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U.S. Insurance Regulators Tighten Capital Rule on Mortgage Bonds

U.S. State regulators approved new guidelines for mortgage bonds that will require insurers to set aside more capital as the watchdogs evaluate how economic stress would affect the firms’ investments.

Insurers will need to hold about 0.5 percentage point more capital for residential mortgage-backed securities under the standards, the National Association of Insurance Commissioners said in an e-mail today. Requirements for commercial mortgage-backed securities will have a “minor” change, according to the NAIC’s statement.

State watchdogs evaluate insurers’ investments to make sure the companies can meet obligations on policies they have sold. The increased capital requirements stem from a report that deemed the mortgage-backed investments to be more risky than they had previously been considered.

“The underlying scenario assumes a slow economic recovery with a slight further deterioration in residential home prices and a slow improvement in employment,” consultants who help assess the investments wrote in a report dated Oct. 16.

The Wall Street Journal reported that the guidelines were approved earlier today, lifting the capital requirement to 3.2 percent from 2.7 percent.

Editors: Dan Kraut, Dan Reichl

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