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Portfolio > Mutual Funds > Bond Funds

NAIC Panel Rules On Bond Insurer Downgrades

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An arm of the National Association of Insurance Commissioners has come up with rules for incorporating bond insurer rating cuts in the valuation of insured bonds.

Members of the Valuation of Securities Task Force, part of the Financial Condition Committee of the NAIC, Kansas City, Mo., voted unanimously Tuesday to adopt a proposal developed by VOS Task Force Chair Michael Moriarty, a New York regulator.

The task force was responding to moves by major rating agencies to lower the financial strength ratings of some bond insurers.

On Jan. 18, the New York office of Fitch Ratings announced the firm has cut the insurance financial strength ratings of the insurance affiliates of Ambac Financial Group Inc., New York, to AA, from AAA.

The Ambac downgrades led to corresponding downgrades of about 137,000 Ambac-insured municipal bonds.

Earlier, in December 2007, Standard and Poor’s Ratings Services, New York, cut the financial strength rating of ACA Financial Guaranty Corp., New York, to CCC, from A.

S&P has suspended the rating of ACA-insured bonds for which the issuer has not sought an “S&P public underlying rating,” or “SPUR.”

A SPUR is an S&P rating associated with the strength of the issuer itself, rather than a rating linked to the strength of the bond insurer.

During a conference call, VOS Task Force participants said they have been using the term “SPUR” to refer to all ratings of underlying bond quality available through the rating agencies, not just to underlying quality ratings from S&P.

At the NAIC’s Securities Valuation Office, an NAIC 1 rating is the highest rating, and an NAIC 6 rating means an issuer is at or near default.

An S&P rating of CCC is equivalent to an NAIC 5 rating. The SVO assigns that rating to relatively “low quality” bonds.

The following are the guidelines the VOS Task Force is giving for 2007 year-end reporting involving bonds affected by the S&P ACA downgrades:

- An insurer can ask the SVO to rate an ACA-insured bond and apply the SVO rating to the 2007 annual statement filing.

- If a bond has an S&P underlying rating higher than CCC, an insurer can translate the SPUR into the equivalent NAIC rating and report that rating.

- If an ACA-insured bond without a SPUR is rated by at least one organization other than S&P, an insurer can report the second lowest of the available ratings.

- If an ACA-insured bond without a SPUR is rated only by S&P, insurers should report an NAIC 5 designation.

The VOS Task Force has issued the following guidelines for 2008:

- If an ACA-insured bond has a SPUR, an insurer can report the bond with an NAIC 3 designation until the SVO assigns the bond another designation. The bond will be eligible for an SVO filing exemption.

- If an ACA-insured bond has no SPUR and is rated only by S&P, the bond will no longer be eligible for an SVO filing exemption. An insurer that holds such a bond will have to ask the SVO to assess the quality of the bond.

The task force approval of the guidance “gives companies some clarity regarding reporting for 2007″ as well as guidance for 2008, says Alan Close, who represented the American Council of Life Insurers, Washington, in discussions about the guidance.


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