ABIR’s technical response on numerous fronts is detailed in a 20-page letter to S&P, which has requested comments by April 29 on its proposed methodology and assumptions for analyzing the risk-based capital adequacy of insurers and reinsurers.
ABIR warns that S&P’s current proposal is unduly onerous, especially pertaining to the treatment of debt as part of a carrier’s capital base for claims-paying ability.
S&P seeks to “potentially remove capital credit for senior debt, which is counter to traditional finance theory that defines a firm’s capital structure to include debt,” according to ABIR CEO John Huff. “In its request for comment, S&P defines capital as ‘available to absorb losses in the insurance businesses.’ Debt issued by a Bermuda-based holding company satisfies this definition, given the Bermuda Monetary Authority’s requirements that Tier 3 issuances demonstrate that the holding company's obligations in relation to the senior debt are subordinated to policyholder obligations.”
Huff adds: “Consequently, S&P’s proposed removal of credit conflicts with the regulator and all other rating agencies, which consider debt as part of a firm’s capital base.”
Further, he notes, “Capital doesn’t disappear overnight and yet that’s how S&P is treating it. Why is it capital today, but potentially not tomorrow?”
ABIR points out that existing securities represent long-term commitments by issuers, “which investors will seek a high price to unwind. Existing securities were issued in good faith, taking into consideration established regulatory and rating criteria. Carriers have issued over a billion dollars of capital in recent years that was rated by S&P without any indication at the time that future eligibility for total adjusted capital (TAC) could change, and these securities might be expected to receive anything less than full credit.”
This debt is viewed as capital by the regulators, Huff says. If carriers are forced to restructure debt, they’ll get less favorable terms today. Any replacement debt will increase financial leverage, which is counter to the stability people seek from a rating agency.
“It’s an overuse of their market power,” Huff says of S&P. “It will have a negative impact on ratings for the Bermuda market without any reasonable justification or market changes. It is clearly anti-competitive.”
The other key issue ABIR points out is an ambiguous timeline and lack of a transition period for the rollout of the changes. Insurers and reinsurers will have no time to respond to the new debt treatment before S&P has indicated the changes will go into effect. “A comment period then will be useless,” Huff says.
“These abrupt changes are incredibly disruptive. Standard & Poor’s should be adding stability, not causing instability.”
ABIR’s letter to S&P, which also outlines objections in other key areas, is available here.
About ABIR
The Association of Bermuda Insurers & Reinsurers (ABIR) represents Bermuda’s major property and casualty insurers and reinsurers doing business in 150 countries. Bermuda is an internationally recognized center of global expertise on underwriting for catastrophe, climate, cyber, mortgage & credit risk transfer products, along with other specialty insurance and reinsurance. For more information, please visit: www.abir.bm. Follow us on Twitter @ABIR_Bermuda.
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