function

a) Directive to Conduct Ongoing SVO Operations

To support the implementation of the standards specified in the NAIC Financial Conditions Framework, the The SVO shall conduct the following ongoing operations:

(i) Produce NAIC Designations in accordance with the various methodologies, procedures and criteria established by the Valuation of Securities (E) Task Force in this Manual. Analysis of credit risk for purposes of assigning an NAIC Designation.

(ii) Determine values, in the form of a Unit Price, for insurer owned securities as and when required to do so and in accordance with the procedures specified in this Manual; Valuation analysis to determine a Unit Price.

(iii) Identify ication and analyze sis of securities that contain other non-payment risk (as defined in this Manual) and communicate ion the result of the analysis of this information by assignment of an appropriate the NAIC Designation and the subscript that identifies that the to such security is iessubject to this methodology.

(iv) Such oOther analytical assignments as may be requested by the Valuation of Securities (E) Task Force; another NAIC regulator group or members of the NAIC regulatory community; in accordance with the directives, procedures and general methodologies described in this Manual.

(v) Compile and publish the SVO List of Securities and publish in the AVS+ products and conduct any and all ancillary processes to ensure an accurate publication; including the periodic assessment of data quality and the resolution of reporting anomalies in the data associated with securities reported as owned by insurers in accordance with the instructions provided in this Manual.

c) Special Instructions to the SVO …

(iv) Limitations on Use of NAIC CRP Ratings(A) NAIC Designation Is Capped To Highest NAIC CRP RatingThe SVO shall not assign an NAIC Designation for a rated security that reflects an opinion of credit quality greater than that indicated by the rating assigned by an NAIC CRP, except as provided in Paragraph (B) below, and except that the SVO may assign the NAIC Designation it deems appropriate to:(1) Municipal bonds and;(2) Military housing bonds or securities as defined in Part Four, Section 5(b) of this Manual.(B) Split Ratings For filing exempt securities as defined in Part Two, Section 4 (d) of this Manual, the NAIC Designation assigned will be the NAIC Designation equivalent that results from the application of the filing exemption process described in Part Two, Section 4 (d) of this Manual. This rule will also apply to replication transactions defined in Part Four, Section 2(a) of this Manual and other instances where NAIC CRP ratings are used by the SVO.

(C) Unrated Transaction of Issuer with NAIC CRP Rated DebtWhen presented with an unrated security of an issuer that has another issue rated by an NAIC CRP, the staff may consider the rated issue and its position in the capital structure of the issuer to arrive at an NAIC Designation for the unrated security, provided that the staff shall first consult with the rating agency and independently consider the terms of the unrated security and its impact on payment risk.



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… Section 3. Internal Administration …

(A) SVO analytical department symbols (except for the SVO SCA Companies Group) …

FE means exempt from filing with the SVO and is used by an insurance company an insurance company to identify report an NAIC Designation for an exempt security. NAIC Designation for FE securities are assigned by the SVO pursuant to the instructions and procedures in Part Three Section 1 (b) of this Manual. The NAIC Designation determined by the SVO is disseminated in the SVO List of Securities compiled and published pursuant to the SVO’s compilation function as described in Section 3 (k) of this Part One. , on the NAIC Financial Statement Blank. When reporting a security on its annual or quarterly financial statements, Tthe administrative symbol FE is used with an NAIC 1 through 6 Designation, and in addition, in the case of preferred stock, in combination with the P and RP Valuation Indicators. FE signifies that the reported security meets the criteria set forth in Part Two, Section 4(d) of this Manual and that the NAIC Designation was arrived at by the insurer by converting the NAIC CRP rating(s) into a corresponding NAIC Designation in accordance with the conversion instructions set forth in Part Two, Section 4 (d) (i)(A) and (B) of this Manual and the rating equivalency identified in Section 7(d) (ii) of this Part or by the NAIC in comparing the security with the NAIC CRP rating feeds.

PL stands for a private letter rating and refers to an insurer owned security that has been assigned a private rating by an NAIC CRP which rating is not publicly disseminated in the CRP’s data-feeds but is instead published in a letter provided by the CRP to the issuer of the security and to the insurer as an investor or that has subsequently been obtained by the insurer and submitted to the SVO under the procedures specified in Part Three, Section 1 (b) of this Manual. The administrative symbol PL is assigned to the security by the insurer in conjunction with reporting instructions. The administrative symbol PL is used with an NAIC 1 through 6 Designation, and in the case of preferred stock, in combination with the P and RP Valuation Indicators.

e) Valuation of Securities Process

Upon determination of either component of an Association Value, (i.e., the NAIC Designation or Unit Price), and of a classification, as the case may be, for an Investment Security, (as defined in Part Two, Section 2 (a) of this Manual), the SVO shall enter such NAIC Designation, Unit Price and classification in the NAIC's Valuation of Securities OS Process. The Valuation of Securities Process is used to store NAIC Designations produced by the SVO on the basis of an independent analysis under the analytical methodology in Part Three, Section 1 (a) of this Manual; or such other methodologies or procedures specified in this Manual for the population of securities.

The SVO shall not add a Regulatory Transaction, as defined in Part Three, Section 2 (e) of this Manual, to the VOS Process. …

g) Filing Exempt Securities Process

A filing exempt (FE) security is an Investment Security, as defined in Part Two, Section 2 (a) of this Manual, that is exempt from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual and is subject to the procedure specified in , as otherwise required by Part ThreeTwo, Section 12 (ba) of this Manual. Insurance companies report FE securities to the NAIC as part of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list of such securities and information about them in the Filing Exempt Securities Process. SVO produces and assigns NAIC Designations to FE securities using a computer process that applies the procedure specified in Part Three, Section 1 (b) of this Manual., pursuant to the filing exemption in Part Two, Section 4 (d) of this Manual. Insurance companies derive NAIC Designations for FE securities by applying the conversion instructions in Part Two, Section 4(d) (i) (A) and (B) of this Manual and the equivalency relationships disclosed in Section 7(d) (ii) of this Part. NAIC Designations assigned to FE securities are reported by the insurance company to the NAIC and subsequently added by NAIC staff to the FE Data File. The SVO Insurance companies shall not add an FE security that is a report Regulatory Transactions, (defined in Part Three, Section 2 (e) of this Manual), as FE securities, and the NAIC staff shall not add a Regulatory Transaction to to the Filing Exempt Securities ProcessE Data File.

