© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

ZZ

INTRODUCTIONTO

THESTRUCTURED

SECURITIES

INTRODUCTIONTO

THESTRUCTURED

SECURITIES

Eric

Kol

chin

sky

Dire

ctor

, Stru

ctur

ed S

ecur

ities

Gro

upN

AIC

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

STRU

CTU

RED

SECU

RITI

ESGR

OU

P

2

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

ABO

UT

US

•St

ruct

ured

Sec

uriti

es G

roup

(SSG

) was

form

ed in

20

13 a

nd is

bas

ed in

NAI

C’s N

ew Y

ork

Offi

ce.

•SS

G’s p

rimar

y fu

nctio

n is

to o

vers

ee a

n an

nual

va

luat

ion

of in

sura

nce

com

pany

hel

d Re

siden

tial

Mor

tgag

e Ba

cked

Sec

uriti

es (R

MBS

) and

Res

iden

tial

Mor

tgag

e Ba

cked

Sec

uriti

es (C

MBS

).

•In

201

5, S

SG a

naly

zed

appr

oxim

atel

y 27

,716

CU

SIPs

co

nsist

ing

of 2

2,40

6 RM

BS a

nd 5

,310

CM

BS.

3

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

NAI

C’S

FIN

ANCI

ALM

ODE

LIN

GIn

200

9, N

AIC

resp

onde

d to

the

impa

ct o

f rat

ing

dow

ngra

des b

y th

e Cr

edit

Ratin

g Pr

ovid

ers (

CRPs

) on

insu

rers

’ risk

-bas

ed c

apita

l (RB

C) c

harg

es a

mid

the

burs

t of

the

real

est

ate

bubb

le.

In 2

013,

NAI

C’s i

n-ho

use

Stru

ctur

ed

Secu

ritie

s Gro

up (S

SG) w

as fo

rmed

to

inst

itutio

naliz

e th

e re

leva

nt

regu

lato

ry fu

nctio

ns.

Subs

eque

ntly,

the

scop

e of

fina

ncia

l mod

elin

g w

as e

xpan

ded

to

com

mer

cial

mor

tgag

e-ba

cked

secu

ritie

s CM

BS fo

r yea

r-en

d 20

10.

2009

2010

2013

The

chan

ge in

risk

mea

sure

men

t for

RM

BS in

the

regu

lato

ry fr

amew

ork

first

bec

ame

effe

ctiv

e fo

r the

stat

utor

y re

port

ing

in y

ear-

end

2009

.

4

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

Insu

ranc

e In

dust

ry H

oldi

ngs

YE

‘15

Colla

tera

l Typ

e20

15 Y

E BA

CV

($Bi

l)20

14 Y

E BA

CV

($Bi

l)%

Cha

nge

RMBS

107.

82

115.

02

-6.3

%CM

BS16

7.12

17

3.93

-3

.9%

Loan

/CLO

52.3

6 51

.79

1.1%

Auto

20.6

0 23

.05

-10.

6%CT

L16

.87

15.8

8 6.

2%Cr

edit

Card

13.7

9 15

.82

-12.

8%Eq

uipm

ent L

ease

13.4

4 13

.63

-1.4

%St

uden

t Loa

n8.

46

7.73

9.

5%Ai

rcra

ft L

ease

10.2

7 7.

01

46.5

%Tr

ade

Rec

3.45

3.

34

3.3%

Oth

er11

0.55

96

.98

14.0

%To

tal

524.

74

524.

17

0.1%

Sour

ce: N

AIC;

Sch

edul

e D1

s 201

4 an

d 20

15.

RMBS

and

CM

BS in

clud

ed n

on-m

odel

ed se

curit

ies.

5

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

“OU

TSO

URC

EAN

DO

VERS

IGHT

”

In-h

ouse

Hybr

idO

utso

urce

d

Exam

ple

SVO

sou

rced

de

signa

tions

SSG

Filin

g Ex

empt

Anal

ysis

perfo

rmed

by

Empl

oyee

sTh

ird P

arty

(con

trac

ted

vend

or)

Third

Par

ty (N

RSRO

)

Regu

lato

ry Q

ualit

y As

sura

nce

Yes v

ia N

AIC’

s gov

erni

ngst

ruct

ure

Yes v

ia S

SG /

cont

ract

w

ith T

hird

Par

tyN

one

6

•Th

ere

are

a nu

mbe

r of a

ppro

ache

s to

regu

lato

ry c

redi

t an

alys

is ra

ngin

g fr

om c

ompl

ete

in-h

ouse

solu

tions

to

com

plet

e ou

tsou

rcin

g.

•Th

e N

AIC

relie

s on

thre

e ap

proa

ches

:

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

ANN

UAL

VALU

ATIO

NPR

OCE

SS

7

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

OVE

RVIE

W

•SS

G’s o

pera

tes u

nder

an

“out

sour

ce a

nd o

vers

ight

” m

odel

. A

vend

or, c

urre

ntly

Bla

ckro

ck S

olut

ions

, is

cont

ract

ed to

pro

vide

an

alys

is fo

r RM

BS a

nd C

MBS

.

