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Rating Agency: Closed-Block Debt Is Still Debt

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NU Online News Service, June 18, 2003, 5:46 p.m. EDT – From the standpoint of analysts rating the financial strength of an insurance holding company, issuing debt on closed blocks of life insurance policies is about the same as issuing any other kind of debt, according to a commentary released by Moody’s Investors Service, New York.

Only two large U.S. insurers have issued notes and bonds backed by large blocks of participating whole life insurance policies, but other life insurers might issue closed-block debt in the future, Robert Donohue and Robert Riegel, Moody’s analysts, write.

The debt securities themselves should be secure, because the participating whole life business is a great business, and securities backed by revenue from that business ought to be quite stable, the analysts write.

The analysts observe that the holders of the debt actually get their payments from the holding company, or parent company, and not from the closed-block business itself. Because the holders can collect only if the insurance operating company is healthy enough to send dividends to the holding company, the closed-block debt will usually get a debt rating that is two notches lower than the operating company’s insurance financial strength rating, the analysts write.

For the borrower, the closed-block debt is not really different from any other kind of debt, the analysts argue.

Moody’s will treat closed-block debt and closed-block interest payments “no differently than if the company had issued senior unsecured debt in a traditional manner,” the analysts write.