Although the stakeholders within the structured settlement market traditionally have focused primarily on A.M. Best when evaluating the potential credit risk of annuity providers, leading regulators including the Securities and Exchange Commission (SEC) and the National Association of Insurance Commissioners (NAIC) utilize their own “category” of rating agencies to access credit risk.
This category, called “nationally recognized statistical rating organizations” (NRSROs), was first created by the SEC in the mid-1970s to assess the riskiness of securities for regulatory purposes.
In 2006, the U.S. Congress enacted the Credit Rating Agency Reform Act (CRAFA) which amended the Securities and Exchange Act of 1934 to require companies that meet defined criteria to register with the SEC as a condition of being designated as NRSROs.
As of 2019, there are 10 companies certified and regulated by the SEC as NRSROs, the following of which should be familiar to structured settlement stakeholders:
- Standard & Poor’s
- Moody’s Investors Service
- A.M. Best
- Fitch Ratings
- Kroll Bond Rating Agency
- Egan-Jones Rating Company
NAIC began utilizing NRSRO ratings in 2004 to assess credit risk and requires NRSROs to register with the NAIC’s Securities Valuation Office. NRSROs use a variety of rating scales to provide these assessments, so the NAIC has created designations that denote a category of credit quality. This allows for comparisons of credit risk to be made amongst the NRSROs. These categories range from NAIC 1 (exhibiting the highest credit quality) to NAIC 6 (in or near default).
All structured settlement annuity providers who are members of the National Structured Settlement Trade Association (NSSTA), including Independent Life Insurance Company, qualify for the NAIC 1 designation (highest credit quality).
In 2019, the NRSRO ratings directly entered the structured settlement legal framework when the state of Texas enacted an amendment to their Property Code. The Property Code provides judges with guidance for approving the annuity issuer for a structured settlement in cases involving minors.
The new Texas Code uses the NAIC 1 designation category as the recommended issuer credit rating equivalent and requires the rating to be issued by an NRSRO. The requirement, which appears in Section 142.009 of the Texas Property Code is one of three requirements for structured settlement annuity contracts subject to Section 142.008.
The requirement reads as follows: “Third, in approving such insurance company, the court may consider whether the company holds an issuer credit rating equivalent to a National Insurance Association Insurance Commissioners NAIC 1 designation from a national or international rating agency that (A) has registered with the Securities and Exchange Commission; (B) is designated as a nationally recognized statistical rating organization; and (C) is on the list of Credit Rating Providers by the Securities Valuation Office of the National Association of Insurance Commissioners.”
Therefore, when stakeholders evaluate credit risk and recommend annuity providers for structured settlement funding, an NAIC 1 NRSRO designation (highest credit quality) should represent the industry standard.
For additional information about evaluating the credit risk of structured settlement obligors, see Section 5.04 of "Structured Settlements and Periodic Payment Judgments."