h) PL Securities Process



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A security subject to private latter rating, i.e., a PL security is an Investment Security, as defined in Part Two, Section 2 (a) of this Manual, that is exempt from filing with the SVO pursuant to the filing exemption in Part One, Section 4 of this Manual , and is subject to the procedure specified in Part Three, Section 1 (b) of this Manual. Insurance companies report PL securities to the NAIC as part of the NAIC Financial Blank reporting process. SVO staff subsequently compiles a sub-list of such securities and information about them in the PL Securities Process. SVO produces and assigns NAIC Designations to FE securities using a computer process that applies the procedure specified in Part Three, Section 1 (b) of this Manual. The SVO shall not add a PL security that is a Regulatory Transactions, (defined in Part Three, Section 2 (e) of this Manual), to the Filing Exempt Securities Process. …

lk) Compilation and Publication of the SVO List of Securities

(i) Status

Until such time as the Valuation of Securities (E) Task Force shall instruct the SVO to publish the SVO List of Securities (discussed in this sub-section) in a different location, the SVO shall publish the List of Securities only in the AVS Plus product. The AVS Product is identified as the sole official source of NAIC Designations.

(ii) Data Quality Assessment Procedure

In any given year, prior to the publication of the first quarterly SVO List of Securities, the SVO shall obtain the latest NAIC year-end reporting data on insurer owned securities, assess the accuracy of the data presented and resolve reporting anomalies in the reported data as specified in this sub-section.

As used herein, a reporting anomaly means that an Investment Security, defined in Part Two Section 2 (a) of this Manual, was not filed with the NAIC for assignment of an NAIC Designation in accordance with the applicable methodology or procedure specified in this Manual; or that the security was reported as having been designated by the SVO when it was not; or that the security is a Regulatory Transaction and not eligible for treatment as an Investment Security; or that the security is a form of indebtedness not subject to assignment of an NAIC Designation or that some other reporting inconsistency exists – which if not corrected would make the data inaccurate.

The SVO shall develop and maintain procedures to identify and resolve reporting anomalies for Investment Securities that are consistent with the methodology or procedure by which NAIC Designations are assigned to the securities and the specific Process where data from that category of securities is maintained. The SVO shall:

C ompile sub-lists of reporting anomalies corresponding to the specific Process and provide a preliminary assessment of the cause or source of the anomalies;

Compile the sub-lists into a report;

I dentify the top ten (or more or less) companies that own the securities and the state(s) of domicile corresponding to those companies;

The resulting report shall be a confidential report and may not be publicly disseminated. The SVO shall then schedule, in accordance with the NAIC Open Meetings Policy, a regulator to regulator session of the Valuation of Securities (E) Task Force to discuss the report;

D eliver the SVO report to the Valuation of Securities (E) Task Force.

The Valuation of Securities (E) Task Force shall hear and review the SVO report, provide comments or instructions to the SVO relative to its subject matter and appoint one or more of its members to represent the Task Force and work with the SVO Director to communicate with other NAIC regulator groups and the specific state insurance department officials to resolve the reporting anomalies.

(iii) Compilation and Publication of the SVO List of Securities



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On a quarterly basis, the SVO shall:

1) Compile, or cause to be compiled, a list of Investment Securities from each of the VOS Process, F iling Exempt Securities E Data Process, PL Securities Process; RMBS/CMBS Modeled Securities Process, U.S. Treasury Process and the Exempt U.S. Government Securities Process (each an SVO Sub-List bearing the name of the corresponding Process).

When compiling or publishing the SVO List of Securities the NAIC shall not publicly show, display or disseminate the credit ratings of NRSROs in the AVS Plus product or in any other NAIC publication associated with the operations of the Valuation of Securities (E) Task Force.

2) Aggregate the content of each SVO Sub-List into a single SVO List of Investment Securities (hereafter, the SVO List of Securities) identifying each Investment Security by name and other pertinent information and showing the NAIC Designation and/or Unit Price assigned to them by the SVO or pursuant to such other the methodology or procedure otherwise specified in this Manual.

3) Compile, or cause to be compiled, sub-lists from the informational content of the Derivative Counterparties Process, Exchange Rates Process, Ex-Dividend Process, Letter of Credit Process, Money Market and Exchange Traded Fund Process and Surplus Notes Processes (each an SVO Sub-List bearing the name of the corresponding Process and collectively the “Other Information”).

4) Publish, or cause the SVO List of Securities and the Other Information to be published, by being incorporated into the NAIC’s AVS + product. …

Section 4. NAIC Policy on the Use of Credit Ratings of NRSROS

a) Providing Credit Rating Services to the NAIC

The NAIC uses credit ratings for a number of regulatory purposes, including, but not limited to, those associated with the filing exempt rule, discussed in Part Threewo, Section 14 (bd) of this Manual. …

b) Procedure to Become an NAIC Credit Rating Provider An NRSRO that wishes to provide Credit Rating Services to the NAIC may indicate its interest by sending a letter to the Chair of the VOS/TF with a copy to the Director of the , SVO in which it:

Indicates an interest in providing Credit Rating Services to the NAIC;

Confirms that it is currently an NRSRO subject to regulation by the SEC;

Provides a chart, in the format shown in Part Three, Section 1 (b) of this Manual, Section 7 (d) (ii) of this Part relating its credit rating symbols to NAIC Designations; and

Indicates that the NRSRO agrees to enter into a legally binding agreement under which the NRSRO will:

Provide Credit Rating Services to the NAIC at no cost;

Reimburse the NAIC for all costs associated with: integration of it data feed into NAIC systems, subsequent changes to NAIC systems to accommodate changes in the NRSRO’s systems and changes to NAIC systems as a result of the termination of Credit Rating Services by the NRSRO;

Give written notice 6 month prior to terminating Credit Rating Services; and

Agree not to claim in marketing literature that the provision of Credit Rating Services indicates NAIC approval or endorsement of the NRSRO, its products or services.



