Gap Between Insurance And Debt Ratings To Grow

Moody’s has been giving bonds issued by many parent companies debt ratings that are two notches below the subsidiaries’ insurance ratings, because policyholders often come out ahead of bond holders when companies run out of cash, Moody’s says.

Now, Moody’s says, it will probably increase the gap between insurance ratings and debt ratings, to three notches, because of new research suggesting that the bond holders tend to do even worse than the rating analysts had realized.

Although parent companies tend to default at about the same rate as the insurance subsidiaries, the bond holders might not get anything unless the policyholders have received close to a full recovery, according to Robert Riegel, managing director of Moody’s life ratings team.