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FOR IMMEDIATE RELEASE RATING REFORM BENEFITS BOND MARKET SAN FRANCISCO (June 1, 2008) — Members of the National Association of Insurance Commissioners (NAIC) moved forward today with a regulatory response that will help the municipal bond market by reducing pressure on insurance companies to sell bonds insured by downgraded bond insurers. The reform, which takes effect July 1, will permit substituting a credit rating from the NAIC Securities Valuation Office (SVO) for the rating from a credit rating agency. “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. So we are stepping in to make sure that insurance companies have accurate ratings. The SVO has the tools to fairly rate municipal issuers,” said Wisconsin Insurance Commissioner Sean Dilweg, who made the proposal. “Removing the current restrictions on our rating unit will permit insurance companies to submit downgraded municipal securities to it. 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,” said New York State Insurance Superintendent Eric Dinallo, who chairs the NAIC Valuation of Securities Task Force. 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. At a minimum, 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. 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. To avoid these problems, insurance company investors will be allowed to submit their municipal bonds to the SVO for credit assessment. Previously, the SVO was not permitted to assign a credit rating higher than that assigned by a rating agency. The new procedure would allow the SVO to determine its own rating based on its own analysis of the issuer’s financial strength. This amendment to the Purposes and Procedures Manual of the NAIC Securities Valuation Office will be effective July 1, 2008. The NAIC will continue to use the resources of the SVO to assist regulators in dealing with disruptions in the capital markets. The change is part of a three-pronged regulatory response to recent concerns about the bond insurance market that (1) addresses the continued availability of AAA-rated bond insurance for municipalities; (2) deals with distressed companies by working to bolster contingency reserves; and (3) considers new and/or revised rules and regulations.
About the NAIC Headquartered in Kansas City, Mo., the National Association of Insurance Commissioners (NAIC) is a voluntary organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and five U.S. territories. The NAIC’s overriding objective is to assist state insurance regulators in protecting consumers and helping maintain the financial stability of the insurance industry by offering financial, actuarial, legal, computer, research, market conduct and economic expertise. Formed in 1871, the NAIC is the oldest association of state officials. For more than 135 years, state-based insurance supervision has served the needs of consumers, industry and the business of insurance at-large by ensuring hands-on, frontline protection for consumers, while providing insurers the uniform platforms and coordinated systems they need to compete effectively in an ever-changing marketplace. For more information, visit www.naic.org/press_home.htm.
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©2008 National Association of Insurance Commissioners. All rights reserved. | ||