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The SVO Director shall coordinate the contractual and other arrangements with the NRSRO applicant consistent with this policy and with NAIC internal administrative procedures related to contracts. The SVO shall thereafter administer the NAIC CRP List.

c) Adding the NRSRO to the NAIC Credit Rating Provider List

When directed to do so by the VOS/TF, the SVO shall add the name of the NRSRO (hereafter described as a Credit Rating Provider (CRP)) to the NAIC Credit Rating Provider List in the publication of this Manual after the that follows the execution of an agreement between the NAIC and the NRSRO and the completion of any other internal administrative issues.

(i) Impact on Regulatory Significance – the Filing Exempt Rule

Adding the name of an NRSRO to the Credit Rating Provider List means indicates that the SVO will insurance companies must use the Eligible NAIC Credit Ratings credit ratings assigned by that NRSRO, if any, as a component rating when it when determines ing the NAIC Designation equivalent for FE securities and for PL securities.a security. The SVO determines an NAIC Designation for FE securities and for PL securities, respectively, to develop the Filing Exempt Securities Process and the PL Securities Process components of the SVO List of Securities as more fully discussed in Part One, Section 3 (l) and Part Three Section 1 (b) of this Manual.

The SVO shall advise the Valuation of Securities (E) Task Force of the decision of NRSROs to no longer participate as NAIC CRPs and of any other significant changes in the credit rating industry that may impact the regulatory operations of the Task Force.

to be reported under the filing exempt rule, discussed in Part Two, Section 4 (d) of this Manual. Only those CRP ratings that meet the definition in Section 4(c) (ii) below may be translated into NAIC Designations under the filing exempt rule discussed in Part Two, Section 4(d) of this Manual.

Securities that have been assigned ratings by CRPs that are not Eligible NAIC Credit Ratings are not eligible for filing exemption and are do not meet the definition of Section 4(c) (ii) below, shall be filed with the SVO for an independent quality assessment as specified in Part Three, Section 1 (a) of this Manual or in any other section that specifies a different quality assessment methodology or procedure.

The translation of a CRP rating into an NAIC Designation is conducted in accordance with the procedures described in Section 3(e) and Section 7 (d) (i) of this Part.

(ii) Clarification on PL Securities

PL securities are subject to the filing exemption identified in Part One, Section 4 of this Manual. Please refer to Part Three, Section 1 (b) for a discussion of the process by which the SVO assigns an NAIC Designation to PL securities.

(iii) Definition - Credit Ratings Eligible for Translation to NAIC Designations

The credit rating of the CRP to which this Section and the NAIC Credit Rating Provider List refers, is the 1) credit rating assigned by the CRP, 2) by application of its long term obligation ratings scale and methodology to 3) securities.

Credit ratings of a CRP that meet this definition are entitled to a presumption of convertibility to the equivalent NAIC Designation published in the NAIC Credit Rating Provider List, in Part Three, Section 1 Section 7 (bd) of this ManualPart, except that the presumption of convertibility is subject to the following limitations:

(A) Those rating activities or markets in which the entity has CRP status;

(B) Securities with monitored CRP ratings that:

1) Are monitored at least annually by the CRP that issued the rating, 2) Are assigned to a specific issue that must be specifically identified,3) Apply to securities where the issuer promises to repay principal and interest or dividends;



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4) (X) Convey an opinion as to the likelihood of payment of both principal and interest/dividends due from the issuer to the holders of the security, or (Y) those structured to pay only principal or only interest/dividends, if the monitored CRP rating addresses the likelihood of payment of either the principal, in the case of a security structured to pay only principal or the interest/dividends, in the case of security structured to pay only interest/dividends, (an “Eligible NAIC CRP Rating”); and …”

(C) The NAIC may determine that the rated security or investment is of a type that is not eligible to be reported on Schedule D of the NAIC Financial Statement Blank or that the NAIC determines is not appropriate for NRSRO credit ratings to be used to determine the regulatory treatment of a specific asset class.

(iviii) Special Rating Systems

Unless otherwise specifically approved by the VOS/TF and published in Part Three, Section 1 (a) Section 7 (d) of this Manual, Part, special rating systems of any CRP, rating agency or rating organization shall not be entitled to a presumption of convertibility. Nevertheless, an SVO analyst assessing a security that has been assigned such a rating by any rating organization, including a CRP, may consider the information imparted by that rating or a related research report under the authority provided in Section 2 (c) (i) of this Part, as one factor in determining an NAIC Designation.

(iv) Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations

The presumption of convertibility accorded to a credit rating of a CRP should not be interpreted to indicate that NAIC Designations and CRP credit ratings are produced using identical methodologies or that they are intended to communicate the same information. SVO quality credit assessment is conducted in support of those for NAIC regulatory standards and purposes specified in the NAIC Financial Conditions Framework that use NAIC Designations as a tool to identify a given regulatory treatment for the security and may therefore include considerations or address concerns unique to the regulatory community. Accordingly, the SVO staff has discretion to ignore the rating of any given CRP if and when it is called upon to consider how to translate a credit rating issued by a CRP into an NAIC Designation.

