US INSURANCE CHIEFS UNVEIL ALTERNATE MUNI RATING

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U.S. insurance chiefs unveil alternate muni rating
Mon Jun 2, 2008 3:06pm EDT

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NEW YORK (Reuters) - A group representing state insurance regulators on Monday said it will offer a substitute rating for municipal bonds backed by downgraded insurers so that insurance companies are not pressured to sell such debt.

Insurance companies have long been among the biggest players in the $2.6 trillion muni market. Currently, ratings on municipal bonds can rise and fall with their bond insurers.

NOTE: INSURANCE COMPANIES ARE KNOWN TO INVEST IN THE STOCKMARKET FOR OVER A CENTURY.

This was not a problem until this spring when several insurers lost the top "AAA" ratings their business requires because of their money-losing plays in the subprime mortgage market.

The National Association of Insurance Commissioners said it will begin offering a substitute rating on July 1.

Relieving the pressure on the insurance companies to sell their muni bonds should benefit the states, cites, agencies and hospitals that sell this debt by helping to prevent their borrowing costs from spiking, the group said.

An insurance company that holds a muni bond that is downgraded might have to reserve more capital for it, and if the rating falls below investment grade "some insurance companies will no longer want to hold them," the group said.

"We know that many municipal bond credit ratings are no longer accurate because they are based on the downgraded rating of the bond insurer, not of the municipal issuer," said Wisconsin Insurance Commissioner Sean Dilweg in a statement. Dilweg said he made the proposal.

NOTE: DILWEG IS A WELL RESPECTED PERSONALITY IN THE INSURANCE INDUSTRY.

New York State Insurance Superintendent Eric Dinallo said in a statement that "removing the current restrictions on our rating unit will permit insurance companies to submit downgraded municipal securities to it." He noted, "The unit, where appropriate, will now be able to assign the correct rating to those municipal bonds."

Bond insurers that have lost the highest rating from at least one credit agency includes: MBIA (MBI.N: Quote, Profile, Research), Ambac Assurance Corp (ABK.N: Quote, Profile, Research), Financial Guaranty Insurance Co., Security Capital Assurance XL Capital Assurance (SCA.N: Quote, Profile, Research), Radian Asset Assurance (RDN.N: Quote, Profile, Research), CIFG Guaranty, and ACA Financial Guaranty Corp ACAH.PK.

(Editing by Leslie Adler)

© Thomson Reuters 2008 All rights reserved

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