Background:
Until recently, insurers that held securities rated by an NAIC-approved Nationally Recognized Statistical Ratings Organization (i.e. a “CRP” or “rating agency”) have not had to submit financial information on those securities to the Securities Valuation Office of the NAIC (the “SVO”) for a rating designation. Instead, insurers have held capital based on the ratings assigned by the CRP.
For those securities with private letter ratings—meaning that the CRP does not publish its rating on a security, but instead provides notice of the rating via a private rating letter or report that is shared with investors—insurers have not been required to submit proof of that private rating to the SVO. Instead, investors have kept private rating letters on file and held capital appropriate for the rating. Thus, unless an insurer’s local Insurance Commissioner specifically requested the letters for review, the private rating process has been largely a self-administered system with no review from a regulatory body.
New Private Rating Filing Requirements:
On November 13, 2017, the NAIC formally adopted changes to its Purposes & Procedures Manual, thereby finalizing new policies governing private rating letters. Beginning on July 1, 2018, insurers will be required to provide the SVO with proof of ratings for privately rated securities issued on or after that date. In addition, by December 31, 2018, such proof will have to be provided for all privately rated securities issued on or after January 1, 2018. There are separate arrangements, discussed below, that apply to privately rated securities issued before January 1, 2018.
The proof of ratings required for privately rated securities can take one of two forms. Either
1) CRPs can provide ratings directly to the SVO, via electronic data feeds or similar ratings delivery methods (such as providing a dataset download in Intralinks) (this is the preferred method) or
2) insurers can manually submit copies of private rating letters to the SVO.
Grandfathering Provision:
The NAIC has agreed that an insurer holding a privately rated security issued prior to January 1, 2018 does not have to comply with the new filing requirements if
a) The security cannot be successfully added to the rating agencies’ direct delivery mechanisms and
b) the confidentiality language in the private rating letter would preclude insurers from sharing that letter with the SVO.
If both of those conditions are met, then the insurer may elect to grandfather the security and not file the rating letter with the SVO. However, the insurer would have to represent to the NAIC that it holds a valid private rating letter for such security, and is holding capital appropriate for the rating. The NAIC does not expect the grandfathering provision to be used a great deal and has reserved the right to revisit the grandfathering provision in 2019 if the provision is being used excessively.
Valid Private Rating Letter Criteria:
The following four criteria must be satisfied in order for a private rating letter to be valid for NAIC purposes:
1) Investors must be able to share the letter with the SVO. This means that if the letter is delivered to investors via Intralinks, then there must be a carve-out on the “hold harmless” splash page that specifically allows investors to share the rating letter with regulators, including the SVO. In addition, there can be no information included in the letter that would preclude investors from sharing that letter with the SVO. Confidentiality watermarks should be removed, and if there is any confidentiality language in the letter itself, that language must include a provision that expressly allows investors to share the letter with their regulators, including the SVO.
2) The rating must be security-specific. General corporate issuer-level ratings are not accepted by the NAIC; private letter ratings must be valid at the CUSIP/PPN level and must contain sufficient information to enable the security to be identified. The preferred approach would be to have the relevant CUSIPs or PPNs included in the private rating letter. However, if a private rating letter does not contain security identifiers, then it must contain the following information so that insurers can clearly demonstrate to the SVO that the rating is security-specific: position in the capital structure (e.g. senior notes) and outstanding amounts, coupons and maturities for each transaction tranche.
3) The rating must be current. Rating letters must either contain a valid date (within the last 12 months), or must clearly state that the rating is a continuously monitored rating that is valid, until investors are informed otherwise.
4) The rating cannot indicate that it addresses repayment of only principal or interest. The rating letter need not explicitly state that it covers repayment of both principal and interest. If the letter is silent on the issue, the NAIC will assume that it covers both unless the letter provides otherwise or there is any contrary indication in the letter (such as an unusual rating modifier that the NAIC is unfamiliar with).
Proposed Language for Model Form Note Purchase Agreements:
The Private Placement Investors Association has proposed language for inclusion in the model form note purchase agreements that addresses private letter ratings. That language is under consideration at present by the Transaction Process Management Committee of the ACIC. The language provides as follows:
Definitions:
“Private Letter Rating” means a letter delivered by an NRSRO with respect to the Notes that includes the following elements:
i) The rating on the Notes with specific reference to any private placement number(s) issued for the Notes by Standard & Poor’s CUSIP Service Bureau or other information that uniquely identifies the Notes, including coupon and maturity;
ii) A statement that the rating of the Notes will be maintained and a rating letter will be produced at least once every calendar year;
iii) A statement that the rating encompasses the expectation of timely payment of principal and interest as scheduled; and
iv) A statement that such letter may be shared with the Noteholders’ regulatory and self-regulatory bodies (including the Securities Valuation Office of the NAIC) and auditors of the holder of the Notes without need for a non-disclosure agreement with the NRSRO.
“NRSRO” means a credit rating agency recognized as a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission.
Covenant:
Maintenance of Rating on the Notes. The Company will ensure that an NRSRO shall at all times maintain a rating of the Notes. Within five (5) Business Days after a Responsible Officer becomes aware of a change in, or withdrawal of, a rating of the Notes, the Company shall notify each holder of a Note in writing of such change or withdrawal. At least once every calendar year, the Company shall provide to each holder of a Note an updated Private Letter Rating, reflecting the rating of the Notes as of such date.