Before an SVO analyst converts a credit rating assigned by a CRP into an NAIC Designation, he or she must first conclude that the analytical issues associated with the security and structure are adequately addressed by the CRP and that the SVO has an approved methodology for evaluating such a security under Section 2(df) of this Part …

Section 7. Administrative Guidance and Information d) List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations(i) CRPs on the NAIC Credit Rating Provider ListThe CRPs that provide Credit Rating Services to the NAIC, either pursuant to the terms of Section 4 of this Part or otherwise, are: Moody's Investor's Service, Standard and Poor's, Fitch Ratings, Dominion Bond Rating Service (DBRS), A.M. Best Company (A.M. Best) Morningstar Credit Ratings, LLC (for All Structured Finance Securities) Kroll Bond Rating Agency and Egan Jones Rating Company. (ii) CRP Credit Rating Equivalent to SVO Designations Please note that the existence of a rating does not eliminate the requirement to file on SAR on any insurer owned security not currently listed in the VOS manual unless exempted from filing as detailed in Part Two, Section 4 (d) of this Manual.(A) Moody’s Investor’s ServiceCorporate, Government Counterparty and Municipal Ratings SVOAaa; Aa 1, 2, 3; A 1, 2, 3 1Baa 1, 2, 3 2



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Ba 1, 2, 3 3B 1, 2, 3 4Caa, 1, 2, 3 5Ca, C 6Commercial Paper and Short Term Counterparty Ratings SVOP 1 1P 2 2P 3 3N P (Not prime) 6 Preferred Stock SVOAaa; Aa 1, 2, 3; A 1, 2, 3 1Baa 1, 2, 3 2Ba 1, 2, 3 3B 1, 2, 3 4Caa 5Ca, C 6(B) Standard and Poor’sCorporate Counterparty and Municipal Ratings -- Public Bonds SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6Commercial Paper (Standard & Poor’s continued) SVOA, A 1 1A 2 2A 3 2B 4C 5D 6Preferred Stock SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC 5CC, C, D 6(C) Fitch RatingsFixed Income and Counterparty Ratings SVOAAApre 1*AAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC, 5CC, C, DDD, DD, D 6* This rating is assigned to pre-refunded municipal debt.

Commercial Paper SVOF 1+, F 1 1F 2 2F 3 2



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B 4C 5D 6Preferred Stock SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC 5CC, C 6(D) Dominion Bond Rating Service Bond and Long Term Debt SVOAAA, AA (high), AA, AA (low), A (high), A, A (low) 1BBB (high), BBB, BBB (low) 2BB (high), BB, BB (low) 3B (high), B, B (low) 4CCC (high 5CC, C (low), D 6Preferred Stock SVOPfd-1 (high), Pfd-1, Pfd 1 (low) 1Pfd-2 (high), Pfd-2, Pfd-2 (low) 2Pfd-3 (high), Pfd-3, Pfd-3 (low) 3Pfd-4 (high), Pfd-4, Pfd-4 (low) 4Pfd-5 (high), 5Pfd-5, Pfd-5 (low), D 6Commercial Paper and Short Term Debt SVOR 1 (high), R-1 (middle), R-1 (low) 1R 2 (high), R-2 (middle), R-2 (low) 2R-3 3R-4 5R-5, D 6 (E) A.M. Best Company Bond, Long Term Debt and Preferred SVOaaa, aa+, aa, aa-, a+, a, a- 1bbb+, bbb, bbb- 2bb+, bb, bb- 3b+, b, b- 4ccc+, ccc, ccc- 5cc, c, d 6Commercial Paper and Short Term Debt SVOAMB-1+, AMB-1 1AMB-2 2AMB-3 3AMB –46(F) Morningstar Credit Ratings, LLCfor All Structured Finance Securities SVOAAA, AA, A 1BBB 2BB 3B 4CCC, CC, C* 6D 6* Morningstar defines CCC, CC, C as "likely to default" which we here equate to the NAIC 6 definitional concept of a security "in or near default." Morningstar's D, defined as "in default" is also equated to an NAIC 6.(G) Kroll Bond Rating Agency



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Long-Term Corporate, Counterparty and Municipal Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6Short-Term and Commercial Paper Ratings SVOK1+, K11K2 2K3 3B 4C 5D 6Preferred Stock Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6(H) Egan Jones Rating Company Corporate Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6Commercial Paper SVOA, A1, A1+ 1A2 2A3 2B 4C 5D 6Preferred Stock SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC 5CC, C, D 6 Part Two- Filing with the SVO Section 1. General Definitions Used In This Manual

The following definitions are intended to have relevance only for this Manual. No suggestion is intended that these definitions have any relevance to any other NAIC publication. …

CRP stands for Credit Rating Provider and refers to the NRSROs on the NAIC Credit Rating Provider List discussed in Part ThreeOne, Section 1 (a) 4 of this Manual and identified in Part One, Section 7(d)(i) of this Manual …



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Filing Exempt Securities Process File refers to an electronic file within NAIC electronic computer systems used by the SVO to store the names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with the SVO because they are assigned credit ratings by NAIC CRPs (FE securities). and that insurers: 1) have reported in quarterly or annual statements (NAIC Financial Statement Blank) filed with the NAIC; or 2) requested to be included in the FE Data File through the Integrated Securities Information System (ISIS) and in both cases, The SVO produces NAIC Designations for FE securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results for which an NAIC CRP rating has been confirmed by the NAIC in the and that is used in connection with the publication of the AVS+ products.

Unconfirmed FE refers to a security that is neither in the VOS Database nor in the FE Datafile with a current year NAIC Designation. This includes but is not limited to securities in the VOS Database that have not been reviewed in the current year by the SVO; securities submitted for FE status using ISIS, but an independent check of the NAIC CRP rating status of the security by the NAIC could not verify an NAIC CRP rating for the FE security; and securities with private letter ratings. …

PL Securities Process refers to an electronic file within NAIC electronic computer systems used by the SVO to store the names and descriptions of securities owned by state-regulated insurance companies that are exempt from filing with the SVO because they are assigned private letter ratings by NAIC CRPs (PL securities). The SVO produces NAIC Designations for PL securities as discussed in Part Three, Section 1 (b) of this Manual and publishes the results in the AVS+ products.

VOS Process means the Valuation of Securities Process and refers to a process within NAIC electronic computer systems used to store the names and descriptions of securities owned by state-regulated insurance companies, and the NAIC Designation categories and/or Unit Price assigned to them by the SVO after independent quality assessment and that is used in connection with the publication of the AVS+ products …

Section 4. Reporting Exemptions …

d) Filing Exemption for Public Common Stock

Insurers must report values for all securities on their NAIC Financial Statement Blank including for FE securities as defined in Part Three, Section 1 (b) of this Manual. Refer to Part Five, Section 1 of this Manual for valuation instructions. Documentation requirements for securities filed with the SVO are set forth in Part Two, Sections 10 and Part Two, Section 11. These documentation requirements apply when a security must be filed with the SVO.

