U.S. regulators don't aim to rival rating agencies

By Joan Gralla

NEW YORK, June 3 (Reuters) - A new U.S. municipal bond rating that state insurance regulators will soon sell is not an attempt to compete with credit agencies but to ensure that insurance companies reserve the correct amount of capital, a spokesman for the lead regulator said on Tuesday.

The National Association of Insurance Commissioners on Monday said it will offer a substitute rating for municipal bonds backed by downgraded insurers so that insurance companies are not pressured to sell such debt.

"We're not competing with the rating agencies," said David Neustadt, a spokesman for New York insurance superintendent Eric Dinallo.

The regulators will use the same six-point rating scale for muni bonds that it has long used for thinly traded securities that insurance companies own.

Insurance companies will be able to buy the new muni ratings for any debt backed by downgraded insurers.

"We don't have the granularity of the rating agencies," Neustadt said, noting that the regulators' six-point rating scale uses just two investment-grade ratings and four non-investment ratings.

In contrast, Moody's Ratings Service and Fitch Ratings, have more than 20 ratings, and 10 are investment grade.

As the New York insurance regulator, Dinallo runs the ratings unit for the insurance commissioners association.

The new ratings scale will be applied to munis after months of criticism of credit agencies, which had to downgrade several bond insurers, including MBIA (MBI.N), Ambac Assurance Corp (ABK.N) and Financial Guaranty Insurance Co. after their expansions into subprime mortgages went awry.

That triggered waves of selling by muni investors who feared the prices of their debt would fall if the bond guarantors lost their top "AAA" ratings.

Neustadt could not say whether the new ratings the insurance regulators will offer in July will be made public, a possibility that could give credit agencies new competition.

The ratings can only be sold to insurance companies because they are the only firms overseen by the commissioners.

The new ratings will only cost $2,800, less than the price several credit agencies charge. (Editing by Leslie Adler)