Bermuda (re)insurers oppose S&P’s proposed debt treatment: ABIR

Farhin Lilywala | 22 April 2022

The Association of Bermuda Insurers and Reinsurers (ABIR) is strongly opposing S&P’s proposal to disallow senior debt as a form of available capital, calling the draft plan “disruptive” and an “overuse of market power”.

ABIR states that S&P’s current proposal is unnecessarily stringent regarding the treatment of debt as a part of a carrier’s capital base for claim-paying ability.

S&P has put forward the change to treatment of tier 3 debt as part of its consultation on updating its capital adequacy model – the first such overhaul of the ratings rules in 10 years.

The debt issue is thought to be among the most impactful of a slew of detailed changes that went out in December with a request for comment. They also include an increase in the capital charge for catastrophe risk.

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,” said 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.”  

This debt is viewed as capital by the regulators, Huff says. If carriers are forced to restructure debt, they’ll get less favourable terms today. Any replacement debt will increase financial leverage, which is counter to the stability people seek from a ratings agency.

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 said.

“These abrupt changes are incredibly disruptive. Standard & Poor’s should be adding stability, not causing instability.”  

“It’s an overuse of their market power,” Huff said 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.”  

ABIR represents Bermuda’s major property and casualty insurers and reinsurers doing business in 150 countries. 

S&P Global ratings has extended the deadline to 29 April for comments on its proposed methodology and assumptions on risk-based capital adequacy.