MBS derivatives safe in NAIC model law.

The model investment law under preparation by the National Association of Insurance Commissioners is not expected to restrict insurers' holdings of mortgage-backed derivatives, according to Arthur Fliegelman, vice president of bond portfolio research for Salomon Bros. and a member of the industry advisory group on the model law.

Fliegelman, who attended the recent Atlanta meeting of the NAIC, said the commissioners still have many disagreements about other derivatives, especially interest rate swaps, caps and options.

The NAIC Investment Law Working Group is expected to present a draft of the model law at a Jan. 27 meeting in Kansas City, Mo., and is hoping to produce an exposure draft by June.

The work of the panel has been slowed because of demands on its chairman, John Kummer, deputy insurance commissioner in Florida, where the ravages of Hurricane Andrew last summer caused eight insurance companies to fail.

The law is expected to put quantitative limitations on the amount of MBS derivatives held by insurers, but those limits are not expected to affect the investment behavior of most companies.

Florida limits life and health companies to placing 40% of their assets in mortgages, MBS or MBS derivatives. The limit is 10% for casualty insurers. In addition, only 3% of assets can be invested in any single project.

When the law was being debated, a study of the portfolios of more than 1,600 insurers licensed in Florida revealed that only about 50 would exceed the limits slightly and only two or three would be significantly over the limits.

An early NAIC model law draft prepared by the industrylimited total real estate investment to 40% of assets for life and health insurers and 10% for other types of insurance companies.

It also aggregated commercial and residential real estate, a feature the advisory panel has worked to have changed to differentiate between residential and the higher-risk commercial.

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