NOTE: This Section sets forth filing exemptions for certain securities that are rated by an NAIC CRP in the equivalent of the NAIC 1 through NAIC 6 Designation categories. Because these securities will not be filed with the SVO, the SVO will not be able to monitor any innovation or regulatory risk in these securities. The SVO does not have responsibility for determining whether specific securities should be filing exempt. An insurer who is uncertain whether a specific security qualifies for exemption should not contact the SVO for guidance, but should either file the security with the SVO or use the EIV Regulatory Treatment Analysis Service process described in Part Four, Section 3 of this Manual and obtain an opinion on exemption for that security.Because these filing exemption provisions are set forth without any compliance mechanism, the SVO will not be able to verify whether insurers have filed all securities that are required to be filed with the SVO. State insurance department regulators may wish to create their own compliance mechanisms to protect any interests they may have relative to their domiciliary insurers. (i) An insurance company must file all securities with the SVO except those securities that meet, and continue to meet, the conditions of either Paragraph (A), (B) or (C) below. Any security that at one time met the conditions of Paragraphs (A), (B) or (C) below, but does not continue to meet such conditions must be filed with the SVO within 120 days of such failure, as if the security had never been filing exempt. These filing exemptions do not apply to investments required to be filed pursuant to Part Five, Section 2 of this Manual. Catastrophe-Linked Bonds are filing exempt provided the credit rating assigned to them by a CRP was derived in a specified manner. Please refer to Part Four, Section 4 of this Manual.(A) Bonds Bonds, excluding RMBS and CMBS, (please refer to Section 4 (e), below), assigned an Eligible NAIC CRP Rating, as defined in Part One, Section 4 (c) (ii) (B) of this Manual, are exempt from filing with the SVO. Bonds assigned Eligible NAIC CRP Ratings will be assigned the equivalent NAIC Designation. If two Eligible NAIC CRP Ratings have been



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assigned, then the lowest rating will be assigned. In case of a security assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for the security will be ordered according to their NAIC equivalents and the rating falling second lowest will be selected, even if that rating is equal to that of the first lowest. (B) Preferred StockPreferred Stock assigned Eligible NAIC CRP Ratings, as defined in Part One, Section 4 (c) (ii) (B) of this Manual, are exempt from filing with the SVO. Preferred Stock assigned Eligible NAIC CRP Ratings will be assigned the equivalent NAIC Designation. If two Eligible NAIC CRP Ratings have been assigned, then the lowest rating will be assigned. In the case of a security assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for the security will be ordered according to their NAIC equivalents and the rating falling second lowest will be selected, even if that rating is equal to that of the first lowest. (C) Public Common StockNOTE: Insurers must report values for all securities, including those subject to filing exemption under this Section on their NAIC Financial Statement Blank. Refer to Part Five, Section 1 of this Manual for valuation instructions. Documentation requirements for securities filed with the SVO are set forth in Part Two, Sections 10 and Part Two, Section 11. These documentation requirements apply when a security must be filed with the SVO.(i) SVO Authority to Require Filing of Filing Exempt Securities The filing exemptions described above do not limit the authority of the SVO to require filings with respect to any security that is otherwise filing exempt at any time for the purpose of reviewing the provisions, terms, covenants or structural features of the security and designating the quality of the security. Upon completion of such review, the SVO is authorized to report its findings and recommendations to the VOS/TF.

Section 5. Special Reporting Instruction …

i) Other Permitted Uses of the Principal and Interest Certification Form and the NAIC 5* and 6* Designation

… (viii) PL Securities

The Principal and Interest Certification Form and the NAIC 5* Designation may be used in connection with the designation of PL securities not rated by an NAIC CRP when the documentation necessary for the SVO to assign an NAIC Designation based on its independent assessment of quality is not available. Please see Part Three, Section 1 (b) of this Manual for related guidance.

Section 10. Reporting Conventions and Required Documents …

c) Reporting Conventions and Required Documents

Specific reporting conventions for initial reports that all reporting insurance companies should follow are described below.

(i) Corporate Issues

(A) RatedIn the case of a corporate issue that is rated by an NAIC CRP that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part, above, the reporting insurance company shall submit a completed SAR with evidence of the NAIC CRP rating. The evidence can be in the form of a copy (or copies) of the rating letter from the NAIC CRP or a copy of the page from each NAIC CRPs rating publication showing the date of the publication. If the issue is rated below “A” or is rated differently by two or more NAIC CRPs, a prospectus and a rating rationale memorandum from each NAIC CRP that rated the transaction must accompany the submission. Insurance companies reporting bonds of not-for-profit entities shall follow the same filing conventions applicable to bonds of profit-making entities. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP.

(B) Unrated

In the case of a corporate issue not rated by an NAIC CRP, the reporting insurance company shall complete an SAR and shall attach the issue's public offering statement or private placement memorandum, as the case may be, the insurance company's



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internal credit committee memorandum and the Audited Financial Statement of the issuer for the last three consecutive years. If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such rating. The SVO will contact the reporting insurance company if additional information is required. If none of these documents are available, the reporting insurance company must obtain and complete the SVO's VIM form and submit it with the required documents and attachments. Insurance companies reporting bonds of not-for-profit entities shall follow the same filing conventions applicable to bonds of profit-making entities.

(C) Rated Medium Term Notes

In the case of Obligations defined as medium term notes in the offering prospectus or private placement memorandum, where the issuer is rated by an NAIC CRP, that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part, above, the reporting insurance company must file a completed SAR and evidence of proof of rating or ratings. The evidence can be in the form of a copy of the rating letter from the NAIC CRP or a copy of the page from each NAIC CRP rating publication showing the date of the publication. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP. …(E) Investments in Certified Capital Companies …

(3) Procedure for Reporting and Filing with the SVO

The insurance company should first determine the reporting for CAPCOs indicated by the statutory accounting guidance. This is done by establishing the character of the investment and then applying the appropriate accounting and reporting guidance and to the extent necessary the related procedures in this Manual for Schedule D or BA assets. If the CAPCO investment is subject to the SVO filing process and does not meet the filing exempt requirements, it should be filed with the SVO. If the SVO disagrees with the insurance company characterization of the investment, it will so inform the insurance company and provide rationale why the SVO believes the company has misapplied or misinterpreted the guidance of INT 06-02 and request a re-filing if necessary.

