Definition of Investment Grade
Investment grade refers to the category of bonds and securities that indicates they are of a high quality and therefore, less likely to default. For insurance regulators, the designation helps determine permissible investments under insurance statutes governed by ligal requirements.
Criteria for Investment Grade Classification:
Ratings by Recognized Agencies: These are determined based on ratings provided by established securities rating agencies that are recognized by the insurance commissioner. They include the top four generic lettered classifications (A, B, C, D).
Confirmation by Rating Agency: An explicit confirmation or written identification by one of these rating agencies also establishes a security’s investment grade quality.
Assessment by the NAIC:
- If a security has not been rated by any agency, it can still be qualified as ‘Investive grade’ based on the assessment done by the Securities Valuation Office of the National Association of Insurance Commissioners (contact link NAIC’s SVO).
- Properties classified as Class 1 and Class 2 are generally looking to fit within the investment grade criteria.
Regulatory Context:
Insurance companies are often regulated in terms of what kinds of investments they can hold, with a strong preference or legally driven requirement to primarily hold investment grade assets. This regulation ensures the financial stability of the insurance firms, mitigating risks that can arise from high-risk investments.
Related Guides and Acts:
- Securities Valuation Office (NAIC)
- Applicable sections on investments from the Insurance Act or Regulations, specific to different jurisdictions which generally include stipulations to only involve investment-grade securities as permissible sercurities.
By keeping these categories and rating standards, insurance companies safeguard their portfolio and adhere to the prudent investor rules typically codified in domestic insurance law.
