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The April 29th deadline is rapidly approaching for insurers, reinsurers and investors to submit comments on S&P Global Ratings’ proposal to change its capital adequacy model that will negatively impact some investment securities’ ratings.

The proposal adjusts how S&P would treat certain insurance company investments not rated by S&P, including significantly downgrading certain securities evaluated by NRSROs other than S&P, Moody’s and Fitch Ratings (Big 3), although Moody’s and Fitch would be subject to downgrades to a lesser extent than ratings by other non-S&P NRSROs. Importantly, securities that are specifically evaluated and designated as investment grade by the National Association of Insurance Commissioners’ (NAIC) Securities Valuation Office (SVO) also likely would be downgraded below investment grade. In either case, the result for insurers holding non-Big 3 rated securities in their portfolios would be the need to increase the insurers’ capital levels in order to maintain their current S&P ratings.

On March 9, 2022, the NAIC addressed the U.S. Senate Committee on Banking, Housing and Urban Affairs in a letter noting the variance in NRSROs securities ratings is on the 2022 agenda of the NAIC’s Valuation of Securities Task Force, but also noting that the NAIC has not endorsed the S&P’s proposal. In its letter, the NAIC raised concerns that the S&P proposal includes securities with SVO-assigned NAIC designations with those securities having no input from the SVO staff. The NAIC emphasized the role of the SVO in providing a fulsome credit risk analysis that protects the financial strength of insurers to pay claims while still allowing diversification of insurers' portfolios in investments across the U.S. economy.

The proposal has the attention of the House Financial Services Committee as well, with Politico reporting that a House Financial Services Committee panel plans to hold a hearing on the proposal, viewing it as S&P’s “power grab.” A hearing does not appear on the House Financial Services Committee schedule ahead of the comment period deadline.

Comments to the S&P proposal can be submitted here.

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.