(4) Required Documentation

(a) Rated — In the case of a CAPCO issue that is eligible for filing exemption by virtue of its rating by an NAIC CRP but filed with the SVO despite the availability of the filing exemption provided for in Section 4 (d) of this Part above the reporting insurance company shall submit a completed SAR with evidence of the NAIC CRP rating. The evidence can be in the form of a copy (or copies) of the rating letter from the NAIC CRP or a copy of the page from each NAIC CRP’s rating publication showing the date of publication. If the issue is rated below “A” or is rated differently by two or more NAIC CRP's, a prospectus and a rating rationale memorandum from each NAIC CRP that rated the transaction must accompany the submission. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP.

(b) Unrated — A In the case of a CAPCO issue that is not rated by an NAIC CRP, is filed with the SVO and assigned an NAIC Designation as discussed in Part Three, Section 1 (b) of this Manual. Tthe reporting insurance company shall complete an SAR and shall attach the issuer’s public offering statement or private placement memorandum, as the case may be, the insurance company's internal credit committee memorandum and the Audited Financial Statement of the issuer for the last three consecutive years. If an issue is rated by a rating organization other than an NAIC CRP, submit evidence of such rating. If none of these documents are available, the reporting insurance company must obtain and complete the SVO's VIM form and submit it with the required documents and attachments.

For CAPCO issues that are not FE securities filing exempt follow the procedures in Section 11(e)(i) of this Part below (Corporate Issues not Filing Exempt) to file a subsequent report with the SVO.

(5) Applicable Methodology

Subject to the directive contained in Part One, Section 2 (f) of this Manual, the SVO shall have discretion to apply any quality credit assessment methodology or any combination of credit assessment methodologies detailed in Part Three of this



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Manual to assess the quality or credit quality; or Part One, Section 3 (b) (ii) of this Manual to assess asset classification of a CAPCO security or other applicable procedure specified in this Manual. .

(ii) Municipal Issues

(A) Rated

In the case of an NAIC CRP- rated municipal issue that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the reporting insurance company shall file a completed SAR with evidence of each NAIC CRP. Such evidence can be in the form of a printed copy of a computer screen display showing the rating as reported by Bloomberg Financial Services, Interactive Data Corporation, JJ Kenny Co, Inc. or Muller Data Corporation or may be evidenced by submission of a copy of the official statement if the issue is within one year of the date given for interest payments to begin. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP. …

(iii) Structured Issues

(A) RatedIn the case of transactions that meet the criteria for Credit Tenant Loan-Variants Requiring an NAIC CRP Rating, as defined in Part Four, Section 1(a)(vii) of this Manual, debt, common or preferred stock issued by a real estate investment trust, commercial mortgage-backed securities, residential mortgage-backed securities, collateralized mortgage obligations, asset backed securities, collateralized bond obligations and collateralized loan obligations, and that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurance company shall submit a completed SAR, evidence of a current rating from each NAIC CRP and a prospectus or private placement memorandum for the transaction. For purposes of this subsection, a current rating is defined as one issued or reviewed within the past 12 calendar months. Evidence of a current rating may also be submitted in the form of a Bloomberg RCHG screen or other similar screen acceptable to the NAIC from another information vendor. Evidence of a current rating may also take the form of a final prospectus or complete private placement memorandum that contains "condition to issuance language." For purposes of this paragraph, "condition to issuance language" means text within the prospectus or private placement memorandum which unequivocally states that it is a condition to the issuance of the securities named in the prospectus or private placement memorandum that the securities shall have been assigned specific ratings by one or more named NAIC CRPs. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP.

(B) Unrated(1) Credit Tenant Loan (CTL) …

(2) Specific Filing Conventions (i) In the case of a corporate issue rated “A-/A3” or better by an NAIC CRP, that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurer requesting that the SVO update the NAIC Designation shall file evidence of an NAIC CRP rating. Evidence of a rating may take the form of a printed copy of the complete Bloomberg Description Screen (“DES”) display, showing the rating(s) assigned by an NAIC CRP. Please refer to Part Three, Section 1 (b) of this Manual for a discussion of the procedure used to assign NAIC Designations securities rated by an NAIC CRP.

(ii) In the case of a corporate issue rated less than “A-/A3” by an NAIC CRP, or rated differently by two or more NAIC CRPs, the reporting insurance company shall file the issuer's Audited Financial Statement and evidence of rating(s) from all NAIC CRPs that have rated the security.

…

(ii) Municipal Issues not Filing Exempt (A) Rated (1) General RuleA Subsequent Report is required on all rated municipal issues.



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(2) Specific Filing Conventions (i) In the case of a municipal issue rated “A-/A3” or better by an NAIC CRP, that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the insurer requesting that the SVO update the NAIC designation shall file evidence of an NAIC CRP rating which may take the form of a printed copy of the complete Bloomberg Description Screen (“DES”) display, showing the rating(s) assigned by an NAIC CRP or a copy of the rating in an NAIC CRP publication that shows the rating. (ii) In the case of a municipal issuer rated less than “A-/A3” by an NAIC CRP, or rated differently by two or more NAIC CRPs that must be reported to the SVO for whatever reason despite the availability of the filing exemption provided in Section 4(d) of this Part above, the reporting insurance company shall file the issuer's Audited Financial Statement and evidence of a rating from all NAIC CRPs that have rated the security. Evidence of a rating may take the form of a printed copy of the complete Bloomberg Description Screen (“DES”) display, showing the rating(s) assigned by an NAIC CRP or a copy of the rating in an NAIC CRP publication that shows the rating. … Part Three – Credit Assessment

Section 1. Corporate Bonds and Preferred Stock

a) Assessment Methodology for Independent Credit Quality Assessments

Corporate bonds defined as the Obligations of domestic and foreign corporations, and preferred stock shall be distinguished on the basis of the categories discussed below. The creditworthiness of the issuer of any particular category of Obligation shall be assessed by reference to the general, and any special, rating methodology discussed in this Part, unless the Valuation of Securities (E) Task Force has specified the use of a different methodology in this Manual.context of the analysis requires a different approach …

(ii) Financial Analysis

(A) Audited Financial Statement Required

As a first step in the independent assessment, the analyst shall conduct an independent financial analysis of the issuer based on the financial information presented in the . The analyst shall review the Audited Financial Statement, as defined in this Manual. and conduct an analysis.

