S&P’s Article Discusses Insurer Credit, Liquidity Support

March 19, 2003

Standard & Poor’s has published an article that explains the rating
criteria for credit and liquidity support provided by insurers.

Capital-markets transactions are often supported by credit or liquidity features, which provide prompt payment of principal and interest in the event of a disruption to – or shortfall in – transaction cashflows. These are available from a number of providers, usually in the financial services and insurance sectors. Both credit support and liquidity payments are needed on a timely basis to support the payment on the rated obligation.

“Insurers generally provide these types of support through investment agreements, GICs, annuities, swaps, and liquidity lines,” noted Standard & Poor’s credit analyst Mark Puccia. “To rate an investment product as highly as the insurance company is rated, Standard & Poor’s will generally ask for assurance that the investment product will receive the same priority as policy
claims in the event of an insurer insolvency for the purpose of insurance law.”

According to the report, it is clear that the market participants expect insurance companies to pay on any investment product in a timely fashion in accordance with the terms of the product. This is a contrast with ordinary policies, for which the market expectation is that the insurance company will contest the claim, raise defenses, and pay only when satisfied regarding the full compliance with terms
and conditions.

The commentary, which is titled “Criteria for Credit and Liquidity
Support Provided by Insurers,” can be found on RatingsDirect, Standard & Poor’s Web-based credit analysis system. The article can also be found on Standard & Poor’s Web site at www.standardandpoors.com. Under Fixed Income, select Credit Ratings Criteria.

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