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Witnesses Pan Raters

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NATIONAL HARBOR, MD. – The National Association of Insurance Commissioners should reevaluate Securities Valuation Office reliance on rating agencies, witnesses said here today at an NAIC hearing.

The NAIC, Kansas City, Mo., should take a hard look at the rating agencies because the agencies’ poor performance helped cause the recent financial meltdown, according to New York Deputy Insurance Superintendent Michael Moriarty and Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas.

Moriarty, Birnbaum and others were testifying at a day-long, 3-part hearing at the conclusion of the NAIC’s fall meeting.

The NAIC’s Rating Agency Working Group organized the meeting, which was chaired by Illinois Insurance Director Michael McRaith and co-chaired by New York Superintendent James Wrynn, to look at how insurance regulators came to rely on the rating agencies, what went wrong, and what to do in the future.

The SVO is an arm of the NAIC that helps insurance regulators analyze and monitor bonds, mortgage-backed securities and other investment instruments.

Earlier in this decade, the SVO responded to limits on its resources by trying to make more use of the ratings and valuations provided by third parties, such as rating agencies, Moriarty testified.

The SVO exempted insurer-owned securities rated by nationally recognized rating organizations from filing requirements, Moriarty said.

“The rationale at that time was fairly straightforward,” Moriarty said, noting that the rating agencies had a track record of reliability.

Today, however, reliance on the rating agencies should be reviewed in light of the events of the last few years, Moriarty said.

Birnbaum criticized regulators for “delegating authority to private enterprises.” He said consumer groups in general are troubled by the fact that regulators handed off a critical public role to rating agencies.

He said that rating agencies got it wrong on mortgage-backed securities, and that, if they were wrong before, there is no reason to believe they are right now, even though they have since downgraded the securities.

Birnbaum also criticized insurers for urging regulators to rely on ratings for mortgage-backed securities when those securities were rated “AAA,” but urging regulators to ignore the lower ratings in some cases now that the lower ratings are causing what insurers say are excessive risk-based capital requirements.

Eric Steigerwalt, chief financial officer at MetLife Inc., New York, defended insurer requests for a review on the downgrades.

Regulators should require higher limits of capital for bonds with a high probability of loss, but lower limits of capital for bonds that have been downgraded but have a low probability of loss, Steigerwalt said.

SVO Managing Director Chris Evangel testified that the SVO could conceivably rate the securities that are currently evaluated by the rating agencies, but he said the cost would be high.

Having the SVO rate all securities would require a “sea change” at the SVO in terms of cost and resources, and making that change would take time, Evangel said.

The change would be beneficial in down markets, but not necessarily in up markets, Evangel added.

In related news, California Attorney General Edmund Brown Jr. said he had issued subpoenas to Standard & Poor’s, Moody’s Investors Service and Fitch Ratings to determine whether the firms had violated California law when they gave “stellar ratings to shaky assets.”

The probe is meant to determine “how these agencies could get it so wrong, and whether they violated California law in the process,” Brown said.