(Bloomberg) — Representatives of the multitrillion-dollar insurance industry are hurling criticism at a proposal that could make it harder to invest in deals sold in fast-growing private markets that offer higher yields but often bring added risks.
The proposal by a unit of the National Association of Insurance Commissioners, a consortium of state regulators that sets standards for the industry, would allow the group to override credit ratings assigned to some deals, in turn affecting how much money insurance companies could allocate to those deals. The NAIC group says it’s necessary in part because more deals are being done in little-regulated private markets.
Money managers and other industry groups are staunchly opposed. The impacts are already being felt, they say, as some insurance firms place moratoriums on certain deals until there’s more clarity.
“The current NAIC proposals have already had a major market disruption as word of the impending proposal permeates all levels of the insurance industry,” according to a letter by Jacques de Saint Phalle, head of debt capital markets at Piper Sandler. His opinion was read aloud at a Monday meeting in Seattle to discuss the plan.
The proposal under discussion would allow the NAIC’s Securities Valuation Office to override the credit ratings assigned to deals in which its own risk assessment is three or more notches different than the one assigned by an official credit rating organization, such as Kroll Bond Rating Agency and Egan-Jones Ratings Co. As a result, an increasing number of insurance companies have instituted a moratorium on purchasing Kroll and Egan-Jones rated transactions in these markets, according to Piper Sandler.
“Egan-Jones has a leading market position in private debt in part as a result of our excellent performance,” said Eric Mandelbaum, deputy general counsel at Egan-Jones, in emailed comments. “In 2022 we only had one default (compared to 50+ implied by our rating levels) and it was a ‘soft’ default for a covenant violation (and not payment) and in 2020 no defaults.”
Representatives for the NAIC declined to comment. Kroll didn’t immediately respond to requests for comment.
Industry criticisms of the proposal center on the fact that the SVO, which has a far smaller staff than any of the national ratings companies, would effectively be assigning its own ratings in cases where it chose to do so. It isn’t itself a ratings firm and isn’t regulated like one, critics said.
“The NRSROs are subject to a robust regulatory regime and have transparent methodologies which are available on their website for investors,” Mandelbaum said, using an acronym to refer to the nationally recognized statistical rating organizations, which includes Egan-Jones.
The proposed change could have big implications for US insurance companies, which reported $8.2 trillion in total cash and invested assets at the end of 2022. They’re closely bound by rules that limit the size of their investments in riskier assets. If the credit ratings of some deals are rejected in place of lower ratings by the NAIC group, then it could limit participation from the industry.
The SVO says the policy is necessary in order to protect against too much reliance on traditionally assigned ratings, in part by bringing transparency to less-regulated private markets. Evidence of some the risks emerged in 2022, when a new regulatory requirement brought to light a number of examples in which deals executed in private markets received substantially different ratings from different credit graders, said Charles Therriault, the director of the SVO, at the meeting.
“We have observed growing and often material discrepancies between the ratings provided by competing NRSROs for the same security,” said Therriault. “The rating exceptions identified by the SVO to the task force only came about because of the requirement for increased regulatory transparency into these non-public transactions. Otherwise, the task force would continue to be completely blind to these issues.”
A decade of low interest rates has drawn many insurers away from traditional public markets toward non-traditional and private markets, increasing the need for careful assessments of risk, NAIC’s president and president-elect wrote recently in a letter to members of Congress who had objected to the proposed rule.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
