NU Online News Service, June 21, 1:40 p.m. EDT

Global reinsurers and their bondholders are poised to benefit as more U.S. jurisdictions look to follow Florida's lead on easing global reinsurers' collateral requirements, according to a Moody's Investors Service analysis.

On June 17, XL Re Ltd. became the second reinsurer, and first from Bermuda, to reach an agreement with the Florida Office of Insurance Regulation (OIR) to operate in the state without having to put up 100 percent collateral.

Moody's, in its weekly credit outlook, said that generally, when non-U.S. reinsurers do business in the U.S., they are required to post 100 percent collateral to secure obligations for incurred losses so that its clients can receive full regulatory credit for reinsurance.

Legislation passed two years ago in Florida, however, allows a reinsurer to post reduced collateral as long as it is highly rated and financially sound.

Moody's said the development in Florida "is part of an emerging trend by U.S. regulators at both the state and national level that has the potential to lower collateral requirements for foreign reinsurers when they operate in the U.S."

Moody's cited circular draft amendments in New York that are similar to the Florida rules.

Additionally, on the national level, the rating agency said the National Association of Insurance Commissioners (NAIC) has been trying to extend the concept to all states by pushing a federal legislative approach that would reduce reinsurance collateral requirements.

For reinsurers, the result would be reduced costs when doing business in the U.S. Moody's said that, according to U.S. insurance regulatory filings, non-U.S. reinsurers put up $23 billion in letters of credit as of year-end 2009 to meet the current collateral requirements.

For the bondholders, Moody's said, "While more collateral provides more security to policyholders and reinsurance buyers, that enhanced security comes at the expense of liquidity to the reinsurers' unsecured creditors, making this latest news an incremental positive for reinsurers' bondholders."

Risks may increase for buyers of reinsurance, though, Moody's said.

"The only losers may be reinsurance buyers, who will now have less security but may also receive a better price, and U.S. reinsurers, who may lose some competitive advantage," the rating agency said.

Special Reports /

States, Feds May Follow Fla. On Reins. Collateral Requirements

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