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Insurers Fire Back at State Regulators' Capital Plan

Source: WSJ - Leslie Scism

Posted on 12 Oct 2012 by Neilson

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NAICInsurers have fired back at a plan by state regulators to require that they set aside more capital to back their investments in residential mortgage-linked bonds, arguing the proposal would saddle the industry with unnecessary costs.

The opposition comes after a task force from the National Association of Insurance Commissioners, an organization of state officials that sets solvency standards, warned the industry it would toughen capital requirements for certain bonds.

The task force is concerned insurers may not have enough capital to cushion themselves from losses on securities tied to subprime mortgages and other riskier home loans should a severe recession hit. These bonds had helped tip some banks and other financial firms into bankruptcy during the 2008 financial crisis.

The American Council of Life Insurers, a major trade group, told the NAIC last week its proposal doesn't reflect improvements in the U.S. housing economy, and would bring unnecessary costs to many insurers.

The changes would increase by about $620 million the total amount that insurers must hold to protect policyholders, according to Barclays.

On a call with regulators, MetLife Inc.'s Nancy Handal, speaking on behalf of the ACLI, said last week the new rules might prompt some insurers to sell their mortgage bonds rather than set aside more capital.

Industry executives contend the proposed changes apply to many more bonds than they think is justified.

In a comment letter, the ACLI said the proposed capital requirements "go beyond prudent improvements" and "will result in higher capital charges for the vast majority of securities."

The proposed changes are based in part on housing-price trends "well outside the most stressful housing projections" of economists, the group said, calling the recommended adjustments "unreasonably bearish."

A representative for the task force declined to comment on the criticisms, saying the industry comments are being studied.

Residential mortgage-backed securities that aren't guaranteed by government agencies like Fannie Mae and Freddie Mac were among the hardest hit after the housing bubble burst and financial markets seized up in 2008-09.

In 2011, insurers collectively invested over $26 billion in the bonds, according to data provider SNL Financial. Insurers say they have made purchases selectively, drawn to the bonds' discounted prices and higher yields.

The regulators' proposed changes are an adjustment to an approach adopted by the states in late 2009. Back then, they stopped using credit ratings as the basis for determining how much capital insurers should hold against mortgage bonds, after ratings from Standard & Poor's and other firms proved inaccurate and they downgraded them in droves.

Regulators hired a unit of Pacific Investment Management Co. to assess thousands of residential mortgage bonds owned by insurers. They also began allowing insurers to take into account the carrying value of their home-mortgage bonds in figuring out required capital.

As a result, insurers that have written down the value of their holdings, or bought at discounted prices, can set aside relatively little capital for what on the face could be a toxic security. The resulting lower capital is what prompted the current discussion about adjustments to the required amounts.