NU Online News Service, May 23, 1:04 p.m. – Moody’s Investors Service, New York, says it will probably be increasing the gap between the insurance financial strength ratings it gives 11 large, well-known U.S. life insurance companies and the ratings it gives debt issued by their parent companies.

In some cases, Moody’s might widen the insurance rating/debt rating gap by increasing the subsidiaries’ insurance ratings, but in other cases it might reduce the holding companies’ debt ratings, Moody’s warns.

Moody’s assigns insurance ratings based on its assessment of an insurer’s ability to pay insurance claims.

Debt ratings reflect Moody’s assessment of a company’s ability to make payments on notes, bonds and other debt securities.

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.