The SVO shall base it’s financial analysis based on at least three years of historical audited financial information and a minimum of one year of projected financial information (, if available) when the issuer has an operating history of three years or more.

However, the SVO may assign an NAIC Designation based on less than three years of financial information in circumstances where the issue’s operating history is less than three years or because the issuer’s legal identi fty has been subsumed as a result of a merger into a new entity or due to other documentable business circumstances. Where three years of financial information is not available, the analyst shall will review such information as is available, and shall determine if the time period for which information is available is sufficient to produce a professionally sound opinion. but will proceed to assign an NAIC Designation only if the analyst concludes that the time period for which information is available is sufficient to produce a professionally sound opinion.

b) Procedure Applicable to Procedures Applicable to Filing Exempt (FE) Securities and to Private Letter (PL) Rating Securities

(i) Filing Exemption

Bonds, (excluding RMBS and CMBS) and Preferred Stock that have been assigned an Eligible NAIC CRP Rating, as described in Part One, Section 4 (c) (ii) (B) of this Manual, are exempt from filing with the SVO (FE securities).

(ii) Identification of FE Securities



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Insurance companies identify FE securities to the NAIC as part of the NAIC’s Financial Statement Blank reporting process. The SVO subsequently collects the securities insurers have identified as FE securities by identifying securities reported using the Administrative Symbol FE when it conducts the quarterly compilation of the SVO List of Securities. SVO then performs the procedures discussed in sub-section (iii) below to produce the most accurate NAIC Designation equivalent for purposes of the NAIC Financial Condition Framework. Please refer to Part One, Section 3 (l) of this Manual for a discussion of the compilation process.

(iv) Direction and Procedure

The SVO shall produce NAIC Designations for FE securities by applying the following procedure in conjunction with the List of Credit Rating Providers and the Equivalent of their Credit Ratings to NAIC Designations, shown below.

A Bond that has been assigned an Eligible NAIC CRP Rating will be assigned the equivalent NAIC Designation.

If two Eligible NAIC CRP Ratings have been assigned, then the lowest credit rating will be used to assign the equivalent NAIC Designation.

In case of a Bond that has been assigned three or more Eligible NAIC CRP Ratings, the Eligible NAIC CRP Ratings for the Bond will be ordered according to their NAIC equivalents and the credit rating falling second lowest will be used to determine the equivalent NAIC Designation, even if that rating is equal to that of the first lowest.

The SVO shall not in any manner whatsoever, show, display or disseminate the credit ratings of NRSROs as part of the compilation or publication of the SVO List of Securities in the AVS Plus product or in any other NAIC publication associated with the operations of the Valuation of Securities (E) Task Force.

(v) PL Securities

The SVO shall produce NAIC Designations for securities subject to private letter ratings as follows:

T he insurance company shall file a copy of the private rating letter with the SVO.

The SVO shall evaluate the private letter to determine whether the security has been assigned an Eligible NAIC CRP Rating.

If the SVO verifies that the security has been assigned an Eligible NAIC CRP Rating , it assigns an NAIC Designation in accordance with the policy and procedure specified in sub-paragraphs (i) and (ii) above. The assumption in the application of this step of the procedure is that PL securities are typically assigned a credit rating by only one NAIC CRP. However, if this assumption is inaccurate for any PL security, the SVO applies the same procedure specified for FE securities above.

If the SVO verifies that the security:o H as been assigned a credit rating but that the credit rating is not an Eligible NAIC CRP Credit Rating; or

o Has not been rated by an NAIC CRP; or

o Is no longer subject to a private letter rating;

SVO shall notify the company that the security is not eligible for filing exemption. The insurance company shall then either file that security and necessary documentation with the SVO for an independent credit assessment per Section 1 (a) of this Part or assign an NAIC 5* Regulatory Designation to the security in the related Interrogatory.

(vi) Discretion to Ignore an Eligible NAIC CRP Credit Rating

Consistent with the policy adopted by the Valuation of Securities (E) Task Force expressed in Part Two, Section 4 (c) (iv) of this Manual (Disclosures and Considerations Related to the Translation of Credit Ratings into NAIC Designations) when the SVO applies the procedures in sub-section (ii) and (iii) above, the SVO is charged with an affirmative exercise of discretion



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to ignore any Eligible NAIC CRP Rating when it determines that the credit rating produces a result inconsistent with NAIC financial solvency objectives.

For purposes of illustration and not for purposes of limiting the how SVO exercises this discretion; it would be an appropriate exercise of discretion if the SVO ignores an Eligible NAIC CRP Rating that is significantly lower or significantly higher than those issued by the other CRPs: or, if in the case when only one CRP has assigned an Eligible NAIC CRP Rating, the SVO reads the CRP’s research report for the issuer and security and determines there is insufficient information or rating rationale to explain the CRP’s decision or evaluate the relationship of that credit rating to NAIC financial solven cy standards such as risk-based capital or statutory accounting objectives.

In those circumstances when the SVO exercises its discretion, it shall inform the insurance company that filed the security of its decision and rationale. If the insurance company vehemently disagrees with the SVO’s determination, the SVO shall immediately bring the matter to the attention of the Chair of the Valuation of Securities (E) Task Force for discussion and a preliminary decision whether the SVO decision appears to be consistent with the scope and purpose that underlies the grant of discretion. The decision of the Chair will be communicated to the insurance company provided that the Chair may direct the SVO to convene a regulator to regulator session of the Task Force to present the issue to the full Task Force. (vii) Application of the FE Procedure to Specific Populations

The filing exemption procedure does not apply to investments required to be filed pursuant to Part Five, Section 2 of this Manual.