•N

AIC

staf

f ove

rsee

all

aspe

cts o

f the

pro

cess

, inc

ludi

ng:

–Cr

eatin

g m

acro

econ

omic

scen

ario

s for

app

rova

l by

VOS

(E) T

F

–O

vers

ight

of m

odel

ing

Cred

it M

odel

ing

incl

udin

g an

ext

ensiv

e Q

ualit

y As

sura

nce

proc

ess a

t the

loan

and

poo

l lev

el, a

s nec

essa

ry.

–De

liver

y of

resu

lts to

Insu

rers

thro

ugh

the

AVS+

pla

tform

.

•Th

e fo

llow

ing

slide

s det

ail N

AIC

mod

elin

g ph

iloso

phy

and

proc

ess.

8

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

BUIL

DIN

GBL

OCK

SO

FM

ODE

LIN

G

Valu

atio

n or

ana

lysis

of s

truc

ture

d se

curit

ies t

ypic

ally

take

the

form

of f

our

dist

inct

step

s.

Use

s tra

nche

ca

shflo

wst

o ca

lcul

ate

som

e as

pect

of r

isk (e

.g.

ratin

g, p

rice)

Valu

atio

n M

odel

Use

s the

resu

lts o

f th

e Cr

edit

Mod

el

to a

lloca

te

cash

flow

s/lo

sses

to

each

tran

che

in th

e de

alWat

erfa

ll M

odel

Proj

ects

the

perfo

rman

ce o

f ea

ch lo

an b

ased

on

mac

roec

onom

ic

scen

ario

and

loan

ch

arac

teris

tics

Cred

it M

odel

Proj

ects

m

acro

econ

omic

va

riabl

es w

hich

dr

ive

the

Mor

tgag

e Lo

an C

redi

t Mod

el

Mac

roec

onom

ic

Mod

el

9

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

MAC

ROEC

ON

OM

ICM

ODE

L“W

hat’s

goi

ng to

hap

pen

in th

e w

orld

?”

Four

scen

ario

s of t

he N

AIC:

•O

ptim

istic

•Ba

selin

e•

Cons

erva

tive

•M

ost C

onse

rvat

ive

Value/Index

Year

Illus

trat

ive

Scen

ario

Cur

ves

Proj

ects

mac

roec

onom

ic

varia

bles

whi

ch d

rive

the

Mor

tgag

e Lo

an C

redi

t M

odel

Mac

roec

onom

ic M

odel

10

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

CRED

ITM

ODE

L“I

n a

give

n m

acro

econ

omic

envi

ronm

ent,

wha

t’s g

oing

to h

appe

n to

my

loan

s?”

Mor

tgag

e po

olM

ortg

age

pool

Out

puts

of C

redi

t Mod

el:

A tim

e se

ries o

f agg

rega

te p

erfo

rman

ce

stat

istic

s inc

ludi

ng P

rinci

pal,

Inte

rest

, and

Lo

ss p

roje

ctio

ns th

at a

re re

quire

d to

de

term

ine

Cash

flow

dist

ribut

ion

and

Loss

al

loca

tion

Proj

ects

the

perfo

rman

ce o

f eac

h lo

an b

ased

on

mac

roec

onom

ic sc

enar

io

and

loan

cha

ract

erist

ics

Cred

it M

odel

11

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

WAT

ERFA

LLM

ODE

L“I

f the

loan

s per

form

in a

cert

ain

way

, how

do

es m

y in

vest

men

t (tr

anch

e) p

erfo

rm?”

Out

puts

of W

ater

fall

Mod

el:

A tim

e-se

ries o

f cas

hflo

wsf

or th

e tr

anch

e in

clud

ing

prin

cipa

l and

inte

rest

pai

d an

d lo

sses

take

n.

Use

s the

resu

lts o

f the

Cr

edit

Mod

el to

allo

cate

ca

shflo

ws/

loss

es to

eac

h tr

anch

e in

the

deal

Wat

erfa

ll M

odel

12

© 2

016

Nat

iona

l Ass

ocia

tion

of In

sura

nce

Com

miss

ione

rsPe

rmiss

ion

to re

prin

t or d

istrib

ute

any

cont

ent f

rom

this

pres

enta

tion

requ

ires p

rior w

ritte

n ap

prov

al fr

om th

e N

AIC.

VALU

ATIO

NM

ODE

L

“If t

he in

vest

men

t per

form

s in

a ce

rtai

n w

ay,

wha

t doe

s tha

t mea

n?”

The

valu

atio

n bl

ock

take

s the

raw

cas

hflo

ws

and

tran

sfor

ms t

hem

into

a fo

rm o

f risk

/val

ue

mea

sure

men

t.

The

NAI

C cu

rren

tly u

ses I

ntrin

sic P

rice

defin

ed

as ‘W

eigh

ted

Aver

age

of(1

–Di

scou

nted

Prin

cipal

Loss

)’.

Use

s tra

nche

cas

hflo

ws

to c

alcu

late

som

e as

pect

of

risk

(e.g

. rat

ing,

pric

e)

Valu

atio

n M

odel

13