NAIC offers substitute insured-bond ratings to insurance companies

New York, June 2 - The National Association of Insurance Commissioners said it will allow insurance companies to substitute a credit rating from the NAIC Securities Valuation Office for the rating from a credit rating agency.

The move, which takes effect July 1, is intended as a regulatory response that will help the municipal bond market by reducing pressure on insurance companies to sell bonds insured by downgraded bond insurers.

"We know that many municipal bond credit ratings are no longer accurate because they are based on the downgraded rating of the bond insurer, not of the municipal issuer," said Wisconsin Insurance Commissioner Sean Dilweg, who made the proposal, in a news release.

"So we are stepping in to make sure that insurance companies have accurate ratings. The SVO has the tools to fairly rate municipal issuers."

"Removing the current restrictions on our rating unit will permit insurance companies to submit downgraded municipal securities to it," added New York State Insurance Superintendent Eric Dinallo, who chairs the NAIC Valuation of Securities Task Force.

"The unit, where appropriate, will now be able to assign the correct rating to those municipal bonds. That will benefit both insurance companies and municipal issuers."

NAIC said that currently, when a bond insurer is downgraded, the municipal bonds it insures receive the same lower rating. That lower rating can result in the new rating for the bond being below the actual creditworthiness of the municipal issuer.

The downgrading of bonds they hold can create problems for insurance companies, the association added. At a minimum, it noted, companies would have to reserve more capital against the downgraded bonds, because reserves are determined by the risk of the investment. That reduces their appetite for municipal bonds.

If bonds are downgraded to below investment grade, some insurance companies will no longer want to hold them, NAIC said. If many companies sell downgraded bonds, they would likely push down the market price and have to take a loss on the bonds. This could also increase municipalities' cost of raising funds.

Previously the SVO was not allowed to assign a credit rating higher than that assigned by a rating agency.

Under the new procedure, the SVO will be able to determine its own rating based on its own analysis of the issuer's financial strength.

NAIC is based in Kansas City, Mo., and acts as a voluntary organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and five U.S. territories to assist state insurance regulators in protecting consumers and helping maintain the financial stability of the insurance industry.

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