Catastrophe-Linked Bonds are filing exempt provided the credit rating assigned to them by a CRP was derived in a specified manner. Please refer to Part Four, Section 4 of this Manual.

(viii) List of NAIC CRPs

The CRPs that provide Credit Rating Services to the NAIC are: Moody's Investor's Service, Standard and Poor's, Fitch Ratings, Dominion Bond Rating Service (DBRS), A .M. Best Company (A.M. Best) Morningstar Credit Ratings, LLC (for All Structured Finance Securities) Kroll Bond Rating Agency and Egan Jones Rating Company.

(ix) Table of Equivalents of Eligible NAIC CRP Ratings to NAIC Designations

(A) Moody’s Investor’s ServiceCorporate, Government Counterparty and Municipal Ratings SVOAaa; Aa 1, 2, 3; A 1, 2, 3 1Baa 1, 2, 3 2Ba 1, 2, 3 3B 1, 2, 3 4Caa, 1, 2, 3 5Ca, C 6

Commercial Paper and Short Term Counterparty Ratings SVOP 1 1P 2 2P 3 3N P (Not prime) 6

Preferred Stock SVO



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Aaa; Aa 1, 2, 3; A 1, 2, 3 1Baa 1, 2, 3 2Ba 1, 2, 3 3B 1, 2, 3 4Caa 5Ca, C 6

(B) Standard and Poor’sCorporate Counterparty and Municipal Ratings -- Public Bonds

SVO

AAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

Commercial Paper (Standard & Poor’s continued) SVOA, A 1 1A 2 2A 3 2B 4C 5D 6


(C) Fitch RatingsFixed Income and Counterparty Ratings SVOAAApre 1*AAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC, 5CC, C, DDD, DD, D 6* This rating is assigned to pre-refunded municipal debt.

Commercial Paper SVOF 1+, F 1 1F 2 2F 3 2B 4C 5D 6

Preferred Stock SVOAAA, AA+, AA, AA-, A+, A, A- 1



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BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC 5CC, C 6

(D) Dominion Bond Rating Service Bond and Long Term Debt SVOAAA, AA (high), AA, AA (low), A (high), A, A (low) 1BBB (high), BBB, BBB (low) 2BB (high), BB, BB (low) 3B (high), B, B (low) 4CCC (high 5CC, C (low), D 6

Preferred Stock SVOPfd-1 (high), Pfd-1, Pfd 1 (low) 1Pfd-2 (high), Pfd-2, Pfd-2 (low) 2Pfd-3 (high), Pfd-3, Pfd-3 (low) 3Pfd-4 (high), Pfd-4, Pfd-4 (low) 4Pfd-5 (high), 5Pfd-5, Pfd-5 (low), D 6

Commercial Paper and Short Term Debt SVOR 1 (high), R-1 (middle), R-1 (low) 1R 2 (high), R-2 (middle), R-2 (low) 2R-3 3R-4 5R-5, D 6

(E) A.M. Best Company Bond, Long Term Debt and Preferred SVOaaa, aa+, aa, aa-, a+, a, a- 1bbb+, bbb, bbb- 2bb+, bb, bb- 3b+, b, b- 4ccc+, ccc, ccc- 5cc, c, d 6

Commercial Paper and Short Term Debt SVOAMB-1+, AMB-1 1AMB-2 2AMB-3 3AMB –4 6

(F) Morningstar Credit Ratings, LLCfor All Structured Finance Securities SVOAAA, AA, A 1BBB 2BB 3B 4CCC, CC, C* 6D 6* Morningstar defines CCC, CC, C as "likely to default" which we here equate



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to the NAIC 6 definitional concept of a security "in or near default." Morningstar's D, defined as "in default" is also equated to an NAIC 6.

(G) Kroll Bond Rating AgencyLong-Term Corporate, Counterparty and Municipal Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

Short-Term and Commercial Paper Ratings SVOK1+, K1 1K2 2K3 3B 4C 5D 6

Preferred Stock Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

(H) Egan Jones Rating Company Corporate Ratings SVOAAA, AA+, AA, AA-, A+, A, A- 1BBB+, BBB, BBB- 2BB+, BB, BB- 3B+, B, B- 4CCC+, CCC, CCC- 5CC, C, D 6

Commercial Paper SVOA, A1, A1+ 1A2 2A3 2B 4C 5D 6


(x) Securities no longer Assigned an Eligible NAIC CRP Credit Rating



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Any Bond or Preferred Stock that at one time was assigned an Eligible NAIC CRP Credit Rating by an NAIC CRP but is no longer rated must be filed with the SVO within 120 days of the loss of the credit rating, as if the security had never been filing exempt.

(xiiv) Limitations on Use of NAIC CRP Ratings

(A) NAIC Designation Is Capped To Highest NAIC CRP RatingThe SVO shall not assign an NAIC Designation for a rated security that reflects an opinion of credit quality greater than that indicated by the rating assigned by an NAIC CRP, except as provided in Paragraph (B) below, and except that the SVO may assign the NAIC Designation it deems appropriate to:(1) Municipal bonds and;(2) Military housing bonds or securities as defined in Part Four, Section 5(b) of this Manual.

(B) Split Ratings For filing exempt securities as defined in Part Two, Section 4 (d) of this Manual, the NAIC Designation assigned will be the NAIC Designation equivalent that results from the application of the filing exemption process described in Part Two, Section 4 (d) of this Manual. This rule will also apply to replication transactions defined in Part Four, Section 2(a) of this Manual and other instances where NAIC CRP ratings are used by the SVO.

(C) Unrated Transaction of Issuer with NAIC CRP Rated DebtWhen presented with an unrated security of an issuer that has another issue rated by an NAIC CRP, the staff may consider the rated issue and its position in the capital structure of the issuer to arrive at an NAIC Designation for the unrated security, provided that the staff shall first consult with the rating agency and independently consider the terms of the unrated security and its impact on payment risk. …

Section 7. Administrative Guidance and Information

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